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Module 5 Case

1. Microsoft Today

After the successful acquisition of Yahoo!, Microsoft has increased its share on the Internet search market and become market leader in web-service subscribers.  However, it is still far behind Google in the searching advertising market.

Although Google is by far the leading power in search advertising today, Internet search technology is still in its infancy and there are much room for improvement. Microsoft shall invest on the R & D research of search technology and the integration of search with its current products. Meanwhile, it shall also invest in the fast growing display advertising market.

Advancement in technology has enable Internet to become a platform in its own right. This brings about the rise of online applications and open-source movement, each offering alternatives to Microsoft software offering. This essay analyses each phenomenon and the threats and opportunities Microsoft is facing.

As the most successful PC software company, Microsoft key strength lies in its ability of creating software that help customers to fulfill their potential. In the up and coming age of Internet computing, Microsoft shall keep its focus on being a successful software company. This however requires it to make radical change to its business model, development method and its competition strategy.

In section 4, a Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix is present consisting the opportunities and threats identified in competitive analysis, and highlight the strategies identified.  These strategies are then present in section 5.

2. The Story So Far

2.1 Acquisition of Yahoo!

Microsoft has successfully acquired Yahoo!, a company renounced for its Internet search and media portal services. This takeover bid has been the most talked about IT and business topic in the year of 2008, for its impact on the IT industry in particular the Internet searching and advertising sector.

As a result of the acquisition, in the Internet searching market, Microsoft and Yahoo! now have a combined market share of 32.7% in the U.S. and 15.7% worldwide, with Google being the market share leader both in the U.S. (58.4%)  and worldwide (62.4%)[1]1 below.

In terms of total number of Internet service subscribers, Microsoft and Yahoo! has become by far the leading market shareholder in both web-based email (U.S. 74.9% and worldwide 75.5%) and instant messaging (U.S. 57.6% and worldwide 77.2%)[1] .

It is believed that, combining with Yahoo!’s expertise in Internet searching and media portal, Microsoft could greatly improve its competitive advantages the online business. In particular, this would put Microsoft in a better position to compete with Google[2][3].   More discussion will be present in following sections regarding the historical, technological and business context of this acquisition.

First of all, let’s have a look at a brief history of Microsoft and Yahoo! to see what path they have taken to arrive in their respective current status.

2.2 Company History

2.2.1 Microsoft

Bill Gates and Paul Allen founded Microsoft in 1975 after they won a contract to deliver an interpreter for the BASIC language on the Altair 8800 system. In 1981, IBM awarded a contract to Microsoft to use its DOS system as the operating system of IBM’s machines. This bought Microsoft its first major success as a software platform provider [4].

It started to deliver its most iconic product – the Windows operation system in the early 90. Working closely with hardware providers such as Intel, Microsoft established its dominating position as platform provider. By 1993, Windows has become the most widely used GUI operation system [5].  It is widely estimated that more than 90% of the world’s PC run on Microsoft Windows [6].

Microsoft started to expand its business to other sectors of the IT business in the 90s. It was engaged in fiercely business competitions with various competitors in many sectors it tried to enter, most notably with Netscape on the “Browser War”, with Lotus on Spreadsheet and with WordPerfect on document editing tool. In each of these major business battles, Microsoft emerged victorious and became dominating power in respective sector [6].  A very interesting point to be made here is: in each of this battle, Microsoft wasn’t the technological leader in respective sector and wasn’t providing the best solution. In the “Browser War”, it successfully attacked Netscape’s business model by bundling Internet Explore on Windows for free. In other two cases, it managed to provide products that were “good enough” and were easier to be used as default tools on its dominating Windows operating system[7].

Microsoft has also established signification presence in sectors such as web based services, server software, enterprise database management system, software development tools and game console. Since 2003, Microsoft has been trying to establish itself as a major player in Internet search engine. However, its effort so far has not been successful. Google has been the run away leader in Internet searching since the early years of 21st century, leading Microsoft’s Live Search and Yahoo! by large margins. In 2008, Microsoft acquired Yahoo! in a bid to close the gap on this particular sector.

Microsoft’s tactics in establishing dominance in the IT industry is often a matter of concern for governments. Both the U.S. and E.U. governments have high profile and long running anti-trust suits against Microsoft. In both cases Microsoft was accused of abusing its monopoly power in it’s handling of operating system sales and bundling of complementary software.  In both cases’ result, Microsoft was forced to share technical information for third party companies to develop competing software compatible with Windows.  The E.U. court also handed Microsoft large amount of fine.

Today, Microsoft is probably the biggest and most profitable software company in the world with annual revenue of US $51.12 billion in the year of 2007.  With the mission statement “To help people and businesses throughout the world realize their full potential”, Microsoft continues to make significant stride to a wide range of IT business.

