In-Depth

Unfair Fight?

Microsoft's assault on a myriad of markets leaves third parties scrambling.

It's been eight-and-a-half years since the federal government launched its infamous antitrust case against Microsoft. The Feds accused the software giant of abusing its monopolistic powers when it tied Internet Explorer into the market-dominating Windows operating system. Quite frankly, the "browser tying" that triggered the protracted legal battle seems almost quaint today against the backdrop of Microsoft's aggressive march into myriad technology markets.

Set aside for a moment Microsoft's coming-out parties for its flagship Windows Vista and Office 2007 products, and instead look at where the company is setting its sights: Security, virtualization, system monitoring and management, storage, CRM, administration tools, business intelligence and unified communications. Now that's empire-building.

This raises the question of what will become of the legions of innovative third-party ISVs that pioneered these markets, many of them Microsoft's own loyal partners. Over time, most will have to dodge, weave and morph their businesses in order to survive on their own. Others that own technology coveted by Microsoft have or will soon become acquisition fodder.

The growing concern is that smaller companies with cool ideas will decide it isn't worth the headache and potential hit to the wallet to try to compete against Microsoft in a particular market. Instead, you'll increasingly find companies whose entire business model centers around eventually being acquired by Microsoft. Worse yet, you'll see a dearth of innovation. Either way, it's a business reality that no third-party technology provider or IT pro should ignore.

"If you're a small developer, be aware you're a mouse in the jungle and that Microsoft is the lion," says Will Zachmann, president of Duxbury, Mass.-based Canopus Research Inc. "Know the lion's feeding habits and figure your strategy around it. If you're not perspicacious enough to realize the piece of meat you want is the same one Microsoft wants to chomp on, you deserve to be eaten."

For those companies deciding to stand and fight the lion, just the mere specter of Microsoft threatening to enter a given market makes it difficult for gutsy startups to get venture capital funding. Many VCs will not fund companies unless they have a clear exit strategy, even if that exit strategy is to be purchased by Microsoft.

"If you're a startup looking for funding, the first thing a VC does is parse your business model against Microsoft's and more times than not [VCs] would not bet against Microsoft," says Dana Gardner, principal analyst with InterArbor Solutions Inc. in Gilford, N.H.

Let's Go Shopping!
Consider the breadth of Microsoft's recent acquisitions spree. In the security arena, Microsoft's purchases of anti-virus and other security firms such as Sybari and Frontbridge has caused much hand-wringing. Those acquisitions put Microsoft in competition with the likes of Symantec Corp., McAfee Inc. and Trend Micro Inc.

Then there's the dual pickup of Winternals and DesktopStandard, which put it up against ScriptLogic Corp. in the admin tools space. Softricity, which it bought last year, throws down a stake in the application virtualization market. Connectix gives Microsoft the beginnings of a foothold in the virtualization space now owned by VMware Inc. Finally, while not an acquisition, the maturation of Microsoft's own SMS (Systems Management Software) products will keep management vendors like Argent on their toes for years to come.

Robert Enderle, Principal Analyst, Enderle Group

Analysts say Microsoft's voracious appetite is directly related to its need to find new avenues of growth beyond its Windows and Office flagships, while also keeping that platform infrastructure in demand. There is only so much growth left for those two products through new PC sales.

"Microsoft is the dominant vendor expanding the definition of what it does," says Rob Enderle, principal analyst at Enderle Group in San Jose, Calif. "It has to acquire technology externally to assure that its [flagship] products remain relevant because it can't innovate enough internally."

Microsoft's exploration of new avenues of technology has meant venturing increasingly closer to competing with the rising generation of fast-moving Web 2.0-based companies. Despite the Redmond giant's $45 billion in revenues and 90 percent share of the desktop operating systems and applications markets, a growing number of these new age developers -- as well as veteran Windows developers -- are now less intimidated by Microsoft.

"I would've got more excited about this five years ago when Microsoft was a truer monopoly. But with companies coming up with solutions that run on any browser or Linux or Mac, and are server-based, Microsoft can't so easily apply its dominant desktop monopoly anymore," says Richard Rabins, president of Alpha Software Inc., which has competed against Microsoft in the desktop applications space for 23 years.

