Friday, October 31, 2008

BriefingsDirect Analysts Take Microsoft's Pulse: Will the Software Giant Peak in Next Few Years?

Edited transcript of BriefingsDirect Analyst Insights Edition podcast, Vol. 32, on the outlook for Microsoft in the face of the economic downturn and new directions in the IT market, recorded October 24, 2008.

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Dana Gardner: Hello, and welcome to the latest BriefingsDirect Analyst Insights Edition Podcast, Volume 32.

This periodic discussion and dissection of IT infrastructure-related news and events with a panel of industry analysts and guests comes to you with the help of our charter sponsor, Active Endpoints, maker of the ActiveVOS visual orchestration system.

I am your host and moderator Dana Gardner, principal analyst at Interarbor Solutions. Our topic this week, the week of October 20, 2008, is the IT elephant in the room ... Microsoft. The software titan held its Professional Developers Conference (PDC) on October 27 in Los Angeles. We’re expecting quite a bit of news from the event, and this also gives us a chance to examine the state of Microsoft and its place and role in the enterprise IT dominion.

We’re going to dig into Microsoft, its mission, how well it’s doing, and how well we’re expecting it do over the next couple of years. We’re joined by this week's panel to help us dig through this.

I’d like to welcome first Jim Kobielus, senior analyst at Forrester Research. Hi, Jim.

Jim Kobielus: Hi, Dana. Hi, everybody.

Gardner: Tony Baer, senior analyst at Ovum. Hi, Tony.

Tony Bear: Hey, Dana, good to be here again.

Gardner: Dave Linthicum, independent consultant with the Linthicum Group. Dave, will be joining in a little bit.

Next, Brad Shimmin, principal analyst at Current Analysis. Howdy, Brad.

Brad Shimmin: Hi, Dana, how are you?

Gardner: Great, thank you. Making his debut on our show, Mike Meehan, a senior analyst at Current Analysis as well, and former editor-in-ehief at Welcome, Mike.

Mike Meehan: Great to be here, Dana.

Gardner: And, last, Joe McKendrick, independent analyst and prolific blogger on SOA and business intelligence topics. Howdy, Joe?

Joe McKendrick: Pleasure to be here, Dana, thank you.

Gardner: Alright, let’s dig into the freshest news this week. Microsoft just yesterday announced its financial results for the quarter ending September 30. We saw 9 percent revenue growth, which includes 20 percent revenue growth for their business software, and overall 2 percent net income growth.

It’s not quite as robust as similar recent reports from IBM, Oracle, and HP. Indeed, the Business Unit at Microsoft did better than the Windows Operating System Unit, which has of course been its long-time cash cow.

I guess we’ll take this over to Tony. Tony, is there anything that we can read into Microsoft’s financial results that give us some indication of how well the company is doing?

Baer: Actually, I’ve been giving this some thought in terms of the results from some of the others lately -- for example, IBM and Oracle, mostly up, and SAP down.

My sense with Microsoft is that the Windows unit has been very much slowed down by the very slow uptake of Vista, and especially by the tendency of corporate customers, if and when they get new machines, to downgrade to Windows XP. So, that certainly has created something of a drag there.

The other part of this -- and this is actually one part which does surprise me a little bit -- is that Microsoft has been putting a lot more emphasis especially around business software, and specifically Oslo. You’ll see a lot of this in the sessions and announcements next week at PDC. It’s too early to impact the results, the financial results, but its indicative of a general direction on Microsoft's part. It has become more of an enterprise computing player.

What does surprise me a little bit is that in a company of Microsoft’s size it would have that much material impact.

Gardner: What's a little surprising to me is that even with 9 percent revenue growth and 20 percent revenue in the Business Software Unit, which includes Office, that only translated into 2 percent income or earnings.

Is Microsoft at a disadvantage, compared to other enterprise vendors, because of its exposure to the consumer market, Web advertising market, and the cyclical nature of an operating system upgrade like Windows?

Baer: I’m not sure if it’s at a disadvantage with regard to the consumer market per se. I hate to use an extreme example like this, but take a look at some of the very toughest economic times that we’ve had. Let’s go back to the Depression, which of course we all remember from our childhood, or at least that we are all reincarnated now. During the ‘30s, when nobody had any money, people went out for cheap, real thrills. In that case, it was a trip down to the movie theater.

My sense is that, if you already have an Xbox 360, what's the big deal about getting another game? That’s a much cheaper thrill than going out and buying some more expensive piece of consumer electronics hardware.

