Since the mid-nineties, I have nurtured a thesis about the dotcom bubble, tech bust, and the role Microsoft played in it. The opportunity to discuss it has never came up.

That is, until Microsoft’s purchase of Skype yesterday.

I have long argued that while Microsoft might have begun life as a software firm, it long ago morphed into something that was more a very clever IP/marketing firm with a huge tactical legal advantage that gave rise to a monopoly, rather than a true technology company.

Microsoft remains hugely profitable today, but increasingly irrelevant. Their purchase of Skype is an attempt to buy back some relevance. They are the rich, uncool fat kid at school, trying desperately to buy their way into some popularity. On a spectrum of relevance, where would you place MSFT: Are they closer to Google or Apple or Facebook or Twitter, or are they more comparable to the Maytag repairman of the tech world?

Let’s back up a bit, and look at Microsoft’s history, including the impact they had on other technology in the 1990s.

The first PC was given to the world in 1980 by IBM. The mainframe giant looked down upon the idea of a personal computer for home or even business use. The PC was insignificant, never to replace the big iron they made. In 1981, they happily outsourced the operating system to Gates’ geeks, who themselves outsourced the OS code writing. By 1982, MS-DOS was released.

Embedded within that original IBM deal was the seed of Microsoft’s vast fortunes. Microsoft’s true genius was in their license agreements of MS-DOS (and Windows) to computer manufacturers. They offered a variety of different licenses, but the version that charged the least per copy included a clever kicker: Microsoft had to be paid for every machine sold, regardless of whether MS-DOS was the operating system.

Of course, the PC makers gravitated to the cheapest option. Hence, that clever licensing trick led to both a monopoly in Operating Systems and an eventual FTC and Justice department Anti-Trust lawsuit.

Thus, Microsoft had their deal with the devil: Their lightning in a bottle was not some awesome technology or brilliant breakthrough – it was a legal clause that led to enormous monopoly power. That was the prime basis of their success. They pre-installed Office in Windows, creating a second near monopoly and billions more in profits. They also had all sorts of dirty tricks, like undisclosed APIs that other software developers did not know of and could not use. They bullied competitors and friends alike. But that is another discussion entirely.

The monopoly profits they accrued were ginormous, but it made Mister Softee fat and fuzzy headed. True innovation was not to be their strength; they may have been competitive, but they were not hungry. Theirs was a one shot, never-to- be-repeated, decade-long “moment” of glory.

Throughout the 1980s and even more so in the early ‘90s, all manner of potentially competitive software products were conceived elsewhere. yet many of these were stillborn. Why? They had a very difficult time getting funding or venture investments. One question — “The Question” — was a perennial problem. In Silicon Valley, in Venture Capital conference rooms, in garages, in the offices of potential start ups, “The Question” resonated again and again:

“What about Microsoft?”

Or asked in greater detail: “What is there to stop Microsoft from putting out their own version of this idea, integrating it into DOS or Windows, or giving it away for free?”

The answer was usually, “Nothing.” There was nothing that prevented the Redmond behemoth from copying the basic concept, making it part of Windows. If that happened, how you could you possibly sell something MSFT was giving away free with every PC?

Handshakes all around, thanks for coming by, sorry, wish we could do something, but we just cannot help you.

Countless ideas, apps, utilities, programs, businesses, start ups were thwarted . . . That was, until the rise of the internet. Freed from the oppressive Microsoft monopoly, it became a viable competitor to the desktop. Microsoft had neither strategic nor tactical advantages there. As soon as an opportunity arose to get out from under Bill Gates’ thumb, tech companies leaped at it.

A million flowers bloomed.

Entrepreneurs, geeks, VCs, coders, two guys in a garage – suddenly, it was possible to develop a web-based product or site without the beast from Redmond breathing down your neck.

Early stage investors, angels, VCs threw billions of dollars at tens of thousands of companies. A Cambrian explosion of life took place once firms could develop without the threat of Microsoft hovering over them. The enormity of the potential, the vast amounts of start up money was no longer oppressed by the shadow of Gates & Co.

Freed from the tyranny of their OS overlord, a massive outpouring of technological innovation and creativity occurred. More than a growth spurt, this was the modern equivalent of the Industrial Revolution: Mobile Telecom, Gaming, Storage, Web Sites, Broadband, e-commerce, Microprocessor Development, and all manners of related technologies flourished once “The Question” was no longer an impediment.

At the same time, Microsoft had grown fat and wealthy and complacent: They became a Wall Street darling and founder Bill Gates became the wealthiest man in the world. But, the company lost its drive and whatever creativity it had. The history of Microsoft is not one of innovation – most of its major products were purchased, copied or stolen – but it quickly became a utility, with Windows and subsequent replacements a necessary evil to maker computers operate.

And what of their Innovation today? Microsoft has missed just about every major trend in computing over the past decade. They missed Search, they missed MP3 players, had to buy webmail, missed user generated content, maps,blogging, online video, cloud computing, location sensitive apps,  smart phones, Apps, texting, social networking, tablets, micro-blogging (ie, Twitter). On and on goes the list of latest and greatest technologies, with MSFT nowhere to be seen.

The list of recent Microsoft innovations is astonishingly short. They were always better copiers than they were innovators; even now, they seem to have forgotten how to steal effectively. They may have bought their way into gaming, dropping several billion dollars to become competitive, develop the X-Box and buying Bungie — but all in, it is hardly a winner for them.

And now their latest ill-advised, wildly over-priced, $8.6 billion purchase of Skype. It is their attempt to buy their way into the Smart Phones, yet another innovation they missed. It is their attempt once again to purchase relevancy.

The rich fat kid just wants to be cool . . .

Category: Legal, Technology, Venture Capital

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

90 Responses to “How Microsoft Caused the DotCom Bubble and why their Skype ‘Hail Mary’ is irrelevant”

  1. And before someone asks, we have no position in Microsoft (MSFT)

  2. PeterR says:

    Very well said, Barry. I had the same reaction to the Skype purchase. To think of all the toys Microsoft could have invented decades ago: Facebook, Google search and mail, iPhone, iPad, an OS which was not full of worm and Trojan Horse holes, and the list goes on . . . . . .

  3. cthwaites says:

    Great point….Lex has a nice take on it too…doubt any of this will lead to that $25-35 breakout.

  4. BennyProfane says:

    Great analysis. It’s what I’ve been trying to tell friends for years, that Microsoft basically hasn’t created a thing in it’s existence, and has been lucky enough to ride a the massive wave of monopoly power after copying the Mac OS and calling it Windows. Thank goodness Jobs could come back and throw it back into their face with what Apple is these days.

    Now, Let’s hear part II – how Silicon Valley churns through billions of dollars to create silly products like Facebook and Twitter.

  5. mitchw says:

    I would also add that when Compaq engineered a Turing machine equivalent of IBM’s BiOS, the barn was opened for Microsoft. IBM had lost control of the clones. And then when that fool sold Apple’s look and feel, Windows was finally able to feel the sunshine on its ugly face. Good times ensued.

  6. Patrick Neid says:

    Who can forget the ugliness of the Netscape wars after Gates was taken by surprise by the internet.

    …from Wikipedia:

    The Road Ahead occupied the top spot on The New York Times’ bestseller list for over seven weeks in late 1995 and early 1996, and sold 2.5 million copies.[citation needed]

    A reviewer at The Seattle Times (and coauthor of Gates: How Microsoft’s Mogul Reinvented an Industry and Made Himself the Richest Man in America, a 1993 biography of Gates), called Gates’ coverage of the Internet “weakest of all” the topics Gates covered, saying the “World Wide Web receives just four index citations and is treated as a functional appendage of the Internet (rather than its driving force), and both come off as a subset of the Information Highway, a term Gates uses with abandon despite its disfavor among digerati.”[6]

    The New York Times review called the book “bland and tepid” and reading “as if it had been vetted by a committee of Microsoft executives”; it is “little more than a positioning document, sold in book form with accompanying CD-ROM and designed mainly to advance the interests of the Microsoft Corporation.”[7] It also said that Gates “has been caught flat-footed by [the Internet's] sudden emergence” and saying the book is “part of Mr. Gates’s extensive effort to force his way back into the game before it’s too late.”[7]

    Time magazine, in a December 1995 article about Gates in general rather than his book, said:[8]

    Gates is as fearful as he is feared, and these days he worries most about the Internet, Usenet and the World Wide Web, which threaten his software monopoly by shifting the nexus of control from stand-alone computers to the network that connects them. The Internet, by design, has no central operating system that Microsoft or anybody else can patent and license. And its libertarian culture is devoted to open—that is to say, nonproprietary—standards, none of which were set by Microsoft. Gates moved quickly this year to embrace the Net, although it sometimes seemed he was trying to wrap Microsoft’s long arms around it.

