Thirty years after Microsoft was founded, most of the world's software companies have learned to live with the industry's gorilla: even its biggest and most direct competitors rarely go head to head with Microsoft these days. But this period of relatively peaceful co-existence will not last much longer. The company's CEO Steve Ballmer recently told a partner conference that Microsoft has several new markets in its sights, and it expects to win in them.
Over the past four years, Microsoft has grown from being the dominant provider of enterprise desktop software systems and applications to become, arguably, the dominant provider of enterprise software. In 2001, for instance, Microsoft's revenue grew 10.2% to $25.3 billion. The rest of the software industry, most of which was reeling from the post-dot com IT spending slump might have looked on enviously at this contrarian performance, but few of them could directly blame Microsoft for their own ills.
At that time, 65% of Microsoft's revenues were derived from its Client (Windows desktop operating system) and Information Worker (Office) business divisions – units that had long since killed of any serious market competition and whose growth, therefore, had virtually no impact on any other company.
Today, Microsoft is a $40 billion company – 53% larger than in 2001 – and its Client and Information Worker business units still account for 58.4% of that total. However, the danger signs for other enterprise software vendors are already becoming clear in other areas of Microsoft's balance sheet, and in its new product roadmap.
Take Microsoft's database server business for instance. Under the umbrella of its Server and Tools unit, Microsoft's SQL Server business has grown from a nice-to-have business, primarily addressing the departmental and small and medium-sized business (SMB) sales opportunities, into a major threat to the two market leaders: Oracle and IBM.
According to IDC, Microsoft's share of the global database server market grew from 12.3% to 13.4% in 2004. It is still a distant third to Oracle, which owns 41.3% of the market, and IBM, whose share slipped to 30.6% from 31.8% in that time. Still, SQL Server was the fastest growing product in the market last year, despite not having benefited from a major revision for approaching four years.
With that update – SQL Server 2005 due to ship in late 2005 – IDC predicts "a battle royal" that, win or lose, is unlikely to be a painless contest for either of today's database market leaders.
And it is not just database vendors that have reason to worry about Microsoft's product roadmap. Between now and the arrival of Windows Vista – the next-generation desktop operating system formerly known as Longhorn – in late 2006, Microsoft is preparing a slew of new products. Some of these, such as Office 12, will have little direct impact on Microsoft's competitors, but the same cannot be said for other products, particularly those that are scheduled to emerge from the Microsoft Business Solutions (MBS) division.
Like SQL Server's challenge to Oracle and IBM's enterprise businesses, the threat posed by MBS to the apparently stronger enterprise applications businesses of SAP, Siebel and others has taken time to emerge – but perhaps less time than Microsoft's competitors will have imagined. Certainly, four years ago, when MBS was created as a kind of holding tank for Microsoft's collection of mid-range business application acquisitions (Great Plains, Navision and Axapta), there seemed little for SAP et al to worry about. MBS was then a ‘tiny' $155 million blip on Microsoft's balance sheet, and focussed exclusively on the needs of small and medium-sized businesses.
MBS is now an $803 million business, more than five times bigger than in 2001, and looking increasingly like an organisation pointing at the right market at the right time. With the enterprise suite market now reaching maturity, it is the SMB space that offers the best hope of growth to vendors such as SAP, Siebel, and Oracle. However, as these companies head down-market, they are entering MBS's stronghold.
The prospect of a head-on collision with MBS has already set alarm bells ringing in application vendor boardrooms – prompting Oracle's protracted pursuit of PeopleSoft, and the short-lived prospect that SAP would fall into the arms of Microsoft. Had this merger gone through, it would have become a classic example of an ‘if you can't beat ’em, join ’em' defence. And, as Microsoft steadily outgrows its desktop roots, it is a defence that might become increasingly popular.
