Can Microsoft reinvent itself?

Microsoft released its third quarter numbers the other day and while revenue growth was strong, the stock got hammered and dropped over 10%.  Why? Microsoft plans on investing for the long term and putting another $2b into the Internet and other new technologies like the XBox.  To sum it up, here is Rick Sherlund, Goldman Sachs' Software analyst, "It sounds like you're building a Google or building a Yahoo! inside the company."

Looking at the long term, I am quite excited about the prospects of all of this money coming into help grow the Internet sector and SaaS.  First, having another big player push the concept of software as a service will only help further educate and soften the market, particularly business customers  Secondly, this will mean that Microsoft will be aggressive with hiring and with acquisitions.  I remember being at the Microsoft VC Summit a couple of years ago and hearing Steve Ballmer talk about his acquisition strategy.  He would either do huge, billion dollar ones or look at acquisitions less than $20mm.  That has been changing and will change rapidly with this renewed empahsis and focus.  That only means good news for VCs and entrepreneurs.  And as a VC, I wholeheartedly agree with Microsoft's CFO, Chris Lidell when he says, "Today, we believe we face the largest array of opportunities for growth and innovation the company has ever seen." I certainly feel the same way from a VC investment perspective.

Whether Microsoft succeeds or not is another story, but $2b invested in new technologies will go a long way towards solidifying their position.  I would say that they did alright in 1995 when they decided to point their guns at Netscape to make sure the browser and Internet would not circumvent their monopoly on the desktop.  The problem is that once they won the browser wars, Microsoft became satisfied, fat and happy. And as we all know, fat cats don't hunt.  Others came around and outinnovated them - Firefox, Google, etc. 

This is Round 2, which really started with Microsoft's purchase of Groove Networks and Ray Ozzie last year.  To refresh your memory, I suggest reading Bill's email from October 2005 (also see the Ray Ozzie memo) where he leads the battle charge for the next generation web, the SaaS era. 

Today, the opportunity is to utilize the Internet to make software far more powerful by incorporating a services model which will simplify the work that IT departments and developers have to do while providing new capabilities.....

However, to lead we need to do far more. The broad and rich foundation of the internet will unleash a "services wave" of applications and experiences available instantly over the internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees. Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.

And yes, it sounds alot like the memo Bill Gates wrote 10 years ago called the Internet Tidal Wave where he helped the big battleship called Microsoft reposition itself and point its guns at Netscape and others.  Round 2 is no different from Round 1 but the stakes are higher and it will cost Microsoft oodles more cash this time to create a dent in this market.  While we all know that memos often do not mean a whole lot, it is clear that Microsoft is quite serious as they are not afraid to piss off Wall Street and really put dollars to work for the long term position of the business.  This will certainly be an interesting battle to watch over the next few years.

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This post was written by who has written 358 posts on BeyondVC.

3 Responses to “Can Microsoft reinvent itself?”

  1. sigma Apr 30, 2006 at 7:21 am #

    Microsoft has done brilliantly well. They have an excellent
    business.

    Brilliance is not always easy to understand, and how Microsoft
    has been so successful is an example. There are many gaps
    between what Microsoft does and what one might assume that
    they do.

    That Microsoft now would “reinvent” themselves is also not so
    easy to see.

    In the great flow of software, computing, and information
    technology, SaaS is perhaps as much as a flea riding on the
    back of a hood ornament of one of the cars in the few billion
    cars part of the great flow. The financial community, in its
    struggles to understand the future of computing, would be well
    advised to look for more substantive influences than SaaS.

  2. David Boxenhorn Apr 30, 2006 at 8:32 am #

    SaaS has one big problem: How do you integrate it?

    (I have a solution to that problem.)

  3. jc Jun 5, 2006 at 6:22 pm #

    It will take only one company , who has developed one product, that will become an acquisition target by google, oracle, yahoo etc… to bring damage to ms core sales: office, sqlserver, ect…

    When a company can abstract the current file system ms offers, and make it more productive, offering a quantum leap in functionality related to file i/o accross both local desktop and the web, it will be a hard road for ms to recover. One single leap could easily put them in the passenger seat for the next decade…Google is close , but they are missing an important peice, abstraction of the file system, a bottom up approach. Google’s approach is top down: like building a sky scraper without plumbing , electric, and elevators, you spend too much time, and effort back filling the holes. An abstracted file system that can be shared and published to the web is the best solution.

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