Certain Habits

Why has Microsoft become increasingly irrelevant?

One view argues that the reason is Google. They’ve figured out a way to effectively monetize the Internet, the new frontier of computing. And this enables them to give away content, software, and now an OS for free. And Microsoft can’t use bundling to kill software that’s already free (the way they killed Netscape).

The other view points to Steve Jobs, and his genius for beautiful, easy-to-use devices and his savvy for media. By making the most elegant and beautiful media players and computers, and by providing a solution to the paid distribution of digital media, Apple has achieved cultural relevance that Microsoft could only dreamif. And their ads are cool too.

These explanations seem at odds. One proposes that Microsoft is irrelevant because it has lost some of the ubiquity it once had. The other, because it is too spread out, and has lost focus. One explanation centers on a set of services. The other, on gadgets.

However, both explanations are true, because they are flip sides of the same phenomenon: the emergence of a new platform that has superseded the desktop operating system. Today, the Internet (with the maturation of HTML) is a more effective means of delivering software-based experiences to customers.

Microsoft’s monoploy is built on the control of the operating system. The OS provides a lot of services to applications and determines to a great extent what language software is written in. When software can only be delivered on the desktop, network effects will drive consuners and developers to one OS. Developers will go where the customers are, and customers will go where the most/best software is.

If you can deliver and use software (and entertainment, information and services) over the Internet, it doesn’t matter what computer you’re using. You can decide based on other criteria (beauty, music and photo apps, frequency of crashing). Apple, which unlike Microsoft controls both the OS and the hardware it runs on, is better situated to win with those criteria. The former liability has become a strategic advantage.

In the race to develop and deliver web-based software, an OS monopoly doesn’t matter. A way to monetize it does. And Google’s better search algorithms, and the superior value it delivers to advertisers, gives it an advantage that Microsoft, with its many billions, struggles to replicate.

What does this have to do with the success of Apple and iTunes? Apple’s market dominance stems not just from making beautiful, highly functional media players, that are easy to use and hard to resist. It’s advantage comes from solving the business model challenges inherent in the distribution of digital content (which inherently wants to be free) and in the delivery of mobile applications.

With iTunes and the App Store, Apple has created a digital ecosystem that is beneficial to users and content creators. The network effects are powerful. More users and better tools draws software developers to the iPhone. More apps and a better experience keep users coming back. As iTunes demonstrates, this is an advantage only likely to grow with time.

Microsoft is still immensely powerful and profitable. However, it no longer controls the future of computing. And not just because it has made mistakes, but because the terrain they fight on has been transformed beneath them.