I don't think that the exposure to the consumer side is such an issue. I think it's more a matter that certain parts of Microsoft’s business have matured and that some of the newer areas, which would be the enterprise side, and would also be say the Web-designer side, where they are going head-to-head with Adobe, are still much too early on the maturity curve to have a material impact.

Gardner: Alright, Mike Meehan, what do you think? Is Microsoft in a good, medium, or a bad position going into an economic downturn, given what we’re seeing and given their exposure across such a wide variety of different products and services?

Meehan: You’re generally never in a bad position when you’re diversified. That’s the one thing Microsoft has going for it. It has its hooks in a lot of different ponds.

I tend to think that they are better off in the consumer market than they are in the enterprise market. My view is that .NET has lost to Java, just as an enterprise technology. It’s a niche. It’s an avenue where Microsoft is going to have a presence.

People are going to use Visual Studio. They can build out Oslo and they can try to keep people in with as much service orientation as Microsoft can give you in their package, but they are not going to be on the same par as IBM, Oracle, or even SAP long term, in terms of being able to give you enterprise applications and application development tools.

They are a sidelight to that. Their business is more in the operating system and in the Xbox. Kids like playing games, and social computing, those game-oriented things, are going to be the areas where Microsoft is going to see its greatest profits down the road.

Gardner: So, you’re saying that Microsoft’s future is waning when it comes to its share of market, profits, and growth on the business side, and that’s its virtuous growth machine between the tension of their tools and its platform is not going to continue? It’s fighting against organizations like Google and Apple in the consumer space that is going to be Microsoft’s growth future?

Meehan: I think they are capped on the business side. There's only so much of that pie they are ever going to get right at this point.

Gardner: Anybody out there have a concurring view to that? It seems that the vast majority of Microsoft’s revenues and profits still come from the business sector.

Kobielus: I think that there’s some validity to the viewpoint that Microsoft's growth potential has capped on the business side, when you consider packaged applications, and software- and application-development tools, in the sense that the entire product niche of the service-oriented architecture (SOA) universe is rapidly maturing.

The vendors in this space -- the SOA vendors, the business-intelligence (BI) vendors, the master data management (MDM) vendors -- are going to realize revenue growth and profitability. Those who survive this economic downturn and thrive in the next uptick, will be those who very much focus on providing verticalized and customized applications on a consulting or professional services basis.

In that regard, Microsoft is a bit behind the eight ball. They don’t really have the strength on the consulting, professional services, and verticalization side, that an SAP, Oracle, or an IBM can bring to the table.

Microsoft, if they want to continue to grow in the whole platform and application space and in the whole SOA universe, needs to put a greater focus on consulting services.

Gardner: That's interesting. Now, here we have Microsoft, as I say the elephant in the room, the largest software company in the world, in many respects one of the most successful companies in the history of business, behind the eight ball. How could it be behind the eight ball, when it has $40 billion in cash in the bank, and an army of global developers and engineers? Yet, I think there's something to this.

Let’s drill down for a second. Gartner, the largest analyst and research firm came out with a Top 10 Strategic Technology Areas list for 2009. These are the 10 areas I think are going to be the most strategic for IT people.

Number 1, virtualization. I think it's safe to say that Microsoft is catching up on virtualization.

Number 2, cloud computing. We’ll soon get detail on Microsoft’s cloud computing, but they’re clearly behind the eight ball if you compare them to say Amazon or Google or

Number 3, servers beyond blades. Well, that’s a hardware story, and Microsoft isn’t in the hardware business.

Number 4, Web-oriented architecture, mashups, or the use of Web development, primarily for new applications. Microsoft’s in that, but that’s a problem, because there isn't always a tie-in to their platform. It’s really a Web- and browser-based business, which has been somewhat troublesome for Microsoft, given its software plus services focus.

Number 5, mashups. Same story there. Microsoft does have tools and approaches, but it doesn’t necessarily feed their cash cow of selling more operating systems or upgrades to operating systems.

Number 6, specialized systems. I’m not exactly sure what that means, but I don’t think Microsoft is so verticalized that this is going to be a growth area for them.

Number 7, social software and social networking. We haven’t seen Microsoft dominate here. In fact, they tried to buy their way into this with Yahoo and failed.

Number 8, unified communications. Microsoft has been big there. That’s a potential growth area for them.

Number 9, business intelligence, another big growth arena.

Then, Number 10 from Gartner’s list, Green IT. Green IT, of course, means consolidation, more highly utilized servers, not hundreds of Microsoft Exchange Servers running at 20 percent utilization. So, I would posit that Microsoft is behind the eight ball on Green IT as well.

