Strategy: Microsoft vs. Microsoft

By Mike Ricciuti
Staff Writer, CNET News.com
October 17, 2002, 4:00 a.m. PT

Microsoft's marketing machine has always worked like clockwork: New versions of the company's software would roll out, and customers would faithfully update their products to get enticing new features.

With .Net, its far-reaching technology initiative that is reshaping product lines, the company is counting on nothing less. In fact, the success of technology architecture is crucial for Microsoft to keep revenue rolling in from its operating systems, server software and desktop products.

The technical vision for .Net has been widely praised, and the first tangible piece of the program--the Visual Studio.Net development tools--is a quantum leap ahead of earlier versions by all accounts. But so far, with a few exceptions, customer adoption of the .Net concept has been sluggish.

		Q&A Ballmer's tangled .Net Microsoft's CEO says he's untangling the .Net mess

"The bigger issue with .Net is selling it and explaining it," said Rob Horwitz, an analyst with Directions on Microsoft.

To be fair, all technology makers are struggling to sell products due to the current economic slowdown. But for Microsoft, which is trying to launch .Net--an entire revamping of its key products--the timing is especially bad.

In some ways, Microsoft may be its own worst enemy. For all the company's resources and business prowess, a combination of marketing confusion, licensing demands and software compatibility problems may have triggered a backlash among customers, in turn slowing adoption of .Net.

Ballmer admits error
Microsoft Chief Executive Steve Ballmer said the company may have erred with its licensing strategy. And he says Microsoft was too aggressive with its .Net labeling. "Turns out we shipped some products that didn?t have .Net as we know it...and that confused things," he told CNET News.com.

But Ballmer argues that customers are adopting .Net--at least the .Net development tools--nonetheless. "The truth is, we probably made (licensing) a little harder to understand than we could have. But that has not mattered.

		Special report Ballmer on the defense Microsoft's CEO defends the licensing plan

The stakes are high with .Net because its overarching strategy will color all of Microsoft's current and future initiatives. Once again, the company is betting that customers will happily pay for more technology even if they haven't fully digested the last generation of Windows--a perilous assumption at a time when businesses are re-evaluating every penny of spending to survive the industry recession.

"We buy Microsoft products, and we have this sort of love-hate relationship with them like everyone else, I suppose," said Phillip Windley, chief information officer for the State of Utah. "Last year, they forced us to conduct an audit, which was very painful. And it turns out that the bottom line was that we have overbought. They didn't offer to refund any of those overbought licenses. But if we had underbought, they certainly would have required us to pay more money, I trust."

Windley and other customers say they aren't in any hurry to upgrade to new .Net products because the company's tactics to wring every penny of revenue from licensing deals have left a bad aftertaste. Under its controversial new licensing program, called Software Assurance, Microsoft requires customers to pay now for software they will receive later--thereby guaranteeing revenue and insulating itself from any delayed buying decisions by customers.

The plan looks bulletproof on paper, but it's missing one crucial element: customer demand. Many cash-strapped companies are no longer automatically upgrading their products as they have in the past, prompting Microsoft to take extraordinary measures aimed at locking in sales.

To make .Net fly, "Microsoft needs to convince customers to upgrade. This is a challenge," said Horwitz.

Many Microsoft customers have grumbled about the licensing plan, but many have also signed up for it. In fact, Microsoft saw a boost in sales of its software last quarter, mostly due to companies scrambling to get their systems onto the most current version of Windows and, thus, remain eligible for discounted software upgrades in the future.

In the short term, that puts money into Microsoft's coffers. In the long term, that carrot-and-stick approach may not always work. It puts Microsoft on a treadmill to deliver new technology in a timely manner, or customers may not sign up for the plan again.

"The timing between releases of products like Windows 2000 Server or Windows.Net Server is like three years or more," said Horwitz. "What if a company misses that window? What's Microsoft's answer to (customers) when they ask, 'Tell me exactly how my money was well spent'?

"This is a ticking-clock challenge that they have really not had before," he said.

That old bugaboo
Another issue that may keep buyers from grabbing up the latest version of Microsoft's software is compatibility problems in moving older applications to the new .Net products.

While .Net represents "many areas of significant improvement and innovation over the previous generation of Microsoft technologies," according to a recent Gartner report, migrating old applications can be a challenge.

Gartner says "a surprisingly large amount of change" may be required to move older applications to .Net. At best, 40 percent of existing code written using Microsoft's Visual Basic 6 programming tools can be migrated to VB.Net, the new version of Visual Basic, without "substantial redesign and re-coding," the firm warns.

		Special report The gatekeeper Windows XP may spark ultimate battle to own the Net

Microsoft does offer many tools to linking older applications into the .Net world, and many companies will want to move to .Net just for the boost in performance and stability, analysts said.

And finally, old bugaboo still haunts Microsoft: Making its Windows server software as secure and reliable as Unix and other large system software. That issue may go away with Windows .Net Server, said analysts. And Microsoft's Trustworthy Computing initiative is designed to quell security and reliability concerns.

But first, the company has to convince customers to buy .Net Server and other products, and it has to overcome longstanding resistance to using Windows on the most critical business systems.

"Microsoft is trying to convince everyone that their (server) software is ready for prime time," said Windley. "Maybe someday, but I think today there are significant security and reliability hurdles that they have yet to overcome. (Windows) XP is a huge step in the right direction, but it's still nowhere near as bulletproof as Unix."