Every oilman dreams of drilling a gusher. Bill Gates certainly hit one with Microsoft Inc.’s core desktop and office software. The company should sell about $35 billion (Rs1.4 trillion) worth this year, raking in operating margins hovering at an obscene 70%. But old oilhands know that every well eventually runs dry. Is Microsoft rapidly approaching peak profits from software? Tech evangelists seem to think the company’s business model of selling desktop software for PCs is sputtering. Its bid for Yahoo bolsters their case.
The threat is clear. Customers pay a hefty amount to use Microsoft’s software. Now, free alternative applications on the Web are appearing. Google, for example, offers ad-supported spreadsheets, word processing and email online for free. And the fight is certainly intensifying. Google’s word processor can now be used offline. And a partnership with online software group Salesforce.com, announced on Monday, should result in more users.
Much like an oil kingdom, Microsoft plays down the possibility that the peak in its core business has already arrived. Instead, it claims software is moving towards a hybrid model—some services will be done online and some on thedesktop. It may be right. Online versions of these programs may be free and are good for collaboration, but they aren’treliable enough for most users. And some tasks, suchas advancedspreadsheet functions, take forever to do online.
But Microsoft’s actions tell a different story. Similar to a sheikdom preparing for a day when oil no longer flows by constructing resorts shaped like palm trees, Microsoft has poured cash into other ventures which act as a form of diversification, such as its Internet business and consumer gadgets such as the Xbox games console. It’s even rumoured to be planning to open a chain of retail stores. Unfortunately, Microsoft’s record in entering new industries is mixed. For every success such as business software, there are vanity-driven investment mediocrities such as the Zune music player.
None of these efforts, however, has been as ambitious as its current attempt to extend the life of its wells: the $40 billion-plus bid for Yahoo.
Microsoft asserts its bid is entirely predicated on building an advertising giant. But bringing in outside engineering expertise could prove to be the key if software distribution is eventually done entirely online—and explain why it is pursuing Yahoo despite shareholder displeasure. The Internet company’s experience in selling online advertising and subscription-basedconsumer services could prove invaluable.
In any case, Google’s free online offerings will improve,attracting customers and putting pressure on Microsoft’s margins. This gusher won’t end overnight, but the days of easy extraction—and profits—may have.