  7. dan10400 says:

    I am no MSFT fan, but how is Apple, with its closed ecosystem, really any different as an providing an impetus for innovation? I think it could be argued it is worse. How many budding engineers got their teeth cut putting together their own DOS/Windows PC? How much automation came about by being able to get to down and dirty to the hardware level?

  8. [...] Barry on why MSFT-Skype is irrelevant.  (TBP) [...]

  9. Josh F says:

    Awesome piece on Mr. Softee. Spot-on.

  10. [...] How Microsoft Caused the DotCom Bubble and why their Skype ‘Hail Mary’ is irrelevant | The Big P…. [...]

  11. b_thunder says:

    MSFT + Skype doesn’t quite have the scale of AOL + TWX (that market the absolute top of dot-com 1.0 mania) but I have a feeling we’re getting very close to the top of dot-com 2.0

    MSFT is not buying “coolness.” They’re simply making a few VCs mega-wealthy… (i wonder if there will be a payback in terms of favorable press , etc)

    And what if this is just the beginning? What if RIMM is next? What if MSFT comes back for Yahoo? Then the hopes for a “juicy” one-time dividend or a mega-buyback are gone. I’m no longer considering buying MSFT… not until it goes to $20

  12. wunsacon says:

    I mentioned the acquisition news to my wife, by starting with “Oh, we’re going to switch from Skype to Google Talk”. I then mentioned MSFT is buying Skype and ended with “Probably everyone else will do it, too. The only people who won’t switch are the uncool people.” (I think I was kidding. But…I’m not sure.)

  13. joshmaher says:

    You do realize that you are saying you can’t believe Microsoft didn’t invent every technological advance in the last three decades right? That is like saying why doesn’t Ford invent every advance in automobile manufacturing. You are suggesting that a single company can invent everything and that the free market system that actually provides for the innovation that we love so much is irrelevant. Of course that is right after saying that when they did control all things in the tech space they were also bad. Which is it? Are they bad if they have invented or copied everything in the tech space to the point that they are the only player or are they bad if they are not inventing every little tech advance that happens? They can’t be bad for both reasons.

    A little short sighted if you ask me. Sounds more like you are jumping on the MSFT bashing bandwagon to get readership (which I guess worked because I am commenting).

    ~~~

    BR: I have been a longstanding member of the MSFT bashers; this has been kicking around my head for a long time (I wrote it in an hour this AM) .

    Traffic is nice, but I have avoided the “Hitler was Gay” headlines approach; Its just not my thing

  14. Chad says:

    The funny thing is that they are so late to the party that they have to overpay, by a lot, for a company that has probably already seen it’s peak. How can a company with MSFT’s resources be so far behind? They are even losing the browser war and IE comes already installed.

    Also, their game system foray was probably only semi-successful because their main competitor, Sony, is about as clueless as MSFT is with tech innovation. Two over the hill fat boxers who are both so out of shape they can’t knock the other out in the video game industry.

    @dan10400
    How is this a MSFT vs. Apple discussion? I don’t see it.

  15. sihaque says:

    You don’t have to be an innovator to be a player. Their partnership with Nokia and now Skype puts them in the center of the smartphone revolution – not the iphone elites, but the masses around the world. So ignore the stock at your peril.

  16. wally says:

    While you say this about Microsoft, my contention is that the best – and maybe only – way to make big-time money in the world today is through monopoly. It may be a total monopoly or a cartel or a monopoly of tacit agreement between ‘competitors’… but nothing else gives you pricing power.
    The world today moves too quickly and information is too readily available. If you cannot monopolize something it will become a commoditized product within days or weeks.

    That why Microsoft was drawn to Skype; it is a proprietary product and can thus be controlled. There are open source internet phone systems out there (Ekiga, for one) but Microsoft has no intention of using an open source product with their Outlook , Exchange or other technology. They need the lock on it, in their mind. They know no other way.

  17. bonghiteric says:

    b_thunder,
    Speaking as someone who started and sold a company in dot-com 1.0 and is playing in the 2.0 sandbox, I feel very confident in saying we are nowhere near the top of “dotcom 2.0″. There is going to be some pain felt by the startups that are basically an i-phone app with no revenue model and a lot of SXSW buzz that VC’s have been throwing money at, but there are also A LOT of early stage companies with revenues and a large enough market to make a decent go of it.

  18. gloppie says:

    Very well written account, Barry. I only find that the fat kid analogy is a bit restrictive;
    I agree that Microsoft was an actor in the .com bubble, and indeed their product is just a clever marketing ploy. During the 90′s, “getting into Computing” became increasingly synonymous with buying an Intel-hardware, pre-canned Software , pay as you use Legal agreement (the EULA) and the average user, being ignorant and /or unwilling to burden him / herself with understanding anything about the darn thing, just happily clicked on the EULA, without even reading it.
    You are right it is a ploy, Barry. I know this because it is close to impossible to get one’s money back from Microsoft when you click “I Do Not Accept” on the EULA. I tried and it is a very empowering experience.
    The only real asset that Microsoft has, is the position of being the pre-installed OS on major hardware indeed. And nothing else. But there’s a rub.
    Fast forward 20 years and here we are.
    The law of unintended consequences had a major effect:
    As Microsoft sucked in all the air in the nascent IT industry and prevented real competition, the mass of talent that Microsoft did not acquire became critical without them, and most importantly, >outside< of Microsoft and what it represents.
    This is crucial to understand; Microsoft is at the opposite spectrum of GNU/Linux and open software no only in terms of product, but philosophy also.
    Copyleft licenses are anathema to the Vermont behemoth. What, are you crazy? You are GIVING IT AWAY? Who's gonna pay the bills you moron?

    "The offered all manner of different licenses, but the version that charged the least per copy included a kicker: Microsoft had to be paid regardless of whether MS-DOS was the operating system." is not true anymore.
    The foundation has cracked. The only way to win the game is not to play (WOPR)
    Free operating systems are here, and while MSFT sat on his ass for 20 years and just collected bully-money from all the kids, a true revolution is happening outside of it: the other kids are growing up. The fat kid analogy only works if the fat kid was a drug dealer Barry. And the other kids are back with baseball bats.

  19. beaufou says:

    I thought the Huff post purchase was a joke at such a price, when I saw Skype at 8.5 billion it was a true WTF moment.
    And some think gold is a bubble.
    BR, have you considered selling the BP?

  20. Taylor says:

    One of the great “what-ifs”: What is MS had indeed been forced to break up, instead of being able to buy a stay of execution? Divested of legacy software like Office, you might have seen some much more nimble off-shoots give the Googles of the world a run for their money.

    I would not yet count them out, but their involvement in WS-* has been a fiasco, and their purchases of Nokia and Skype are true Hail Mary passes.

    I would not be sanguine about Google. They don’t have the business expertise of MS, or IBM for that matter who really know how to play the game, and they don’t have the consumer electronics expertise of Apple. They are a company of engineers, and there are discernible cracks emerging in the edifice….

    I hate to say it, but the player to watch now is Facebook. You know, the company whose business model is based on stripping away people’s privacy…..

  21. Steven Levy says:

    Why Google Does Not Own Skype

    So Microsoft is buying Skype for $8.5 billion, its biggest deal ever. It’s too soon to make a pronouncement on whether the purchase is an idiot move, a brilliant one or just something in between. All the geniuses who ripped the investors who bought Skype from eBay in 2009 don’t look so smart now.

    But I will recount a bit of history that readers of In the Plex already know: It was almost Google who owned Skype.

    Here’s more detail on the story:

    In 2009 a brilliant product manager named Wesley Chan was in charge of Google Voice, which was still in development. It was Google’s revamp of Grand Central, which Chan had snared in an acquisition the year before. When some Google executives heard that eBay was selling Skype, they jumped on the opportunity and began negotiating.

    As Chan helped with due diligence, even going to Europe to see Skype firsthand, he became convinced that the purchase was a bad idea for Google. He concluded that one of Skype’s key assets — its peer-to-peer technology — was a mismatch for Google, which worked on the newer paradigm of cloud computing.

  22. StrictlyDownvotes says:

    Barry, you are wrong. Microsoft’s innovations just aren’t as visible because they are targeted towards developers, rather than consumers. Their genius is to make sure that Windows is the easiest and most profitable platform for software programmers like myself to target. As a result, there’s a a diverse and high quality ecosystem of programs that run on Windows. Microsoft’s innovations are things like the .NET framework, Visual Basic and DirectX.