2.2.2 Yahoo!

Yahoo!’s origin can be tracked back in 1994 when Jerry Yang and David Filo started a directory to keep track of their personal interest on the Internet. This directory called Yahoo! soon gained popularity among web users as a single place to find useful websites. The business was incorporated in 1995 and involved to become a major player in Internet searching and web portal by the late 90s [2].

Yahoo! was hit hard by the doc-com bubble burst in 2001 but nevertheless survived. It since then partnered with telecommunications and Internet providers to create content rich service. Despite offering ever-rich content,   its core business Internet searching suffered lack of progress and gave way to Google[2].

The mission statement of Yahoo! is “to connect people to their passions, their communities, and the world’s knowledge”.  By the time of its acquisition by Microsoft, Yahoo was the second must used search engine, and also provide a wide services including web based email, instant messaging, video/photo sharing and online community.

As a business, Yahoo! relies heavily on search advertising. About 88% of Yahoo!’s total revenues came from marketing services in 2006. The largest segment of it comes from search advertising.  This helps to explain why Yahoo! is considered to be underperformed in last few years as it struggled to compete with Google on Internet searching.  Advertising as a business model for online business will be discussed in following sections

3 Competitive Analyses

3.1 The online advertising game

When Google co-founders Larry Page and Sergey Brin published their definitive paper describing the PageRank algorithm in 1998, they pointed out that advertising is the predominant business model for commercial search engines. Today digital advertising is a $40 billion industry and is projected to double to an $80billion industry in two to three years time. For its part, Google report first quarterly revenue of $5.1 billion in 2008, 99% of which comes from advertising.  Compare to Google, Microsoft’s online services business for the same period stands on a modest amount of 671 million, with 264 million’s loss [6].

There are several forms of advertising online: Search advertising refer to those ad that are provided alongside internet search result; Displayed advertising refer to banner and video ads that run on side of web pages; other form including email advertising (including junk mail)  and advertise via online community.

So far, search advertising has been the most developed market. As the most popular search engine, Google is the dominating power in this segment, taking 77% market share [3].  However, display advertising is believed to be the segment with most growth potential:  It is projected to grow faster in the next few years as internet video technology advances and double to $15.1 billion; revenue from search will reach $17.6 billion [3].

Although Google is occupying by far the largest share in search, Internet search is considered to be only in its infancy [8]. Only a fraction of the content available online is searchable, users only get back a few links that they have to subsequently click on, search engine has only start the attempt to take users’ context into account. How search algorithm will be developed and how Internet search will be integrated with other application will have in-depth impact in the future.  Going forward Microsoft still has resource and time to catch up. It shall keep investing on R & D of search technology, and explore the opportunities of integrating search with its existing products such as Microsoft Office.

With regards to display advertising, Yahoo! over the years has positioned itself as a content portal to provide rich information on finance, news, music and entertainment. Both Yahoo! and MSN has popular offerings in web mails, instant messengers and online communities. The acquisition therefore allows Microsoft to obtain dominating position in terms of service subscriber and significant amount of online audience. If display advertising grows as predicted, Microsoft will be well positioned to gain significant advantages on this segment.

3.2 Software business in the online age

Microsoft’s mission statement is “To help people and businesses throughout the world realize their full potential”.  Through out its history, Microsoft has been fulfilling this statement by providing useful software to enterprise and individual customers.  Although online advertising is such a fast growing and profitable market, Microsoft’s main strength remains in creating software that help customers to develop themselves. Understanding the impact of Internet on software business is therefore essential to any strategy making.

3.2.1 Rise of online applications

Since the 1990s and the burst of dot-com bubble at the turn of the century, internet technology has become much more mature thanks to advancement in fields such as broadband , network protocol, network security and ever more powerful machines on both server and client sides.  This in turn leads to the so called “Web 2.0” phenomenon: the business revolution in the computer industry caused by the move to the internet as a platform, and the attempt to understand the rules for success on that new platform [8].

The imminent arrival of Internet as a software platform presents both threats and opportunities for Microsoft.  For the last 20 years, Microsoft dominated the PC operating system market with Windows.  This gave Microsoft tremendous competitive advantage in almost every software market it tried to enter. It was able to emerge victorious in numerous competitions by offering solutions that are easy to be used as default tool on Windows. On the other hand, more applications are developed on Windows because there are more users and more users use Windows because there are more applications. This technology locked-in effect served to consolidate Windows as the dominating system.  It is for this reason that Microsoft became the most successful software company.