Does anybody out there want to react to this issue of Microsoft in catch-up mode?

McKendrick: When did Bill Gates start Microsoft? What year was that?

Gardner: 1977.

McKendrick: It was actually 1975. That was the worst downturn in our generation, as far as the economy goes. He, and eventually Steve Ballmer, started the company going. What year was MS-DOS launched to licensing? When did that began to catch on?

Baer: 1980, 1981.

McKendrick: Yeah, the other downturn, the other worst economic downturn in our generation. So in other words, in Microsoft’s history it seems they’ve had their crucial turning points, at times when the rest of the economy was in a funk.

Windows was in the early 1990s, another recessionary period.

I was speaking with Brian Loesgen from Neudesic a couple of weeks ago. It was in the midst of the first wave of financial panic in the economy. He put it this way. Microsoft has its own economy. No matter what happens to the economy at large, Microsoft has its own economy going, and just seems to get through all this.

What’s driven Microsoft from day one, and continues to do so, is that Microsoft is the software company for Joe the Plumber. That’s their constituency, not necessarily Joe the Developer. They cater to Joe the Developer, Joe the CIO, and Joe the Analyst certainly likes to check in on what they are doing. It's this whole idea of disruptive technology. They have always targeted the under-served and un-served parts of the marketplace and move up from there.

Gardner: So we have two narratives. We have Microsoft is too big to fail, has done well regardless of economics in the past, and is independent of larger economic trends because of its "Joe the Plumber" appeal. We also have this narrative of they are playing catch-up.

McKendrick: The base of Microsoft, these companies that are using Microsoft technology, don’t necessarily get virtualization or cloud computing.They just want a solution installed on their premises and want it to work.

Gardner: Dave Linthicum, are you out there now?

Dave Linthicum: Yeah, I am out there now. How are you doing Dana? I was actually crying over my 401(k) portfolio, so I got in late on the call.

Gardner: Well, I can see why that would choke you up. Now, what's your position on these dual narratives: Microsoft, too big to fail, has done always well in the past -- or Microsoft behind the eight ball on virtualization, cloud computing, and some of the other major growth areas of the next couple of years?

Linthicum: I think they are behind the eight ball. A lot of the strategy I’ve seen coming out of Microsoft over the last few years, especially as it relates to cloud computing, SOA, and virtualization, has been inherently flawed. They get into very proprietary things very quickly. It really comes down to how are they going to sell an additional million desktop operating systems.

Ultimately, they just don’t get where this whole area is going. If you think about Joe’s point, going back in history, not as far, but to the whole Internet trend, it turned out to be an explosion back in the middle ‘90s.

They missed the boat on that completely. They were off doing their own MSN network and working on that kind of stuff, and they really were catching up in the end. They had a pretty good offering and they took a large part of the market because they own the desktop and all those things going on.

Now, we’re heading into an area where they may not be as influential as they think they should be. They may be not only behind the eight ball, but lots of other organizations that are better at doing cloud computing, virtualization, and things like that, and have a good track record there, are going to end up owning a lot of the space.

Microsoft isn’t going to go away, but I think they’re going to find that their market has changed around them. The desktop isn't as significant as it once was. People aren’t going to want to upgrade Office every year. They’re not going to want to upgrade their desktop operating systems every year. Apple Macs are making big inroads into their market space, and it’s going to be a very tough fight for them. I think they’re going to be a lot smaller company in five years than they are today.

Gardner: Let’s take that notion to Mike Meehan. Is Microsoft going to be the same, smaller, or bigger in five years?

Meehan: I wouldn’t say smaller, only because they got maybe as large as they were going to get in the earlier part of this decade. Dave is absolutely right in that the one area that Microsoft never really conquered that it needed to conquer, given its strength in the desktop, is the handheld. If they are not going to be there with the handheld long-term, that’s a major growth area that they are going to miss out on. That’s where a lot of the business is going to shift to.

I don’t spend all my day on a handheld, but I live in Boston. I can ride the T and I can see a lot of people who do use handhelds. If you want to be there, if you want to be in the cloud services, that’s where a lot of people are going to be getting consumer cloud services from. It’s going to be right off those handhelds, and Microsoft is just not there.

On the SOA side, as I said before, Microsoft is just trying to be as service-oriented as they can for users who are trying to be not SOA-driven, but "As Service-Oriented As Possible."

In fact, make that an acronym, ASOAP. There are going to be a number of users who are not going to go fully into SOA, because they have an enterprise architecture. It’s too hard to do, too hard to maintain. They’re never going to quite figure that out. They are just going to try to be tactical and as service-oriented as possible. Microsoft will try to service them and hold that part of their business.