Has Microsoft undercut prices of third-party competitors in areas that Microsoft recently entered?For those who have watched Microsoft over the last 25 years, you might say this is nothing new for the software giant. A major part of its modus operandi has been to adopt the ideas of others -- or buy them -- and ride to market leadership on a combination of marketing might, brand superiority and endlessly deep pockets. The scope and reach of its current machinations, however, could significantly alter the landscape of third-party ISVs. This in turn will impact future innovation, pricing and technology choices for the IT professionals who make the buying decisions.

A recent survey of Redmond readers elicited an interesting mixture of responses that demonstrate just how conflicting Microsoft's expansion strategy is for some. By more than a 2-to-1 margin, readers said they believed Microsoft undercut the prices of competitors in these newer markets, while an even greater number (80 percent) charged Microsoft with giving away its new-market software to entice users away from third-party solutions. Yet here's the kicker: Almost three-quarters of those same people polled said they believed it to be perfectly fair for Microsoft to compete against companies that have helped invent market segments, such as Symantec in the anti-virus space.

Overall, however, a sizable majority of those surveyed said Microsoft's presence in a plethora of new markets will result in fewer technology choices and eventually put the control of pricing into one very large hand. Some argued the pressure bearing down from Redmond could be a good thing for the market, though, albeit in a survival-of-the-fittest kind of way.

"Microsoft forces innovation. Any company that is complacent about their entry into a market is a fool. You either innovate to compete or whither away," writes Joel Munt, an IT administrator responding to our survey.Joel Munt, IT Administrator

Playing Fair?
While few can honestly begrudge Microsoft for operating like the for-profit company it is (this is America after all), some ISVs say they're troubled by what they view as questionable or heavy-handed tactics. Some raise the specter of predatory pricing, while others simply bemoan Microsoft's practice of bundling pieces of technology it has acquired into other products or giving them away free or as part of its Software Assurance contracts.

Most analysts believe Microsoft is toeing a fine line between pursuing a good-old-American growth strategy and being perceived as a carnivorous bully. "Microsoft needs to be a little more cautious here. If the company is viewed as just a predator, then that will not suit [its] long-term interests. [Microsoft needs] to choose more wisely where it's going to be a predator and where it's going to be viewed as a partner," says Gardner.

One tactic toward which Microsoft appears to be gravitating is "giving away" products or pieces of products to users who sign up for its Software Assurance (SA) services program. For instance, only users signing up for SA can receive the upcoming Windows Vista Enterprise Edition. The company also plans to carve out some capabilities from its recently acquired Softricity line, including its Soft Grid technology, and make that available only to SA subscribers.

All things being equal, would you prefer to buy a Microsoft or the equivalent third-party tool?Some industry observers see this as unfair competition with third parties. "[It's] planning to roll together a number of things in an optimization pack of some sort that would include Soft Grid, [its] Asset Management service, [its] diagnostic and data recovery tool kit, and advanced Group Policy Management, and make it available through SA. If you don't have [SA], it's out of your reach," said one source familiar with the company's plans.

As third-party competitors start disappearing, some users fear Microsoft will only become bolder in its attempts to bulldoze its way into new markets using cutthroat pricing and feature-stuffed products. "Microsoft needs more head-to-head competition to keep prices in check. Current prices are out of line and now [the company is] trying to switch to an annual license structure, which is just another way to jack up costs and create a structure similar to cable TV and telephone. I don't see an operating system as a service, but as a tool that should only need to be purchased one time," says Tim Jorgenson, an IT staffer responding to our survey.

Security Squeeze
Third-party security vendors have been among the most vocal critics of Microsoft's entrance into new markets -- namely their own. Consider Alex Eckleberry, president of Clearwater, Fla.-based Sunbelt Software. While he readily admits his bias as a security software developer, Eckelberry says Microsoft's aggressive entry into the security marketplace against a raft of third-party developers both large and small is not only unfair, but also unethical.

"I know I'm a security vendor, but I look at the security space as holy ground -- given its growing importance. You don't mess with that as a vendor. If you have the OS and also sell security software, you're the robber baron running both the workshop and the storefront at the same time. It is a fundamental ethical problem," Eckleberry contends.

Is it fair for Microsoft to compete with companies that helped invent market segments in the first place?

Eckleberry and other vendors believe that Microsoft has ventured dangerously close to predatory pricing on some of its security offerings of late. They claim the company is bundling a rich array of capabilities into some offerings and pricing them at levels that make it virtually impossible for smaller third-party ISVs to compete.

