Tuesday, July 06, 2004

Microsoft becoming Middle-Aged

Microsoft is quietly turning itself into a utility company. The vision being presented by many computer industry leaders, including Bill Gates of Microsoft, is of computing services being piped into businesses and homes like electricity, delivered across some kind of grid, and billed according to usage. Utility computing is not just a technological move, but represents a business departure for Microsoft, leading it away from its high-tech alliance with Intel.

Many years ago, Gordon Moore of Intel declared that computer hardware power would double every eighteen months. The hardware industry continues to track this principle - known as Moore's Law - fairly closely. Meanwhile, the software industry has benefited hugely from Moore's Law and the exponential growth of computer hardware power. A constant supply of bigger and faster machines has meant a continual demand for new software licences. Meanwhile the software industry has returned the favour by producing feature-laden power-hungry software that helps stimulate the demand for bigger and faster machines.

Moore's Law appears to offer a vision of ever-cheaper computing - but this is a mirage. Since total production costs, including R&D, are constantly increasing, unit costs can only fall if the total production volumes grow to achieve ever-larger economies of scale. Without rapid growth in IT spending, Moore's law is not economically viable. Influential computer users, such as Eric Schmidt of Google, are turning their back on Moore's Law, and using older, cheaper technology. Corporate IT budgets are being squeezed, and purchase of hardware and software is much harder to cost-justify. A dedicated minority of users may want the latest products with the most advanced features, but most users will be focused on more basic aspects of software value, such as reliability and total cost of ownership.

In January 2002 Bill Gates responded to this challenge by declaring a goal of Trustworthy Computing, both for Microsoft and across the industry. Against a background of poor software security, with Microsoft's own organization frequently falling victim to Internet attack (most recently the Slammer virus), Microsoft promised to improve the reliability and security of its products. Instead of pushing out new features at all costs, Microsoft would devote more effort to testing, and to weeding out vulnerabilities. Some industry observers have seen this initiative as purely a technical one, and have noted Microsoft's struggle to adopt this consistently across its organization. Others have dismissed it as marketing spin.

But the strategic potential of trustworthy computing goes much further than technical quality. Utility computing requires Microsoft to adopt a different culture, perhaps more grown-up and responsible, less technically exciting. It is a bold strategic move, with no certainty of outcome. Microsoft could simply have chosen to sit through the downturn in IT spending, waiting for previous spending patterns to be resumed, knowing it would survive where many of its competitors wouldn't. But if the move is successful, Microsoft becomes a value stock, producing a fat dividend yield from a secure industry position. Safe computing.

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