Sample Reports

Although Microsoft often cancels products in good times, declining revenues and cost containment may accelerate this process, increasing the risk that customers and partners could bet on a product that's later eliminated. Characteristics that make a product vulnerable include overlap with better-selling or more strategic products, reduced market opportunities, failure to thrive, and entrenched competitors that pose no threat to other core Microsoft businesses. The company uses several methods to cancel or scale back development, some of which allow customers and partners to preserve their investments better than others.

A Continuous Process

Although their numbers appear to have swelled recently, product cancellations are nothing new at Microsoft. The company frequently discontinues outdated or underperforming products and reallocates resources in response to strategic shifts or market changes. In particular, Microsoft often allows multiple product teams to work on similar technologies, and then picks a "winner" and scales back development on the others.

Since Oct. 2008, when the company began experiencing a slowdown in its core businesses, Microsoft has stopped selling or scaled back development on at least a dozen products. (For a list, see the chart "Products Recently Phased Out".) While some cancellations are probably the result of cost-cutting efforts, others may have been planned before the downturn or continue trends that started a long time ago. For instance, the end of Encarta follows the elimination of other packaged consumer software, such as Digital Image Suite (which was subsumed into Windows Live Photo Gallery in 2008) and Autoroute (a European mapping product that has received no updates since late 2007).

Nonetheless, as Microsoft continues to reduce costs, product development will be impacted. Understanding the characteristics of cancelled products—as well as characteristics that can protect seemingly unsuccessful products—could help partners and customers identify products that are most likely to become victims of the cost-cutting drive.

Making the Cut

Microsoft seldom explains exactly why it is eliminating a particular product, and the process doesn't follow a predictable course. Some products fall victim to strategic shifts before they had a realistic chance to gain market traction, while others continue to be major areas of investment despite the absence of measureable progress.

Nonetheless, eliminated products tend to have some or all of the following characteristics:

Overlaps. Microsoft's "Darwinian" product development process frequently results in multiple organizations working on similar technologies. Top executives eventually choose a winner and scale back or end development of the alternatives. Examples include the following:

• PerformancePoint Server, which delivered applications for tracking key performance indicators (KPIs), analysis of historical business data, and financial planning; in Apr. 2009 Microsoft announced that some aspects of this product would be folded into SharePoint Server, which had overlapping features for KPI tracking and data analysis
• The Information Bridge Framework (IBF), one of many proposed technologies for building applications on top of Office; in 2007, Microsoft announced plans to discontinue it in favor of other technologies, such as Visual Studio Tools for Office (VSTO)
• Content Management Server, which offered tools for creating and managing content for large Web sites, was discontinued in 2007 and most of its features were folded into SharePoint Server.

Diminished potential. Many product cancellations are the result of market changes that result in diminished revenue potential. Recent examples include the Encarta encyclopedia, which after more than 10 years faced increasing competition from the free online Wikipedia and general-purpose Web search engines, and the OneCare antimalware and PC maintenance product, which faced an explosion of free antivirus programs from small competitors.

Entrenched competitor that doesn't pose a threat. Some discontinued products fared poorly against an entrenched competitor that poses no threat to core Microsoft businesses. Recent examples include Office Accounting (which is being moved into maintenance mode) and Dynamics Entrepreneur, which entered the small business accounting market already staked out by Intuit and a variety of local competitors; and OneCare, which went into battle against long-established providers of antivirus and utility software for Windows, such as McAfee and Symantec.

Immunity

On the other hand, products that have the following characteristics are less likely to be eliminated:

Profitable. Microsoft continues to offer some products that are no longer strategic simply because they turn an operating profit. The canonical example here is MSN dial-up Internet access: revenue and customers have been steadily declining for the last several years, and there's little potential for upselling customers because Microsoft has no plans to offer broadband Internet access. However, Microsoft executives have said that the business is profitable.

Defense. When Microsoft identifies a significant threat to one of its core businesses, it often invests in products that place pressure on the core or most profitable products of those competitors. These investments may continue for many years, even if they are not warranted by traditional metrics such as revenue growth, profitability, or market share. The prime example here is the Xbox console gaming business, which responded to a threat that game consoles from Sony and others would eventually displace a significant number of consumer PC sales. Microsoft may be pursuing Internet search partly for defensive reasons as well—although search advertising is an attractive business, generating more than US$10 billion a year for Google alone, Google as a company also threatens Microsoft's desktop computing paradigm with an increasing array of Web-based services for consumers and businesses.

Powerful internal advocates. Products that have attracted the personal interest of a top Microsoft executive may receive more development than would normally be expected given their market performance and uncertain strategic fit. One example is the Smart Personal Objects Technologies (SPOT) watches and related technologies such as MSN Direct and the .NET Micro Framework, which were favored by Bill Gates. These products may be downscaled or eliminated (as appears to have happened with SPOT) when their advocates lose interest or leave the company.

Different Fates

When Microsoft decides to scale back its investment in a product, that doesn't necessarily mean the product or its features disappear completely. Rather, it will suffer one of the following fates:

Outsourced. In this scenario, Microsoft continues to sell a product under the Microsoft brand but outsources its development. The company may use this tactic for products that have a significant customer base but have become less strategic or no longer fit into a product group's development priorities. In these cases, customers may not notice much change: they will continue to see improvements and new versions, and Microsoft will continue to support the product. Examples of outsourced development include Dynamics SL (outsourced to Plumbline software in 2004) and the Commerce Server product for building e-commerce Web sites (outsourced to Cactus Commerce in 2007).

