Yahoo Bid, Online Ventures May Reflect Strategy for Life Beyond Desktop Software
Every oil man dreams of drilling a gusher. Bill Gates certainly hit one with Microsoft's core desktop and Office software. The company should sell about $35 billion of it this year, with operating-profit margins hovering at 70%. But every well eventually runs dry. Technology evangelists seem to think the company's business model of selling desktop software is sputtering. Its bid for Yahoo bolsters their case.
The threat is clear. Free software that competes with Microsoft's is appearing on the Internet. Google offers advertising-supported spreadsheets, word processing and email. Google's word processor can be used offline as well. And its partnership with online-software concern Salesforce.com, announced last week, should result in more users.
Microsoft plays down the possibility that its core business is peaking. Instead, it claims software is moving toward a hybrid model, with users employing both desktop applications and online services. It may be right. Free online programs aren't yet reliable enough for many users. And some tasks, such as advanced spreadsheet functions, take forever to do online.
Microsoft's actions tell a somewhat different story. It is experimenting with a shift to subscription-based versions of its Office programs. And like oil-rich sheikdoms turning to tourism and financial services, it has poured cash into other ventures that act as a form of diversification, like its Internet business and the Xbox games console. Microsoft's record in entering new industries is mixed. For every success like business software, there are 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 oil wells: its $40 billion-plus bid for Yahoo. Microsoft says its offer is entirely predicated on building an advertising giant. But bringing in outside Internet expertise could prove vital if software distribution eventually shifts online.
In any case, Google's free online offerings will improve, attracting customers and putting pressure on Microsoft's profit margins. The gusher won't stop overnight, but the days of peak extraction -- and earnings -- may be ending.
By: Robert Cyran and Lauren Silva
Wall Street Journal; April 22, 2008
