A Kinder, Smoother 2008 For Microsoft?

Looking Ahead

Microsoft to 2007: Good riddance.

The past year was full of legal and regulatory messes for Microsoft. Plus, Windows Vista missed the 2006 Christmas rush, and the company was slow to roll out its online services.

But things could be looking up in 2008, at least in some areas for the software giant. However, the company is losing one very important asset in 2008: Bill Gates.

Enter the ‘Oz’ Era

Company co-founder Gates, who fueled the Microsoft vision for the past 32 years and was previously CEO, is retiring from active work at the company, expected by summer, 2008. He’s making the move in order to spend more time working on his family charity, the Bill and Melinda Gates Foundation. (What’s the fun of earning all those billions if you can’t have a little fun giving them away in ways meant to benefit the world, such as funding malaria vaccination campaigns in emerging nations?)

As Microsoft’s largest stockholder, Gates will retain his job as chairman of the board of directors. However, he already relinquished his role as chief software architect (CSA) to former competitor, Ray Ozzie, in 2006. Gates will step away from the company full-time, with the exception of “special projects,” as of July 2008.

What won’t change? The company’s top management. An employee since 1980 and CEO since 2000, Steve Ballmer is the firm’s second-largest stockholder. By all accounts, the company is well managed and will continue to be for the current future.

Meanwhile, Ozzie is nearly as legendary as Gates himself, in terms of his powers as a tech visionary. After all, he fathered probably the most successful product that Gates and company ever had to compete with – Lotus Notes.

Ozzie’s biggest challenge is helping to figure out how the company can survive as a software publisher in a world where it looks increasingly that the future will be in services provided “in the cloud” rather than as big programs installed on users’ PCs.

Like Gates, Ozzie enjoys a reputation as both a brilliant engineer and a savvy businessman. He’s also known as a consummate manager. However, since he took the CSA’s reins, Ozzie has been nearly invisible outside the company. Some observers feel he should take on more of the public role that Gates has played – that of technology visionary and the public face of the company.

Since he became CEO, Ballmer has taken on much of the role as Microsoft’s business figurehead. Whether Ozzie will follow in Gates’ shoes as Microsoft’s “Mister Wizard,” however, is unknown.

Next page: Merging the Old and the New

Looking Ahead

Page 2 of 3

Old, Meet New

One key area under Ozzie’s purview will begin to be fleshed out in 2008. Microsoft’s response to the perceived threat of “software-as-a-service”— that is, of applications as services “in the cloud” — has been to create a framework for the strategy that the company’s execs refer to as “software-plus-services.”

As chief software architect, Ozzie has played a large role in the continuing evolution of that strategy.

To begin with, in 2008, expect to see Microsoft continue to massively build out its physical infrastructure worldwide to support services in the cloud, as it buys or builds more gigantic datacenters. All of those coming services in the cloud will require lots of processing power and storage.

Another area to expect growth – given the company’s recent land purchases and its plans for constructing a slew of new buildings, ostensibly to support many of Microsoft’s planned online offerings – is a dramatic increase in headcount.

For instance, the company hired 12,800 new employees in fiscal 2007 alone. Microsoft closed out fiscal 2007 with more than 78,000 employees.

Meanwhile, 2008 will be one of the most important years in recent memory for Microsoft’s traditional infrastructure products as well. On February 27, the company will hold a gala launch event for Windows Server 2008, Visual Studio 2008, and SQL Server 2008. Sometime in the first quarter, perhaps the same day, Microsoft is also slated to deliver the first service pack for Windows Vista.

Vista Service Pack 1 (SP1) is expected to be the milestone that many IT shops have been waiting for before beginning widespread deployments of Vista.

Additionally, Windows Server 2008 coordinates with Vista to provide additional security capabilities. Network Access Protection or NAP, will provide the ability to sequester PCs and laptops from the rest of the network until they satisfy defined security requirements.

