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Microsoft Monopolies Evaporating?

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By ClientNine
June 19, 2008

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I'm in the process of buying a new computer, which has got me thinking about the ways that I use a computer, especially the changes in my usage since 2004, when I last bought a computer.

That computer, the one I'm typing on right now, is a Dell desktop. As a lifelong Mac user, it was difficult to accept that I needed a Windows machine. But in 2004, I really did need a Windows machine, to run some of the trading and portfolio management software that my new business required.

Today, I'm down to a single Windows-only application that I use with any regularity. All the rest have essentially moved to the web, removing any switching barriers that once might have held me in the Windows camp. For essentially all consumers, and most small businesses, the amount of software available for the Mac is higher today than ever before. Though I'm no expert on Linux, I understand that the range of applications available today is also very high. And Linux has decent GUIs now that actually make it useful for non-techies -- a situation that has a lot of appeal in the developing world, as I'll get to later.

Even more importantly, applications are being moved en masse to the Internet, part of the "cloud computing" or software as a service movement that we've all been reading about for some time. Bill Gates saw this coming in 1995, prompting his famous war memo that began the conflict with Netscape. But for most of the time from the birth of the web in the early 90s, till just a few years ago, browsers were just browsers. Now they are so much more.

I haven't launched Outlook, except to search for old emails, for months. That's because I recently signed up for Google for my Domain, which allows me to get Google web services using my own domain name and email address. Notably, this Google service is 100% free and I was able to do this without switching web hosts -- my old host still runs my web site, but I now have the power of Gmail instead of combination of POP3/Outlook with a clunky webmail interface for when I was on the road. The old setup had bothered me for some time because there were no records in Outlook of emails I sent from the webmail client, unless I bcc'ed myself every time.

When I switched to Gmail, I initially set it up in IMAP to solve this problem. But Outlook is so weird when running IMAP that I gave up and moved to handling all my email through the Google web interface, and boy what a revelation that is. It's ridiculously easy to keep track of everything, and Google is brilliantly set up for anyone who uses David Allen's Getting Things Done system to manage their email. I've been at Inbox Zero for months now.

I also haven't used MS Word in several months. Now, I use Google Documents for all my work, meaning that all my files are available to me wherever I go. It's really cool logging onto Google from my girlfriend's house and having all my work there if I need to review anything. I have begun to move my spreadsheet work over to Google spreadsheets as well, though I haven't made the full switch yet, since Google's spreadsheet lacks some features found in Excel. Still, Google adds new features every week (which is itself amazing), so most features I need have been added in recent months, with more coming. And Google Spreadsheet has a ridiculously easy web form input field that I'm finding more and more uses for.

Everything else on my computer is moving online, fast. My browser is synced between my desktop and my laptop using Google Browser Sync, though that product has been discontinued, so I'll need to switch to FoxMarks eventually. All my pictures are stored online using Flickr. Backup, which used to be such a pain that I did it once or twice a year (I know -- awful! You back up every day, right?), is now totally mindless, since I use Mozy.com. Mozy is a service of EMC that allows unlimited online storage and backup for $50 a year. Their client, which runs on both Mac and PC, uploads all your files and then keeps the backup up to date by recording changes daily. I sync what few files still live on my hard drive between my desktop and laptop using SugarSync and Dropbox, both of which I'm testing right now. Eventually, I'll settle on one and use that as a solution for both backup and sync. If you have more than one computer, you really should check out Sugar Sync's free 45 demo period -- it's spectacular to edit a document on one machine, then open it and see the updates on your second machine just 5 seconds later. All without needing to copy the file or email it over to your second computer.

Google now has my calendar as well, though syncing it with the iPhone is still a problem. Apple has just announced MobileMe, which does push email, calendar, and contact syncing on the Macintosh, representing a very serious threat to MSFT's Outlook/Exchange standard. And I expect Google to release a sync program once the iPhone Application marketplace is turned on.

Even Photoshop, which I use for my photography hobby, has serious online competition now, thanks to Splashup. The software has a pretty decent collection of brushes, layer effects, and filters. It'll be a long time before I give up the working knowledge of Photoshop I've built up at such expense of time, but the next time an expensive update is needed, I just might switch to Splashup.