    Microsoft went wrong in a big way with Internet Explorer. At first, they were doing it right: they knew that the Internet web browser was the future of computing and therefore poured tremendous resources into Internet Explorer in order to make it the best web browser for software programmers to target. They won the browser war because honestly, IE6 beat the pants off Netscape 4.7. So far, so good.

    Microsoft’s big innovation was supposed to be ActiveX, a technology that allowed web programmers to use native windows components inside web pages. The problem was that it opened up gaping security holes in the operating system so it had to be abandoned.

    Then, Microsoft inexplicably just totally abandoned the web browser. The best platform to develop for became Gecko (Firefox) and recently webkit (Chrome). This is why Microsoft has become increasingly irrelevant: the best products no longer run in Internet Explorer on Microsoft Windows.

    Microsoft makes its money from sales of Windows: they have to make it relevant to developers and then the developers make it relevant to consumers.

    Google makes its money off of Internet advertisements: they have to make the Internet the best medium with things like good web browsers, good e-mail and good internet connections.

    Apple makes its money off of devices: they have to make them the slickest available.

  23. AHodge says:

    Rich fat kid…you mean tantrum Ballmer?
    totally agree.. the poster child for excessive patent rights, and a nearly zero marginal cost product.
    It should not be a $10 figure earnings company…its an app. a big one granted, but an app.
    that doesnt do doodley with its realm of $10 figure cash flow

  24. There are some typos in the original and I dont know how Seattle got in there (instead of Redmond mentioned earlier)

    But the cleaned up version comes back from the editor in about 3 minutes

  25. rktbrkr says:

    Mr Softee had a lock on everything in the PC universe until there was a jail break in the browser wars, now everybody runs rings around Explorer in performance.

    Openoffice is a very acceptable free alternative to MS Office, first offered as Star office then gobbled up by Sun and christened OpenOffice, then regobbled up by Oracle and just recently pooped out by Oracle.

    Amazon and Google are now offering streaming music services to compete with Apple and Amazon and Youtube are recently offering streaming video competition to Netflix.

    Ebay couldn’t do much with Skype lets see if Mr Softee can move the ball down the field.

    Tech success depends a lot on corporate heft, not just first mover advantages

  26. y’know, it’s interesting, but the ‘Super-Project’ that the Protagonist, in this Movie http://www.amazon.com/Antitrust-Ryan-Phillippe/dp/B00005AUDW , was hired to work on, is similar to Skype..

    Movie from 2001, *Based, loosely, on Billy G. & MSFT..
    ~~
    past that, the Qustion of IP, itself, is a chin-stroker..

    May 8, 2011 by Stephan Kinsella

    Below is a letter to the editor I just sent in to The Economist in response to a pro-patent piece. I doubt they will publish it, but here it is.

    ***

    Your May 5th piece on Patently Absurd contends that “America’s system of intellectual property has played a crucial role in generating economic growth, encouraging inventors and entrepreneurs by ensuring that they can make money from their good ideas” and that “there is no doubt that, collectively, [patents] are a useful contribution to an economy that is still struggling to grow.”

    In fact, there is quite a bit of doubt. The Founders had no proof that any innovation gains from a patent system would outweigh its undeniable costs; they had only a hunch. In the ensuing two centuries there has been no clear showing that patent systems result in net gains for an economy… ”
    http://blog.mises.org/16849/the-economist-on-the-american-patent-system/
    ~~
    and, for all y’all that think choosing between ‘Bill’s Foundation’ & ‘Steve’s Panopticon’ are, really, choices..
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Linux+Freedom+

  27. trmelvin says:

    Skype is the Magic Jack of laptop calling. I think there is no value in either. Noone wants to sit at their computer and make calls. Beyond this, figuring out how there is any advantage to Skype for international texting, voice, etc. is very difficult to see. The business model appears to be: get used to free voice on computer and then wander into an ever changing maze of credits, foreign country cost differentials and on and on. In short I think Skype is a mess and Microsoft will find it is as well and the public will see how little value there is and how many other ways communication can be done. Not to mention Verizon etc. can always match or beat the international prices of Skype. Remember there is really nothing there, no towers, no infrastructure, its just an idea with customer loyalty and dependence on others fiberoptics. Maybe this has or will change due to acquisition or equity holdings in the infrastructure, but I think this is a waste of money. Memories of AOL and Time Warner come to mind.

  28. also, I will say, that, now, w/ Xbox making $$ (and Kinect, that makes Wii look like something out of the ’30s) *noone is ragging on MSFT about “Xbox” (and ‘losing soo much Money with it..)

    w/ Xbox+Kinect it may, fairly?, be said that ~”MSFT developed something” ?

  29. machinehead says:

    ‘Not to mention Verizon etc. can always match or beat the international prices of Skype.’ — trmelvin

    Are you serious? Verizon’s rack rates for international calls (for example, $1.04 per minute, New York to Vancouver) are ten times higher than their own calling card rates, and 50 times higher than competitive VOIP calling cards.

    Sure, you can pay a monthly fee for a Verizon ‘international plan’ that lowers the rates, but then you’re bleeding cash for a service that Skype offers for free.

    Don’t feed the telco trolls.

  30. gariki says:

    Hey Barry,

    I am a long time reader of your blog and love it; but this post and the thought process behind it is absolutely very “un-Ritholtzy”. You are really bashing it based on your biases; you are an apple fan. Go for it; but apple is such a horrible company – open-ness wise that i cant believe how you can turn a blind eye to it. Apple did not do too many great things either; other than their pure genius in creating extremely simplified user experience. They get a point for that; but thats about it.

    I agree with one of the comment above that what you are really blaming MSFT for is to not create every single innovation that has happened over the past 2 decades; and then also that its controlling too much. It really cant be blamed for both. Can it?

    Now as per relevance of MSFT: try not using any microsoft product. not just in house but even in your dependency chain and then access whether it is relevant to your day to day life or not. That means NO Windows (not in your offices, not in your clients offices, not in people you do business with), no MS office. Try living on apple or any other OS for that matter. You will soon realize that Windows whether you like it or not is the best, most user friendly operating system existing. Apple and any other flavor of linux doesnt even come close to it.

    disclaimer: I do work at microsoft but i am pretty open to all technologies and just use the best technology for my current task at hand.

  31. the pearl says:

    It wasn’t long ago that another cash rish tech company was left for dead on the side of the road with little direction or innovation. I suspect the apple/msft debate will look much different 10 years from now. There isn’t a mortal alive who thinks Apple won’t continue on as the greatest tech company in the history of mankind. Some have even predicted a Trillion or two market cap. Most wizards are horrified at the departure of Mr. Buffett, but very few discuss Apple’s future when Mr. Jobs is called to serve above. Berkshire can chug along to some degree without Mr. Buffett. What about Apple? It is when things are obvious that one must take caution. It is obviously cool to hate Microsoft and love Apple.

    ~~~

    BR: What of those of us who disliked MSFT 20 years ago, and have been using Macs since 1988?

  32. PrahaPartizan says:

    MSFT appears to have wanted to play in the clouds with its purchase of Skype, but it may jut disappear in a puff of smoke to dissipate in the wind.

  33. honeybadger says:

    trmelvin,

    I enjoy “sitting at my computer” and using skype to videoconference with my family. We all gather around, and my folks can see/talk to their grandkids all at once. International. For free. We once had my folks over for “family dinner” that way– just put the laptop on the table while we were eating.

    I have also used skype for longer professional calls; given that I don’t have a telemarketer’s headset and that it includes video, an hour discussion in front of my computer is much preferable to holding a telephone receiver to my ear. Again international, again free.

    I once had a nice hour plus chat with a gentleman in Singapore, who was running Skype on his iphone. The traffic noises suggested to me that he was not sitting in front of his computer. Did I mention that this call was also free?

    That said, I never entered the maze of credits, nor do I plan to. I think you can guess the main reason I use skype. So I tend to agree with you that the business proposition is not as clear as it could be.

  34. James says:

    And now their latest ill-advised, wildly over-priced, $8.6 billion purchase of Skype. It is their attempt to buy their way into the Smart Phones, yet another innovation they missed. It is their attempt once again to purchase relevancy.

    —-

    Frankly, I don’t know if this assessment is correct or not. I recall when everyone had given Apple up for dead, and when IBM was getting knocked off its perch by Microsoft. And this is coming from someone who has loved to hate Microsoft for years, having used their products extensively in my business (products, incidentally, which have gotten better year after year . . .).

    My only wish here is that they don’t muck Skype up. I have also increasingly used that product – which was often dismissed early on, for what it’s worth – in my business and personal life, and I would hate to see it morph into another rich fat kid.

    Time will tell on all counts.