"What's scary is [Microsoft is] selling SMTP gateway anti-virus and anti-spam solutions with up to nine anti-virus engines, so for a five-user shop it comes to $10 per user. How can I compete with that? I have a product with two engines, and I have to go out and buy them. I was blown away," Eckleberry says.

Others support Microsoft's entry into the security market as a necessary step. In fact, Enderle contends that security firms have become a huge competitive disadvantage for Microsoft, so much so that Microsoft is well within its rights to fight back. "[Security firms] rely on actively marketing the defects in Microsoft's products as exploited by third parties," he explained. "Microsoft can't have an entire industry making money off of finding problems with its products. [It has] to respond."

Staying One Step Ahead
Some consultants roll out the old adage about making lemonade out of lemons when advising third-party software vendors how to deal with Microsoft's advances. One obvious way is to out-innovate the giant, creating a product that differentiates you from the rest of the pack. Another is to stop fighting an uphill battle. Instead, extend Microsoft's platform and other software with your own industry-specific solution. Verticals, at least for now, are not Microsoft's strength, nor a major part of their strategy.

Either way, some say, don't whine -- get creative. "Does Microsoft steal ideas? [Does it] adopt them? Yes. But [it is] not the only company that does this," says Albert Bitton, president at Partnerwise, a Montreal-based consulting firm focused on the ISV market. "If you're a small ISV and you need to hitch your wagon to a large partner, I'm hard-pressed to find benefits that you'll get over and above what Microsoft offers."

Al Gillen, Research Vice President, System SoftwareBe prepared, though, if you decide to stay in a market and fight, you can't predict the outcome. Bitton cited one interesting example where an ISV transformed its business and survived Microsoft's entrance into the business intelligence market. ProClarity was a BI vendor specializing in general analytics when Microsoft barged into the fast-growing and lucrative space about two or three years ago. The company, according to Bitton, knowing that it couldn't compete, developed a whole portfolio of differentiating vertical solutions, such as retail analytics, health-care analytics and financial analytics. ProClarity was successful, and in April 2006, Microsoft bought the Boise, Idaho, company.

An example of a market where Microsoft's success is not a foregone conclusion is virtualization. VMware has continued to maintain a healthy lead in this market despite Microsoft's best full-frontal assaults the past few years. "VMware is now a company that Microsoft realizes it will have to compete against for a long time. It's one of those rare cases where Microsoft says, 'We have a product coming so hold on,' and the rest of the world says it isn't going to wait," says Al Gillen, research vice president, System Software with Framingham, Mass.-based research firm IDC.

Viewed through a different lens, being bought out is either a bad thing (quashes competition) or a good thing (a shrewd business move by a small ISV). Bitton argues that third parties need to differentiate their companies to effectively compete. In the end, very few will actually be acquired and for those that are, like ProClarity, it will be welcome.Will Microsoft's increased presence in third-party markets increase or decrease prices?

"Any one developer that has worked with [Microsoft] knows [it's] a double-edged sword. For ISVs, [Redmond] will help you with great tools, promote your stuff and put you in [its] booth at shows, and then proceed to beat the hell out of you competitively and put you out of business. It's up to you to do the best job you can so they won't knock you down," says Dan Bricklin, president of Software Garden Inc. and inventor of VisiCalc, the first electronic spreadsheet.

Only recently has Microsoft shown signs it may want to shed its image as the monster that eats its young. In mid-November, it announced the InterOp Vendor Alliance that will, in some cases, actively promote among customers the use of others products over its own when it best serves the users' business needs. That announcement came nine days after Microsoft's agreement with archrival Novell Inc. that ensures Novell's version of Linux works smoothly with Windows in corporate data centers.

It remains to be seen if a kinder, gentler Microsoft is emerging. Argent Software is one third-party ISV that isn't waiting to find out. Despite Microsoft's strong push into the network monitoring and systems management space where Argent plays, the Connecticut-based ISV intends to out-innovate to stay one step ahead, according to President and founder Andrew Blencowe.

"We have to earn our stripes every day," Blencowe said. "The moment we stop pushing to be the best, we're dead, just like any technology company." And at the end of the day, IT buyers will indeed vote with their wallets.

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