What’s the next big thing they’re going to do? Joe referred to Microsoft having come up with that in previous downturns. I don’t see where they have got that right yet, and so I think that leads to them being smaller long-term.

Baer: I think the biggest deficiency in this go-around, compared to the Internet about a dozen years ago, is that they don’t have a figure like Bill Gates to crystallize turning the company around.

That was an amazing case study back around 1995, where Microsoft was caught by surprise by the Internet. Gates basically convened a weekend-long retreat, or something like that. I’m not sure how long it was, but it was pretty short.

At that time, the company was small enough -- and I use the term “small” in a relative sense -- that the company could turn around. More importantly, in someone like Gates, they had someone with the type of vision that could crystallize everyone to start thinking on the same page. I don’t think they have that same kind of figure now.

Gardner: That's right. It was the first week of December, 1995 that Microsoft came out and announced that the Internet was a big deal, and within two years they were the top browser company in the world, and have remained there ever since. So they have demonstrated an ability to move quickly.

Let’s go to Brad Shimmin. Brad, you are going to go to PDC. If there’s any venue where Microsoft can talk to Joe the Plumber and Joe the Developer, and convince the world that its vision of the future is the right way to go, it’s at the PDC.

Do you think that Microsoft is going to have an opportunity to change this perception of it being behind the eight ball in any appreciable way at the PDC?

Shimmin: I do, and simply because they don’t have to. I think back to a number of points that’s been made here that to be successful Microsoft doesn’t need to convince the world. It just needs to convince the people that attend the PDC. They have such an expansive and well-established channel, with all the little plumber-developers running around building software with their code, that just as 40 is the new 30, Microsoft is really kind of the new Apple, in a way.

They don’t need to be Oracle to succeed, they really need to have control over their environment and provide the best sort of tooling, management, deployment, and execution software that they can for those people who have signed on to the Microsoft bandwagon and are taking the ride with them.

That’s what it’s all about for them at these shows. In general, it’s the same way. They don’t need to be the next Oracle to remain successful on the business space.

As Mike said, they’re kind of capped out in many ways relative to the consumer market, but, gosh, they have shown that with things like SharePoint, for example, Microsoft is able to virally infest an organization successfully with their software without having to even lift a finger.

They’ll continue to do that, because they have this Visual Basic mentality. I hate to say it, but they have that mentality of “Let’s make it as simple as possible” for the people that are doing ASOAP, as Mike said, that don’t need to go all the way, but really just need to get the job done. I think they’ll be successful at that.

Kobielus: I just want to elaborate on what Brad said and then bring it back to the question of will Microsoft be larger, smaller, or the same size in five years time. I think they will be larger, and they will be larger for the simple reason that they do own the desktop, but the desktop is becoming less relevant.

But now, what’s new is that they do own the browser, in terms of predominant market share or installed base. They do own the spreadsheet. They do own the portal. As Brad indicated, SharePoint is everywhere.

One of the issues that many of our customers at Forrester have hit on -- CIO, CTO, that level -- is that SharePoint is everywhere. How do they manage SharePoint? Its a fait accompli, and they have to somehow deal with it. It’s the de-facto standard portal for a large swath of the corporate world.

Microsoft, to a great degree, owns the mid-market database with SQL Server. So owning so many important components of the SOA stack, in terms of predominant market share, means that Microsoft has great clout to go in any number of directions.

One direction in which they’re clearly going in a very forceful way that brings all this together is in BI and online analytical processing (OLAP).

The announcements they made a few weeks ago at the BI conference show where Microsoft clearly is heading. They very much want to become and remain a predominant BI vendor in the long run.

What that means is a number of things. First and foremost, innovating at the desktop within SharePoint and in Excel to enable, in memory, deeply dimensional user-driven modeling to begin to dissolve the OLAP cube and enable users to begin to develop their own advanced analytics, build it out, and grow that knowledge base in a collaborative environment that’s very much hinged on SharePoint -- the collaborative features, version management, library check-in and check-out, and so forth.

In five years time, Microsoft will be one of the predominant BI players. It already is, but it will become more important as one of the main BI platforms out there.

I don’t imagine Microsoft would become as verticalized a BI player as say a SAS Institute, but Microsoft, as several other analysts on this call have mentioned, has a phenomenal partner ecosystem, and they are providing an evermore powerful platform for those vendors and professional sources and customers to build out those analytics. So, they will be bigger.

