Microsoft’s Record Quarter

Microsoft reported record revenue for 4Q13. Tim Anderson has a good summary on his blog.

The overall trend is;

  1. Sales to corporates is doing very well.
  2. Cloud services are also doing well, although the size is still very small.
  3. Consumer side software is not doing well.
  4. Devices (Xbox and Surface) are growing.

If we look at Microsoft’s traditional strengths which are software for both consumers and corporations, we see that they are going in different directions; consumer software is declining whereas corporate software sales are strong. Corporate software sales are their largest segment, so its a good thing that that is growing.

Many people would say that their weakening consumer sales are a cause for concern and that eventually corporate sales will also start to fall. However, evidence for this is weak. With the limited information that we have, especially about the corporate market and how this will evolve, I don’t think we can reasonably know what will happen to Microsoft in the future.

I would like to take a bit of time to summarize how Microsoft came to be this strong in corporates, and gain some perspective as to how things might pan out.

Microsoft serially disrupted corporate IT

Microsoft can best be seen as a serial disruptor. In many times of their history, you can see how they created a simpler software product that ran on low-end hardware. This enabled them to enter an existing market from the low-end, and from there, Microsoft relentlessly improved their product to eventually capture the high-end.

  1. BASIC: The BASIC interpreter was what got Microsoft started. It was a low-end derivative of FORTRAN that ran on the emerging personal computers of that time. As Windows became prevalent in PCs, BASIC evolved to become Virtual Basic, an easy-to-learn programming language, which was used even by non-professional programmers to create simple corporate IT solutions.
  2. MS-DOS: Because IBM did not initially consider personal computers to be very important, the IBM-PC used off-the-shelf components and out-sourced its operating system to Microsoft. MS-DOS itself was a low-end operating system. It was initially based on QDOS, the “Quick and Dirty Operating System” written by Tim Paterson. Microsoft improved MS-DOS so that although it was still very simple compared to sophisticated UNIX operating systems, it was good enough for the personal computers of that time. Eventually Microsoft create Windows which evolved to gain multi-processing and memory management, and this enabled Windows to even move up-market to snatch away the workstation market and the server market from UNIX.
  3. Server Products: At the time Microsoft introduced server products, their main competitor was UNIX. UNIX was difficult to administer and required familiarity with the command line. Windows server products could be managed from the GUI and were much simpler. Hence people with basic training could now administer servers for which there was huge demand due to the exploding popularity of the Internet.

Because of this history or starting out at the low-end and then moving up-market, Microsoft has managed to capture multiple key footholds in the corporate IT value chain.

Corporate IT software takes a long time to switch platforms

Corporate software solutions can live for a very long time. Consider how long COBOL systems are still being used.

The rapid take-up of Windows was not because Windows replaced legacy systems. It was because there was a sudden need to put computers on the desks of every office worker and to provide email and Intranet services. Windows was competing with non-consumption.

Now that Windows is so dominant in the workplace, there is little possibility of any non-consumption remaining. The only other way an entrant could penetrate corporate IT is to attack from the low-end hoping that Microsoft would retreat up-market. This cannot succeed primarily because corporations are generally reluctant to switch their current platforms, and secondly because Microsoft’s culture is to defend the low-end.

Summary

Even though mobile platforms are gaining in popularity, I see little reason to predict that this will encourage corporate IT to change their platforms. The more likely scenario is the inverse; that mobile platforms will have to adapt to the requirements of legacy corporate IT solutions.

If so, the end result is that corporate IT will have to support more devices, not less. This would mean more servers, more licenses, more corporate IT solutions. Microsoft’s record quarter is no fluke. I expect them to continue to have strong corporate revenue.

Of course Microsoft would like to own the mobile market as well so that they could provide and end-to-end solution. However, they would still remain in a strong position even if they couldn’t.