<<Previous • Next>>                [Table of Contents]

Microsoft Aims at the Enterprise (Introduction)

By virtually any index one chooses to use—revenue growth, market share, profitability, market capitalization, number of employees—Microsoft’s growth over the last decade has been explosive. Its business has also proven to be relatively durable. As the technology boom skidded to a halt in late 2000, Microsoft continued to enjoy steady, if less-spectacular revenue growth, ending its 2001 fiscal year 10% higher than the year before. (Microsoft's fiscal years end on June 30.)

But even that lower level of growth could be difficult to sustain, as it was propelled primarily by the growing popularity of the personal computer and single-processor network file-and-print servers. That market is saturated with Microsoft’s operating systems and productivity applications. Worse, growth in PCs has ceased for the time being—worldwide PC sales for 2001 are expected to be down 6% from 2000, and growth in 2002 is expected to be a modest 5%, according to Merrill Lynch.

In addition, the Internet has shifted the focus of desktop computing from locally run applications to browser-accessible Web sites, many of which offer functionality (e-mail, stock-tracking, and reference, such as address look-ups or encyclopedias) previously supplied by desktop applications.

To compensate, Microsoft is trying to move beyond the desktop-oriented "front office" and expand into the enterprise data center, currently dominated by mainframes and Unix-based midrange systems. The enterprise data center is where customer, product, and financial information systems store critical day-to-day business information and business rules. Applications running on dedicated application servers process the data and make it available to employees, who then use it for customer management, financial management, sales analysis, transaction processing, and other business purposes.

Until now, most of the billions (more than US$60 billion in 2001) of dollars spent every year on enterprise software have found their way into competitors' pockets, paying for systems from Hewlett-Packard (HP), IBM, Sun Microsystems, and other vendors. But that landscape is changing. The PC—which is vastly more powerful, yet less expensive than it was 15 years ago—wormed its way into the corporation as a desktop system and as a departmental file-and-print server, sometimes without the knowledge or involvement of the central IT department. Now, enormous advances in hardware and the shift to network-based computing have opened doors for larger and more capable Intel-based machines. Systems built on these powerful processors (and in some cases on hundreds or thousands of them working together) offer as many CPU cycles and as much input/output capacity as mainframes, at far lower cost.

Another large enterprise market is services and consulting. One rule of thumb says that, in the average enterprise consulting engagement, consulting revenues will exceed income from hardware and software sales by more than six times. Indeed, while most of Microsoft’s revenue comes from selling software licenses, some of Microsoft’s competitors in the enterprise market generate half of their revenue from consulting and services. Thus, achieving parity with its competitors in consulting and services could double Microsoft’s revenues. An even more important benefit: consulting assignments open doors for Microsoft and its partners to demonstrate that Microsoft deserves to be on the list of data center software vendors, which could pave the way to dramatically increased sales of server software.

This report examines Microsoft’s ambitions in the enterprise data center, a centralized (either physically or logically) computing center containing multiple, dedicated server computers dedicated to hosting server-based applications.

To realize those ambitions, Microsoft is making the following changes:

• Retooling its server products to meet data center scalability, availability, and manageability requirements
• Changing its pricing and licensing to address the needs and expectations of enterprise data centers
• Changing its sales and support practices to make them more comparable to those offered by incumbent data center software vendors, such as IBM, Oracle, and Sun.

But many challenges remain, including the following:

• Products that are only now beginning to achieve the scalability and power that data centers expect, and that will take years to gain the track record for reliability that risk-averse data centers require
• A reputation for caring more about "cool" features and ship dates than for security and stability, creating hidden costs and concerns that outweigh, for many data centers, the benefits of lower prices
• Hazy and constantly changing goalposts for future products, making it difficult for enterprises to know where a Microsoft commitment will take them in the long run
• A sales force focused on short- and medium-term sales of desktop software rather than on comprehensive solutions involving a variety of integrated server components
• A difficult transition from relying almost entirely on other companies for the sales and consulting effort required to gain access to enterprise data centers to a greater emphasis on in-house consulting services (which could cut current partners out of consulting engagements)
• A prevailing belief that Microsoft has a poor understanding of real-world business needs.

<<Previous • Next>>

Copyright © 2001, Directions On Microsoft, Inc. All rights reserved. No part of this newsletter may be reproduced, stored in a retrieval system, or transmitted in any form or by any other means without prior written permission.