Why Microsoft’s “Software + Service” Strategy Will Not Work
It seems Microsoft believes it can slow down or stop the rising tide of Software-as-a-Service (SaaS), and it is this approach that may be the downfall of this monopolistic behemoth. Like so many empires before them, the belief that they’re too big to fail could be the root cause of their undoing.
There are some very specific reasons the SaaS industry (also called “cloud computing“) is growing exponentially:
- Low up-front development costs
- No ongoing maintenance – no on-site applications and software
- No homegrown applications that need constant tweaking
- No servers to maintain, patch, and secure
- No in-house network to protect and maintain
- Seamless upgrades – often 2 to 3 times per year
- No broken integrations from upgrades
- Fast implementation – companies can have full-blown applications in weeks rather than months and years
- Flexible application that can change and grow as the business changes and grows
IT departments have been severely burdened by upgrades, server patches, and security issues, as well as developing and maintaining homegrown applications. Often, 60% to 70% of IT resources are directed at maintaining this infrastructure, while the business units within their organization are demanding more tools to make them more productive. This tension between the need to maintain an in-house infrastructure and the need to quickly provide innovative IT solutions while keeping costs in check is straining IT organizations, regardless of company size.
The future is now and the evidence of the emergence of a significant shift in IT is mounting.
The SaaS deployment method will ultimately eliminate the need for an in-house network and will continue to free resources to provide innovative tools to business units. While the longer-term vision of companies maintaining their entire IT infrastructure in the “cloud,” or Internet, is not there now, the time is not far off. There are some companies who have already saved millions of dollars by eliminating their in-house network and have found the new “cloud” environment incredibly fluid, flexible, and reliable.
This trend is unstoppable, and Microsoft thinks it can stem the tide. It cannot. There are far too many benefits that come from cloud computing. Microsoft is a massive company with huge influence, but it’s not large enough to stop the new paradigm of SaaS.
Microsoft is trying to redefine SaaS as “Software + Service (pdf),” a mixture of in-house networks and cloud computing. The only problem is while this model may help Microsoft, it will not help a company struggling with upgrading servers and old applications, patching software, and having to fix integrations at each upgrade. These problems are a significant burden and CIO’s are looking for solutions, which is why they’re turning to SaaS in droves.
The SaaS tide is rising and Microsoft’s attempt to slow down this trend will ultimately end in their demise, if they do not fully adopt SaaS. Unfortunately for Micorsoft, fully adopting SaaS presents significant risk because it will cannibalize their main revenue source, which includes server-based applications like Exchange, security patches to applications, hardware, and upgrading and maintaining physical infrastructures. Ultimately, it’s a lose-lose proposition for Microsoft because they do well with greater complexity which runs counter to what a CIO desires.
Smaller companies and startups are beginning with the SaaS model and skipping over the installation of complicated and costly IT infrastructures. The more progressive small companies don’t even try to develop in-house networks – they use services like salesforce.com, Google Apps, and Amazon S3. Why would they, when they can have a far superiour IT infrastructure in the cloud?
This phenomena is similar to how developing nations have skipped over expensive “hard lines” and have gone directly to wireless networks. Why would any developing nation, given a choice, install copper wires throughout their country when they could install wireless towers at a fraction of the cost? The same could be asked of any new and developing company considering how to develop their own IT infrastructure.
The Software + Service model proposed by Microsoft does not resolve the issues with which CIO’s are struggling. In fact, it adds more complexity, which is why Microsoft will ultimately not survive this new paradigm shift to Cloud Computing. A true paradigm shift seldom occurs, but when they do large and seemingly unstoppable companies often disappear if they do not radically change. The only problem is it’s very difficult for a large company to innovate because their survival depends on an old paradigm, which will be swallowed up by the new.
“Microsoft’s challenge is to execute a fine balancing act between it’s traditional PC-based revenue stream (and the massive margins that stream provides) and the market demands for more flexible, internet-based software design and delivery options. Its ability to manage this balancing act could very well determine the future of Microsoft itself.” – Springboard Research (pdf)
It’s surprising how so few people in the IT industry see this coming trend. It’s obvious to anyone who has used SaaS applications, but not so much for those who live in the old paradigm of large and complex in-house networks. The writing is on the wall, and the next chapter has already been written. It’s only a matter of time before all companies are operating 100% out of the cloud, in which people will be able to work anywhere and be provided level of fluidity, flexibility, and freedom we’ve yet to experience.
We’ve only scratched the surface of what this new IT paradigm will bring. Once we’ve finally “unplugged” from the old paradigm, the sky is the limit. Things will become less physical, and more unencumbered, and this newfound freedom will come at a fraction of the cost.
October 20th, 2008 at 9:10 pm
I think you make some good points, but Microsoft is no fool. As your quote from Springboard suggests Microsoft can’t afford to make the transition to SAAS. Microsoft will abandon thier current “software + services” strategy only when they are no longer making many billions of dollars from the likes of Windows Server, Exchange and parts of Office.
Also CIO officers arent about to vote themselves out of work by outsourcing thier needs offsite to 3rd parties. Ultimatly the transition to enterprise SAAS will be slowed by CIO’s unwillingness to cede authority.
October 21st, 2008 at 9:10 pm
Rob –
Great points.
I wonder when the SaaS industry, and the players in it, grow to a point that Microsoft may have a hard time entering? At what point will it be “too late” for Microsoft and other traditional software companies to suddenly wake up and join the paradigm shift?
I don’t think we’re anywhere near that point now, but what about in 5 to 7 years as these SaaS companies are upgrading their applications 3 to 8 times per year?
I think CIO’s may also find themselves behind the eight ball if the SaaS industry progresses and they have ignored the opportunity to lower costs, etc. CEO’s may be looking for the competitive advantage SaaS brings, which could put a CIO’s position in jeopardy.
Regardless, it will be an interesting few years as this shift toward SaaS slowly asserts itself on IT departments and traditional software companies. This shift is certainly uncomfortable and many will try to avoid it, but I think one could make the argument that this transformation is inevitable.