At an organization where I'm on the board, we used to use a MSFT Access database to manage our data. However, as a distributed organization with users in many different offices, this kept our data in a silo accessible only to the two people in the head office. Six months ago I exported all our data to Salesforce.com (which is free to nonprofits!) and now we are happily using this service to manage much of our workforce. We've even developed online forms that allow our scholarship students to submit applications, change contact information, etc. all online, with the data feeding directly into Salesforce.

*****

The point of this long discussion is to illustrate the very real threat facing MSFT. MSFT products now have very little urgency or relevance for my day to day use of computers. I clearly prefer the Mac operating system, as do many people, judging from the market share gains posted by Apple in the last five years. And now, any reason to avoid switching has been eliminated, thanks to the proliferation of online apps that are replacing traditional desktop software. That hits one MSFT franchise -- Windows.

Office, the other great MSFT franchise, is in serious trouble given the rapid development of Google Docs and the inherent superiority of online office applications. If you're part of a team that routinely collaborates to design PPT presentations or long Word docs, try doing your next project using Google docs. It is a revelation when you realize that you never again have to worry about whether you're working on the right version, or whether the "Track Changes" feature was turned on or not. I now use this tool for my nonprofit and it makes collaborative document production light years easier than it was in the old MSFT model. And if you're still not comfortable with online documents for security reasons, you still don't need MSFT Office. OpenOffice.org, which develops a suite of desktop software products fully compatible with MS Office, has been getting better and better for years now, to the point at which it's essentially just as good as the Microsoft product. It's easy to set the default such that any document created in the Open Office suite of programs is saved as a .doc, .xls, or .ppt file. Google's online products easily export to these file formats, by the way.

It's been interesting to see the owners of the world's most important file formats (MSFT with DOC, XLS, & PPT; and Adobe with PDF) begin to lose control of their own file formats. The PDF is well on the way to commoditization, thanks to the efforts of Apple and Microsoft to build PDF conversion functionality right into their operating systems. Now, you only really need the paid version of Acrobat if you're designing a form or embedding flash into the PDF. That's about 1% of all PDF's I've ever seen. You wonder what this will do to sales of Acrobat.

The same thing is clearly happening to MS Office. I can now save/create DOC, XLS, and PPT files in Apple iLife, Open Office, or Google Docs. Do you remember how in the 1990s, if you were using ClarisWorks on a Mac, you had to actually BUY file conversion software just so you could save a ClarisWorks document as a DOC file? The world has changed a lot since then.

Almost three years ago I wrote about the beginning of the end of MSFT's competitive advantage period:

http://boards.fool.com/Message.asp?mid=23127036&sort=username

Since then the stock has gone from $25 to $28. The threats to MSFT's franchise are much more acute today than they were then. MSFT will continue to lose market share in both Windows and Office, and they will lose all of their pricing power within a few years. On the subject of pricing power, here's a great story:

http://bits.blogs.nytimes.com/2008/05/08/how-to-get-microsoft-office-at-91-percent-off/index.html?partner=rssuserland&emc=rss

Basically, MSFT was offering the $680 version of Office for just $60 to college students. Nothing new there -- that's been going on for years. But Microsoft executives were actively encouraging anyone with an EDU email address to sign up, whether or not they were a current student. Given that almost anyone can get an EDU email address from their college alma mater, the barriers to getting that 90% discount were essentially nil. I think that speaks volumes about their pricing power.

International growth won't come to the rescue, because most users, especially in the developing world, have less of an installed base that they need to retain compatibility with. If you don't need compatibility with legacy applications, and you have the choice between a $500 desktop that runs an attractive, stable Linux build, and an $850 desktop that runs a buggy version of Vista, which are you going to choose? If you make $9,000 a year, that's a pretty easy choice.

The company will continue to generate lots of cash for the next few years. But they have always relied on the cash from their two monopolies to fund their forays into other (money losing) businesses, as well as stupid acquisition attempts like Yahoo. Now that the monopolies are fading, you are left with a declining cash cow, a management team with a record of poor capital allocation, and a rapidly weakening competitive position in all the business lines outside the core franchises.

What multiple would you pay for that business?

Best,
ClientNine