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Bill Gates Letter…
Gates Memo Rocks Microsoft
November 9, 2005
Bill Gates wants to overhaul the way Microsoft approaches the software market, shifting toward online services and the ad-supported model championed by rivals, according to an internal email that was broadly circulated on Wednesday.
In the email dated October 30, Mr. Gates urged the company he founded to better leverage web-based software and services to make up for missed revenue opportunities realized by competitors such as Google, Salesforce.com, and Skype Technologies, which was recently acquired by eBay.
“The next sea change is upon us,” wrote Mr. Gates, in an email reminiscent of his landmark 1995 email about the threat of the “Internet tidal wave.” In this email, he predicted the coming “services wave” will be highly disruptive to the software industry.
“We have competitors who will seize on these approaches and challenge us—still, the opportunity for us to lead is very clear,” he wrote. The email included a far-reaching memo by Chief Technology Officer Ray Ozzie, who also lamented the company's sluggish development of an Internet strategy.
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"We knew search would be important, but through Google's focus they've gained a tremendously strong position,” wrote Mr. Ozzie.
Over the next few months, analysts said the various business divisions inside Microsoft are likely to incorporate the services idea into their products. It could lead to some confusion, but by early next year, a clearer plan is likely to emerge.
“When Gates sent out the Internet memo [in 1995], every single group started putting Net-related features in their products, a lot which aren’t used today because they were not well thought of,” said Rob Helm, an analyst at Directions on Microsoft, an independent Microsoft-focused consultancy firm.
“A few winners did emerge and we are going to see something similar happen now with a lot of independent groups in the company getting on the services bandwagon,” Mr. Helm predicted.
The news did little to move Microsoft shares, which closed down $0.09 at $26.96 on lower-than-average volume.
Ozzie’s Role in Redmond
Although Mr. Gates serves as the company’s chief software architect, Mr. Ozzie has gained increased power and influence at Microsoft in recent months, and is seen as a possible long-term successor to Mr. Gates as leader of the company’s technical direction.
Microsoft reorganized into three business units during September as part of its goal to develop new web-based services that can add to the company’s coffers (see Microsoft Revamps Structure).
Last week, the software giant announced new online services associated with Windows and Office (see Microsoft Puts Windows on Net).
Mr. Ozzie hopes to tie together Microsoft’s PC-based software more extensively with web services and properties, such as its MSN portal.
In his memo, Mr. Ozzie asked each of the business units to create their own plan for generating new web services. He also outlined his intention to name executives to run each of the business units.
In addition, Mr. Ozzie seeks to dissolve tensions that have emerged among the various divisions at Microsoft. “These teams must work together, benefiting from each other’s strengths,” he wrote.
Mr. Ozzie, a former executive at Lotus Development (now part of IBM), not only noted the challenges posed by Google, but bemoaned the lead taken by Skype in VoIP popularity, even though Microsoft has begun to integrate VoIP technology into MSN Messenger.
Mr. Ozzie noted that Microsoft’s own data formats had not yet become standards in the way that Adobe’s portable document format, commonly called PDF, has become through the use of Adobe Acrobat and Reader.
However, he indicated he believed the company was finally surpassing Research In Motion’s BlackBerry in the wireless email area.
Fighting Competition
Analysts said the memo showed Microsoft’s realization that it has to move faster on product development to respond credibly to competitors.
In the last four years, Microsoft has faced severe criticism over its delayed software development cycles. For instance, updates to SQL Server 2005 came nearly five years after the release of the previous version. Similarly, a trial version of Windows Vista, formerly known as Longhorn, was released in July after missing multiple deadlines.
A service-oriented delivery model could be a way to solve the problem of “long and painful” development cycles, said Mr. Helm.
“As its business matures, Microsoft is more dependent on getting existing customers to upgrade,” said Mr. Helm. “If those upgrades come six years later, then it is difficult to have customers buy in to it. Slow releases are a brake on Microsoft.”