Gardner: Okay. So, Microsoft has its installed base. It has its devotees, people who are making their living based on its products. It’s a huge channel. You see in a number of key IT areas a deep advantage in terms of their installed base, but that begs the question of whether things remain fundamentally the same or whether we’re going through a period of transformation.

Let’s go back to Brad. Based on what you know about PDC announcements, how is Microsoft going to pull off both retaining its installed base strengths, and also ushering people into higher productivity and lower cost, which are going to become essential?

Many Microsoft products are not the lower cost alternatives in the market, particularly from an architectural standpoint. Does anything come out in your understanding of the PDC announcements that will help solidify its base, but also substantially reduce total cost?

Shimmin: I do. It’s kind of funny, because a lot of the stuff they are going to be announcing, or demoing I should say, at PDC, lean toward some of the things we have been dinging them on.

For example, they are making Windows Communication Foundation (WCF) and Windows Workflow Foundation (WWF) form the heart of their ASOAP model, if you will, but they have been very much geared toward the bitheads that are working in Visual Studio to develop them.

What they’re trying to do is move those more toward an Oslo perspective of compilation and composition, so they’re making them such that they have a much better workflow capability. You had to code it by hand, but they are just coding it in, which goes back to their entire approach with tooling in general. They try to take you as far as they can, so that you don’t have to make as many decisions or intellectual efforts to make your software work.

They’re doing the same thing not just with .NET but also with their Windows Server, which I found to be the most curious part of what they are doing at PDC.

They have had Window Server sort of unofficially as their application container, but really it’s not. BizTalk has been their application container for everything SOA. They’re moving toward Oslo, with the Dublin release. They’re making it more of a first-rate citizen for hosting composite applications as a container.

Gardner: Oslo is their next generation development and deployment framework, which is highly focused on services and business-process level integration.

Shimmin: It is. It’s nice, because they are actually going to have a registry- repository. You literally just have to partner and use standards for anything like that with them now, but they are going to build their own on top of SQL Server, which I think is a smart move, by the way.

But they will have that, and the development tooling that’s going to be hooked indirectly to .NET and the Windows Server. They’re going to make BizTalk more of a B2B integration, yet making it more of an enterprise service bus (ESB), which is the last thing they would have ever told you they want a BizTalk to be. But, they’re going to make it more of that in the future and make Windows Server more of your traditional Java development, Java Shop, which would be your app server.

Gardner: So we have an ESB function set. We have a registry-repository function set. Microsoft is coming not on the leading edge of these technologies. They’re clearly five or seven years behind some other entrants in the marketplace. But, on the total cost perspective, I think what I am hearing from you is that if you go all Microsoft all the time, there are going to be efficiencies, productivity, and cost savings. Is that the mantra? Is that the vision?

Shimmin: That‘s exactly right, Dana. That’s what they’re banking on, and that’s why I think they are the next Apple, in a way, because they are downtrodden, compared to some of the other big guns we’re talking about with Oracle, SAP, and IBM inside the middleware space. But that doesn’t matter, because they have a loyal following, which, if you guys have ever attended these shows of theirs, you’d see that they are just as rabid as Mac fans in many ways.

They’re going to do their best job to make their lives as easy as possible, so that they remain loyal subjects. That’s a key to success. That’s how you succeed in keeping your customers.

Gardner: Dave Linthicum, Microsoft is continuing to make offers that their installed loyal base can’t refuse. But the total cost of ownership (TCO) equation comes in a little bit later. That is to say, if you have bought into the Microsoft-oriented architecture vision, and you’ve spent a lot of money with Microsoft in doing so, you will be able to do all of these things better in the future. What’s wrong with that vision?

Linthicum: Ultimately, people are looking for open solutions that are a lot more scalable than this stuff that Microsoft has to offer. The point that was just made, there are a bunch of huge Microsoft fans that will buy anything that they sell, that’s the way the shops are. But the number of companies that are doing that right now are shrinking.

People are looking for open, scalable, enterprise-ready solutions, they understand that Microsoft is going to own the desktop, at least for the time being, and they are going to keep them there. But, as far as their back office things and some of the things that Microsoft has put up as these huge enterprise class solutions, people are going to opt for other things right now.

It's just a buying pattern. It may be a perception issue or a technological issue. I think it’s a matter of openness or their insistence that everything be proprietary and come back to them.

I heard the previous comment that looking at all Microsoft all the time will provide the best bang for the buck. I think people are very suspicious of that.

If you look back in history, Microsoft Transaction Server (MTS) and all of these other things that Microsoft has built over time to get into enterprise-scale computing, haven’t worked very well. Either it was perceptions or openness. I reviewed MTS when I was at PC Magazine and I found it to be a pretty good product, but it just had no uptake into the market space.

