Analyst Opinion – With Google coming to market, the OS environment is very similar to what it was in the late 80s with Microsoft in IBM’s position, Apple in Apple’s, and Google in Microsoft’s. Windows 7 is the best operating system that Microsoft has created since Windows 95, but it breaks the same model that Windows 95 did – and Windows 95 began the cycle that effectively eliminated much of Microsoft’s market control. In the end, the next three years will be one for the history books. Those who lose will go down in infamy for their failures.
This battle is for all the marbles and it is particularly interesting that Apple may actually depend on Microsoft’s success, because Google plans on taking both out.
Bill Gates is credited with making that one critical decision that turned Microsoft into the power it became and made him the richest man in the world. He gave away the OS at cost to IBM while retaining the rights. (Clicking on the link will showcase what happened to the guy who actually wrote the OS).
Until then, operating systems were largely provided by hardware manufactures and could never reach the level of dominance needed to control a market and the resulting eco system. By ultimately giving the software to IBM initially (while retaining critical rights) and later selling it very cheaply, Gates took control of a market and made money off of the products like Microsoft Office that were built on top of it.
In effect, hardware vendors outsourced the operating system to Microsoft who had given them a product that allowed them to compete with each other on hardware prowess (which is what they did best anyway). An empire was born on one simple OS lesson: Keep it cheap, keep it simple, control the OEMs and own and profit from the applications.
Breaking the model
Once dominant, and this appears to be a repetitive and common mistake, there was an increasing need to grow the revenue from the OS. Windows 95 was created, doubling the price at a time when hardware cost had dropped by around a third and it started to feel more like a bundle of applications than just an OS, containing the UI, which had previously been a spate addition, media playing capability, several games, basic editors, disk utilities and a browser. Still, there was only one version, it was still relatively cheap (under $100 on top of $2000+ hardware) and, while weakened, it seemed bulletproof.
Except Microsoft was so dominant the bundle created anti-competitive problems, first with the U.S. and then with Europe. This got the government involved and, coupled with some other mistakes Microsoft made, caused them to lose their U.S. antitrust trial and put them solidly in the EU’s gun sights.
Then the OS forked. Windows NT, which had initially been intended for workstations and servers, dropped into the business market creating two versions somewhat incompatible with each other. They stayed this way until Windows XP and then Microsoft seemed to forget that Windows was an OS and started treating it like an application and the versions started to multiply.
With Vista, they blew up the model with two versions for business and four for the consumer topped by Ultimate, which, with hardware cost reductions, actually cost more than some of the hardware in the market at the time it was released. Microsoft Office became decoupled so it no longer helped drive upgrades and, for the first time ever, sales of the previous version of the OS actually increased, Microsoft lost market share, and OEMs started aggressively looking for alternatives. First with Linux and most recently with Android.
Microsoft forgot their lesson and Google is moving in for the kill.
How do you displace Windows? You look for a technology change wave, much like Microsoft did with the PC, and then you use Microsoft’s model to do the same thing Microsoft did. The wave is the Cloud and, initially, it is having a bigger effect on smartphones than PCs.
Google picked where Microsoft was weakest to attack first (smartphones), built a pool of developers, showcased that their model worked. But Google always planned to displace Microsoft. We’ll see the initial moves late this year with the big push starting next year.
The Android OS will be very cheap or free to the OEMs, carriers, and cell phone companies that use it. Google will make money off the applications, services, and advertising revenue that lies on top of this platform they will increasingly own, and, if they are as successful as Microsoft was, they will end up where Microsoft is.
Currently. virtually every major OEM is in talks or tests with Android. Each one is increasingly frightened that one will get this right first and steal the market, initially for netbooks and Nettops, but eventually for PCs. It is interesting to note that Google is borrowing from both Apple and Microsoft. They are modeling the user experience from Apple and the economic model is a variant of Microsoft’s focused on an on-line application store to bypass retail.
Read on the next page: Snow Leopard, Windows 7
Apple is now faced with a set of situations very similar to what happened in the 80s. Steve Jobs won’t be around much longer, the fact that management has to say he is involved in day-to-day operations while the Shaking Baby problem last week clearly showcased he is not, suggesting yet another Apple cover up. So far, only Steve has been able to pull off this hardware/software vertical integration play successfully in two decades.
If this OS model works this time as well as it did last time – and without Steve to market through it – Apple will bleed share again. But this time it is on both phones and PCs and it is Google and not Microsoft. It sets up a situation where Oracle might buy Apple much like Sun once looked at doing this. Though with Larry With Ellison you would think it would be successful this time (Larry is on Apple’s board and is one of the few people who might be able to step in for Steve on stage.)
It would be ironic if it was Microsoft’s mistakes rather than its success that caused Apple to either fail or lose its independence. The irony is that Apple may be dependent on Microsoft winning this fight, yet their current marketing, which disparages Windows, is effectively plowing the field for Google.
Windows 7 is a strong improvement over Windows Vista. But it doesn’t restore the model that protected Microsoft’s market. For every seat Windows 7 gets, Microsoft gets time to respond to the threat Google is creating, because their Android will move most easily against dated Windows XP and Windows 2000 installations (both consumer and business). The account with the most likelihood of driving the biggest disruption is the U.S. Government, which has a CIO who believes strongly in the Google model and appears to be leaning towards their solutions already. If they go, they will likely take the industries they own with them (financial and automotive), creating the biggest potential technology move over a short time in history and the only one I can recall actually driven by the U.S. government.
The product is solid; it is on track to hit stores in September. That gives it about a year to roll in and create a defense against Android. This is at a time when folks, particularly companies, don’t have a lot of money. Microsoft does not depend on Windows 7, but rather on Google screwing up. That’s similar to the bet that IBM made and that didn’t end well for IBM.
When the PC was driven into large companies, they were initially driven in by line managers and employees, not IT organizations. Later, IT took them over, but for the last few years, P&L responsibility has moved back to line managers and they control the budgets for PCs again. This sets the stage for a possible repeat with the roles somewhat changed.
The true irony is that this creates a market where Microsoft is in the old IBM role and Google is the new Microsoft. There is no OS/2 equivalent, but given that it actually worked for Microsoft (the application interface was largely theirs) should not give the company any comfort. Both Apple and Microsoft better learn from the past quick. Or the grief their executives will get for losing their respective portions of the market will be legendary and generational.
The next three years should be really interesting. Remember? “Those who cannot remember the past are condemned to repeat it.” We’ll see.
Rob Enderle is one of the last Inquiry Analysts. Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them. Currently he provides his services to most of the major technology and media companies.
The opinions expressed in this commentary are solely those of the writer.