To maintain its developer ecosystem and protect its apps business, Microsoft has no choice but to loosen its grip on the Windows source code and drive down costs.
in the next round of computing, independent developers will punish closed systems and reward open ones. The only way to remain closed will be to command high-end consumer mindshare, the way Apple does with its iPhone, a consummate consumer device backed up by cool advertising and the distinctive Apple store buying experience. Research In Motion's BlackBerry also does it with a superior text device combined with strong network access.
Microsoft tried to do it with Windows Mobile, Jerry Seinfeld and Bill Gates ads, and its "I'm a PC" marketing campaign, but those efforts have been flops. The Windows brand doesn't command consumer mindshare the way it used to. Windows is being managed by Microsoft senior VP Bill Veghte, who actually worked on Windows 95 development. But it's just not 1995 anymore, and Microsoft's proprietary OS is in many ways a relic. The next wave isn't about bigger and fatter desktop PCs, the place where Microsoft has excelled. Laptops now outsell desktops. Future computing devices are lighter, smaller, sometimes connected, sometimes not. They follow the end user around, like cell phones. The desktop is migrating toward the mobile device.
Microsoft is well aware of this evolution. In a December TV interview with Charlie Rose, chairman Bill Gates said that "mobile phones are the PC of the future." And he called Microsoft "the underdog in that space."
"That market is going through an incredible shift" away from hardware-specific devices toward software-differentiated devices, Gates said. "Software will be at the center of it. We're in the game. The only question is, how much market share will we end up with?"
In one format, the computer of the future will be the shrunken laptop known as a netbook, with flash drive instead of hard drive, Internet connectivity, and long battery life. If Windows doesn't dominate this new form factor, it will slip further off its perch. Already, there are signs of trouble. Dell's low- end $349 netbook runs with consumer-friendly Ubuntu Linux.
Most early netbooks tended to run Linux, but as they gained acceptance in 2008, more and more manufacturers offered them with Windows, and now Windows runs on 70% of netbooks sold. That may seem like a lot, but Microsoft is used to market share of greater than 90% on PCs, and its margins on netbooks are lower.
EVIDENCE OF WHAT'S TO COME?
Microsoft hosts independent open source projects to produce code that works with its products.
Microsoft sponsors open source development projects, including a translator between Open Document Format and its Office Open XML.
3. Shared Source
Microsoft lets others modify and redistribute some of its code, but with restrictions.
4. Open Licenses
Open Source Initiative approves use of the Microsoft Public License and Microsoft Reciprocal License.
Microsoft agrees to make its workgroup protocols available to outside developers on Samba open source project.
Microsoft's Veghte, speaking at a Credit Suisse technology conference in December, conceded that netbooks represented an unexpectedly large share of the 10% to 12% growth Microsoft expected in PC sales last year. Microsoft's return on a netbook sale "is significantly lower than what you might take as a midrange or high-end PC," he said, indicating that netbooks, particularly those running Linux, were "cannibalizing" what would have been a regular PC sale.
Jim Zemlin, CEO of the Linux Foundation, points out that even some Windows laptops and netbooks come equipped with Linux for quick startup and Internet connectivity. Netbooks are the first new x86 computing device that Windows hasn't completely dominated from birth. And the version of Windows that runs on netbooks is Windows XP, not Vista, another sign of Windows' vulnerability at the low end.
Likewise, Microsoft is struggling to keep up in the market for cellular devices with mobile Web browsing, despite its keen focus on Windows Mobile. Microsoft's already up against popular devices like the BlackBerry and Apple's iPhone. An open source version of Nokia's Symbian mobile operating system, long dominant overseas, is due to hit the United States next year, and AT&T plans to produce a Symbian-based cell phone.
Google's open source Android, essentially a mobile version of Linux, has already won widespread adherents. Operator T-Mobile and device makers Ericsson, Garmin, Lenovo Mobile, Motorola, and Samsung are flocking around Android. Even if Android doesn't have everything they want in its first iteration, those manufacturers see Google as a company with both online applications and the staying power to get the OS right.
The new mobile device on the block, the iPhone, running Mac OS X, has already passed Windows Mobile with 12.9% of the market, compared with Microsoft's 11.1%, according to Gartner.
Android is just beginning to build steam. Even Palm, in decline with five losing quarters in a row, just collected $100 million from Elevation Partners because its backers have confidence Palm can compete--probably not with the iPhone or BlackBerry, but with Windows Mobile.
It's clear that Microsoft senses that mobile application writers are shifting away from Windows Mobile, and in Redmond's culture, that's a precursor to decisive action. On Dec. 15, Microsoft revealed it's bringing out its own iPhone image browsing application, called Seagarden. The move is a concession that Windows Mobile will never roll back the gains that Apple has made.
Microsoft can still compete for the mass market with Windows Mobile, but how will it do so when the competition is both technically strong and open source? Microsoft will grit its teeth and try to neutralize the advantages of open source code. My candidate for the first Windows system that will become open source code is Windows Mobile.
So what does Forrester analyst Rymer say to that? He says Microsoft has the inherent advantage over open source of owning the user's existing desktop space, and theoretically it can extend Windows developers' skills into its mobile environment. But that alone, so far, hasn't been enough, he concedes. "To compete effectively, Microsoft will have to give developers the flexibility that they have with other mobile systems," he says.
I couldn't have said it better myself. Windows will have to become freely available to developers, one way or another.
Senior VP Veghte says netbook margins are lower than PC margins
Even the full-form-factor PCs are no longer sacrosanct. Low-end PCs were once Windows' exclusive domain. Asus, Dell, HP, and Lenovo have started making Linux PCs for business--loaded with open source applications. They represent a miniscule share of the market, but it's the first time that this crack in Windows' front has appeared. Apple is growing its desktop OS share (now more than 9%, up two points from 2007) with $1,000 to $3,000 Macs. Smartphones, netbooks, and Linux PCs are undercutting Windows PCs at the bottom. "For the first time, Microsoft is being squeezed on the high and low end," says Zemlin of the Linux Foundation.
HP is offering a $729 business PC based on Novell's SUSE Linux and open source applications. The standard HP Vista PC with Office 2007 Pro is $1,399, or $670 more.
Past attempts to offer a Linux PC consisted of selling a plain vanilla box and telling the customer to download Linux, network connectivity, and applications. "There were no professional transition services available," says Kirk Godkin, HP's North America business PC manager. This time, customers can introduce low-cost desktops with help from HP's services organization. Drivers and utilities for a wide variety of devices are available online, as they are with Windows, Godkin says.
Zemlin argues that most consumers are defining their computing experience in terms of the Web, not a desktop machine. "That's a major problem for Microsoft," he says.