I think their current efforts are going to run into the same issues. You’re not always going to have people who are going to buy it. It’s part of the bundles that they’re offering to the enterprise, the enterprise license agreements that they are selling in, but it's going to be a very hard path for them I think.

Gardner: Mike Meehan, virtualization is obviously a big topic these days. VMware came out with results that showed these things are selling like hot cakes. VMware itself is going to be under pressure in competitive offerings in the marketplace.

Is virtualization at the hardware level, infrastructure level, applications level, and then ultimately at the desktop level -- where we have virtual desktop infrastructure (VDI) -- a game changer in terms of Microsoft being able to pull this off? ... “If you do it all with us you have a better economic story.” How does virtualization change Microsoft’s strategy, if at all?

Meehan: I don't know that it does, in that you have to be so integrated with the company to take advantage of that, that I am not really sure that Microsoft is in the right position to do that.

For example, four years ago, Sun Microsystems started beating that drum that they were going to take these virtual environments, put it together with their software environments, and have this soup-to-nuts computing that was going to be five times more powerful and so much more efficient.

It just never happened on their end. It's hard to execute. It’s hard for Microsoft to align itself with what anybody else is doing. Whatever VMware is doing, I find it a little difficult to believe that Microsoft is willing to be the tail that’s wagged by any other dog.

To a certain extent, Microsoft will try to plug-in to that in its own way. What its own way is, and where exactly it plugs in though, are unknowns to Microsoft itself, and its going to want to own something in there. I don’t even know what it wants to own in terms of virtualization.

Gardner: It seems it wants to own the hypervisor. It’s going to make the Hyper-V hypervisor part and parcel with other infrastructure, and, I would imagine, at a price that people can’t refuse. They’ll also continue to sell Windows licenses for all those virtualized instances of an operating system. That’s still Windows. That’s still good revenue.

Does anyone else have a sense of whether virtualization, as a general trend, knocks down Microsoft’s ability to do it all and well?

McKendrick: VMware announced that operating system, what’s it called, the VMware VDOS, do I have that correct?

Gardner: KVS. Is it their Hypervisor?

McKendrick: No, they are actually calling it an operating system.

Dana Gardner: That's right, their cloud-based infrastructure operating system.

McKendrick: Exactly. That’s the direction organizations are going. Cloud computing, SOA, virtualization, all those things are going to be internal clouds, private clouds, maintained within enterprises.

When you think about an operating system, what is an operating system? That’s virtualization, right? An operating system virtualizes resources underneath, in the server, the hardware, and storage. Virtualized operating system, like VMware is talking about, is probably the next evolution of operating systems in general.

Gardner: That’s right. A disk operating system virtualizes the disk.

McKendrick: Right. That’s what an operating system is, virtualization. People don’t think about it that way.

Gardner: So, your point is that Microsoft is in the position to take its advantages and strengths and move that up yet another abstraction to this private-cloud infrastructure level.

McKendrick: I think so. Steve Ballmer kind of responded to the VMware announcement by saying that Microsoft has something cooking in that regard too, some kind of virtualized operating system. I don’t know if it will be separate from what Windows will be in the future. An operating system is a cloud management system, when you really get down to it, and it’s the next natural evolution for operating systems. That’s what Microsoft is good at.

Gardner: We’ve heard quite a bit on this cloud operating system from Red Hat, Citrix, VMware, IBM, and HP talked it up a little bit. No one’s really come out with a lot of detail, but clearly this seems to be of interest to some of the major vendors.

Let’s go back to Dave Linthicum. What is the nature of this operating system for the cloud, and does it have the same winner-take-all advantage for a vendor that the operating system on the desktop and departmental server had?

Linthicum: I think it does in virtualization. Once one vendor gets that right, people understand it, there are good standards around it, there are good use cases around it, and there’s a good business case around it, that particular vendor is going to own that space.

I’m not sure it’s going to be Microsoft. They’re very good about building operating systems, but in understanding my Vista crashes that are happening once a day, they are not that good.

Also, there are lots of guys out there who understand the virtualization space and the patterns for use there. The technology they’re going to use, the enabling standards, are going to be very different than what you are going to use on a desktop or even a small enterprise departmental kind of problem domain.

Ultimately, a large player is going to step into this game and get a large share of this marketplace pretty quickly, because the cost and ease of moving to that particular vendor is very low.

I can decide this morning that I want to use a particular virtualization vendor, sign up with them, and start putting my assets out in that world in a very short time, versus buying hardware and software I am installing in my own systems and other things that are going to be leveraged.