Subsumed. Sometimes Microsoft stops offering a particular product but incorporates features from a discontinued product in a current one. Microsoft often uses this tactic when the eliminated product overlaps with a more strategic or better-selling product. In these cases, Microsoft frequently offers a discounted volume licensing path for customers to upgrade to the other product, although migrating data from the old product to the new could prove more difficult. Development on the subsumed features will continue, but probably at a slower pace, and some features may be canceled in future versions of the "winning" product. The most recent example is PerformancePoint Server, some of whose features are being replaced by corresponding features in the next version of SharePoint Server. Microsoft has also confirmed that Office Live will be subsumed into Windows Live.

Given away. Microsoft might stop offering a product for sale, but give it (or a subset of its features) away for free. Microsoft may use this tactic when sales of a product are disappointing, but it still fulfills a useful role, such as complementing a different, more strategic product. As with subsumed products, development will probably continue at a slower pace, and support may be harder to find. Recent examples of products meeting this fate include OneCare, whose antivirus functionality will be replaced by a free product code-named Morro, with the goal of bolstering Windows security; and SharePoint Designer, which will be given away for free with the goal of encouraging the development of customized SharePoint Web and intranet sites.

Maintenance mode. This category covers products that Microsoft continues to sell but has no plans to upgrade. Such products may have a significant customer base and might even be profitable, but Microsoft feels there's not enough long-term upside potential or strategic importance to continue further development. This tactic may also be used when a product overlaps with a more strategic or better-selling product. Products in maintenance mode are supported through the end of their life cycle but receive few updates, except to fix serious security-related problems or other changes that threaten their viability (e.g., changes in accounting regulations for accounting products). Office Accounting is one product that has recently entered maintenance mode.

Spun out. In this case, Microsoft transfers all responsibility for a particular product, including sales, marketing, development, and support, to a third party. This tactic may be used when Microsoft wants to eliminate a product quickly without alienating current customers. Recent examples include the RoundTable videoconferencing hardware product, which was spun out to Polycom in Apr. 2009, and the MSN Groups service, which was transitioned to Multiply in late 2008. Reports suggest that the Flight Simulator game and associated ESP development platform may meet this fate: most of the group was reportedly laid off in Jan. 2009, but Microsoft hasn't confirmed the products' fate.

End of life. In this scenario, Microsoft stops developing and selling a product and its component features and offers no replacement or discounted upgrade path for existing customers. Support for existing customers typically continues through the end of the product life cycle. Products that have recently reached end-of-life status include the Automated Service Agents (a platform for text "bots" used in online support, originally gained in the acquisition of Colloquis in fall 2006), the Connected Services Framework (a service-delivery platform for telecommunications providers), Encarta, Equipt (a suite that included OneCare and a subscription-based version of Office 2007 Home and Student), and Dynamics Entrepreneur.

Other Victims

Product development won't be the only—and perhaps not even the main—victim of cost-cutting at Microsoft. Many other areas are likely to be impacted, which could in turn impact customers and partners.

Research. Although Microsoft Research, the company's computer science "pure" research division, remains largely unaffected so far, the Live Labs group, formed in 2006 and tasked with finding new opportunities in online services, has been disbanded and its members laid off or moved into product groups. Cuts in research could reduce the number of new products Microsoft builds and slow the pace of innovation in existing products.

Sales and marketing. External reports indicate that Microsoft's May 2009 layoffs—numbering more than 3,000 employees—affected many in Microsoft's field sales and marketing groups. This could reduce the attention that customers receive from salespeople and could increase pressure on partners to shoulder more of the sales and marketing burden for Microsoft products they resell or recommend.

Support. External reports indicate that Microsoft's Jan. 2009 layoffs—which affected 1,100 employees—included customer support personnel. This could reduce the quality and availability of support for some Microsoft products, particularly consumer products for which customers have no support contracts.

Operations. Although customers will probably see minimal impact from cuts in Microsoft's operations group (such as human resources or finance), they could reduce the overall efficiency of the company. Partners in areas that depend on Microsoft's operations budget, such as staffing companies, could also be impacted.

Resources

Changes in the status of SharePoint Designer, Forms Server, and PerformancePoint Server were discussed in "SharePoint Products Shuffled" on page 9 of the May 2009 Update.

The spin-out of RoundTable to Polycom was covered in "RoundTable Handed Off to Partner" on page 11 of the May 2009 Update.

Encarta's end of life was covered in "Encarta Discontinued" on page 25 of the May 2009 Update.

PerformancePoint's cancellation was covered in "PerformancePoint Server Discontinued" on page 13 of the Mar. 2009 Update.

Office Live's fate was noted in "Office Live Merging into Windows Live" on page 23 of the Mar. 2009 Update.

The discontinuations of OneCare and Equipt were discussed in "Free Morro to Replace OneCare Subscriptions" on page 22 of the Jan. 2009 Update.

Coverage of Microsoft's two most recent quarterly earnings reports can be found in "Revenue, Profit Shrink in Q3'09" and "Earnings Miss, Layoffs in Q2'09" on page 23 of the Feb. 2009 Update.

A collection of recent memos from Microsoft executives about layoffs and cost-cutting can be found at mini-microsoft-india.blogspot.com/.