Microsoft: A case study in mismanaging a business ecosystem

mslogoA lot of fuss has been made about Microsoft’s inability to compete in the online space and the web specifically.  Indeed, it is widely acknowledged that Microsoft was slow to understand the web’s implications and adjust its product lines accordingly. How did the largest, most successful software company in the world fail to predict or even, once the future became clear, effectively adapt to the rise of the internet? More importantly, why hasn’t it been able to acquire its way out of trouble?

Numerous articles have been written on this, many focusing on Microsoft’s strategy and the fact that it likely faced a disruptive innovation problem. I’d like to supplement that analysis by focusing on the predatorial way Microsoft managed and engaged its business ecosystem in the 1990s. I’ve not seen this analysis before so I thought I would throw it out there.

The 1990′s were a good time for Microsoft. It experienced tremendous growth and its operating system was by far the dominant choice in the market place. It had tremendous leverage over everyone in its business ecosystem, including its competitors, customers and complementors. While this was seen as a source of strength (and profit) it also laid the foundation for many of its problems. The story of Microsoft’s competitors in its traditional marketplace – especially those that have adopted an open source space model such as Linux, Mozilla and Apache – is well documented and forms the core of the traditional disruptive innovation thesis. But I think Microsoft’s inability to counter these threats, as well as its inability to compete in new spaces – such as against Yahoo! or Google – isn’t just a result of the fact that it crushed its traditional competitors but also due to the mismanagement of its relationship with its complementors and partners. More importantly, the disruptive innovation thesis fails, on its own, to explain why Microsoft hasn’t been able to acquire itself out of its problems.

I’ve been told that one of Microsoft’s great strengths is that it has fantastic tools for developers (I’m not a coder so I can’t comment myself). However, in the 1990s and early 2000s, Microsoft lacked a sophisticated or long-term strategy for engaging the software products and companies those developers created. Given that Microsoft was sitting atop the  computer software ecosystem the company had one goal – staying there. This lead it to view anyone as a potential competitor – or if not a competitor than at least someone eating into profits that it could otherwise capture. Rather than balancing the growth of the value network with trying to capture its fair share, Microsoft prioritized the latter over the former. Consequently, many companies that produced products within the Microsoft ecosystem – particularly for Windows – were often not seen as complementors, but as rivals. Microsoft was aggressive in dealing with them – it was gracious in that it would usually offer to buy them out – on its terms – but always looming in the background was the threat that if you didn’t sell to them they would copy what you did. Consequently, many little companies that designed applications that enhanced Windows were forced to sell – or were put out of business after Microsoft copied their products and integrated them into the operating system.

A business ecosystem is like a natural one. It doesn’t matter how nutrient rich the environment (like say, one with excellent development tools) if emerging lifeforms are consistently snuffed out, pretty soon they will elect to grow and evolve elsewhere – even in places where the nutrients are weaker. This is precisely what I suspect started to happen. Likely, fewer and fewer developers wanted to approach the Microsoft ecosystem with a 10-foot pole because they would either be bought out on unfavorable terms or at an early stage (before they were too valuable) or worse, Mircosoft would simply crush them by using its enormous resources to replicate them and eat into their business.

The repercussion of this is that Microsoft saw fewer and fewer new and innovative products being created for its platforms. Programmers and developers shifted to other platforms, or created whole new platforms where they would be free to grow ideas. This, I believe, prevented Microsoft from understanding how the web would change its business. Not only did its current profits create a disincentive to altering its business strategy but it snuffed out one of the few groups of people that could warn it, educate it and challenge it, about the impending changes – its complementors and partners. Equally important is that it diminished the pool of potential acquisition targets whose culture, technology and processes might have helped Microsoft adapt. There were simply not that many mid-sized mammals in the ecosystem: Microsoft had prevented them from evolving.

Today – based on conversations I’ve had with some people in Microsoft – I get the sense that they are trying to become a better partner (or at at least, they may be aware of the problem). Perhaps Microsoft will succeed in becoming a better partner. It won’t however, be easy. Changes to how one treats complementors and partners often require rethinking the very culture of an organization. This is never an easy or quick process. In addition, it takes time to rebuild trust and attract new blood into the ecosystem… and any misstep will count dearly against you.

There are also almost certainly some interesting lessons in this for other dominant players – such as Google. Will Google behave differently? I don’t know. In many regards Microsoft behaviour was rational. It was seeking to preserve its position and maximize its share of the pie. This was made all the tougher because its market was evolving and the future was unclear. No one knew which pieces of the value network would be critical (and therefor most profitable)  and so Microsoft was simply trying to stake out as many of them as possible. It is easy to imagine Google behaving in a similar manner. But I suspect that if it does, it may also find it hard to escape Microsoft’s fate.

