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Open Innovation series – Platform case: MICROSOFT

Microsoft (“MS”) is considered a platform leader in the PC industry. Microsoft contributes the core software product, the operating system as well as key applications. It determines or at least heavily influences the evolution of the PC, laptops and ultrabooks, tablets and smartphones.

Microsoft competes in different contexts with a leadership strategy in the four levers:

  1. Scope of the firm: It partners with third parties and stays close to its core technical competence in software, but does have the resources to make many of its own software complements (applications for the Windows Operating System) and thereby ensures that new generations of its platform will be successful.
  2. Product Technology: It has a more dominant position with its Windows operating system and established interfaces that were mainly proprietary.
  3. Relationships with external complementors: It limits the scope of its business but always makes it clear that it may complete with its software and even hardware complementors. Its strategy for software applications was to enter any “horizontal” business of large market potential and thus, to ward off potential competition by enhancing the operating system with numerous features or technologies that complementors often sold as separate products.
  4. Internal organization: It long maintained an integration approach amidst its operating system, applications, and networking technologies as central to its strategy and good for customers. Microsoft facilitated this approach by holding the market power to push its choices forward, although facing antitrust controls from Regulatory Bodies from the US and Europe.

The MS operating system was as essential as the microprocessor in that it allowed a PC to run an almost infinite variety of software applications.  It dominated the software side of the PC platform with MS-DOS since IBM introduced the PC in 1981, and then Windows for the mass market in 1990.  In this evolution, as demanded by users, MS offered the ability to read files made using older versions of their applications or from third parties, and as a result, no one company could easily change any of the hardware or software standards that made up the PC. Even MS could not make radical changes to Windows even though it owned the API and interfaces because this would destroy compatibility with existing software assets and applications, hardware platforms and complementary peripherals. If MS were to attempt such changes, it would likely alienate a large portion of the millions PC users and the 4.5 million software engineers who wrote Windows programs. On the other hand, the commitment to backward compatibility succeeded as a business strategy for users and developers, but it made Windows somewhat awkward to evolve and thus, locking MS into a mode of incremental evolution and innovation. Thanks to applications compatibility, customers continued to use MS software as Windows evolved, and they were reluctant to switch to alternative operating systems. This technical “lock-in” was essential to dominate the PC software platform.

Unlike Intel, MS early on in its history moved aggressively into making its own complements such as applications, suites, email and scheduler, workgroup server, programming tools, internet browser, and the SQL Server database system.

But also MS had similarities with Intel:

  1. MS dominated a key part of the PC platform (the operating system) with a mainly proprietary technology (MS-Dos and Windows)
  2. MS worked to evolve its operating system and shared the interface specifications openly with potential complementors (PC hardware and peripheral manufacturers, software application companies and consumer electronics and telecommunication companies)
  3. MS continually added features  to its software platform that were once separate products sold mainly by complementors
  4. MS broadly distributed specifications and programming information for free or a minimal charge to companies considered complementors or even competitors

Nonetheless, the Windows programming interface standards were not open in order to control the design and future evolution. MS would sometimes withhold technical information from firms it considered competitors, and it did not give away the source code to its products.

In the mid-1970s when MS was founded by Bill Gates and Paul Allen, the few thousands of PC users had to make their own software, and for this task they needed programming languages. Rather than becoming a platform leader, MS saw programming languages like BASIC as the major software business of the time. Later on, as the market expanded and the need for packaged and standardized and ready-to-use software programs emerged, MS moved into new business and MS adopted the strategy to dominate desktop PC software, from operating systems to other horizontal applications such as word processing and spreadsheets. Since then, MS has always chosen to innovate incrementally by gradually offering multiple versions of the software platform and keep the ability to run applications written for previous versions of the operating system.

Essential to MS’s business model was that it received not only revenues from new sales of Windows and applications, but also from upgrade sales as users moved to its new versions. By late 1990s, the PC and software programs were so powerful that few users felt a compelling need to upgrade. MS reconcile its commitment for backward compatibility with its need to generate revenue from upgrade sales by limiting forward compatibility. For example, users of programs written for Windows 95 or later versions could read and run programs written for Windows 3.1 or DOS. However, the opposite was no guaranteed unless the user of the newer version had saved the file in the old file formats.

MS played an active role in promoting standards as a platform leader:

  1. Application business: Just as it did not invent the BASIC programming language or the core of the DOS product, or office and personal productivity products, MS pursued a strategy of following or acquiring other firms and incrementally introducing innovations. MS initially concentrated on stand-alone application products, but it soon found that it could attract more customers by bundling products together and dramatically lowering prices.
  2. Enabling tools and technologies: MS played an active role in promoting standards that would be beneficial to it as a platform leader. MS engaged in holding development forums for application developers to show how Windows interfaces were evolving and also shipping programming tools (SDKs, OLE, VB tools), beta versions and code samples to help them. MS worked closely with hardware component vendors (Intel) and PC manufacturers (Compaq, Dell, IBM, HP) to make sure they understood how to design computers that could use the latest version of its operating system.
  3. Internal and external conflicts of interest: MS’s dual role as both platform leader and complements producer generated tensions within and outside the company, including antitrust trials promoted not only by the US Government, but also by its competitors and partners (Netscape, Intel, Apple, RealNetworks, IBM, Compaq).
  4. .NET: MS took on the challenge of the internet as an alternative computing platform by bundling a browser with Windows and aggressively pursuing deals with PC manufacturers, AOL and other distributors and customers to make Internet Explorer their default browser. However, the fact that users could access the Internet through non-windows PC and workstations as well as through non-PC devices, including mobiles and PDAs, represented a big thread that merit a new platform strategy.
  5. The Window Platform Strategy: In 2000, MS announced a five-year plan to evolve the Windows software platform, server products, applications and MSN to make Internet browsing and applications hosting capabilities available as Windows services, that is, special programs hosted on remote servers that were available to Windows users by accessing them through .NET features, and able also to communicate with each other from multiple devices and locations. However, alternative technologies were also another big risk: (JINI/JAVA from Sun Microsystems, OpenView from HP, Dynamic Services from Oracle, WebSphere from IBM) without mentioning the reputation of MS in making sure its complementors had successful business. But MS had the money (US$ 20 billions) and technical resources to produce enough complementors to .NET, including development tools, applications and services, to accompany it.

Increasingly from late 2000s, people access the same content and services from multiples devices or use more than one device at a time. Like Google and Apple, MS also understood that defining the future of productivity, entertainment and communication in the new world involves integrating software including cloud services and hardware devices. By releasing Windows 8, MS is delivering the same graphical user interface and integrated operating system experience across all devices (smartphones, tablets computers, laptops, servers and even supercomputers) with software delivered from the cloud, and demonstrating the possibilities to customers, original equipment manufacturers (OEMs) and Windows ecosystem.

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