Threats to Microsoft multiply
redmond, wash. -- For decades, Microsoft Corp. has used its smarts, muscle and the occasional illegal maneuver to beat back major competitors and become the world’s most valuable technology company.
But the software giant has seldom dealt with opponents as strong as those it now faces. And it’s fighting with an arm tied behind its back, handicapped by the European Union’s regulation of its business tactics.
The threat posed by Google Inc. and others distributing cheap or free alternatives to some of Microsoft’s bread-and-butter products has shaken the Redmond, Wash.-based company like nothing since the Internet explosion a dozen years ago.
That’s because the Web is fast becoming the medium of choice for new technologies in the same way that Microsoft-powered personal computers displaced the massive mainframe machines sold by the likes of IBM Corp.
As a result, the Office suite of e-mail, word-processing and other basic tools is finally becoming vulnerable to displacement by programs delivered over the Internet. If it falls, Windows could be next.
“Microsoft’s nightmare scenario is a relevance shift to the Web, and it’s happening. It’s a natural progression,” said Joe Wilcox, editor of the Internet newsletter Microsoft Watch. “Google is to Microsoft as Microsoft was to IBM.”
Microsoft is fighting back. Today, for example, it is making available a set of what it calls Microsoft Online Services aimed at businesses with more than 5,000 employees. Included is a Web-based version of Outlook e-mail that’s administered by Microsoft, which declined to provide prices.
But Google has already been offering e-mail and other services to the businesses that are Microsoft’s best customers. Google charges just $50 a person annually for a version with round-the-clock tech support. That’s roughly a fifth as much as Microsoft charges for regular corporate e-mail alone, but Google says it’s making money on it.
The Mountain View, Calif., search giant is a long way from doing serious harm to Microsoft’s near-monopoly Office franchise.
Microsoft is still alarmed. At meetings here for investors in July and employees in September, its executives stressed that they were shifting the entire company to focus on selling both traditional software and “software as a service” -- that is, using the Internet to deliver what people need, when they need it.
“This transformation from software to software-plus-services is a very, very big deal for our company,” Ray Ozzie, who succeeded co-founder Bill Gates as Microsoft’s chief software architect in June 2006, told the gathering of investors and analysts. “It’ll be a very critical aspect of all of our offerings over the next few years.”
Yet Ozzie has been saying similar things since penning a pointed memo not long after joining Microsoft in 2005.
“They have shown some progress, but it’s not a great deal of progress,” said Rob Koplowitz, a Forrester Research analyst who has worked at Microsoft and IBM.
Credit Suisse analyst Jason Maynard was harsher at the July meeting, describing the current crop of services as “worst of breed, but integrated.”
Microsoft’s stock is reflecting the concerns. The shares closed at $29.46 on Friday, well below the $35 they fetched in 2001 during the technology bust, even though the company’s earnings have nearly doubled during that time, to $14 billion in the most recent fiscal year.
Investors are grumbling that their company has already poured too much money into online efforts with few rewards. The online division’s annual operating losses top $700 million, and revenue has increased little in two years.
The pressure to produce or walk away from Web services is making the next year a crucial test for the company. “There are some big technology and business problems we’re continuing to chew on, but we’re making progress,” spokesman Adam Sohn said. “We’ve turned the strategy corner, and we’re in execution mode. In the next one to two years, you’re going to see it come to life.”
Sohn had better be right.
Windows and Office have been the pillars of Microsoft’s financial performance for better than a decade and generated more than $22 billion in profit last year. Other divisions have had mixed results. Server software produced earnings of $3.9 billion last year and online services and entertainment posted a combined loss of about $2.6 billion.
The company has pumped much of that profit into new products on many fronts. It has courted consumers with the family of MSN services, spending a fortune on search technology to compete with Google. Its Xbox console and video game titles have eaten up more than $6 billion. It also developed the Zune media player.
Although the Xbox 360 has become the bestselling next-generation console, Microsoft’s gaming division has been unable to turn a profit. Zune has scarcely slowed the rise of Apple Inc.’s iPod. And Microsoft’s search engine is falling further behind Google’s, attracting only 11% of the U.S. market in August compared with 57% for Google, according to ComScore.
Microsoft last week rolled out another overhaul of its search engine that quadrupled the number of searched sites, focusing on such areas as shopping, maps, health and entertainment and culling product ratings from around the Web.
“We believe we can now compete with Google,” Corporate Vice President Satya Nadella said.
Its slow progress in search hasn’t kept Microsoft from trying to peel off more Internet advertising business from Google and Yahoo Inc. Microsoft recently spent $6 billion on AQuantive Inc., a Net ad agency and technology firm.
At the same time, Microsoft has gone after more pieces of the business market. In addition to the server software that controls networks of machines, Microsoft has added financial management and collaboration tools and software for handling customer accounts. Beyond servers, though, the business lines remain small, generating less than a tenth as much revenue as Office.
“They want the third Windows or Office, and they’re willing to invest in an increasing number of horses every year,” said Matt Rosoff, an analyst with the Directions on Microsoft research firm.
Another looming rival: the open-source software movement. For years, core Windows and Office products have fended off threats by such software, which depends on contributions from a cadre of volunteers who update the freely disclosed code. But now they face a foreboding combination of forces:
the familiar and trusted face of Google, which has built on the open-source productivity software project OpenOffice
the technological efficiencies of an Internet-based services model
a customer base increasingly willing to let data and programs reside somewhere other than the PC .
Gmail got Google’s efforts off the ground. It won fans by automatically keeping running e-mail conversations together, offering tons of free storage space and weeding out spam.
“When people saw how responsive it could be, it went a long way toward changing people’s perceptions about how well things can work on the Web,” said David Girouard, general manager of Google’s business services.
A free version for companies comes with word processing, spreadsheets and presentation software, all paid for by text ads in Gmail.
Hundreds of thousands of businesses have signed up, most of them small. But Capgemini, one of the world’s largest managers of information systems for bigger companies, said recently it would support Google’s software suite, and the likes of Procter & Gamble Co. and General Electric Co. are testing it.
IBM, the biggest backer of the open-source Windows rival Linux, also is fighting Office with a free suite called Lotus Symphony.
So far, Microsoft’s comeback products haven’t blown many people away.
Office Live, which has been on the front line against Google and other rival offerings, is aimed only at small businesses, with such features as e-mail, website hosting and collaboration tools. Some 450,000 users have signed up in the 10 months since launch, mostly for the free version. All the versions come with ads.
But Microsoft just lost the essence of its long-running appeal of antitrust restrictions imposed on it by the European Union. That means Microsoft’s usual response -- to tie new products to the core Windows and Office offerings, which is how it beat challenges from the pioneering Netscape Web browser and the RealNetworks Inc. media player -- could trigger new penalties.
“They can’t engage in the same tactics they used to,” analyst Rosoff said. “They can’t just make Windows search good enough and put it in the browser. They actually have to take each individual product and service and make it competitive on the merits.”
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Times staff writer Jessica Guynn contributed to this report.
