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Cannibilize or die

And the third from our Smug Friend. He goes off the rails on this one.  It starts with a rant about security, and moves from there to a tirade on Microsoft’s high handedness to… I don’t know what.

There’s a couple of things that are worth drawing from this:

Microsoft has a big bank account, which everyone knows.  They could close the doors tomorrow, and never ship another software product, and be the “biggest software company in the world” for all eternity on the interest in that bank account.  That’s both good and bad. 

It’s good because they have the money to invest in long term vision that today’s VC community isn’t willing to invest in.   Example: Five years ago, I was stumping the speaking circuit with Craig Mundie talking about what home networking would mean to consumers, and the value of networked entertainment.  That market is finally starting to take hold, but the networks are the dumbest of networks.  The vision we promoted is at least another five years away.

It’s bad because that bank account makes them complacent about their future, and it causes them to aggressively stamp out any threats to the cash cow.  That’s business.  Eventually, without any help from the monopoly laws, one of two things is going to happen — someone is going to build a better mousetrap, or Microsoft will build a better mousetrap.

An excellent read, highly debated at Microsoft, is Clayton Christiansen’s The Innovators Dilemma. Christiansen’s thesis is that discontinuous innovations periodically occur when someone else other than the dominant player recognizes that a cheaper, often simpler and less functional, solution than the dominant players, invades a market.  This happens in markets all the time — over at Ventureblog, for instance, is a story about a radio station using Apple’s iPod for storage.  It’s good enough, and it’s a lot cheaper.  Christiansen’s book has examples ranging from steam shovels to hard disks. 

The dominant player often tries to protect the cash cow by moving up market, as Microsoft is today with its OS.  It’s moving from desktop to server to cluster to…  The dynamics that make it easy for the dominant player to move up, also make it hard for the dominant player to move down market to compete with the invader because that means sacrificing profits from the cash cow.

Inside Microsoft, the Windows Hawks preserve the value of the cash cow at all costs.  Most of the Internet innovators have left the company, and Internet Explorer is just an OS feature.  The embedded efforts have never really taken off because they want to maintain just one source code base if they can, and they don’t want to cannabilize NT sales by offering a cheaper version for embedding.  Periodically, an embedded Windows product does gain some currency — the Pocket PC, xBox, Windows Server Appliance.  It’s an ongoing tug of war.  If they can’t figure this out, then they will surely die the death that the Smug Canadian predicts. 

Interestingly enough, I heard that Will Poole, who successfully ran the Windows Media group for a long time, is now the guy running all of Windows, including the Media group.  The Windows Media team has a history of looking beyond the PC. Perhaps there is hope for Microsoft to make the transition that so few companies successfully do.

The same phenomenon is going on in another industry — Telecom — at this very moment.  Compact PCI has invaded the low end of the telecom space with radically different price points from previous solutions offered by the big incumbents.  Compact PCI form factor telecom equipment is now a $1BB business annually. It can only, however, address small systems — up to 4,000 lines on an h.110 bus.  The ATCA spec, which is the next generation Compact PCI architecture, removes that limitation.  Soon you will be able to build something with the capacity of Nortel’s DMS class switches from standard off the shelf components.  That will wreak havoc among the telecom equipment manufacturers.  They will have to cannabilize their sales to survive.


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