EXECUTIVE SUMMARY MICROSOFT Microsoft is unique in history. By virtue of its dedication to providing complete PC user desktop solutions, Microsoft has revolutionized computing by making it available on every desktop. PC solutions are positioned to promote ease of use. The company has developed a group of products that provide incredible functionality, are intuitive to use, and are at the same time widely available to users because of the low cost of products. Rules-based configuration enables implementation of large numbers of products by a great variety of consumer and business customers in many different countries. Limiting end user software operations to very simple, understandable, well defined tasks make computer use achievable. This is the genius of Microsoft. MICROSOFT REVENUE Microsoft product segment revenue is analyzed by the calendar year following. Platforms accounted for $8.09 billion dollars in 1998. (See Figure ES- 1 and Table ES-2.) Applications and tools accounted for $7.47 billion in 1998. (See Figure ES-3 and Table ES-4.) Interactive media and other grew to be a measurable market segment with $1.1 billion in 1998. The company did not start reporting this revenue separately until September of 1998. ES-1
ES-1 MICROSOFT PC APPLICATION PRODUCT MARKETS, PERCENT, 1998 Word 4% Office 82% Excel 2% PC Input Devices 8% AD Tools 4% Source: WinterGreen Research, Inc. TABLE ES-2 MICROSOFT PC APPLICATION PRODUCTS AND DEVELOPMENT TOOLS, 1998 In Billions of Dollars Billion $ % Office 6.13 82 Word 0.28 4 Excel 0.15 2 PC Input Devices 0.60 8 Application Development AD Tools 0.31 4 Total 7.47 100 Source: WinterGreen Research, Inc. ES-2
ES-3 MICROSOFT PLATFORM AND BUSINESS APPLICATION PRODUCT MARKETS PERCENT, 1998 Workstation NT 13% Server NT 7% Backoffice 15% Windows 98 58% Source: WinterGreen Research, Inc. Exchange 4% SQL 2% WinCE and Other 1% TABLE ES--4 MICROSOFT PLATFORM AND BUSINESS APPLICATION PRODUCTS, 1998 In Billions of Dollars Billion $ % W indows 98 4.63 57 W orkstation N T 1.07 13 Serv er N T 0.54 7 Backoffice 1.24 15 Exchange 0.32 4 SQL 0.16 2 W ince and Other 0.10 1 Total 8.09 99.65 Source: WinterGreen Research, Inc. ES-3
MICROSOFT OPERATING SYSTEM AND APPLICATION STRATEGY Since its inception in 1975, Microsoft s mission has been to create software for the personal computer that empowers and enriches people in the workplace, at school and at home. Microsoft s early vision of a computer on every desk and in every home is coupled with a strong commitment to Internetrelated technologies that expand the power and reach of the PC and its users. Microsoft strives to produce innovative products that meet customer evolving needs. Large corporations used multiple versions of Office during the deployment phase. Upgrades depend on the time it took to install large numbers of desktops and end users. The Office 97 service upgrade included Word 97 binary file converter that simplified the sharing of documents across multiple versions of Word. Shell Oil deployed Office 97 on 10,000 desktops in the same day. Microsoft has built in market protection because of the diversity of its Windows operating systems. The products go beyond full functionality to a level of product complexity that delivers enormous simplicity to users. No competitor can hope to deliver comparable functionality even if the operating system code is available. Microsoft dominates by virtue of its comprehensiveness. Microsoft has positioned to provide a robust, scalable, and global directory service. Active directory is being positioned to be integrated with new and existing applications. NT is positioned to minimize costs, improve functionality, and increase the ability to respond to moves and changes. Consolidating directories and implementing a global directory service represents a feature of NT. ES-4
Therein lies the vulnerability of Microsoft as well. Some competitors may implement network computing more efficiently than does Microsoft. Microsoft is tied to a large, immutable operating system that is not yet stable. Success has pushed out competition in many client segments but that situation could change. Now, competitors can only hope to provide products that supplement Microsoft functionality rather than compete directly with it. The 3Com Palm operating system is more efficient than the Microsoft CE operating system. Linux is emerging as a market force. Real time operating systems are gaining a market presence. Companies now seek to ally with Microsoft to achieve a market presence. Microsoft seeks to harness critical forces in the personal computing and digital technology revolutions by creating a plethora of partnerships represent the primary strength of Microsoft. Microsoft has been able to ally with the developers who define PC technologies, and the customers who use PC technologies. IBM AND MICROSOFT CORPORATE POSITIONING Microsoft has a focus and an expertise in providing client side, across industry platform and framework products and applications. IBM has a large enterprise focus on providing mission critical, industry specific solutions. Each company participates in the others markets, but in large part they do not collide in the market. As the Internet takes hold, all the rules change. The Internet represents a quantum change in all the rules on doing business and of managing computing systems and IT departments. As these changes occur, Microsoft and IBM have ES-5
