Is Microsoft Office Invincible, Indeed? - Part Three

As a matter of fact, Microsoft is a franchise company

Every year, Microsoft holds Worldwide Partner Conference. In 2011, it was held in Los Angeles. Not surprisingly, 95% of Microsoft's revenue is stemming from their partners and the number of partner companies in the World is up to 1.3 million.

Microsoft Worldwide Partner Conference 2011, Keynote

From 2001, Microsoft started to drive 3 year cycle licensing model for their Office suite instead of selling shrink-wrap packages.

A great invention, software franchising + licensing model

After that, this business model significantly affected customers, and partners as well. Especially, in this scheme, partner structure was necessary component. And by making partners to stay for foreseeable revenue stream, Microsoft could build a huge and strong ecosystem embracing partners. It was a deliberately designed great invention of delivery model at that time and maybe it can match the invention of App store today. 

Some Microsoft volume licensing programs

Fundamentally, the model led a change from sporadic connection to contractual relationship for the product, to staying always in a program with ideally perpetual recurring licensing. Over a decade, it may be not an exaggeration to say that there isn't any company, which has some scale, unreached by their partners. This franchising has been so successful that the other players in the market cannot help facing another hurdle challenging long-established chain among partners and IT departments in nearly every company. 

And contenders, finally, may find that it is not easy to prove the benefit from TCO against MSO's licensing model deliberately designed for and locked in not only other Microsoft software components but also nearly every aspect of convenience on maintaining contracts.

On the other hand, Microsoft's WPC, in 2010, was different a little bit. As Steve Ballmer had been stressing Could All-In from early 2010, Microsoft had to explain how this will affect  partner relationships at that conference. 

After introducing SaaS as a new viable delivery model, Microsoft started to face challenges from market disruption. Although Microsoft has been experimenting with various delivery models for years, they aren't likely to take an approach with an entirely new design of delivery model. Microsoft will keep deliberately taking a two-pronged approach with Office 365 and gradually tightening locked-in user experience. 

Advent of new battle of ideas for new level of abstraction

Still, the franchise seems invincible at this moment. However, Microsoft should keep delivering tangible value into market for justifying license fee that keeps raising every year for sustaining their huge ecosystem. Inevitably, this approach also will keep introducing complications. That's where Microsoft's dilemma exists. History always showed us that simplification by new level of abstraction is derived from over excessive complication. The market seems to have started to turn into new battle of ideas already.

• Part one: Network effect, the characteristics of Office suite market 
• Part two: Another standard, user experience 
• Part three: As a matter of fact, Microsoft is a franchise company
• Part four: Growing opportunities and new battle of ideas

    

Is Microsoft Office Invincible, Indeed? - Part Two

Another standard, user experience 

The installations of WordPerfect was estimated 4 million to 5 million in 2010. And it's revenue was estimated to $49.4 million in 2009 by Gartner. 

Although it’s market share keeps shrinking by intense competition and the market interest does not seem to exist for the product, but the revenue is still not so negligible and there is something interesting. 

In legal market, it’s influence and the affection to the product were conspicuously long lasting. It is most likely due to some distinct features in WordPerfect. One of them is very nice paragraph numbering and another is ‘reveal code’ that is a function to show all the formatting codes, so that the resulting document doesn't have any strange hidden areas. 

Reveal code in WordPerfect

These features might result from the efforts to focus on legal market defensively. Interestingly, it shows that once user experience on any functionality is accustomed and occupied for a long enough period time, users can be stubborn to stick to that experience. And user experience seems to be mostly bound to user interface and functionalities.

Adversely, this fact seems to lead most of competitors, even Google, to abandon their unique user interface by cloning MSO's. And it lowers entry barrier and learning curve obviously.

Furthermore, some players seem to be obsessed by perfect cloning at the cost of sacrificing their uniqueness. It seems to make it able to reduce costs for development and marketing but, at the same time, it looks like to make their deficiencies much noticeable by allowing direct comparison with MSO and undermine their credibility unfavorably. 

Koingsoft Spreadsheet 2010 (*image from softpicks.net)

The cost for migration doesn't seem so impractical

Unlike the inherent obstacle from network effect we've seen in the previous part, many  researches on migration from Microsoft Office to another product including Michael A. Silver's "Cost Model for Upgrading Microsoft Office or Moving to OpenOffice.org" seems to provide some grounds that the user experience itself bound to the user interface and functionalities can be adjusted to new application with affordable costs. 

However, it cannot be denied as well that users are strongly inclined to stay their experiences, if the change is not enforced. 

There remains another crucial user experience which is profoundly challenged by Web-based Office suites. It will be addressed in the last part. 

• Part one: Network effect, the characteristics of Office suite market 
• Part two: Another standard, user experience 
• Part three: As a matter of fact, Microsoft is a franchise company
• Part four: Growing opportunities and new battle of ideas

*The dispute over the rise and fall of WordPerfect has been lasting for a long time. If you are interested in the history of WordPerfect. "Almost Perfect" by Pete Peterson is worth to read.