However, situations will change with Internet becoming a platform of its own right. Software providers no long need to develop their solutions based on any particular operating system as long as it can be made available on the web. The technology locked-in effect no longer applies with software providers moving away from PC platform.  This could lead to significant decrease of demand on Microsoft’s core product – the Windows system.   The demand for Microsoft’s other software solutions could also be affected as more and more online alternatives become available. Day-to-day applications such as word and spreadsheet processors, as well as enterprise-level management software, are now available on web-based format. For example, Google offers word process, spreadsheet, and presentation tool on its Google Doc for free. Companies such as Zoho have even greater range of offerings including enterprise-level applications such as CRM and project management tools [6].

            These online solutions probably are not as good as desktop solution at the moment. Working via the network can be sluggish, data security could be questionable, and the application server may not be readily available as personal computer. However advancement in technology will eventually improve these applications to a level that they are comparable to desktop solutions.  By that time, Microsoft will need to reposition itself to cope with this online migration.

The growth of Internet, however, also presents great opportunities for Microsoft to extend its software business to many of the newly generated high-growth markets.  As discussed above, the acquisition of Yahoo! allows Microsoft to further expand its online services and significantly increase its online audiences.  Along side with its brand recognition among computer users, this large base of online audience should provide Microsoft with significant competitive advantage in the online market.  It would be a very good starting point, for example, to start provide light versions of MS office  and make them easily accessible from Microsoft’s web mail, instant messengers and online community.  Much similar to how Google bundle Google Doc with Gmails.

3.2.2 Open Source: The emerging power

Compare to a decade ago, Entry barrier to the software market has become much lower. With resources such as development tools readily available on the web, software can now be developed in a ubiquitous and collaborative manner by developers and users across the globe. This gave rise to the open source movement.  According to the open source definition, software shall be freely distributed, with its source code and open to modification by other parties. Already, open source software is making headway in various sectors: Apache occupied 73.18% of the web server market according to the latest survey of Securityspace, as oppose to Microsoft’s 18.22%. Mozilla Firefox enjoys an 18.41% and fast growing share on the web browser market [8]. In the operating system area, Linux has been catching eyeball for last few years.  And project such as OpenOffice are available as an alternative for Microsoft Office.

Similar to online applications, open source software in many areas provide alternative to Microsoft’s products without requiring any license.  However, probably the most important impact of open source software is not how software is distributed but how it is developed. The philosophy of open source, that software to be developed and distributed freely and therefore shared by community, is stark contradiction to the underlying development paradigm of proprietary software company such as Microsoft in which every piece of code is owned and copyrighted.  Should open source software prevail in the future, Microsoft may have to fundamentally change the way it is operated in order to stay in competition. According to Microsoft’s chief software architect Ray Ozzie, open source is a more disruptive competitor than Google.

It is a hotly debated issue how does open source development compare to close source in term of performance, security and robustness. Nevertheless the up and coming of open source software is a undeniable fact. Despite obvious threats post by open source vendors (or ad-hoc communities of developers), there are opportunities for Microsoft to work with them to improve competitive advantage. One possible strategy is to convince open source vendors to develop software compatible with Windows, possibly by making Windows itself partly open sourced.  Windows’ dominating position on the PC platform would certainly work in Microsoft favor in abstracting open source business. With Windows being open sourced, this would create further opportunities for Microsoft to provide services such as consultation and installation.

3.3 PC Microsoft Vs Online Microsoft

Microsoft will need to make radical change to carry its success in the PC market onto the online market. And it needs to be quick, as the most dominant power in PC software business, the shift online would see Microsoft to become the company with the most to lose.

3.3.1 Software Development and Deployment Model

Traditionally Microsoft has been focused on developing close-sourced, high spec, and all functional operating system. Take Windows as an example, new Windows version often can’t be run on hardware that is more than 3 for 4 years old; in return it provides a wide array of functionalities that cover all needs of most users.

However, such a method is beginning to show cracks. As Windows code base expands rapidly, it takes longer and longer to create new version with meaningful changes. The obvious example is the long delay of Windows Vista. On the other hand, it is becoming harder and harder to persuade users that newer version is good enough to be worth the switch. Statistic has shown that uptakes for both Windows Vista and IE7 have been slow.

As uses of Internet continue to grow, it is widely expected pervasive computing, in which people use a wide range of devise to access the network on the move, will become more and more important. This indicates that Microsoft should rethink its core product’s make up, and start the shift from all-powerful, chunky operating system to alternatives that are lighter, more flexible,  and with greater mobility.

A change in development method is also needed. Instead of keep enlarging its army of developers to develop close-sourced proprietary product, Microsoft should try to harness the potential of open-sourced development.  Although making Windows fully open-sourced is unlikely due to Microsoft’s reliance on licensing fee, it can get great benefit by allowing peripheral features to become open-sourced.  Doing so would reduce risks and cost of development as well as helping to enhance perception of Microsoft among online community.