significant market opportunity to redefine their participation in computing systems markets. Microsoft has a people focus. Microsoft is attuned to how people shape the face of computing. Microsoft seeks to develop products that are intuitive to use. This is in contrast to IBM which has a mission critical solutions focus. IBM is focused first and foremost on how to preserve and protect data and information which is located inside the computer. Each company typifies a particular market focus. Each company addresses the complete needs of an industry segment but with a particular slant on the business of computing. There is a significant place for both types of company in the computing industry. Middleware represents the most comprehensive threat to Microsoft operating systems. As computing enters the network age, the network is the computer. Middleware is the operating system of the network. But, within PC operating system functionality, Microsoft is everything to all people. Windows has achieved a monumental dominance of enabling PC functionality by virtue of its comprehensiveness. The intricacy of the features and the large number of features are admirable and have no parallel in any product ever offered to the market. Windows 98 and its successors represent fully featured operating systems. They are unmatched for functionality and utility. The cost of development has been spread over many years. The cost has been spread over a large number of users, resulting in a very large installed base. The huge installed base assures a market for upgrades for years to come. Microsoft operating systems drive sales of PC equipment, because users desire to have ever increasingly powerful functionality. As PC hardware ES-6
component and system vendors have been able to provide increasing speed and continuously improving performance, demand for more functions persists. Performance improvements for PC hardware are expected to increase by quantum leaps for the nest 15 years, driving demand for operating system multimedia capabilities. MIDDLEWARE As Microsoft moves to put middleware into the operating systems, significant hurdles have been encountered. Middleware is by definition across platform, open systems software network enabling technology. Operating systems are by definition proprietary. So the Microsoft operating system does not logically embrace middleware and the operating system has tried to reach outside its logical definition. Microsoft seeks to avoid middleware by embracing the Internet. Microsoft puts functionality in operating systems that other vendors are putting in middleware. The issue is how to manage cross platform cross application strategy. Microsoft has implemented HTML in Word making these documents available on the Internet in a universal format. The issue relating to middleware revolves around how to manage transactions in a similar universal manner. Microsoft has targeted proprietary operating system solutions balanced by the Internet. Concurrently middleware vendors are developing EAI application integration strategies with message broker and switching algorithms. Microsoft server related strategy targets small and mid size businesses with the Windows and NT operating system platform. ES-7
WELL DEFINED TASKS Limiting end user software operations to very simple, understandable, well defined tasks makes computer use achievable. This is the genius of Microsoft. Microsoft has been able to implement this capability for both consumer and enterprise operating system and applications software. Ultimately, Microsoft is expected to separate its Internet servers from the PC operating systems and institute separate pricing schedules. TRAINING TOOLS Just-in-time training tools are positioned to be available when needed by knowledge workers. Instead of learning a lot and retaining a little, a new method of training is evolving. Information can be learned in an incremental way. Learning occurs as needed. Learning is achieved through help systems. Help systems in the Windows shell comprise investments of thousands of hours of usability testing, making it easier for users to instantly locate and read relevant information on a topic. Information pertaining to any Microsoft and third-party products is displayed in help systems. Help systems go a long way to deliver just-in-time training to users. Help systems reduce peer support and formal training expenses. REDUCING COST OF OWNERSHIP Lowering the total cost of administering applications is a key concern to IS managers. Microsoft users and system managers embrace reduction of total ES-8
cost of ownership as a key priority. Microsoft has a goal of reducing total cost of ownership (TCO) by another 50 percent in future versions. Lower cost of ownership represents a significant competitive issue in software markets. Microsoft has positioned to provide lower cost of ownership across its entire product line. MIGRATION STRATEGY Migration strategy is an integral part of Microsoft operating system positioning. Microsoft pays attention to how it adds new functionality, being sure that it extends the life cycle of existing products even while developing new functions and features for next generation operating systems. The migration process from down-level servers to new servers can take place one domain controller at a time. When all of the domain controllers in one domain have been upgraded, it can be switched to a newer domain. In this manner, Microsoft has positioned to keep customers purchasing existing products while developing new ones. SUCCESS FACTORS Microsoft s commitment to making innovative software products, combined with soliciting for customer feedback, is the key to customer satisfaction and long-term success. Microsoft s long-term vision of the personal computer as a tool to empower people and organizations is the basis of its success. To the extent the Internet drives PC markets, Microsoft is tied to the Internet. Development efforts are centered on personal productivity enhancement. As we enter a new era of ES-9
personal computing that embraces communications technology, the vision is shifting. WELL DEFINED TASKS Limiting end user software operations to very simple, understandable, well defined tasks makes computer use achievable for most people. This is the genius of Microsoft. Microsoft has been able to implement this ease of use capability for both consumer and enterprise operating system and applications software. ES-10