Is Microsoft Office Invincible, Indeed? - Part One

Network effect, the characteristics of Office suite market


Microsoft Business Division, the section produces the Office Suite of productivity software, including Word, Excel, Powerpoint, SharePoint, Exchange, and Lync, showed that the revenue was $22.2 billion, and operating income was $14.1 billion in 2011, which were up 16% and 23%, respectively, from 2010. 

It's market dominance looks like invincible now. What makes this monopoly and huge profit possible for such a long time?

In 2010, Gartner delivered an intriguing report "Cost Model for Upgrading Microsoft Office or Moving to OpenOffice.org"

As we can imagine, Michael's research showed that moving an Office 2003 user to an open-source office product may cost less than moving them to Office 2007 with a suspicion that, however, ongoing compatibility costs could make the open-source product more expensive in the long run.

As Micheal focused on developing quantitative cost model based on users' usage pattern in his research, he didn't address so much that how significant the compatibility costs are. Whereas John F. McGowan articulated that point from his paper in 1999.

"Even if a competing network exists, there is substantial cost and practical obstacles to converting to the competing network of products and associated standards." - Standard Based Monopolies and Near Monopolies : The WinTel Example

Depiction of Clayton Christensen's disruptive innovation

As many challengers in the market have been strongly enticed by price differentiation and low-end disruption and as this approach might have seemed to be supported by Christensen’s disruptive innovation theory, they were more likely to overlook an intrinsic characteristics of the market. 

How much does it cost for uncertainty and imperfection on communication?

Trying to perceive Microsoft Office as a communication network not as an application can reveal the underlying mechanism of the market more obviously. 

Even though I couldn't find any quantitative analysis or case study for the cost to build a competing network against dominant primary network or the cost to cut into existing network with uncertainty and imperfection as a part of network. However, you may notice that this networking is very similar with the things happened in telephone industry and many researches on AT&T case are enough to give some insight on the mechanism of this monopolized communication network. Here is one of the researches.

"As did AT&T, the network with the highest quality and largest number of users would continue to grow and become more valuable to the consumer and smaller companies would not be able to offer the same benefits – in fact by drawing customers away from the primary network they may lessen its value." - excerpted from "AT&T: A Natural Monopoly Worth Preserving or Destroying?"

What happened in the market?

There are several companies like as ThinkFree, SoftMaker and Kingsoft. They aimed at low-end disruption with aggressive low price. Interestingly, they have reached considerable level of quality on visual fidelity, compatibility on the file format and copied UI. Nonetheless, any of them couldn’t gain significant presence in the desktop market so far. Some of them grasped opportunities in mobile market. However, it is still hard to find any strong evidence that the performance is not transitory by absence of MSO on that platform.

In a certain sense, Office files can be perceived as very complex and sophisticated protocol on a network. Although the specification of the file format was opened and governed by open standard committees. But Microsoft still has greater advantage not just by leading open standard but by having taken sophisticated networking in place. And the network is forced to run to accept majority as standard in every ambiguity on convention. Inevitably, the nature of mission-criticalness yields up crucial uncertainty and imperfection to contenders. That is where contenders can't cope with.

On the other hand, as Openoffice.org tried to develop a competing network based on new open standard (ODF), they targeted non-consumption market ostensibly and/or actually and had gained some meaningful traction in public sector. However, they had not made so much progress for a long time as well.

Although LibreOffice and OpenOffice.org are gaining new momentum recently, it is the fact that OOo was not so successful to deliver any significant value over MSO. Whereas loss of the value from being away from existing network seems not to be compensated with the benefit from even imputed cost-free. And while the longevity to existing network seems much substantial, establishing new standard is extremely expensive.

Of course, the monopoly network is reinforced as well by other factors like as huge monopoly profit, which yields price control power and investment on superior quality, and long-established partner/re-distributor delivery structure. They also invalidated the pre-existing low-cost strategy significantly. Anyway, the bottom line is that low cost can be necessary for any contender but it is not sufficient at all. And one of keys to be able to compete against monopoly network may be to find out something to pay for the costs from uncertainties and imperfection on the networking. 

A Question

Now, we can throw a question. 

"If there is any way to build a competing network without imposing costs on users from being away from existing network, or any way to give them substantial value that can justify that cost and essentially if the value is what MS cannot catch up with easily, so maybe does a chance exist at there?"

This first post will be followed by the below posts. And we may see the names of the companies above and other emerging companies' names from various perspectives in the following posts again. 

• Part one: Network effect, the characteristics of Office suite market 
• Part two: Another standard, user experience 
• Part three: As a matter of fact, Microsoft is a franchise company
• Part four: Growing opportunities and new battle of ideas

*I have been making a careful observation and investigation on Office market and it's technology for several years. What I found is this market is really unique and fascinating and on top of that it's the beginning of new battle on ideas I think.