    James (Redmond, WA)

  35. rip says:

    Agree with most of what you say.

    While MS may have contributed to the dot.com bubble, their’s was not the major causes.

    For that you have to look at the infrastructure insanity caused by the telcom law. Suddenly CLEC s and companies like Worldcom and Winstar were having money thrown at them by the billions with no chance off ever achieving positive cash flow, or cash flow at all. There was a entire generation of WS darlings that got flushed.

  36. BennyProfane says:

    @gariki

    Open your mind, dude, or, soon, you’ll just be another 50 year old guy trying to find a job in tech and blaming immigration or outsourcing or something for your plight.

    Apple is a “horrible company”???? Good lord.

  37. mad97123 says:

    Tell any large corporate IT department that Microsoft is irrelevant and just a marketing gimmick. They own the corporate space for reason.

  38. Dow says:

    Microsoft Office still sucks.

  39. BPLipschitz says:

    @Taylor:

    To me, the greatest “what-if” is, what if IBM had marketed the crap out of OS/2 Warp? They had an OS that made Windows 95 look like the POS that it was.

    Think of how much further along computer software could be right now. . .

  40. Jack McHugh says:

    Your points about Microsoft on the consumer side of the technology business are well taken, as are the complaints about the company’s anti-competitive behavior in the 1990′s. And during the last 10 years, MSFT’s biggest failure was Vista. It stunk and it hurt every aspect of MSFT’s consumer offerings.

    But remember that Microsoft mostly caters to the enterprise, the business side of technology. You should read Bill Fleckenstein’s take on the Skype deal in last night’s Rap. If you don’t have access, I’ll ask Bill if I can send it to you. You might be surprised, especially since Bill used to disparage MSFT until 2 years ago.

    Jack

  41. SivBum says:

    Rumor has it that msft is paying double the bids from goog and facebook (msft owns part of). But it is funny money. The tax lawyers and accounting firms will structure the deal to net out much less after all those expenses and write-offs. Wonder if msft can offset those foreign profits parked offshore for the past 5 years.

  42. JimRino says:

    GOOGLE: Saves Microsoft Daily.
    Let’s not forget, that being the largest producer of second best software does have an advantage:
    - You can Always Search Google, to find a Solution.

  43. JimRino says:

    I like “what-if”‘s too.

    What if INTEL bought AMD, and used AMD’s ability to put advanced Computer Science ideas into silicon, with Intel’s Process Technology!

    What if Apple gave Objective-C the grave it deserves, and converted to a Java computer, or at least the language syntax, it could 10X it’s developer base.

  44. Mike B says:

    Your memory is biased.

    There were plenty of software companies in the 90′s that made millions.

    Wordstar and Wordperfect competed with Word for decades.

    Acrobat, Ventura Publisher, Corel Draw, Lotus 123 and Notes and game companies by the dozens also made money.

    Many of these companies went under, and in large part because of Microsoft’s licensing agreements, but the thing you seem to be missing is Microsoft was better at delivering to it’s core market: business. Did they always deliver the best software? Maybe not, but they delivered the best certainty. In the nineties the oft quoted slogan was “Nobody ever got fired for buying Microsoft”. Business like having one place to go for most of their software.

    The innovations you point to are all in the consumer market. That’s kind of like saying while other companies were innovating with increased fuel efficiency and safety, Lamborghini never made a decent mid-sized sedan.

    And perhaps without “The Question” the software industry would not be as advanced as it is now. Yeah, the threat of competition from Microsoft may have held back small business innovators, but it also may have spurred the creation of the “open source” movement. Talented people working together to solve problems not for money, but for the admiration of their peers have come up with some amazing code. Both Microsoft and Apple have ditched major parts of their proprietary operating systems in favor of algorithms taken from Linux. And just maybe, without the lack of faith in innovation from venture capitalists, the open source movement might not have gotten off the ground.

    I’m not saying Microsoft was great, they’re another me-first-to-hell-with-the-rest-of-you company, for whom violating the law was just figured in as a cost of doing business. I’m just saying the effect of Microsoft wasn’t all bad.

    But to your thesis, that Microsoft caused the dotcom bubble, I don’t think you’ve proved your point. How did Microsoft inflate the value of companies that it wasn’t perceived as being in competition with? And if there wasn’t a Microsoft depressing an investment in software in the 80s and 90s, wouldn’t there have been a software bubble as well? Was it venture capitalists that overestimated the value of the dotcoms? or was it the public trying to get in on what they saw as the ground floor of a new type of product?

    – Mike

  45. Mike B,

    Wordstar disappeared many years ago

    Eventually, Word Perfect was bought and sold repeatedly, before fading into irrelevancy

    Lotus 123 was bested by MSFT with Excel, in large part because of the “free” version that came with windows

    Your strongest point is their appeal to the Enterprise — but put that into context of how that happened. If it wasn’t for that clever clause, they may never have had the opportunity to become the enterprise vendor of choice.

  46. CorpratismNoMore says:

    MFST+RIMM+SKYPE = an interesting possibility jump ahead of the curve.

  47. alanw says:

    “I would not be sanguine about Google. They don’t have the business expertise of MS, or IBM for that matter who really know how to play the game, and they don’t have the consumer electronics expertise of Apple. They are a company of engineers, and there are discernible cracks emerging in the edifice….”

    The counter argument, though, is that as a company of engineers, Google creates really cool stuff and has a decent track record of buying really cool stuff… and then giving it away, since the company is built on advertising. Facebook, on the other hand, depends on the network effect, which is powerful, but lacks the durability of Microsoft’s monopoly built on a legal trick that Barry mentions.

    That is to say, it looks to me like Facebook is more like Microsoft than it is like Google, which means that competitors will eventually out-innovate it and marginalize it. Of all the big tech players, Apple seems like the most vulnerable, being built more on an attitude than an ecosystem.

  48. new slang says:

    I’m interested to hear what people think of this deal’s implications on Nokia?

  49. mad97123 says:

    Perhaps the ‘Clever Clause’ gave MST the opportunity to dominate the enterprise space initially, but they still have to deliver products that remain relevant 20 years later to continue to dominate it.

  50. Mike B says:

    Barry

    But how do you answer the question of who is really responsible for the dotcom bubble? Was it venture capital money, or the public’s that inflated the value of dotcoms?
    Did MS force the money that would have been invested in software development to stay on the sideline for a decade or more and then like a dam bursting, it all flooded in when internet startups started?

    I readily concede that Microsoft cheated. And that what they sold was not superior software, but a feeling of reliability. I just don’t see how that makes them responsible for the dotcom bubble.

    -Mike B

  51. Mike B

    I was taking license when I said they caused it –its more accurate they indirectly were a significant contributor.

    But the point that during the pre-internet, desktop days, MSFT was a huge impediment to start up firms is not exaggerated. It was very very challenging to fund new projects

    Compare it to today or the post 1995 era — the funding situation is enormously different

  52. Bob A says:

    xxxxThe rich fat kid just wants to be cool . . .

    the middle-aged balding rich fat bozo wants to be cool.. and never will

    this is why God made golf courses.. and bridge

  53. Lee Mathews says:

    Why Microsoft Spent Billions to Acquire Skype

    For starters, Skype has a massive user base (in the hundreds of millions) and a healthy revenue stream (closing in on $1 billion annually). Both numbers are impressive, and they’ll only increase as Skype becomes more readily accessible on mobile operating systems and additional wireless carriers. Microsoft did, of course, promise Skype for Windows Phone 7 last month — and that’s guaranteed now that Skype has been acquired. Windows Phone 7 needs some marquee apps, and Skype is certainly one of the most highly sought-after. While iPhone users might have Facetime, Skype will give WP7 users the ability to video chat with friends across a number of platforms using an app they’re already familiar with.

    Another attraction for Microsoft is Skype’s interoperability with another close friend: Facebook. Skype added the ability to SMS and call Facebook friends back in October of 2010, and coupled with Windows Live Messenger’s Facebook integration, Microsoft has a very formidable presence in app-powered communication on the largest social networking site on the Internet.

  54. Andy T says:

    I was under the impression that Alan Greenspan caused all of our bubbles with his “easy money” and lack of regulatory oversight.

  55. donna says:

    Oh, so good. Can you write another on the evil that is Oracle, please?

  56. All due respect, this is a pretty inaccurate, heavily hindsight-biased take on not just MSFT (who is, like any tech behemoth, guilty of uncountable sins against tech itself) but the evolution of “personal” “computing”. In the bad old days of the 20th Century, consumers–especially businesses, but individuals too–needed someone to pull together the many components of an infant industry with an exploding and unmanageable growth cycle and make them _relatively_ easy to use. It was a crisis of stupid usership, and MSFT’s great genius was to put together systems for dummies where no one else was.

