The economy and the downfall of Microsoft

Over the last 20 years the key to Microsoft's dominance has been PC manufacturers. Among the hardware folks were Apple with its own software, and every other vendor with Windows. Microsoft had the great advantage of a competitive hardware market with vendors compressing margins and kicking each others heads in to make the total hardware/software package far less expensive. It's been a good run, but the winds of change are blowing.

Given the state of the economy, market and new alternatives the PC market is in a state of flux. The PC market is off 15% or more with the only sector showing strength is the Netbook market. Netbooks have less memory and storage and can be had for around $400. This makes every component decision that much more important in the unit costs. Among the most expensive part in any PC is the operating system license, and this is where the story gets fun.

Netbooks are driving an alternative to Windows called Linux. Linux is freely available to the manufacturers so they can keep the money that they used to send to Microsoft. If keeping much needed profit dollars weren't enough, another incentive is Linux itself. Linux is small and light allowing it to work on lower powered machines well. In a recent review of XP vs. Linux, the XP system couldn't keep up with a two way video conference.

Adding fuel to this fire, the highly profitable server business is under air assault by something called cloud computing. Cloud computing works by running your software on the computers of Amazon, Google or one of the other folks in the business. Amazon was the first to the dance and has more than 400,000 subscribers. Each of these users results in at least one fewer server that HP, Dell, IBM or Sun will sell. Google, as an example, uses their own proprietary computers and don't buy traditional servers. Google runs nearly 1 million servers and turns its spare capacity into new revenue with the cloud offerings. When folks buy these services they get themselves out of a ton of other costs from power, to bandwidth, to managing the stuff. It's a huge win for clients at the expense of the hardware folks.

With these pressures on the hardware folks it's hard to see how the traditional lock step of them with Microsoft holds up. With a shrinking pie for the combined wares of hardware folks and Microsoft, the hardware folks will need to cannibalize Microsoft to insure their own viability. While changes of these magnitudes are typically slow to happen these forces combined with bad economic forecasts will accelerate the markets adoption of these very attractive alternatives. In this world it's hard to see Microsoft dominating the future the way it has the past.