At last week’s MIX09 web conference, Microsoft made a couple of important announcements.
The first is regarding Silverlight 3, the latest version of Microsoft’s web application environment (competing with Adobe’s Flash and Air products). The key new feature for SL3 is an “out of browser mode”, which enables applications written using the system to not only be run from within a regular web browser – they can be downloaded to a user’s computer and then executed independently. Why is this an important new capability? With the mobile world seemingly gaining a lot of new focus from app developers (iPhone, Android, Windows Mobile, BlackBerry App Store, Palm WebOS, Nokia Ovi) and some netbook makers starting to look to bring these environments to larger form factors, the battle for app developers is really on now. If SL3 is brought to the different incarnations of Windows 7 for desktops, servers, and mobile devices, it would provide a way for developers to write applications once and have them usable on all of these platforms. The disadvantage for regular client applications (like Microsoft Office) is that these programs aren’t easily transferable between systems (they would need to be adapted and re-compiled) but SL3 apps are runnable on any platform, and now using this out of browser mode, can even escape the confines of the web browser and look like a regular application.
Google Apps meanwhile has been trying to escape the confines of regular browsers as well, and through Google Gears can now save data to the local computer (for running in an off-line mode). Moreover, with Google’s Chrome web browser, Google applications can be launched from a computer as if it were a standalone application. Offering the advantages of seamless document sharing, plenty of on-line storage, being free for regular consumers, and integrated with a web site domain for enterprise users, Google Apps using the Chrome web browser becomes a formidable threat to Microsoft’s productivity money-making machine.
I also took Adobe’s AIR environment, and an application called TextFlow in particular. TextFlow is a program that allows users to share documents with others, and then allows an editor to review and merge changes to produce a final version. Downloading the application was a seamless process, and the Installation took place all within a matter of minutes directly from within a browser (The Adobe Air environment was installed first). Registering TextFlow only took a few moments through an e-mail check… the end result? Absolutely terrible. I had a chance to look at Adobe Air applications last year and thought that while the user interface was stunning, I wondered who would want to use this? The view is pretty much unchanged, and using the TextFlow non-commercial version, a document I uploaded not only wasn’t really editable at all using a graphical interface to control formatting (unlike what I saw in the demo video), but worse, the document I uploaded disappeared completely and trying to re-upload a simple Word file caused the program to hang up. The bigger problem for Adobe Air is that while Adobe Flash is installed in almost every web browser in the world these days, Adobe doesn’t really have access to users – it’s missing a platform…. unlike Facebook, Google, Microsoft, and Yahoo. Through Google Apps, the most important thing that Google gains is access to users that are interested in enterprise apps, and this is something that Adobe simply doesn’t have at the moment. Should Adobe really be buying Yahoo in this context? Hmm…
The second important announcement for Microsoft was the beta launch of the Microsoft Web Platform. Why might this be an unprecedented time for Microsoft? For the first time, we’re seeing Microsoft really embrace open source applications, which by their nature are and will remain free. Microsoft has been milking enterprises for a long time now through its dominance in the space, and charges a hefty price for even its most basic server offering (around $1k for 5 users, $2k for 15 users) When was the last time that Microsoft really gave something away for free? For companies like Real and Netscape, the answer might be “only when they want to torpedo another company”. With Microsoft’s Web Platform, we see a fundamental change in the approach Microsoft is using, adopting more of a Google model where they’re trying to add value for customers using their ecosystem. According to an eWeek article, the product manager for this product, Lauren Cooney, comes from IBM and BEA and brings a different attitude towards open source applications and emerging technologies not built from within (“Make Web not war”).