    The rules have changed a lot, but dotcom 1.0 was just stupid-usership 2.0, and what we’re now in the middle of is 3.0 or 4.0. Despite enormous money and endless analytical ink, the main engine of tech from a dev perspective is still getting things that work well built and in use. We don’t master it, users don’t understand it, and the endless parade of commentators has more in common with political punditry than critical thinkers. MSFT is making a host of decisions, stupid and smart, as we speak, but the evolutonary battle has always been beyond them. No doubt in 10 or 20 years someone will be writing about how AAPL and GOOG did too. Tech, happily, does not care.

  57. Scott F says:

    A friend and fellow long this morning, after I sent him your post.

    The “lack-of-innovation” issue IS a real one IMO. But it’s true of almost all big companies. What was the last HPQ innovation? IBM, ORCL, CSCO? Or the whole mega-health care complex? As a group they spend many, many tens of billions in R&D and get little out of it. But the L-o-I issue is just brought up as a selective negative in any case. And never when a stock is going up.

    These companies are technology factories. And they know it. Even if they don’t admit it – even to themselves. They should all be spending less on internal R&D and much more on internal VC. They should be getting the market intelligence and early round pricing. Even MSFT could have paid less than 50% for Skype less than 2 year ago.

    At least today’s tech giants understand (but don’t admit) the reality of the situation. Early innovators – EK, XRX, PRD and the rest of the BUNCH believed their own BS all the way to the bottom. They never turned their one-time IP bonanzas into cash rich/cash generating technology factories.

    It’s interesting that our foreign competitors mostly went the EK way. The “profit share” of most major technologies – computers, semiconductors, software, entertainment, internet based, telecom (smart phones!!), etc. – are accruing to US based (if not taxed) interests. Mostly held (including options) by US based individuals or institutions.

    Now….how much am I bid for a cash generating, but not super innovative, cash machine?

  58. rip says:

    @BR: You missed a key issue: Adobe.

    IMHO the desktop market is split. MS takes the business networking side and Adobe takes the Graphics art, advertising, illustration side by virtue of Adobe’s lock on graphics art software, which MS can’t touch. But the Adobe side prefers Apple which is probably the bulk of their desktop sales. IMHO, Adobe coupled with Apple conquer because they provide job security. Adobe software caters to graphics expert professionals, not casual, non-graphics expert users as Office did. The learning curve is very steep, and the sweat is in feeding Adobe software all the required “properties”. When Adobe bought Macromedia, the deal was sealed.

    That and Academia’s elitism attitude for Apple.

    The irony is Steven Jobs hates Adobe, particularly Flash, but it captured the market for animation and video so well Apple is in a very deep whole trying to muscle the market away from them.

    Not sure HTML5 will get it done.

  59. bob chartain says:

    Doesn’t anyone remember Ballmer ranting as how he was going to take out Google just as he had taken out a hundred other companies? The Valley is full of wounded players – Eric Schmidt of Google was taken down twice by MS. Microsoft single handedly set computer development back by at least 10 years by squashing innovation. My own experience is partnering with Go to develop digital signing many years ago and we were trashed by MS.

  60. sangfroid says:

    @StrictlyDownvotes Says:

    “May 11th, 2011 at 9:35 am
    Barry, you are wrong. Microsoft’s innovations just aren’t as visible because they are targeted towards developers, rather than consumers. Their genius is to make sure that Windows is the easiest and most profitable platform for software programmers like myself to target. As a result, there’s a a diverse and high quality ecosystem of programs that run on Windows. Microsoft’s innovations are things like the .NET framework, Visual Basic and DirectX.”

    Sorry, no go. Microsoft .NET is a direct copy of Java and its associated technology and philosophy…What MS had before Java came along was COM and C++. ASP.NET is a mirror copy of JSP and how it works. Most open-source programmers don’t take MS programmers too seriously because of all the drag-and-drop paradigm.

  61. jj2me says:

    I gotta agree about the irrelevance of this Skype purchase. A day late and a dollar … whoops, can’t say short dollars and billions in the same breath.

    Who needs Skype? I’ve been calling free VOIP in the U.S. on my Android phone (free Google Voice + sipdroid app and free sip provider) using wi-fi (3G quality is not so good) for months. There are also sip providers that charge a small amount per month, or go with Skype, no difference.

    Or Ooma device for $200, or Obi110 for $50.

    Video competition won’t be difficult, either.

    Sure, current embedded base and all, but how long will that last when there are $$ to save.

    As Barry said, things are different now.

    Or is it less stupid and more sinister? Like buying Skype to get another lobbying wedge (FCC)? That’s the new American marketplace: stacked markets, not free markets, and Microsoft knows something about stacked markets.

  62. DL says:

    MSFT may be fat and lazy, but I don’t see them being kicked out of the DJIA any time soon.

    ~~~

    BR: You usually need to be near obsolesence (Kodak) or bankrupt (AIG, GM) for that to happen

  63. Microsoft Just Pulled Another “Microsoft” with its Purchase of Skype

    Microsoft had the chance to buy Skype for a long, long time. eBay would have parted with Skype for a fraction of $8.5 billion as recently as 2009; in fact it did, it sold 70% of it to private equity, valuing Skype at $2.8 billion, a third of what Microsoft is offering today. Skype only generates $800 million in revenues, putting today’s price tag at over 10x revenues and some much, much larger multiple of earnings – a very lofty valuation.

    Microsoft falls into the broad category of high-quality stocks that were incredibly expensive in 1999 and have not gone anywhere since (and have often declined, as is the case with Microsoft). But most stocks in that category – take Wal-Mart, Cisco, Medtronic, etc. – have seen their earnings and revenues triple and P/E’s collapse. So before we run to crucify the management of these companies and call them “value traps,” we should actually take a careful look at their fundamental performance. Management did what it was hired to do: it increased shareholder value by growing the business while maintaining or increasing the moat. It is the shareholders who overpaid for those stocks in the ’90s. Management is not at fault for that, human greed is.

    However, ten years ago Microsoft was an icon, it was a star, it was the company that any self-respecting software engineer wanted to work for. Today, with current management’s help, it is slowly becoming a has-been. In fact, when I think of Microsoft I often think of a quote from Warren Buffett (Bill Gates’ best friend), who said he wants to own a company whose business is so good and whose moat (competitive advantage) is so wide that it could be run by a monkey, because someday it will be. Buffett, though he’s the Oracle of Omaha and all, probably did not know at the time that he was talking about Microsoft (bing it: “Steve Ballmer Monkey“).

  64. TripleSigma says:

    “The rich fat kid just wants to be cool . . .”

    Haha!!! So well said, one sentence has never described a situation so perfectly….

  65. James says:

    > Who needs Skype?

    “Skype is a leader in Internet voice and video communications, with 170 million users each month connected for more than 100 minutes on average. In the last year or two, video use has surged, now accounting for 40 percent of Skype’s traffic.”

    http://www.nytimes.com/2011/05/11/technology/11skype.html?hpw

    It may be easy to dismiss this deal, but I wouldn’t be too quick on the draw. There was a time when it was even easier to dismiss Apple.

  66. wildebeest says:

    @rktbrkr FWIW IBM also offer a build of Open Office. I think it is called symphony.

    re: mentions of excel above

    I remember have an animated discussion with someone about 8-9 years ago who said he’d never use Apple because Excel doesn’t run on it. I pointed out to him that Excel was developed for Apple and then acquired by MSFT.

    I know of a company that has had flat revenues of ~30 million per year that MSFT tried to get a stake in back in 2010: offered 200 mill for 40%. MSFT (Yahoo is another) just seem to throw the valuation book out the window when they buy things.

  67. WaltFrench says:

    Perhaps the most damning fact about the Skype acquisition is that it is being touted as “enhancing” voice services that Microsoft already links into shared services— it brings essentially NO new capability to Microsoft, just a different implementation than they’ve had for years and done nothing with.

    They are adding to their portfolio that includes the formerly-biggest manufacturer and the previously hippest teen TXT device. Something that will provide zero incremental income (losses, actually). The two likely target uses are home users who want a videocall, (a feature now bundled with smartphones at no incremental cost), or dirt-cheap international calling, competing against ultra-low-cost calling cards. Perhaps they think a few years of giving away the service can drive out the free competition due to network effects, but it’s hard to see why MS can do what Skype failed to do as an independent.

    So I think the buy is primarily to show shareholders that MSFT is aggressive in the mobile space, its invisible market share notwithstanding. If I were Steve Ballmer and cared not one whit for shareholders’ ROI, I think I’d have done it, too.

