The year 2009 was a tough one for Microsoft. Overall sales slumped, and core franchises like Office and Windows were hit doubly hard. Sure, the economy was bad, but a handful of other tech vendors managed to hold up significantly better.
Redmond's problem is that CEO Steve Ballmer and other top executives continued to operate as though it were 1989 -- when the personal computing industry was new and Microsoft could dictate prices and practices. In reality it's two decades later, and Microsoft has numerous new rivals, computing is moving from the desktop to the Internet, and the company is having trouble keeping up.
Windows 7 screen shot
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Here's what Microsoft must do over the next year to get back in the game.
1. Cut Windows Prices
Windows has gotten too expensive to compete with virtually free offerings from Linux vendors like Ubuntu, which is gaining ground in the ultra low-cost netbook space.
Dell, for instance, now offers the Ubuntu-based Inspiron Mini netbook starting at $299 -- a price that is less than what one copy of Windows 7 Ultimate costs. The fact is, most consumers no longer care what OS their PC uses, as long it's priced right and they can reliably send e-mail, surf the Web, and get to their Facebook page. Meanwhile, nascent powerhouse Google appears willing to use its use Android OS as a loss leader to establish a beachhead in the netbook market.
The upshot of it all: Windows sales were down 13% in Microsoft's most recent fiscal year.
To stay competitive, Microsoft needs to slash Windows prices by 50% or more, or the market will continue to move toward alternative operating systems. Microsoft would also do well to banish the memory of Vista, the most reviled OS in its history, by giving all users a free upgrade to Windows 7.
Sure, Windows still represents a $15 billion annual cash cow for Microsoft -- but business history is replete with examples of companies that tried to play it conservative in the wake of profound change -- and got run over by the disruptors. Eastman Kodak, for instance, tried to protect its film business for far too long, and was late to the game when the photography world went digital.
2. Forget Willy, Free Office
On a similar note, Microsoft needs to produce a full, consumer version of Office that sells for no more than $20. The company is releasing a no-charge Web edition with Office 2010 next year, but that offering lacks the bells and whistles of the pricier desktop version, which starts at $80.00
IBM's Lotus Symphony is robust and free, and can do about 80% of what the full version of Office does. That's good enough for most users on the consumer side. Microsoft needs to respond, or it will see Office sales to consumers, off 34% in the most recent quarter, continue to suffer double-digit declines.
Microsoft must also trim pricing on the enterprise editions of Office and Exchange Server, as, again, rivals like Google are moving in with cloud-based products that are fully functional but much cheaper. Want proof? The cities of Los Angeles and Washington, D.C. recently ditched their Office environments for Google Apps, and stand to save tens of thousands of dollars on desktop software. More government agencies and businesses will follow suit unless Microsoft responds with some price elasticity in the current economic climate.