- Market shifts can lead to new solutions that are free
- Free products often cause historical competitors to fail
- Microsoft is at great risk as the market for business applications is shifting to free solutions from Google
More than a decade ago Microsoft made the decision to bundle, at no extra charge, an encyclopedia with its software. Almost nobody had heard of Encarta, and it had never been a serious competitor to Encyclopedia Britannica. But when it came on a CD for free it stopped a lot of people from buying a new set of books for the family. It only took months for Encarta to become the #1 encyclopedia, and Encyclopedia Britannica found itself in bankruptcy. While quality is always an issue, it's very tough to compete with "free." Now Wikipedia, another free product, dominates the encyclopedia market.
For decades people paid for access to news – via newspapers and magazines. Advertisers and subscriptions paid for news. But when newswriters started offering news on the internet for free, and when readers could access news articles on the web without subscriptions, publishers found out how hard it is to compete with "free." Several magazines and newspapers have failed, and several publishers have entered bankruptcy – such as Tribune Corporation.
Now Crain's New York Business headlines "Google's Free Appls Click with Entrepreneurs." Companies are learning they can accomplish the tasks of word processing, spreadsheets, website creation and enterprise email for free via Google apps. And this is not good news for Microsoft.
Microsoft has 2 product lines that make up almost all its sales and profits. Operating systems for PCs (Windows 7) and office automation software for businesses (Office 2010). That there is now a viable offering which is free has to be very, very troubling. How long can Microsoft compete when the competitive product is, quite literally, free? If you adopt cloud computing applications, you no longer need a PC with an operating system. You can use a much simpler device. And you can use Google apps for business applications at no charge.
Microsoft is a huge company, with an incredible history. But how is it going to compete with free? And as computing becomes more and more networked, and Microsoft loses share in mobile devices from smartphones to tablets, what will be the sustaining revenue at Microsoft?
Investors in Microsoft have a lot to fear. As do its employees and suppliers. As do supply chain partners like Dell. When markets shift – especially when led by a shift to free solutions – the impact on traditional competitors can be extreme. Even the very best – such as Encyclopedia Britannica – can be destroyed. Sun Microsystems led the server business in 2000, with a +$200B market cap. Sun is now gone. Market shifts can happen fast, and when products are free shifts often happen even faster.