Microsoft's New War Against Apple, Part I

While many observers are, with plenty of justification, slamming the recent Microsoft "You Find It, You Keep It" TV ads, that's just a minor tactical loss for Microsoft.  In the long run, however, the ads are a possible early warning signal that Microsoft is starting to think on a more quantitative basis about what the real problems are that it faces as a corporation. For now, Microsoft is stumbling a bit with that thought process. The company is not in habit of operating and marketing at the same level of excellence as Apple. However, if a change is coming, how will it happen?

I suspect that Microsoft is sensing that it's time for a fundamental change in their foundation. Back in 2000, when Microsoft's quarterly profit equalled all of Apple's quarterly revenue, there was little need for concern. A fundamental change in Microsoft's Windows foundation wasn't necessary to either succeed in the enterprise or against Apple. So Microsoft drifted from 2000 to 2008 while Apple was building a sound foundation with Mac OS X. Apple had to do that to succeed; Microsoft had to not change to succeed.

Apple's success with the iPod and iPhone, built on that OS X foundation, has to be regarded by Microsoft as a new threat, one that cannot be ignored any longer. 30,000 iPhone apps in one year is the tipping point for Redmond's thinking. So what's the first thing a company does when it realizes that it's facing a crisis? Buy time. Look for weaknesses in the competition, skirmish, and buy more time for R&D.

The "You Find It, You Keep It" ads are the first skirmish.

That brings up two critical questions. What does Microsoft have to do in the long run to avoid having its frog boiled by Apple? And secondly, what are Apple's weaknesses and how can they be exploited?

Of course, no company is invulnerable, not even Apple.  The history of business in America has shown over and over again that companies succeed in cycles of ups and downs.  There is no better example than Apple itself.

Business Boom and Bust

Apple soared with the Apple II in the late 1970s, got into trouble with the Apple III, strained under the pressure from the launch of the original IBM PC in 1981, soared again with the initial enthusiasm for the Macintosh in 1984, strained over time when all the early adopters had their Mac and the rest of the world came to realize the Mac's lack of expandability, and really, really wilted under the pressure of Windows 95. Then, just like the U.S. economy from 1992 to 2007, Apple has enjoyed a long period of success, thanks to Steve Jobs. But eternal success is never guaranteed in business.

Few companies are in a position to give Apple headaches. One of them is, in fact, Microsoft, who is both burdened by an insecurity complex while simultaneously enjoying over 90 percent market share. Shaking out of its doldrums and recognizing the new crisis is the next challenge for Microsoft. Fortunately, it only has to slow Apple down a little to buy some time.

And so Microsoft's hand has been forced. They can maintain the status quo as the eternal whipping boy of Apple, be satisfied with a slow, steady decline as Apple boils its frog -- or they can fight back while they still have the resources.

Fighting back requires, perhaps for the first time, a hard nosed, practical and smart approach to its own weaknesses as well as Apple's weaknesses. After all, when a company is gaining PC market share at the rate of only one percent per year, more or less, it shouldn't be too hard to put a dent in that growth, especially during a recession when customers are more cost conscious. (Even if the PC business is temporarily suffering even more.)

For example, despite all the Apple community rhetoric about the illogic, silliness, technical absurdity of Lauren and her PC quest, the one thing that remains is that Microsoft is, for the first time, showing that they're at least thinking about how to slow down Apple's steady growth.

Even if the first attempts are somewhat amateurish, the real question, as Apple would also ask, is: are the ads making a difference?  Is Microsoft obtaining a return on its investment (ROI) in these ads?  Time will tell, but if they don't get the job done, Microsoft will learn from the experience and keep trying. After all, the Apple community has conveniently told Microsoft everything they did wrong in the first attempt.

Microsoft's Weaknesses

There is no doubt now that Windows is the single most important noose around Microsoft's neck. PC vendors refuse to show their hardware with Vista on the display in print ads and catalogs. The OS has reached its technical limits. Its brand is broken. The very word Vista has become a symbol of Microsoft's Big Problem. Microsoft cannot move forward until that problem is solved.

The solution is to clean up Vista (a little) and rebrand it as Windows 7 to buy time to develop a next generation OS. Microsoft is very late doing this, but the iPhone may have finally convinced Redmond that the days of the desktop metaphor are numbered. Now it's a race: can Microsoft hold on until the desktop OS is irrelevant? There are, once again, persistent rumors that Microsoft is spending R&D dollars on a next generation OS. This time, it better be for real.

What's clear, however, is that Microsoft no longer has the luxury of not acting. While its managers and engineers figure out how to implement a vision for the future, for now, exploiting Apple's own weaknesses, to buy more time, is in order.

In Part II next week, I'll look at that aspect of Microsoft's strategy.