This attitude shift is something that I’ve been a proponent of for a long time. After all, companies these days may be running a mix of different server technologies and applications, and want to be able support all of them through a minimum of re-engineering work. Through the new Web platform, we see Microsoft supporting not only its own ASP.Net technology, but adding support for a free programming environment called PHP out of the box. Even better, Microsoft will now offer important new open source packages through their enterprise app store for free, including popular packages like WordPress and Gallery, enabling hosting companies and enterprises to add these capabilities on Microsoft architectures, and I’d expect other major open source tools like Joomla to be on this platform before long. It’s not perfect yet though, and where the buck stops might be in offering Sun’s MySQL database (perhaps soon owned by IBM). After all, MySQL competes directly with Microsoft SQL Server… the problem lies in the fact that a lot of open source packages use the open source MySQL as a fundamental database – would Microsoft force new open source packages to allow them to interface with Microsoft’s database? No, but I’d expect that Microsoft would want to plug this hole by at least submitting new open source changes to these packages to at least allow Microsoft to not have to also install MySQL at the same time as they install these new packages.
What does this have to do with virtualization? Perhaps a lot. As a consulting client ponders a new server architecture, the fundamental question arises. Go with a costly Microsoft server architecture or a free Linux server? One reason to go the Microsoft route would be to enable legacy applications like payroll and accounting software to be seamlessly transitioned over to the new hardware. Finding alternative software packages for these applications would be time-consuming and risky. Up until a few years ago, companies had no choice but to buckle to Microsoft’s demands and buy new licenses. However, with virtualization, this suddenly opens up the possibilities. For these old applications running on Windows Server 2003, users can now use tools from companies like Microsoft and Citrix to virtualize these old environments, essentially simulating them either on bare metal (no operating system) or within Linux. Ironically, Microsoft moving into the virtualization market with its low-cost Hyper-V offering forced VMWare to go with a free product (ESXi), and VMWare hopes to make money on it through support and training. For a lot of small businesses, this could be a great and free way of supporting old Microsoft server installations (which are already paid for) in a Linux environment. Better yet, it turns out that the risk might even be lower for these business because they don’t need to upgrade to a new operating system in Windows 7 server, which might have forced them to upgrade their application software at the same time – killing two birds with one stone so to speak. The other option that Microsoft was hoping for was to get customers to buy the latest Windows 7 server, and for applications that they want to consolidate onto the Windows server, they could use the Hyper-V virtualization, while also enabling free Web applications as well. Does this strategy work for Microsoft? No, but at least it narrows the price gap, making it easier for companies that really want to stay with Microsoft to justify away from Linux. For example, companies wanting to set up a corporate blog might now simply install WordPress on a Windows server instead of buying a $1000 Linux box to run the popular blogging software.
In summary, Microsoft in my view appears to be moving in the right direction in the server area, and Microsoft Exchange (supporting Outlook) is still a dominant technology in the enterprise. And while virtualization is still a big threat to consolidate Windows applications on Linux platforms, Microsoft’s apparent embracing and promotion of open source applications does signal an important change in Microsoft’s “only built from within” mentality. How important is the server area for Microsoft? With an operating margin of almost 40%, it was responsible for about 25% of the operating profit in Microsoft most recent quarter. Definitely an important piece of the puzzle. More importantly, keeping companies “Microsoft only” is definitely a starting point for Microsoft’s Office franchise, which is even more important to Microsoft. What would happen if a company doesn’t use Exchange and instead goes to IBM’s Lotus suite or Google Apps? While Word remains the dominant word processor in the corporate world, it could lead to more usage of free/low-cost tools like Google Docs. For example, in writing this blog, I use a simple text editor and then on-line WordPress.com HTML editor for formatting, which is sufficient when you want the content to be viewable on a number of screens, including within a mobile context. The important jewel for Microsoft is its business tools division, which earned 53% of the company’s operating profit last quarter, with a 64% operating margin! Clearly, lots of low-hanging fruit for the competition, and with Microsoft now trading at around $18 (up 20% from its low at the beginning of March), it still trades at under 10x P/E.
The bottom line for Microsoft is that while Microsoft should have been more proactive in the past with regards to open source software, I’m encouraged by the announcements from MIX09 in this regard, and it does signify that Microsoft is working to improve the value proposition for its server customers at a time when they have more choices than ever before. There are implementation risks with this strategy, and Microsoft faces internal struggles as it starts to offer external software packages that internal groups might have been working on (such as MySQL vs. SQL Server). At this low relative valuation for Microsoft, I do see that Microsoft will be incrementally more successful with this strategy going forward in protecting the “family jewels”.
