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Microsoft is Finally
Growing Up
With
a new move to make its products work better with open source
and its effort to buy Yahoo, Microsoft shows it wants to move
into the present.
By
David Kirkpatrick
March 7, 2008
Microsoft
is at a critical moment in its history and is taking brilliant
steps to remake itself. Thursday's announcement that it would
open itself up to far greater interoperability with other
types of software, including open source, is the latest big
move. But the bigger step is its $44 billion bid for Yahoo.
 The
crisis Microsoft faces is multi-part: Google continues to
grow, lapping up the majority of revenue created by online
advertising. Since such ads may someday be the primary source
of revenue to pay for software, especially for consumers,
that part of the crisis is grave. Microsoft has failed to
build a massive online advertising business and has fared
poorly in creating online services that capture the imagination
of customers.
On the enterprise
side, open source alternatives to Microsoft software, particularly
in the back end of corporate infrastructures, have clearly
diminished revenue growth. Finally, founder Bill Gates retires
from his management role this summer, remaining part-time
chairman of the board. But for all those challenges, the company
remains a money factory, with 2007 net profits of $14 billion
on revenues of $51 billion - a net margin of more than 27%.
So Microsoft needs
to move beyond Gates and maintain profits, while segueing
into a world filled with new and mostly unfamiliar competitors.
This week's move
was a very canny step to neutralize the ability of open source
to pull more business away from Microsoft.
In November 2006,
Microsoft and Novell announced a historic partnership that
aimed, among other things, at making Windows-family products
work better with Novell's open-source SUSE Linux software.
It was in part a response to customers outraged with how hard
Microsoft makes it to get its products to interoperate with
open-source software. A few months prior to the Novell deal,
Microsoft had set up a Interoperability Customer Executive
Council to placate big customers.
The Novell deal
has been a success. Microsoft executives learned they can
actually sell more products once it is easier to dovetail
Windows with Linux.
This
week's announcement takes the logic of the Novell deal to
the next stage. It makes it easier for Microsoft's customers
and competitors to modify its products for their particular
needs—a longtime lure of open-source alternatives—as
well as to more easily connect other sorts of software to
Microsoft products.
So look at it as
a canny response to market realities. It's a pragmatic realization
that the days of true monopoly may be over, even as the company
seeks to ensure that the days of dominance are not. (The deal
is also, of course, a response to the continued prodding of
never-satisfied regulators in the European Union.)
As recently as
2004, Microsoft Chief Research and Strategy Officer Craig
Mundie was telling me open source was "socialism."
But by the time I wrote a piece in Fortune two years later
about the rising influence of new Chief Software Architect
Ray Ozzie, it was apparent the company was moving in new directions.
That
article explained the urgency with which Microsoft was treating
the challenges of advertising and moving to the Web. "Put
simply," I wrote, "Ozzie's assignment is to Webify
everything: To intertwine Microsoft's entire product line—software
for consumers, software for businesses, Xboxes, all of it—with
the vast and ever-growing power of the Net."
Bill Gates did
not participate in the announcement this week about openness.
CEO Steve Ballmer spoke along with Ozzie, server head Bob
Muglia, and General Counsel Brad Smith. I doubt that if Gates
were still in charge of Microsoft it would be making such
moves. He created the old world of "shrink-wrapped"
software with superb success. The new coexistence with open
source and the move to the Web present fundamentally different
challenges.
Think of this week's
opening up of Microsoft's proprietary software alongside its
effort to buy Yahoo. That deal is intended, I believe, as
much to prod Microsoft's culture toward a Web-centric mentality
as to acquire powerful new advertising properties. Ozzie has
had trouble getting the company to move as quickly toward
the Web as he said it should in 2006. Spending more than $40
billion dollars signifies the company's seriousness much more
than exhortations ever could. I suspect it will work. And
recent alarms raised by Google execs suggest they worry it
might.
Open source and
Web software are Microsoft's two major challenges. As Gates
departs, both are being addressed by the company's new leadership
with creativity and deftness. The monopoly mentality no longer
works. But Microsoft can still thrive in a world of cooperation.
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