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Weekly Column

Paper War: Microsoft Is Leaking Internal Documents to Make Us Think They Have a Plan

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

Oscar Wilde said that the only thing worse than people talking about you is people NOT talking about you, and it must have been with this in mind that Microsoft recently "leaked" two company-wide memos concerning the Redmond's new strategic direction -- its so-called Live strategy that I wrote about last week. My plan for this column had been to detail what I believe will be Google's upcoming web services strategy, but that will have to wait a week since these memos are simply too juicy to ignore.

Please read both documents, which can be reached through this week's links. Do that right now. I'll wait for you.

While ostensibly written solely for internal discussion, the documents from Bill Gates and new Microsoft CTO Ray Ozzie were clearly supposed to be leaked. These are external marketing documents -- the equivalent of those ubiquitous white papers -- only Microsoft is pretending they aren't. We won't see any witch hunt at Microsoft trying to find the leaker, because I'm sure he or she was just following orders. With this in mind, then, let's decide what is the real message here.

Microsoft always needs a bogeyman, and in this case, it is Google. There can be only one devil, so Yahoo is dismissed as a "media company" and AOL is ignored completely. This is not a realistic competitive scenario. While AOL's position is uncertain given current ownership discussions with Microsoft and others, in web services, Yahoo represents as big a threat to Microsoft as Google.

But I have to say that Gates or Ozzie or whoever actually wrote these documents has done a very effective job of differentiating the company roles in a way that makes Google appear to be the bad guy, and Microsoft appear to be the good guy. Google is going to develop and deploy Internet services while Microsoft is going to ENABLE the deployment of such services BY ITS DEVELOPER PARTNERS. This makes Google the would-be monopolist.

Looking deeper, though, we see that the only way Microsoft can achieve its vision is by continuing to own the platform. They want us to be GRATEFUL, in fact, that such an enlightened outfit is running the store. And this will work to an extent, but only to an extent. Then what happens? All hell breaks loose as Microsoft again changes the game. Here's how:

1) Gates and Ozzie HUGELY over-estimate the role of advertising. This is intentional because it distracts with enthusiasm and plays into current Internet hype. Advertising alone will not be able to support these services, especially if Microsoft benefits from them only tangentially as Ozzie suggests. Remember that for Gates and Ballmer to be happy, Microsoft will have to maintain $2.5 billion per month in revenue and $1.5 billion per month in profit. That's FIVE TIMES the size of Google without Google's ad expertise or ad infrastructure. It simply won't happen.

2) Once the developers are committed and have made their Microsoft-centric technology investments, Microsoft won't gain much further, so it will be time for those third parties to start to die. Microsoft will buy 3-4 top players and then introduce knock-off services to kill the rest. The company's incessant need for revenue growth practically mandates this. It's this maw against which Microsoft, itself, is powerless.

3) Their homage to competition is hollow. Ray Ozzie is a very smart man, but if he thinks he can really pull this off, he's been smoking something. What's key here is Microsoft's innate inability to do something right the first or even the second time. The nature of Internet services is that to be successful, they have to come at little or no cost and JUST PLAIN WORK. What Microsoft products or services would that historically describe? Certainly not Windows or Office or any of the other shrink-wrapped products. And the services? Hotmail has had more than its share of service problems compared to Yahoo Mail or GMail. MSN has had huge service and reliability problems. The fact is that Microsoft doesn't have a culture of quality or reliability and -- short of outsourcing EVERYTHING -- that isn't likely to change soon.

So here's what will happen. Microsoft will make a huge effort and get some good press toward the beginning. I'm not saying they don't mean this stuff, just that they don't really know WHAT it means. They'll attract developers and, by doing so, maybe take a small bite out of Open Source, but mainly they'll just sell stuff, which for them is good enough. Then, to maintain earnings growth, they'll turn on their developers. Finally, when things still don't work right, they'll turn on their customers, jacking up prices and milking the monopoly.

They can't help themselves. It's all they know. And booting Allchin for Ozzie won't change that fact.

That's the external picture. But what's happening inside the company and its leadership to drive this?

Well, Microsoft needs a good story. We're now in the Christmas quarter, traditionally the biggest sales quarter of the PC year, yet PCs and Microsoft software will probably not be at the top of many shopping lists. Other than the xBox 360, Microsoft will not see much business this Christmas. xBox 360 could be huge, or maybe not, who knows? Using my friends' kids as a reference, I'd say it is going to be an iPod Christmas.

PCs are no longer getting faster every few months. There is no long-sought version of Windows in the immediate future. Windows Vista and Office 12 are months away from shipping IF they aren't delayed again. What reasons do consumers or corporations have to buy new PCs?

Microsoft's revenue growth is slowing down. This has many important implications, most of them on Wall Street. If Microsoft is perceived as slowing down chances are the stock price will drop. Microsoft is still a very healthy company, however Wall Street reacts more on perception than on fact. If Microsoft becomes boring in Wall Street's eyes, they will react to perception before fact. So if you were leading Microsoft, what would you do?

Create a plan for a new and exciting line of products and services. Even if you have no idea what those products and services will become.

IBM has done this for decades. Could Microsoft now be trying to announce a product "future" before there is substance? Sure. Investors have been willing to overlook bad quarters or years at IBM if they believe a better future is coming. These memos are intended to start a public dialog that will take attention away from Microsoft's business slowdown.

Microsoft historically has never cared about the public perception of their company. Their huge legal bills show the company's willingness to push the boundaries of ethical behavior, and maybe legal behavior too. Microsoft's corporate culture is different than most companies. They are not practiced at making the "right and fair" decision, then making it happen. Most companies find a way to balance profit and be a good citizen. Not Microsoft. This just wasn't important to them. To me, the Microsoft memos looked like an amateurish attempt to improve their image and give the perception they care.

Looking at Ray Ozzie's memo, it is rich in generalities and lacking in specifics. I found it helpful to again step into the shoes of the consumer or corporate IT buyer. What APIs and what services would Microsoft offer that I'd be willing to buy? The internet has provided us many new ways to do business. But are there even more big untapped business ideas out there? If Microsoft could break open a new market, that would be exciting. But is there a new market to be opened?

Ten years ago, Microsoft realized the importance of the Internet and revamped the company to meet the challenge and opportunity. Back then, it was well understood what needed to be done. Bill's Internet Tidal Wave memo at that time led to new business plans, new projects, and a new direction for Microsoft. As I read the recent Microsoft memos, they seem to be lacking in substance. Where's the beef? I can see only two possible explanations:

1) Microsoft's execs don't know what to do.

2) The memos are a facade.

Microsoft's core businesses are slowing down. Google could become a major threat to Microsoft. What harm could Google cause Microsoft? Microsoft's greatest business vulnerability is Office. If a competitive product (or service) hit the market it could further dilute Microsoft's earnings since they'd have to lower Office prices to compete. Another great threat is Google could become an organizing influence in the Open Source world. They could guide the Open Source community and it could become a greater threat to Microsoft.

If I were Microsoft and afraid of Google, I think I'd try to figure out what they are going to do and how. These Microsoft memos look like a plan to do the same thing Microsoft "thinks" Google will be doing. By publically stating their plans and putting those plans in the hands of Wall Street, Microsoft is giving the perception they are doing the same things as Google, so Microsoft will be as good an investment as Google.

But what if Google isn't doing what Microsoft thinks it is? I personally think Google's plan is bigger than Microsoft can even imagine, and Microsoft tends to think big. I'll explain this next week.

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