These virtualization operating systems that are enterprise bound or even in a gray area with the cloud are going to come from somebody else besides Microsoft. That’s just my own personal opinion, based on what they are doing.

Kobielus: I think that Microsoft stands a chance of becoming the predominant cloud OS vendor. Let me just define the level set of what I mean by that. At the heart of any cloud or virtualized cloud operating system is a virtualized database environment. Database virtualization is a real hot topic, and it means many things to many vendors and to many analysts.

Fundamentally, like any other virtualization approach, it simply involves abstracting the internal implementation from the external calling interface, using a variety of approaches.

It’s not all together yet, but Microsoft is coming along with a fairly interesting database virtualization story that will play out in releases over the next several years.

For one thing, of course, they bought DATAllegro a few months back, and now Microsoft is building a shared-nothing, massively parallel database, a data warehousing environment that can scale up to thousands of nodes potentially and many petabytes of data. It’s grid at its very heart. So, a grid environment is virtualization, a database virtualization on one level.

Also, Microsoft has a very interesting project going on that will probably see the light of day in terms of roll-out in the whole SQL Server vNext timeframe in 2011. It’s called Project Velocity, which is very much virtualizing data persistence across both disk-based and spindle-based storage, as well as in-memory cache across a distributed virtualized fabric.

There's also a bit of virtualization going on in the front end of their BI stack, in terms of using in-memory approaches more deeply in all the app, and so on.

Of course, Microsoft has got the whole SQL Server Data Services, software-as-a-service (SaaS) initiative ongoing, and they will continue to ramp that up in coming years. I see all this coming together as the heart of a database virtualization environment.

Then, one other thing you need to have for a fuller virtualized OS in this environment is something called in-database analytics, where you can run the compute intents of algorithms right inside the database. You can take advantage of all the parallelization.

Microsoft doesn’t have a strong story there yet, but I think that in the next year or so, they will roll out a much more interesting story that tracks with what's going on elsewhere, like vendors in the data warehousing arena that have aligned themselves around this framework called MapReduce. A lot of that will come together in the Microsoft side over the next few years, and I think they will be a power in cloud OSs.

Gardner: So, I think what I am hearing from you is that virtualization, grid, and cloud can help Microsoft in its database and data services story, particularly up against someone like Oracle and IBM.

Kobielus: Yes, yes, yes.

Gardner: Okay. There's another difference here though with cloud and private cloud and that is that Joe the Plumber and Joe the Developer aren't going to be deciding the architecture for this cloud.

Also, moving toward the cloud infrastructure is a significant multimillion dollar decision process, involves creating new data centers, tens of millions of dollars in facilities, infrastructure, and manpower, and energy types of investments, things that will impact the company for five, 10, 15 years.

It seems to me that there's only going to be a handful, perhaps fewer than 25 true third-party cloud providers, and that the type of organization where a private cloud makes sense are going to be the Global 2000, maybe down to the Global 500, who would be interested in investing and have the cost savings in scale that would make cloud computing make sense.

So, in a sense, this move toward private-cloud and public-cloud infrastructure really does not benefit Microsoft’s traditional market and channel distribution and penetration. We’re really talking about perhaps as few as 2,500 total customers across the world who would be buying this. Given that that’s the economic landscape, does this not impact Microsoft in terms of its ability, or even interest, in approaching this market?

Baer: A couple of things. I agree with you in terms of the private cloud. I don't think that's really a real winner of a market for Microsoft, because it will require the customer to put in significant capital investments from the top-down. The thing is, those types of customers have not traditionally been Microsoft’s strengths.

I had a couple of thoughts as this session has drifted. One, how does the cloud really impact Microsoft and its prospects, and will Microsoft be able to compete in a more open world?

I have a couple of answers to that. You still have a certain, very stubborn level of mid-size businesses that are Microsoft shops. You go to these PDC conferences, which unfortunately I won’t be at next week, and you see these armies of people, who have been loyal ever since Visual Basic 0.5. They have built a huge developer base, which is translated to an incredible base among small businesses.

So, on one hand, I don’t think that Microsoft is going to lose its grip on its Joe the Plumber small and mid-size business (SMB), enterprise business. On the other hand, in terms of the emergence of clouds, and forgetting about private clouds at the moment, on public clouds I’m not sure. Microsoft has a software-plus-services strategy, the idea of which is to make it as invisible as possible. That has a nice value proposition to its traditional market base.