  68. WaltFrench says:

    @MikeB, I worked closely with other word processors. They did very well until MS managed to exploit the monopolies @BR cites. I can specifically recall a bake-off in InfoWorld where Word’s access to Windows internals was presumed to make it work better, and they upvoted Word into first place on the belief that Word would get preferential treatment. (That treatment was documented in the anti-trust trial where it was known as “tying”).

    @wildebeest, Microsoft’s first spreadsheet was MultiPlan, implemented to be available on many OS platforms. Wikipedia will tell you that Gates is quoted as having said they sold more on the Mac than anywhere else. But shortly after they built Excel; by designing it more for specific hardware (there were both Mac and PC versions, IIRC), they could compete more on the merits against 1-2-3, which out-performed Multiplan.

  69. philipat says:

    Doesn’t that IBM decision qualify for a listing under “Really Really Bad Calls”?!!

  70. Mares says:

    Brilliant article, and very astute analogy. I’ve said for years now, Microsoft is and was never going to be anything other than a one trick pony. Bill Gates was never the genius he’s been painted as being, and the way he’s run Microsoft shows that fact. He stole and adapted other people’s work, and was incapable of coming up with anything new after the fact. I’ve come to believe that because of his tremendous ego, and his desire to prevent anyone new coming along and showing him up, Gates has sought to displace the true inventors and innovators from the tech jobs in his company, replacing them with uneducated and substandard foreign workers and ensured that others had to do so as well, to ‘compete’.

    So Gates sole focus is increasing his wealth, and undermining the wealth and potential for wealth of others. I see him as the rich fat kid, who isn’t so much looking to buy his way in, but in pushing his weight around, so jealous of others, and resentful of real abilities in others. What’s more, given that his own market share is declining, he’s developed a sense of entitlement for corporate welfare. He’s demanding the US pay him hundreds of millions of dollars to pay for his own business expenses. His expansion into Sri Lanka and other countries. His so called Foundation doesn’t spend any money helping the poor, either here or any where else.. he demands the US taxpayer pay for his so called, ‘good works’, that he has the ability to profit from. His so called ‘AIDS prevention, was a scam, to profit from an AIDS vaccination, and the end result was exposed in the African and European press, it caused a wider spread of HIV and AIDS, and the death of untold numbers of men, women and children. His scam to get laptops to African children, he didn’t spend a penny on that, he got the government to pay for his so called inexpensive laptops, and they didn’t work.

    Gates bought Skype, he plans to loot the company’s wealth, and squeeze it of any life. Jobs will be lost, a company will be reduced to nothing but a shell, and then cast upon the scrap heap when the parasite Gates is done feasting upon it’s corpse. Bill Gates was a lousy student, a lousy worker. The spoiled son, of a spoiled father. Gates only got where he did, because of his own wealth, and the fact that he has never been called to account for what he’s done.

  71. BarryW says:

    Finally, someone has laid out what I’ve believed for decades. Microsoft, bought, stole or copied nearly everything that they have been credited with. Someone made a comment that they must be doing something right since big business almost exclusively used their products. Don’t forget the reason Microsoft is in the business world in the first place is because of IBM which dominated corporate IT. Without that initial impetus Gates would have been an also ran still writing Pascal interpreters. IBM was noted for their handholding of corporate IT and they in turn danced to IBM’s tune, so that made the PC the platform for corporate use. IBM didn’t realize that they were creating the entity that would eventually make their big iron obsolete. Don’t get me wrong, Gates is a business genius. However he is not in any sense of the word a innovator. Anybody remember “Bob”?

  72. nathanbutnet says:

    Barry, great analysis, but they are not the only one:

    http://www.salesforce.com/company/news-press/press-releases/2009/10/091012.jsp

    Dell is getting desperate for a margin methinks.

  73. readerOfTeaLeaves says:

    The MSFT v Apple wars tend to border on the religious, and in sane moods I steer clear.

    But I think BR is probably underestimating the *potential* of the MS-Skype deal.
    Google ‘Stephen Elop’, former COO of Macromedia, which while he was COO developed Flash and other web-targeted graphics software, including digital video. Elop went to MS in 2008, remaining there until 2010 when he went to Nokia. While at MS, he was head of the Business Division.

    What does this have to do with mobiles and networks?
    Macromedia (now Adobe) was farther ahead of MS in developing for mobiles, so Elop probably came to MS with that background. He’d have arrived at MS after Apple released iPhone, but he would have arrived at MS from a company that helped invent the user interface layer of mobiles.

    Nokia used Symbian OS, although it appears that under Elop’s leadership Symbian is now to be ‘killed off’ and Nokia will use the Windows Phone OS instead in its top line phones. (Unclear what this may mean for Nokia devices other than phones, although one of the outcomes is ‘Nokia gets Big Money For Patent Use’ from MS – infusing Nokia with capital.)
    Google ‘Elop’ + “burning platform’ for more intriguing details.

    Now, add on Skype.
    Nokia phones running on Windows Phone OS, and it looks like MS may have — depending on how one views it — more security in the system, or more monopolizing power.

    Either way, looking at MS + Skype without also putting Nokia into the picture seems to be leaving out a very large piece of the potential puzzle.

    Note also that Macromedia — a splendid little company pre-Adobe — was creative and focused on multiplatform apps before there was much of a network to support apps (Flash was first out of the gate).

    Macromedia put a lot of emphasis on ‘ecosystem’: the developers, the platforms, the products all interconnected. Jobs has said much the same thing: to develop strong platforms all these companies need to create an ‘ecosystem’ that attracts the best developer talent.

    By combining with Nokia, MS opens their app ecosystem to anyone who can then target WP, along with Nokia: duplicate revenue streams always beat solo. Add onto that the potential to integrate Skype and I wouldn’t be as quick to condemn as BR appears to be.

    ———————-
    Reactions to earlier comments:

    Whoever said that HTML5 doesn’t pose a deep threat to Flash…. well, I think they may want to take a second look.

    HTML5 is the first major upgrade since about 1999, and HTML5 offers native audio and video. Which means that plugins like Flash Player are no longer needed; HTML5 allows interactivity and also animation, so one has to ask what value Flash has as a result. This is not good for Adobe, but Flash is on lots of things and will probably remain around as a legacy feature — and no doubt, puts Adobe in MS’s arms (and in Nokia’s arms) to ensure that WP and Nokia both run Flash built apps.

    WebKit is used in Chrome. It is also used in Safari, so to claim that WebKit is simply a Google enabler is not accurate. WebKit is open source, and Google and Apple took it as the base and built on top of it.
    MS, on the other hand, decided to keep its proprietary structure wayyyyyy too long, so got behind the other companies – poetic justice, karma, call it what you like, but it means that IE has tweaks the others do not.
    No doubt the Nokia + WP deals are intended to make IE stronger in the mobile space; how they’ll do that is above my pay grade.

    It may be that the technical and organizational issues will be too complex for MS + Skype + Nokia to work smoothly, but it’s an interesting combo.

    And I have no vested interest in MS, and am an avid Mac-Apple user myself. In terms of user experience and support, IMVHO Apple is a far superior company.
    But I don’t dismiss the Skype move lightly.

  74. V says:

    Well they may have overpaid, but look at it this way, at least they get something, which if they integrate it into Microsoft products has the potential to add some value. People do still talk about ‘Skyping’, same as people Google, Tweet, Facebook etc. Facetime isn’t quite there yet, and of all Apples innovations, theres something odd about the term Facetime that I can’t put my finger on.

    Alot depends on what Skype developers can up with once the R&D purse strings are loosened a little.
    Making this VoIP segment profitable in it’s own right is probably the biggest challenge to be overcome, whilst not trying to get the big Telcos offside.

    I thought the AOL-Huffington Post deal was far worse. $300 million for some voluntary authors and reposted links.

  75. V says:

    Another slightly difference perspective to your piece, is that as object orientated programming has developed it has become easier for the programming (or even non-programming) community to create programs and create API’s etc, whereas back in the day this wasn’t so easy, proprietary code or not. Paradoxically Microsofts development tools along with Sun probably kick-started this development wave.

    Whilst I agree that MSFT has stalled innovation both internally and of others, there are also many successes, especially commercially, embedded payment systems, software from Adobe etc.
    MSFT have ‘tried’ to be innovative at times, but Bill Gates was probably a decade too soon, remember MicrosoftTV back when everyone was still on dialup, or those 80′s style tablets running Windows 3.1.
    MSFT was up with the play with touch screens but failed in it’s decision to pitch Microsoft surface at the commerical sector, who didn’t want to shell out $12k for a system etc

    The current opensource model we have is interesting, as more top-quality ‘free’ software is created, the income stream has to be broadened away from the old retail model. Apple has done this best with it’s micro-payment ‘app’ model, which mixes affordability with high quality product.

