Business

Microsoft’s Reorganization Predicted In 2003 Manager Farewell Letter

Microsoft’s current business problems, which prompted a major corporate reorganization last week, were foreshadowed in a farewell letter in 2003.

Matthias Schrader / AP

When David Stutz left Microsoft, he gave some advice to the company: The future of computing is not in a world where software is structured in a one-size-fits-all style of service like Office and Windows, but rather bite-size chunks.

Stutz’s advice foreshadowed both the challenges Microsoft faces as consumers more frequently use smaller-scale software services and apps like Dropbox, Google Maps, and Evernote on mobile phones and tablets, and Microsoft’s reorganization last week into a “devices and services” company.

Unfortunately for Microsoft, Stutz sent his letter in 2003, or 10 years ago.

It’s still not clear if Microsoft’s reorganization, which is optimized for preserving its key services like Windows and Office, will address the problems Stutz foreshadowed. For instance, while Office 365 offers businesses more diverse options when it comes to document-editing software than the original one-size-fits-all packaged version of Office, it is still not available on the iPhone or iPad, even though businesses are rolling out on those devices in droves and loading them up with Web-based software like Salesforce and Box.

Here’s Stutz’s letter, with certain phrases bolded and their more modern replacement terms in parentheses next to them. Read both ways, the letter is as much true for Microsoft today as it was a decade ago:

“The market for shrink-wrap PC software began its slow upmarket ooze into Christensen obsolescence right around the time that Microsoft really hit its stride. That was also the time of the Internet wave, a phenomenon that Microsoft co-opted without ever really internalizing into product wisdom. While those qualified to move the state of the art forward went down in the millennial flames of the dotcom crash, Microsoft’s rigorous belief in the physics of business reality saved both the day and the profits. But the tide had turned, and a realization that “the net” was a far more interesting place than “the PC” began to creep into the heads of consumers and enterprises alike.

During this period, most core Microsoft products missed the Internet wave, even while claiming to be leading the parade. Office has yet to move past the document abstraction, despite the world’s widespread understanding that websites (HTML, HTTP, various embedded content types, and Apache mods) are very useful things. Windows has yet to move past its PC-centric roots to capture a significant part of the larger network space, although it makes a hell of a good client. Microsoft developer tools have yet to embrace the loosely coupled mindset that today’s leading edge developers apply to work and play.

Microsoft’s reluctance to adopt networked ways is understandable. Their advantaged position has been built over the years by adhering to the tenet that software running on a PC is the natural point at which to integrate hardware and applications. Unfortunately, network protocols have turned out to be a far better fit for this middleman role, and Microsoft, intent on propping up the PC franchise, has had to resist fully embracing the network integration model. This corporate case of denial has left a vacuum, of course, into which hardware companies, enterprises, and disgruntled Microsoft wannabes have poured huge quantities of often inferior, but nonetheless requirements-driven, open source software. Microsoft still builds the world’s best client software, but the biggest opportunity is no longer the client. It still commands the biggest margin, but networked software (online services like Box and Dropbox) will eventually eclipse client-only software.

As networked computing infrastructure matures, the PC client business will remain important in the same way that automotive manufacturers, rail carriers, and phone companies remained important while their own networks matured. The PC form factor will push forward; the Pocket PC, the Tablet PC, and other forms will emerge. But automakers, railroads, and phone companies actually manufacture their products, rather than selling intangible bits on a CD to hardware partners. Will Microsoft continue to convince its partners that software is distinctly valuable by itself? Or will the commodity nature of software turn the industry on its head? The hardware companies, who actually manufacture the machines, smell blood in the water, and the open source software movement (app development ecosystem) is the result.

Especially in a maturing market, software expertise still matters, and Microsoft may very well be able to sidestep irrelevance as it has in the past. The term “PC franchise” is not just a soundbite; the number of programs written for the PC that do something useful (drive a loom, control a milling machine, create a spreadsheet template, edit a recording…) is tremendous. But to continue leading the pack, Microsoft must innovate quickly. If the PC is all that the future holds, then growth prospects are bleak. I’ve spent a lot of time during the last few years participating in damage-control of various sorts, and I respect the need for serious adult supervision. Recovering from current external perceptions of Microsoft as a paranoid, untrustworthy, greedy, petty, and politically inept organization will take years. Being the lowest cost commodity producer during such a recovery will be arduous, and will have the side-effect of changing Microsoft into a place where creative managers and accountants, rather than visionaries, will call the shots.

If Microsoft is unable to innovate quickly enough, or to adapt to embrace network-based integration (online services), the threat that it faces is the erosion of the economic value of software being caused by the open source software movement. This is not just Linux. Linux is certainly a threat to Microsoft’s less-than-perfect server software right now (and to its desktop in the not-too-distant future), but open source software in general, running especially on the Windows operating system (or, today, the iPhone and Android devices), is a much bigger threat. As the quality of this software improves, there will be less and less reason to pay for core software-only assets that have become stylized categories over the years: Microsoft sells OFFICE (the suite) while people may only need a small part of Word or a bit of Access. Microsoft sells WINDOWS (the platform) but a small org might just need a website, or a fileserver. It no longer fits Microsoft’s business model to have many individual offerings and to innovate with new application software. Unfortunately, this is exactly where free software excels and is making inroads. One-size-fits-all, one-app-is-all-you-need, one-api-and-damn-the-torpedoes has turned out to be an imperfect strategy for the long haul.

Digging in against open source commoditization (the app ecosystem) won’t work - it would be like digging in against the Internet, which Microsoft tried for a while before getting wise. Any move towards cutting off alternatives by limiting interoperability or integration options (restricting Microsoft’s services to Windows instead of expanding them to other platforms like the iPhone) would be fraught with danger, since it would enrage customers, accelerate the divergence of the open source platform, and have other undesirable results. Despite this, Microsoft is at risk of following this path, due to the corporate delusion that goes by many names: “better together,” “unified platform,” and “integrated software.” There is false hope in Redmond that these outmoded approaches to software integration will attract and keep international markets, governments, academics, and most importantly, innovators, safely within the Microsoft sphere of influence. But they won’t .

Exciting new networked applications (apps) are being written. Time is not standing still. Microsoft must survive and prosper by learning from the open source software movement and by borrowing from and improving its techniques. Open source software is as large and powerful a wave as the Internet was, and is rapidly accreting into a legitimate alternative to Windows. It can and should be harnessed. To avoid dire consequences, Microsoft should favor an approach that tolerates and embraces the diversity of the open source approach, especially when network-based integration is involved. There are many clever and motivated people out there, who have many different reasons to avoid buying directly into a Microsoft proprietary stack. Microsoft must employ diplomacy to woo these accounts; stubborn insistence will be both counterproductive and ineffective. Microsoft cannot prosper during the open source wave as an island, with a defenses built out of litigation and proprietary protocols.

Why be distracted into looking backwards by the commodity cloners of open source? Useful as cloning may be for price-sensitive consumers, the commodity business is low-margin and high-risk. There is a new frontier, where software “collectives” are being built with ad hoc protocols and with clustered devices. Robotics and automation of all sorts is exposing a demand for sophisticated new ways of thinking. Consumers have an unslakable thirst for new forms of entertainment. And hardware vendors continue to push towards architectures that will fundamentally change the way that software is built by introducing fine-grained concurrency that simply cannot be ignored. There is no clear consensus on systems or application models for these areas. Useful software written above the level of the single device will command high margins for a long time to come.

Stop looking over your shoulder and invent something!

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