As the Internet transforms the way people use computers, Microsoft Corp. founder Bill Gates has a message for the world’s biggest software maker: Adapt or die.
“We must act quickly and decisively,” Gates wrote in an Oct. 30 memo to Microsoft executives. “The next sea change is upon us.”
In the four months since Gates put his company on notice, the maker of the Windows operating system and Office productivity suite has embarked on a restructuring no less significant than its adoption of the mouse-based graphical user interface 20 years ago or its embrace of the Internet a decade later.
This time, Microsoft wants to diversify away from pre-packaged software and toward Web-based services that provide steadier, faster-growing income streams. In this vision, users would lease access to online software or use services in exchange for putting up with on-screen ads.
Gates warned that every part of the company would have to embrace the new market realities: “This coming ‘services wave’ will be very disruptive.”
The pressure is on. Microsoft’s sales grew 8 percent last year, a precipitous slide from the 49 percent annual growth rates of a decade ago. Wall Street has greeted its vast profit – $3.65 billion last quarter alone – with a yawn. The company’s stock has stagnated for three years.
By contrast, rivals such as Google Inc. pull in billions of dollars for ads on free Web- search pages. Salesforce.com’s leased sales-and-marketing software has given it revenue and profit growth above 65 percent. Apple Computer Inc. recently announced it had sold the billionth download for the iPod, which has become its biggest revenue source.
“Microsoft hates the services business,” said Jeffrey Tarter, executive director of the Association of Support Professionals. “If they can’t solve the services problem, they’ll gradually begin to see themselves drifting into a backwater.”
But to embrace the next big thing, Microsoft risks further slowing the most prolific cash machine in software history and forcing product managers to take huge risks.