Big thank you to David H. for pointing out some typos and errors.

7 thoughts on “Microsoft: A case study in mismanaging a business ecosystem

  1. Kim Feraday

    Interesting but I think any large company is inevitably going to act in similar ways. They need to expand reach in order to grow revenue. Any technology that is adjacent to core products is going to be fair game. The company can either move into these spaces organically or through acquisition. If you're in an adjacent space, you're an acquisition target, if not then you may be in for a tough fight. If you're lucky you can find a profitable niche (either geographical or industry) and establish some barriers that way. MS did this to us in the 90's (Delrina). But then Netscape tried to do similar things at a small company I went to after.

  2. Conrad Barwa

    A business ecosystem is like a natural one. It doesn’t matter how nutrient rich the environment (like say, one with excellent development tools) if emerging lifeforms are consistently snuffed out, pretty soon they will elect to grow and evolve elsewhere – even in places where the nutrients are weaker.This is a slightly optmistic reading imo; you assume that the so-called “emerging lifeforms” have the freedom of choice to move elsewhere. That is a big if, plausible in some situations but not in all

  3. Christopher Blizzard

    Tim O'Reilly's recent essay on working on things that matter seems relevant here:http://radar.oreilly.com/2009/01/work-on-stuff-…“Take Microsoft. They started out with a big goal, “a computer on every desk and in every home,” and for many years unquestionably created more value than they captured. They helped grow the PC industry as a whole; they built a platform that helped many small software vendors to flourish. But over time, they began to capture more value than they created: as the cost of PCs plummeted, hardware vendors had to survive on the slimmest of margins while Microsoft collected monopoly rents; bit by bit, Microsoft consumed its own developer ecosystem by building the features of successful startups into their own products, and using their operating system dominance to crush the early movers. As I've written elsewhere, I believe that Microsoft must re-commit itself to big goals beyond its own profitability, and to creating more value than it captures if it is to succeed. (Danny Sullivan wrote a great piece about the strategic relevance of this very idea just last week, Tough Love for Microsoft Search.) “I tend to agree with this. Big companies with leverage need to be able to walk away from possible value with the understanding that the soft value of the ecosystem is more important than the short-term value of competing with those who complement them.I think that one of the main problems is that that “soft value” is very hard to measure when compared with the hard dollars you realize that you're leaving on the table. And if you can't measure it it's hard to compete in a conversation inside of one of those companies. I can almost hear it in my head now where one guy says “these things help us” and someone else says “that's money we can return to our shareholders and they might grow to kill us anyway.” So the money-left-on-the-table argument wins.This is one reason why I'm a fan of companies that can look past the next quarter, or don't have to worry about that pressure at all. And I wonder what Microsoft would look like if it went private.

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  5. Andrew

    I agree. The fact that you have written this now and almost mentioned some of the points made by Joel Spolsky in his essay of some years ago shows that he was right about a lot of things. http://www.joelonsoftware.com/articles/APIWar.htmlI think even Microsoft internally would recognize that breaking the backwards-compatibility of Visual Basic, while cool and nifty in the short-term, was a serious long-term mistake.Even though they clearly did succeed in cutting off Netscape's air supply, Firefox lives on because it is open source. And yes, developers moved to niche platforms where Microsoft would leave them alone long enough for them to create something cool – Linux, OS X and what we now call Web2.0They forced all the action and futuremaking to move to the iPhone and the cloud. How many rich clients made with wonderful old .NET do we use today?Joel's other important point here was that Microsoft inherited it's monopoly from IBM and so abused it for as long as it could. Google earned it's 85% market share by being superior. Although that may not mean it fares any better.Does anyone think the stock market has registered this long term weakness at Microsoft over the next decade, or is it just way down anyway because everything is?

  6. Andrew

    I agree. The fact that you have written this now and almost mentioned some of the points made by Joel Spolsky in his essay of some years ago shows that he was right about a lot of things. http://www.joelonsoftware.com/articles/APIWar.htmlI think even Microsoft internally would recognize that breaking the backwards-compatibility of Visual Basic, while cool and nifty in the short-term, was a serious long-term mistake.Even though they clearly did succeed in cutting off Netscape's air supply, Firefox lives on because it is open source. And yes, developers moved to niche platforms where Microsoft would leave them alone long enough for them to create something cool – Linux, OS X and what we now call Web2.0They forced all the action and futuremaking to move to the iPhone and the cloud. How many rich clients made with wonderful old .NET do we use today?Joel's other important point here was that Microsoft inherited it's monopoly from IBM and so abused it for as long as it could. Google earned it's 85% market share by being superior. Although that may not mean it fares any better.Does anyone think the stock market has registered this long term weakness at Microsoft over the next decade, or is it just way down anyway because everything is?

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