Not surprisingly, synergies between servers, development platforms, and client desktops tend to influence overall sales of all of those products. IT shops often plan migrations to newer versions of server products at the same time that they deploy, or are about to deploy, a new client desktop version of Windows. That could mean healthy profits for Microsoft’s flagship products, which will help offset losses incurred while it tries to build momentum for its software-plus-services initiative.

Microsoft at Your Service

The company’s software-plus-services initiative is one point where the old Microsoft that sells packaged software converges with the emerging “new” Microsoft that’s fighting for survival in a Web-based services world. Whether or not the company can meld those technologies and economic models together successfully remains an open question.

It should be no surprise that a lot is riding on that.

For example, Web-based productivity applications, from Google and others, could conceivably tempt users away from massive desktop apps like Office, but that remains to be seen. In one response, the company is planning to pilot test an edition of its low-end productivity suite – Microsoft Works – that will be free but ad-supported. The company has not announced plans to do anything similar with its high-end Office suite – at least not yet.

However, online applications is only one of several areas where Google and Microsoft are beginning to collide.

There will be plenty more competition between the two rivals in 2008. For instance, Microsoft has struggled for years to catch up to Google in the area of search, an incredibly hot market for ad placement on the Web.

Still, Microsoft’s Live Search (and its variants) continues to run a weak third in the search engine race. NetApplications reported in mid-December that, during 2007, Google kept its commanding lead in the search market with 76 percent of all searches globally, compared with 12.7 percent for Yahoo, and a combined total for MSN Search and Live Search of just 6.3 percent. (There have been repeated rumors throughout the past year that Microsoft was negotiating to buy out number two search player, Yahoo, but that hasn’t happened yet either.)

Not to be deterred, this fall, CEO Ballmer said he’s shooting to have as much as a quarter of the company’s revenue coming from advertising within a few years.

“Today the market for online ads is really only about $40 billion, and probably climbs to about $80 billion by 2010,” CEO Ballmer told shareholders at the company’s annual meeting in November. He also projected that “there’s a much larger advertising market as well, worth over $600 billion worldwide that includes TV, radio, and print — a market that is rapidly shifting to the world of software-based platforms.”

Next Page: It’s All About Advertising

Looking Ahead

Page 3 of 3

New Year, Big Plans For Advertising

In order to win ground against Google, in particular, the company needs to expand its advertising base all around, says one analyst.

“For Microsoft to really get a big chunk of [those] revenues, they have to be more than just [an ad] publishing [site],” Matt Rosoff, lead analyst for consumer technologies at researcher Directions on Microsoft, told InternetNews.com. The company’s executives know this, he said, and are investing for the long term.

For instance, last summer, Microsoft bought out online advertising firm aQuantive for $6 billion, the largest acquisition in the company’s history. It was a move designed to help it gain a larger footprint and more advanced technology in the online ad arena. It also acquired aQuantive’s interactive agency unit Avenue A | Razorfish in the deal, making it one of the largest players in the online ad agency arena almost overnight as well.

That investment is already starting to show some promise.

In mid-December, Microsoft and Viacom inked a deal aimed at providing content to Microsoft’s Web sites. Additionally, Viacom also announced it has selected Microsoft to be its preferred Web site display ad service provider, and will let the software company sell unsold display advertising for Viacom Web properties.

The Viacom deal highlights two other properties that Microsoft got in the aQuantive purchase — the Atlas AdManager graphical ad serving technology, and DRIVEpm, which provides services that match advertiser campaigns up with publisher ad inventory.

However, online advertising is still a money pit for Microsoft and will remain so for now.

“By their own admission, they’re not giving a timeline for profitability [for online advertising],” Rosoff said.

In the meantime, it appears likely that Microsoft’s traditional product lines – augmented by ample reserves of ready cash — will continue to keep the firm’s coffers brimming.

On its financial analysts’ call in October, company executives predicted revenues for fiscal 2008, which ends June 30, in the area of $58.8 to $59.7 billion, up from $51 billion in fiscal 2007.

News Around the Web