Microsoft Will Win Online

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Over the past few months, Microsoft has produced several in-house memos detailing their strategic interest in web services. In November 2005, Gates himself issued a memo in which he declared the birth of Microsoft’s new Live strategy and began restructuring Microsoft to run leaner and meaner, and lean towards services over the internet, rather than on the static PC. Earlier this month, MSN head David Cole issued a memo identifying Microsoft’s Windows Live as the key ingredient to Microsoft’s new online strategy. But while MS becomes more aggressive online, the challenger against leading online service providers like Yahoo! and Google, it’s their connections to the PC desktop platform: Microsoft Windows and Microsoft Office that will eventually win them the industry lead.

Why Microsoft will win
While online service providers like Google and Yahoo have focused almost their entire business models on online services, Microsoft has maintained a vision, albeit a cloudy one, on the seamless integration between internet and desktop. Back in 1996, when Microsoft was kicking Netscape’s hiney with their shiny new Internet Explorer 4, they also introduced Windows Desktop Update, which moved Windows 95’s shell, Windows Explorer, onto an Internet Explorer-based platform, adding now common Windows Explorer elements like the address bar, and forward & back buttons. Windows Desktop Update also came with something called Active Desktop, which was designed to let users seamlessly integrate HTML content and widgets like stock tickers and weather reports, with their desktop wallpaper — something that Yahoo’s Widgets and Apple’s Dashboard do now.

Obviously Microsoft’s attempt at integrating the desktop with online data was all thumbs. Active Desktop frankly sucked, but it shows that Microsoft was clearly thinking about full-on internet integration long before anyone had realized the web could have version numbers. Because of mediocrity and because of a lack of competition, Microsoft pretty much gave up dabbling in online integration for a long time to focus on their core businesses.

It’s not easy to move away from a business model that brings home several billion dollars worth of bacon every year. But clearly some LED in Bill Gates’s mind suddenly flipped on again. Maybe it was all the hype over Google, maybe it was the buzz that follows anything Web2.0-related. Who knows? Something clicked, and Microsoft began examining online integration again. In June 2005, Microsoft announced they would be fully integrating RSS with their Internet Explorer 7 and their upcoming operating system, Vista (then known as Longhorn). In November 2005, Microsoft began re-branding many of their MSN services into Windows Live, which they have been constantly updating with new features to mach services offered by Google and Yahoo. And also in November, Microsoft launched a closed beta for their MSN adCenter to rival Google’s contextual ad platform.

There’s been a lot of speculation about desktop PCs eventually becoming thin clients, with all services being provided off-site by a third party. Both Google and Yahoo offer some desktop software, notably their instant messenger clients, but they’re still focused on driving customers online. Every computer, no matter how thin, needs an operating system. And guess who’s in the operating system business? Microsoft wants to destroy the line between desktop and Internet, and OS-level integration is the only way to do that. The operating system is the gateway to the Internet, not the web browser. The long-standing Microsoft vision of braiding online and desktop together is what gives them a clear advantage over their online service competitors. Oh yeah… that and revenue of nearly $40 billion a year.

Chinks in the armor
Despite Microsoft’s vision and the massive resources they have to draw on, there are a couple of things that could knock them off the one-way track to the top of the web services industry:

  • Microsoft loses speed. If Microsoft truly is an overweight behemoth, and they can’t develop services fast enough to satisfy the fickle consumer, they will lose agility and be quickly overtaken by others. Microsoft has taken steps to avoid this; the most noticeable one was splitting the company up into three nearly-independent divisions in September 2005: Microsoft Products and Services, Microsoft Business, and Microsoft Entertainment and Devices.
  • Microsoft loses their OS advantage. It’s not likely, given consumers familiarity with Windows, and Microsoft’s partnerships with PC manufacturers. But if Windows somehow becomes dethroned by another operating system, it could spell disaster for their online efforts as well. Contenders could be Linux on the business-side, or Apple’s OSX on the consumer side. Also, if Google were to release a polished, public version of their in-house Goobuntu version of Linux, it could cause some problems for Microsoft. But Google has publicly stated that their operating system is for in-house use only.
  • Microsoft avoids standards. If Microsoft, while they’re still developing their online services ignores standards-compliance, say making Web2.0 pages that only work with Internet Explorer, they will fail. It’s a strategy Microsoft used before Firefox to try and get more people to use IE. It’s failed and people hate it. ’nuff said. The point of making general services available online (like email, or personal data management), whether they’re ad-supported, or paid, is to make them available to as wide an audience as possible.

MS contextual ads
Tales of text-ad blindness aside, Microsoft must release a superior contextual ad platform. There’s no question that Google’s AdWords and AdSense combo are what has propelled them to the top of the online charts. It’s Google’s core business, and where they make the big bucks. Google’s success also illustrates the success of self-serve CPC text advertising itself. It’s a platform that not only brings in revenue for Google and lets them offer most of their services for free, but it also lets small web publishers earn money from advertising themselves.

If Microsoft wants to challenge Google on Google’s own turf, it has to be done here. MSN adCenter has been in a closed beta since late 2005, which means that Microsoft is giving some serious thought to its development. Consumers increasingly expect their web services to be free, and advertising is one of the few ways to generate revenue from a free online service.

Microsoft: past and future
Microsoft’s past attempts at integrating online data and services failed not because of a lack of vision, but because of a lack of technology. It was something no one had ever done before, so there were no standards, and no competition to drive development forward. It’s only now that technologies and web standards have been developed and pioneered by others that Microsoft can realize their original vision for the Internet, making the gap between online and offline data seamless and invisible. And it’s Microsoft’s offline core that will cause them to succeed online.

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