  76. [...] Microsoft caused the dot-com bubble. (Oh, and the skype deal is [...]

  77. Uchicagoman says:

    Personal taste and “coolness” aside, it’s hard to say Microsoft isn’t a successful, well-run company.

    It has grown into a company that treats its employees well and has a measured approach to innovation and risk. It has a HUGE IP portfolio and invests heavily in R&D. And it produces highly successful products.

    Certainly it has had many failures. But it couldn’t call itself a tech company if it didn’t. Most importantly, Microsoft is the default and a critical tool for most.

    I LOVE my iphone (in fact I think it is the single greatest consumer product ever built!) also love my iPad for that matter, but I am yet to be compelled to purchase an expensive Apple laptop or desktop. Windows 7 + Ubuntu is fine for me, and at half the price.

    As for Skype, eh, why not?

  78. Uchicagoman says:

    @Mares :

    Why the Gates hate/envy ?? Kinda pathetic. He’s a f***ing smart geek that knows how to run a business. I don’t think Buffett would throw away his fortune to what you described.

  79. post-apocalypsed american says:

    WOW!: I think Gate’s and his Uncle Warren attempted to run-the-table in acquiring enough ownership interest in The Washington Post (plus befriending the Graham’s) to be appointed to their board-of-directors until recently when Buffet, I guess in disgust, resigned. But that’s another story. In any case, it seems like Balmer gets so wound up (I imagine when you’re worth tens-of-billions the adrenaline gets pumping, plus add caffine) and next thing you know you’re offering $45 billion for Yahoo! Yesterday on Forbes.com a photo of Gates was captioned, “Bill Gates, energy investor and thought leader”. Bill’s background is in computer programming, right? But after a trip through the courts for abusive business practices he vacated the executive suite. And so now he’wants to play in the ” Geopolitical Know-it-All” sandbox (with MS/NBC in support). One assumes the philathropies do good work, and Microsoft produces useful products. But ultimately (like Obama) Gates loses style points for narcissicism because it’s a form of domineering arrogance that can often lead to underperformance. Which is the point of BR’s insightful commentary. Myhrvold, Allen Ballmer Gates…they all do good work, but there’s also some
    overreach. That may have been celebrated in the 80′s, but given today’s often grim realities it instead makes them fat targets for criticism.

  80. bedhead says:

    Barry, didnt you just describe Google? They never invented anything, they’re basically a one-hit wonder that was merely an improvement on existing stuff, other search engines now work just as well, everything other than search has been bought late, failed, or missed entirely. I’m sure there are some interesting legal maneuvers behind the scenes as well.

  81. Evan Newmark says:

    Mean Street: 8.5 Billion Reasons To Fire Steve Ballmer

    why is this man still CEO? That’s just how bad this deal is.

    It’s one thing for a CEO to convince himself that a deal is “strategic” – even if he’s buying a money-loser with no proprietary technology and no viable business model.

    But it’s another for him to bid against himself and end up forking over $8.5 billion in cold cash to buy said money-loser – three times what it fetched a year and a half ago.

    That’s unforgivable.

    Why the Microsoft board is happily going along with this folly is a mystery to me. Then again, this is the same board that blessed Ballmer’s profligate $48 billion bid for Yahoo. Such is the fate of a company with too much money, too few good ideas and a share price that can’t break $30.

    It may seem harsh to condemn Ballmer for a smallish deal (Microsoft’s market cap is over $215 billion) that is still months from closing. But it’s impossible to ignore both the circumstance of the Skype deal and what it symbolizes.

  82. danburns says:

    Until there is a viable play in the enterprise space, it’s all just sour grapes. The other options are crap that doesn’t work well, if at all, or you can lay down all your capital to kings IBM and/or Oracle. Say, what you will about MS in the consumer space, but until someone makes better products at a very competitive price point and/or the cloud matures and proves itself stable enough for SMEs, MS isn’t going anywhere.

  83. kaleberg says:

    Microsoft is in the same situation IBM was in before they ot rid of their operating system based monopoly. The operating system was OS\360, and god knows it was a primitive, fragmented beast, even when compared to the operating systems put out by its competitors, Honeywell, NCR, Univac, Burroughs and the like. Using OS\360 required an early 20th century mind-set as if everything one did involved doing something to a deck of punch cards in fixed, batch oriented processes. Mind you, this worked for big companies who actually did think that everything was a big deck of punch cards. Otherwise, they were amazingly anti-innovative, Watson Research notwithstanding.

    Like IBM, Microsoft was beset by antitrust lawyers, and when they decided to roll out their PC, developed down in Boca Raton, FL, not Armonk, NY, they also decided to jettison the whole operating system monopoly thing. (Did you ever try to program an RCA Spectra? It was like programming an IBM 360, except with RCA on every page of the manual. Some guy actually set off a bomb on 5th Avenue bitching that OS\360 hated Puerto Ricans. He was wrong. OS\360 hated everybody.) I wondered what IBM’s next step would be. The PC was almost an accident, but everyone knew it was going to be the new standard, and whoever developed its OS was going to be the new IBM.

    Amazingly, IBM ditched the whole PC thing. That was an incredibly smart decision. In the early 90s they declared that the last thing they needed was a corporate vision. (I bought the stock on the strength of their no-vision statement. I figured they knew what they were doing.) Then, I had to port some program to the IBM RS-6000 or whatever workstation and the C compiler dumped out 1,000s of warnings about my lax adherence to ANSI C standards citing chapter and verse. IBM was serious. That’s when I upped my position. I knew IBM was going to be a player.

    Right now Microsoft is thrashing around. They say having rich natural resources makes you fat and stupid. Microsoft has a rich natural resource, and they’ve become fat and stupid. They still own the enterprise market, but they still envy the consumer market. When they ditch that envy and concentrate on what they are really good at, they’ll start being and looking a lot more innovative. People who buy their own computers are leaning towards Apple, but companies buying big lots of computers and rolling them out for employee use lean Microsoft. That’s a big market, and it could be an innovative market. Ballmer and his gang should recognize this and focus on it. Alternatively, they could do what IBM did and spin off their OS business and pass it on to a new bunch of billionaires. If Microsoft has the sense not to develop a corporate vision, they might do very well.

  84. David Pogue says:

    The Future of Skype

    Well, you heard the news: Microsoft is going to buy Skype for $8.5 billion. It’s the most money Microsoft has ever spent for anything.

    Analysts — the ones who think the deal is a good idea — say that Microsoft can use Skype’s voice and video technology to build into its products, like Windows and Kinect.

    But that’s such a weird analysis, since Windows and Kinect already have voice and video built in. Hello? NetMeeting? Windows Live Messenger?

    The difference, of course, is that nobody used those programs. At least not compared with the 170 million people who use Skype every month, including close to 9 million of them who actually pay for the service. (You pay, for example, if you want to make voice calls to telephone numbers, rather than other computers or phones.)

    “It’s an amazing customer footprint,” Ballmer said in a Times interview. “And Skype is a verb, as they say.”

    And so is “Google.” I’d be willing to guess that this purchase was as much about “look what we’ve got, Google!” as it is about Microsoft’s technology strategy.

  85. [...] about right. Barry Ritholtz piles on:  Microsoft has missed just about every major trend in computing over the past decade. They missed [...]

  86. Greg Burton says:

    Not sure when the phrase “The road to Silicon Valley success is littered with the bones of Microsoft’s ‘partners’” was coined, but sometime around ’88 as I recall. Too, the world would have been very different if Gary Kildall had handled things better at any number of points. It’s a long discussion of should, woulda, really.

    I don’t think you’re wrong at all. There’s just more to the story.

    Regards,
    Greg

  87. [...] know enough about the tech market of the ’80s, ’90s, and today to accept or reject this Skype-occasioned version of the rise of Microsoft from Barry Ritholtz, but it’s a story worth considering.  The whole thing is worth reading.  Here are a few [...]

  88. curmudgeon2000 says:

    Although I suspect few people will read this comment at this
    late date, I am compelled to correct the many, many flaws in
    your thesis that invalidate the conclusion. My background: I
    have worked with computers for decades, and spent much of the
    1990s toiling in the IT trenches on contract at various
    well-known big companies.

    “The first PC was given to the world in 1980 by IBM.”

    False on every count. IBM introduced its PC in 1981, but the
    personal computer business was already at least four to seven
    years old at that point — and possibly even older, depending on
    where you want to set your ruler. Apple famously displayed its
    cheek that year by running print ads that welcomed IBM to the PC
    business. Visicalc was the killer app then, and the Apple II
    was the preferred platform for it.

