Microsoft's Illusion: Netbook & Linux Threats Can be Neutralized

"The most dangerous thing is illusion"

-- Ralph Waldo Emerson

Apple enthusiasts like to think that Steve Ballmer stays awake at night worrying about Apple. The facts in the market place, driven by the recession, netbooks, mobile users, however, suggest that simpler, mobile OSes are a much bigger threat. How Microsoft and Apple deal with those issues will determine their success over the next few years.

For a long time, Apple enthusiasts have watched with amusement as the Windows OS has grown to become a monster on the desktop. Typical users are befuddled by the modern Windows OS, like Vista, with its Registry and complex maintenance issues. As a result, users just ignore potential problems, then get into trouble, especially with the security of their data.

Mac OS X is just as complicated, but Apple's design philosophy has allowed it to make life easier and more understandable for its users while Microsoft has been constrained to meet the needs of IT managers. That status quo might have continued indefinitely except for two whammies that came at the same time: mobile computing and the deep recession.

Getting Mobile, Getting Cheap

Many PC users, realizing that they are totally overwhelmed and under-equipped to be a system administrator for a personal computer that has a CPU with a billion transistors and a terabyte of storage have turned to the simpler solutions imposed by mobile devices. It's not that more people are more mobile. Rather, it's that people like the solutions presented by mobile devices, devices whose constraints drive the design to become more palatable.

Accordingly, cloud computing -- which has come along at the same time -- is more of a crutch than a solution. It allows the user to spend less time worrying about local file management and put the responsibility on some other entity. For example, why store and manage URLs on a local device when we can use Instapaper.

During the economic boom before 2008, there were many illusions and conceits that lingered on, often with no particular penalty. But this recession is turning out to be like a war. Poor decisions and self-serving illusions have brutal consequences.

The fact is that millions of PC and Mac customers are liking the breezy, lightweight approach to communications. In fact, considering what most people do with their notebooks netbooks, and smartphones, communication seems to be the bottom line -- whether it's writing a corporate memo on investments or using Twitter.

As a result, it's sensible for PC companies to ask themselves the classic business question: "Am I in the PC business, or am I in the communication business?"

Attacking a Business Model with Technology

Asian companies like Acer, Asus and MSI as well as Apple figured this out before Microsoft did. John Dvorak recently pointed out, with well constructed logic, what's going on as the netbook presents the user with a financial and technical solution that will forever undermine Microsoft's business model. That's exactly why, in a recent address to investors, Microsoft's CEO Steve Ballmer labelled Linux as the principal threat to Microsoft.

That's because Microsoft depends on PC sales to drive its business, and as PCs become cheaper and cheaper, Microsoft is in a poor position to extract large fees for its relatively complex OS and office products. After all, as Dvorak pointed out, with atypical clarity:

"Right now, for example, I can get a complete Intel motherboard with an Atom processor, ready to install in a box, for about $100. All I need is a $30 memory module, an inexpensive hard disk ($50) and a case/power supply ($75). For $255, I can have a pretty nice cheap machine. Now I have to add the most basic version of Windows for $199? And Office for another $399 (standard no-frills edition)?

"Let's add this up: Hot little computer: $255. Basic low-end Microsoft software: $598.

"What's wrong with this picture?"

The simple fact is that while Microsoft is acutely aware of the Linux threat, their particular illusion is that there is some action they can take, given the constraints they've placed on themselves, that it is within their power to successfully deal with it.

Apple's Role

Apple has been successful in steering away from the debilitating PC price wars that put companies out of business or detract from R&D dollars to make customers life better. That has positioned Apple as a premium brand, and, as I've discussed before, many people like having that option. Using a first class instrument is pleasing to the human spirit, and that will never change.

However, as the PC market slides into worthless hardware, free Linux OS, mobile communication supported by the cloud, Microsoft will have to transform itself from a company that offers complex, agenda supporting solutions to friendlier products -- if only because the common culture, even in the corporate world, demands it. Windows 7 and Windows Mobile 6.5 leading to 7 are Microsoft's best efforts to deal with the threat. With Steve Ballmer getting older and possibly out of touch the with trends by younger consumers, there's a question whether Microsoft can weather the storm. How fast can Microsoft compete with itself before others do?

Apple meanwhile, has maintained its nimbleness thanks to its profitability. As our own Bryan Chaffin's report concluded on March 6th:

"That downsizing has effectively completed the end-goal of PC vendors such as Dell, Acer, Asus, eMachines, and others to fully train customers to understand that PCs have no value. The race to the bottom, in other words, is just about over.

"Be that as it may, the analyst said that the price compression the industry is seeing is going to eventually force Apple to lower its prices. So even if the company does remain at the top end of the market, which is likely, that top end will sooner, rather than later, be cheaper than today's top end."

All this would suggest that Apple's continuing vision of quality, mobile products for communication combined with cloud support, MobileMe, is on track. The recession indeed may force Apple to lower prices, but the real question is whether the visions of the two companies are devoid of illusions. That is, how fast can Apple cater to the needs of mobile users for simplicity versus how fast can Microsoft unwind itself from the morass of expensive desktop nightmares. Without a hardware platform to instantiate the necessary vision, as Apple has, Microsoft may finally have found itself holding on to a shrinking lifeline, unable to avoid catastrophe.

The real test of a company is not how well it's doing when times are good. Rather, it's how it responds when times are really bad and illusions collapse.