Delivering products through services and the web could also help the company fight competition, especially in the form of Google. Analysts noted Google and Salesforce.com have been successful in using the web to deliver their products, something Microsoft wants to replicate.
“The undercurrent here is the same: information and services delivered over the web, and with no Windows required,” said Joe Wilcox, an analyst with JupiterResearch. “Sure people will use Windows, because of the operating system’s widespread use. But vendors wouldn't have to, nor would the people accessing the content or services.”
Eventual Threat?
While many of the offerings made by competitors are not a threat today, they could eventually hurt the company, something that Mr. Gates realizes, said Michael Gartenberg, an analyst with JupiterResearch.
“[Mr.] Gates more than anyone understands the importance of being proactive and not reactive,” he said. “The key is to leverage the strength of the core Windows and Office platforms and use that as a case to extend into these new areas.”
The new memos show that for the second time in a decade, Microsoft is embarking on a major strategy. The last time the company did so was in 1995 when the “Internet Tidal Wave” memo helped Microsoft decimate competition from Netscape and Sun.
This time around, Microsoft faces a new set of competitors and has to find its place in the world of Web 2.0, which refers to the next generation of services and ideas on the Internet.
Energizing Microsoft with this memo will not be easy, said analysts. “It’s not clear a strategy memo will have the same effect of turning the ship,” said Mr. Helm. “The ship is a lot bigger now.”
In their memo, Mr. Gates and Mr. Ozzie said their company needs to better address technologies and trends that are fueling the new wave of revenue generation on the Internet. The core of the memo described some of Microsoft’s missed opportunities and also mentioned companies like Salesforce, Google, Skype, and other startups that have successfully ridden the Internet wave, according to the Wall Street Journal.
Mr. Benioff founded Salesforce and pioneered the business of delivering software over the Internet, which cuts major costs such as expensive hardware and the deployment of software. The company has grown quickly, with revenue rising to $176 million in fiscal 2005 from $5 million in fiscal 2001
“There is no software on the path to enlightenment,” above a picture of a praying Dalai Lama. Mr. Benioff later apologized.
Mr. Benioff’s salesmanship will be in full flower at his company’s Dreamforce user and developer conference in September. One goal will be to convince software vendors, developers, and venture capitalists to embrace Salesforce’s Multiforce platform strategy.
Traditionally, companies bought expensively packaged CRM software that they hosted on their own servers, which often took months to deploy. Mr. Benioff conquered the online CRM market by offering customers an inexpensive alternative: He gave them access to equivalent software via their web browsers for as little as $65 a month per user, and hosted both the application and customer data on his own data centers
His company ranks No.1 in the on-demand space but a distant No. 12 in overall sales of CRM products. In 2004, SAP ranked first in the CRM market with 15 percent of total revenue, followed by Siebel with 12 percent. The worldwide CRM market stood at $4.04 billion in 2004, up almost 8 percent from $3.75 billion in 2003, according to AMR Research
Six months ago, people [asked] us, ‘what is Salesforce going to do next?’” says Phil Robinson, Salesforce’s senior vice president of global marketing. “What we’re going to do is build a platform on which other people can build the applications they want.”
The company will also introduce a catalogue of applications on Multiforce—a sort of eBay for application software—in addition to tools and features that will make it easier for developers to build applications.
Competitors say that Mr. Benioff has to increase his value proposition as other companies enter the on-demand arena. “The place where Salesforce is going to fall down with the entire platform discussion is the fact that there is no real data of value held on Salesforce,” says Zach Nelson, CEO of competitor NetSuite, which also offers applications via the Internet. “Who wants to build an application on data that is only about prospects or contacts?”