On the other hand, when you start seeing the proliferation of these third-party clouds, which are coming very much commodity prices -- the Amazons of the world, and so on -- I’m getting the sense that these public clouds are going to become so commoditized that there’s not going to be any single player that’s going to dominate.

I think that Microsoft will be able to retain a very loyal niche at SMB, but I don’t think when it gets to cloud that its going to dominate.

Shimmin: I just want to add to what Tony was saying. Yesterday, Amazon announced that EC2 is now running on Windows Server and Microsoft SQL Server.

Obviously, this is a public cloud, but in my mind, the fact that Microsoft has virtualization is a necessity for them to move forward, I don’t think it’s something they are going to be building a direct business on, like VMware. For them, it’s simply a necessity so that they can run on places like EC2.

The most important thing is, as Tony was just saying with Visual Basic, it all comes back to where you develop your application. Whatever you code in, the tool you’re using is going to dictate where you push that final application out. If it’s to your local server or to a cloud is irrelevant to you.

Whether you’re saving money going to a public cloud, for example, or you have your own investment internally doesn’t matter. The point is that Microsoft, to succeed, needs to have its application container. What I was saying is the Windows Server is a WebSphere Application Server in the cloud, and it seems like they are heading in that direction. So, I think they’re going to be able to ride this virtualization wave.

Gardner: Perhaps it will allow Joe the Developer to have it his way. That is to say, develop in what you like and what you know, target the Microsoft middleware functional set, as well as the containers that the tools are integrated to and aligned with, but perhaps host that up at a cloud.

Now, if Amazon is going to do it, and then Microsoft is going to probably want to do it too -- and they more than likely will -- it’s almost certain that Microsoft will have its own cloud. You use their tools, perhaps their tools are in the cloud as well. So platform is a service value for Microsoft.

That’s all well and good, and it certainly would cut total cost and demonstrate the value of doing it on Microsoft. However, their ability to charge for those services is going to be up against other commodity-level platform-as-a-service and cloud-services sets. Microsoft’s ability to take money from each of these accounts, each of these developers, each of these departments would be severely crippled under that circumstance.

It raises the question: In five years will Microsoft, on a revenue basis, be bigger, the same, or smaller?

Let's wrap up our discussion today by going around and asking that very question to each of our participants. Let's start with you Brad. Brad Shimmin, Microsoft five years from now, bigger, the same, smaller, revenue wise?

Shimmin: I think they will be smaller revenue wise, but they will be making more money from their infrastructure and their business applications than they were in the past.

Gardner: Good. Dave Linthicum, same question.

Linthicum: I already said they are going to be smaller. I think it's going to be turned kind of more into a cash-cow company. They’re going to have hooks into some of these new trends. Where they’re going to find their business model and the culture within the company is going to be the single most preventive factor for them expanding their revenue.

Gardner: So, you see it as a smaller revenue and a smaller profit.

Linthicum: Smaller revenue, smaller profit, and smaller impact on the marketplace.

Gardner: Michael Meehan?

Meehan: Just because I think the economy will grow over the next five years -- almost because it has to -- I’m going to say they are going to be bigger in revenue but they will have smaller impact on the marketplace.

Gardner: Tony Baer?

Baer: I agree with Mike. The economy will grow and, more importantly, world markets will grow, and they just will not be the single biggest frog in the pond.

Gardner: Jim Kobielus?

Kobielus: I think they will be bigger, and their growth will be in packaged applications, analytics, BI, and performance management.

Gardner: Joe McKendrick.

McKendrick: I agree with what Mike originally said. They will be bigger, because the whole pie will be a lot larger in the next few years. Let’s face it, many competitors have taken on Microsoft have had their head handed to them on a plate over the years. Don’t underestimate the folks in Redmond.

Gardner: Very good. I’ll throw my two cents in. I think their revenues will be smaller, but not appreciably so, but that their margins will continue to erode, and that’s going to force them to pick and choose businesses more carefully, and have to decide what they want to be when they grow up rather than try to be everything to everybody.

Well, thanks everyone. This has been a good and fun discussion about Microsoft and their PDC. I want to thank all of our guests for joining.

I also want to thank our charter sponsor for the BriefingsDirect Analyst Insights Edition Podcast Series, Active Endpoints, maker of the ActiveVOS Visual Orchestration System. I am your host and moderator Dana Gardner, principal analyst at Interarbor Solutions. You’ve been listening to Volume 32 of our series. Thanks and come back next time.

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Transcript of BriefingsDirect podcast on the outlook for Microsoft. Copyright Interarbor Solutions, LLC, 2005-2008. All rights reserved.

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