3.3.2 Business Model

For Microsoft, one of the biggest threats in the Internet age is that its PC software business model may not be suitable to the Internet software market.  In the PC software market, Microsoft is a typical product oriented company, which generates revenue by selling software license [7]. On the Internet, however, many existing online applications are freely available. Therefore the model of selling software license at high cost is not likely to be viable.

Google uses its huge advertising income to fund the development of its web-based application, and then freely provide them to enhance its brand recognition, which then help to increase its search volume. This is the reason many believe why Microsoft want to compete with Google in Internet search and online advertising [2] [3] [8].   As discussed in section 3.1, as well as competing with Google in the search market, Microsoft can develop its display advertising capability and cash on this market’s expected growth.

Unlike Google, who has been solely relied on online advertising, Microsoft has its enormous PC software business as its backyard and is well positioned in exploring other potential business model in the Internet age.   One possibility is to transform its high profit product business model to lower profit but more sustainable service and software rental models.  For example, transition from PC computing to Internet computing will create many opportunities in providing consultancy service to enterprise and individual customers; low cost rental for online application would also become a useful alternative to the high-profit license fee.

3.3.3 Competition Strategy

Historically, Microsoft used very aggressive competition strategy against rivals. The most notable example is the bundling of IE to Windows during the “browser war” to attack Netscape’s business model.  Such strategy has enable Microsoft to deal with competition swiftly.

However it also leads Microsoft into long term anti-trust lawsuit, which result in heavy fine for the company and bad publicity.  In the Internet computing market, such strategy is unlikely to be effective. Part of the reason is that any more law suit will post great political risk – Microsoft was ordered to split but appealed successfully.  The fundamental reason is that Microsoft is no longer the dominant platform leader on the Internet.  It is now much more difficult to become the de facto standard with other software developer adhere to.

Going forward Microsoft should swift its strategy toward enhancing its own capability.  This may include: placing more emphasis on technology R & D, seeking to obtain superior technology by acquisition and establish business alliance.

4. SWOT Matrix

Brand recognition
Internet search is still in its infancy with much room for improvement.
Successful PC software business
Display advertising is expected to double in the next few year
Improved online search share after acquisition of Yahoo!
Transition from PC computing to one line computing create new opportunities in IT service sector
Leading position in display advertising
Cooperation with open source community will create opportunities in services sector
Leading position in web-service subscriber and online audience
Cooperation with open source community will ease development pressure on Windows system.
Windows can be an attractive platform for open source community
Emerge of pervasive computing generates new opportunities for operating system that are lighter, more flexible and with greater mobility.
Increasing difficulty in creating new Windows version due to rapid expanding code base
Microsoft is currently far behind Google in search market

Windows product makeup is not suitable for pervasive computing in the internet age
Emerge of online applications as alternative to Microsoft’s offerings
Aggressive competition strategies caused troublesome past with anti-trust issue and damaged company image
Emerge of open source software as alternative to Microsoft’s offerings
PC software business model is no longer suitable for internet computing
Emerge of internet as an alternative platform to Windows

Customers’ slow uptake for new version’s of Microsoft’s product.

Ongoing political risk result from anti trust suits

5. Strategy Recommendation

After developing the SWOT matrix, it seems to be in Microsoft’s best interest to pursue the following strategies:

1. Replace the culture of aggressive competition with one that encourages cooperation.

2. Redevelop its business model such that it is suitable for the Internet computing market.  The IT service business model is a key area to look at, including consultancy service for transition from PC computing to internet computing, consultancy and installation service for open source software.

3. Incorporate open source development concept into Microsoft’s software development activities. Cooperate with open source community to prompt open-sourced software on Windows.

4. Redesign product structure such that future operating system product will be suitable for user’s need in pervasive computing.

5. Focus on R & D for advance search technology, integration of search to existing products and digital advertising capability.

6. Offer online equivalence of current product to web-service subscriber and online audience.


1. Media Advisory: Microsoft Bids on Yahoo!(2009), ComScore

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2. Microsoft v Google – When clouds  collide (2009), The Economist

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3. Searching for the next big thing (2009),  BBC News

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4. History of Microsoft, (2008) Wikipedia

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5. Microsoft Company 15 September 1975, The History of Computing Project,

Retrieved 20 Jan 2010 from:

6. Operating System Market Share (2009), Market Share

Retrieved 20 Jan 2010 from:

7. The Business of Software (2009), Michael A. Cusumano, ISBN 9780743266635,  2004

8. Gates VS. Google: Search and Destroy (2009), Fred Vogelstein, Fortune

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