Mr. Benioff is well aware of what he has to do. “We’re going to get out and evangelize this platform just like every other platform company has done,” he says. “We are going to do seminars and we’re going to go to
Don’t Forget the Big Boys
Mr. Benioff needs to worry about the push into the on-demand space by big competitors like SAP, Oracle, Microsoft, and IBM, as well as smaller ones like Netsuite. While SAP is busy promoting its NetWeaver platform, Oracle has Fusion, Microsoft has .Net, and IBM has WebSphere—all of which could be used to create on-demand applications similar to Salesforce’s, says Ms. McCabe.
There is one thing, however, that Mr. Benioff is afraid of. “I’m worried about how [to] show people that this isn’t just about CRM, that this is about the Internet,” he says.
Indeed, Mr. Benioff’s biggest challenge lies in convincing customers that his online model can do everything they need for their business. He will need more than youthful exuberance—or the maturity he now professes—to accomplish that.
From: Marc Benioff
Sent: Wednesday, November 09, 2005 8:58 PM
To: All Salesforce.com
Subject: The Business Web
Today, I woke up to read on the front page of the Wall Street Journal how Microsoft is reorganizing to take on companies like Google and salesforce.com—building a new generation of products called Microsoft Live. The article is below.
And just last week, Bill Gates gave a speech about the end of software that could have been a page out of our playbook. His rhetoric sounding as if it was he who was picketing software companies and calling for “The End of Softwareâ€â€”our mantra since 1999.
The speech was an amazing bracket to his famous Tidal Wave speech on December 7, 1995, about how Microsoft would own the Internet. But over this 10-year span, what has Microsoft done for business on the web besides cloning a slow browser? The answer: nothing.
For example, Microsoft says one day that customers in our industry should upgrade from Microsoft CRM 1.2 to Microsoft CRM 3.0 (they lost 2.0 on the way), and, unfortunately, the two versions are not compatible with each other—customizations will not upgrade, they have different user interfaces, and they require lots of different Microsoft software. It’s an old Microsoft game that ends in failure for customers, but generates their mafiaesque upgrade revenues.
The next day, Microsoft has a new version called “Live.†It’s the new on demand offering that will not be compatible with the current product line. So, perhaps they should rename their entire Microsoft software product line, Microsoft Dead. It’s the analog to Microsoft Live, the new on-demand offering that does even exist.
What is going on? This is a time of seismic shifts in our industry. The Internet is disintermediating the status quo, and old models of software cost and complexity are being replaced with new models of affordability and ease of use.
Last month, our number one competitor surrendered, and decided to take its place beside several former competitors at software’s Shady Pines Rest Home, also known as Oracle. It was a merciful outcome for shareholders, but a time of con “fusion†for customers.
The software industry is going through a transformation that is unlike anything it has seen in two decades, and the emergence of the PC itself.
This transformation goes by many names: On-Demand, Web 2.0, Software as a Service. But they all point to the same conclusion: The era of the traditional software “load, update, and upgrade†business and technology model is over. It is time for “The Business Web.â€
New Internet-based companies are showing how services will replace software for both consumers and corporations.
Exciting new companies have emerged like salesforce.com and Google who have real businesses that can challenge and win against the old guard companies, and are. Customers love these new services, and are finding tremendous success as never before.
A new range of startups are showing how this is just the beginning of the business web—that there are new technologies coming to replace traditional word processing, spreadsheets, and other staples of business with Internet services. Companies like Writely, Numsum, Zimbra, and Goffice are breaking Microsoft’s hypnotic trance that the Microsoft Office, and its myriad of clients and servers we are installing today, it is simply a dinosaur.
Would these companies have existed 10 years ago? Five years ago? Probably not. But, new widely accepted technology standards, like
Just as mainframe companies struggled for relevance in the client-server era, Microsoft finds itself in a worse position today facing not just the obsolescence of a technology model, but a business model as well. They have no position today in the business web, for example.
Now is our time to demonstrate the next level. New technologies like AppExchange, Mirrorforce, and our Winter 06 release further demonstrate the next generation of the business web, and we will all continue to lead this important movement.
Aloha,
Marc
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