Microsoft Excels With Four Business Models

It’s tough to cheer for a company with $46 billion in revenue, the monopoly power to dictate technology, and net profit margins consistently north of 30%. Microsoft doesn’t make friends easily.

Nonetheless, Microsoft’s risky investments in new IT markets are remarkable. The company is poised to display the IT industry’s best technology business model execution in 2007.

Only the very best managed companies can sustain profitability in two technology business models. It takes a rare combination of size, innovation and talent to realize profits with a third. And it’s a very exclusive club of companies that can launch a fourth business model.

But today Microsoft has four distinct businesses: licensed software, gaming, Web services and personal music. Microsoft established beachheads in the third and fourth businesses in just the past 12 months. Achieving profitability in four business models requires considerable innovation and increases competition.

Shareholders should see profits from Microsoft’s Xbox gaming system in 2007, six years after it was launched. The one-year-old Windows Live — essentially an advertising-supported Web services model — is trying to compete with a nimble Google. The new Zune, launched at the end of 2006, is clawing its way into the personal music marketplace dominated by Apple’s iPod.

Many companies are profitable with a single business model — Dell and Google are marquee examples, and there are thousands of others. Fewer IT companies have mastered the scale and innovation required to achieve profitability with two business models. The iPod contributes to Apple’s bottom line. And Cisco recently announced plans to unbundle its IOS software and networking hardware in a gambit to add a second business model.

With the iPhone, Apple is now hoping for success in three arenas, but few companies can attempt three business models, much less attain profitability. IBM and HP have managed this in licensed software, computing platforms and various types of IT services. IBM exited consumer computing by selling its PC business to Lenovo, while HP continues to invest in this highly competitive fourth business model.

Microsoft’s Windows and Office cash cows sustain the company while it experiments to find the right formula to succeed in new high-growth businesses. Microsoft has earned a reputation for tenacity, a critical attribute for making profits with a new business model — perhaps even as important as innovation. Wall Street frowns on spending cash for risky ventures, figuring the money should be returned to stockholders, which is why Microsoft’s stock price has languished.

Contrast Microsoft’s recent efforts to launch risky new technology business models with its past efforts to eliminate threats to its operating system franchise.

Bundling Media Player and the Internet Explorer Web browser with Windows were self-serving marketing moves hailed as innovative technology. The results of this strategy were further bloating of the operating system, more security vulnerabilities and an antitrust lawsuit filed by the U.S. Department of Justice.

Today Microsoft really is fostering competition. Zune, Microsoft’s entrant into the Internet music business model pioneered by Apple, will hemorrhage cash for the foreseeable future as the company strives to sell 3 million units in 2007. The upstart Zune competes with Apple’s 85% share of the Internet music download market, the result of having sold 67 million iPods and 1.5 billion online songs.

To boost Zune’s fortunes, Microsoft is reusing a connectivity strategy that helped to grow the online gaming marketplace and accelerated Xbox sales. Microsoft is attempting to create product synergy with a wireless connection that beams songs among Zunes, just as Xbox’s Live Internet connectivity boosted online gaming for Xbox — at the expense of Sony, Nintendo and Sega.

Microsoft’s Live offering is challenging Google in the Web services market. Live targets any consumer browser, including Mozilla’s Firefox. Windows Live Mail supports competitive e-mail services, including Google’s Gmail.

Experimenting with new business models is evidence of real change occurring on the Redmond campus. Interoperability with competitive offerings hasn’t been a historic strength of Microsoft’s, to say the least. Profitability for Live depends on advertising and subscriptions for premium services, which requires targeting the largest possible addressable market. In fact, Microsoft’s commitment to openness and interoperability for the advertising-supported business model may be the boldest of its new moves.

Xbox has been an innovator in online gaming while creating a new marketplace for Microsoft partners. Xbox should become profitable this year with around $4.6 billion in sales, climbing to $7.6 billion in 2009.

Growth in revenue generated by the original software business model should jump from 11% last year up to 13% to 15% in 2007 as Vista and Office upgrades kick in. But this older model is most at risk to competition from maturing Web services business models. And the agile enterprise is the death knell of Windows’ five-year software release cycle.

Noticeably absent from Microsoft’s assault on new business models is an offering in the open-source software market. But who knows — that may yet become a new business model for Microsoft if it sees dollar signs in the ecosystem of open-source software.

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Source: Computerworld.com

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