    “They pre-installed Office in Windows”

    “Lotus 123 was bested by MSFT with Excel, in large part because
    of the “free” version that came with windows”

    False again. Neither Office nor Excel were ever included in any
    version of Windows. Indeed, the Office products have long been
    Microsoft’s cash cow, and they would never give them away. It’s
    possible that some PC manufacturers bundled the inferior, crippled,
    partially-compatible Microsoft Works suite with their machines,
    but again, that was never included as part of Windows.

    “Throughout the 1980s and even more so in the early ’90s, all
    manner of potentially competitive software products were
    conceived elsewhere. yet many of these were stillborn. Why? They
    had a very difficult time getting funding or venture
    investments. One question — “The Question” — was a perennial
    problem. In Silicon Valley, in Venture Capital conference rooms,
    in garages, in the offices of potential start ups, “The
    Question” resonated again and again: ‘What about Microsoft?’

    “But the point that during the pre-internet, desktop days, MSFT
    was a huge impediment to start up firms is not exaggerated. It
    was very very challenging to fund new projects”

    Again, your timeline is seriously flawed. Allow me to set you
    straight.

    The 1980s were a wide-open time in the PC software business, and
    Microsoft was nowhere near as dominant as you state. Both CP/M
    and later DR-DOS had significant market share, although MS-DOS
    was number one. Windows versions 1.0 and 2.0 were released, but
    they were both dogs that nobody bought. Microsoft had even less
    success on the application side. Both Word (for DOS) and Muliplan
    were also-rans. The winners were Wordstar and then Wordperfect,
    Lotus 1-2-3 and perhaps Quattro Pro, and Ashton-Tate’s dBase.
    Even Microsoft’s language tools took a backseat to compilers
    from Borland.

    Windows didn’t begin to take hold until version 3.0 was released
    in 1990, but even then a machine with sufficient memory and
    speed to run it properly cost around $2,500, which impeded its
    wide-spread adoption. Hardware costs were lower by the time the
    refined Windows 3.1 came out in 1992, but there still were
    several less expensive, less resource-intensive alternatives
    such as Desqview or GeoWorks that were popular in the home
    market.

    While Windows 3.1 running on DOS was firmly established as the
    dominant environment by 1993, the application space was still
    being fought over. AmiPro, WordPerfect, and Word were all
    viable wordprocessing choices, and Lotus 1-2-3, QuattroPro, and
    Excel were the top spreadsheets. Indeed, at some large companies,
    all of these programs were available and employees could chose
    which one they preferred. That didn’t change until about 1995,
    when finally Microsoft prevailed by making sweetheart deals on
    per-seat licensing agreements that excluded their competitors.

    And still there were areas that Microsoft didn’t dominate. It
    didn’t “win” the browser war with Netscape until about 1997-98.
    Outlook/Exchange didn’t overtake cc:Mail until around 1998-99.
    Ditto for Microsoft Networking over Novell. In sharp contrast
    to the picture you paint, Microsoft doesn’t gain its near total
    monopoly in business software until around 1999.

    As far as the Internet “revolution” is concerned, for those in
    the know it started in 1993. Back then the buzz words were
    things like gopher, archie, veronica, and WAIS. 1994 saw more
    widespread use of the Mosaic web browser. In 1995 Netscape
    rapidly gained prominence, Yahoo becomes a big name, and we’re
    off and running.

    Getting back to “the Microsoft Question,” the first well-known
    example of that tactic of preemption was the inclusion of
    DoubleSpace in DOS 6.0 in late 1993, which eclipsed the very
    popular Stacker software from Stac Electronics. (Microsoft was
    later found to have infringed and paid a hefty settlement.) In
    1995, during the hey-day of AOL, the inclusion of the MSN icon
    on the desktop of Windows 95 caused a big brou-ha-ha. And of
    course, there was the integration of Internet Explorer into
    Windows 98 that eventually led to the Federal anti-trust case.

    Given all these facts, I would refute your thesis by saying that
    Microsoft didn’t dominate the desktop software market as much as
    you claim for as long as you claim, and also that the Internet
    “revolution” was already well under way years before they became
    the leading player in nearly every market segment. In fact,
    “the Microsoft Question” was a factor for only four or five
    years — from about 1993 to 1998 — and it didn’t gain much
    notoriety until they started scrapping with Netscape. Certainly
    “the Microsoft Question” was asked, but it did not stop the
    truly innovative products — just the “me too” ones that were
    only incrementally better than what already existed. If
    anything, the question represented the maturation of the desktop
    software market and the inevitable consolidation that comes with
    it.

    “Microsoft remains hugely profitable today, but increasingly
    irrelevant.”

    The Xbox notwithstanding, Microsoft has always done poorly in
    the consumer electronics area. And with the the declining
    emphasis on desktops and laptops in the home, its sway in that
    market will decline as well. However, it will remain
    influential in the corporate market for many years. Not only
    because it offers the necessary enterprise computing
    infrastructure products, but because of the HUGE installed base
    of applications. Businesses use dozens and even hundreds of
    custom programs — some developed in-house, and many purchased
    from outside vendors. It’s the chicken & egg problem — they
    won’t be re-written to run on Apple’s platform (or Linux)
    because there’s no market for those versions, and there’s no
    market for those versions because they haven’t been re-written.

    Where I agree with you, Barry, is that Microsoft has a long
    history of buying, not creating its “innovation.” Its software
    in nearly every category is not the best, but it does
    demonstrate that people are willing to settle for “good enough.”
    I also agree that Microsoft’s dominant position is not due to
    the quality of its software, but rather its business tactics,
    many of which are decidedly underhanded. In particular, I think
    the anti-trust case focused on the wrong issue. The integration
    of IE into Windows was not as important as the Windows licensing
    agreements with PC manufacturers, the undisclosed APIs, and the
    exclusionary deals it made to eliminate competitors to its
    Office suite.

    One final note in reference to the mention of “Bob.” Bob never
    went away — it was re-incarnated as “Clippy” and the other
    animated assistants and/or wizards in subsequent versions of
    Office.

  89. Bill Fleckenstein says:

    I had not really thought of Skype as being an acquisition candidate for Microsoft, but after reading a number of articles discussing the details, it quickly became clear to me that this was a deal that Microsoft could not afford not to do. I have no idea what the right price for Skype might be, but we won’t know the answer to that question until we see what Microsoft does with it. I have a hunch that, over time, this price could turn out to be quite reasonable. One thing folks need to do is lop off about 30% from the actual price, as Microsoft will be using overseas cash it will not have to pay U.S. taxes on, since Skype is headquartered in Belgium.

    Bottom line: other than the valuation, which is not really worth worrying about given Microsoft’s cash pile and cash generation ability (i.e., potentially paying an extra couple of billion doesn’t change anything for Microsoft), this deal was a great idea and has a lot of potential. For what it is worth, I checked in with my good friend Fred Hickey and he was even more enthusiastic about this than I was — and he really understands all the moving parts.

    The Deal Is In the Details Rather than trying to explain succinctly why it makes sense, I would like to quote from an article at Extremetech written by Lee Mathews, which was the best synopsis of the ones that I read:

    “For starters, Skype has a massive user base (in the hundreds of millions) [roughly 700 million] and a healthy revenue stream (closing in on $1 billion annually). Both numbers are impressive, and they’ll only increase as Skype becomes more readily accessible on mobile operating systems and additional wireless carriers. Microsoft did, of course, promise Skype for Windows Phone 7 last month — and that’s guaranteed now that Skype has been acquired. Windows Phone 7 needs some marquee apps, and Skype is certainly one of the most highly sought-after. While iPhone users might have Facetime, Skype will give WP7 users the ability to video chat with friends across a number of platforms using an app they’re already familiar with.

    “Another attraction for Microsoft is Skype’s interoperability with another close friend: Facebook. Skype added the ability to SMS and call Facebook friends back in October of 2010, and coupled with Windows Live Messenger’s Facebook integration, Microsoft has a very formidable presence in app-powered communication on the largest social networking site on the Internet.

    “But while consumer uses for Skype are important, Microsoft is no doubt very keen on its enterprise-friendly features. Skype has become a leading collaboration and screen-sharing tool, and it also has a strong foothold in enterprise VoIP and nontraditional PBX systems. That presence bodes well for Lync, Microsoft’s unified communications server, which will no doubt receive a healthy injection of Skype integration.

    “Providing low-cost voice communications isn’t all that Skype has to offer businesses, of course. It’s a killer presentation tool as well, so when you add the red-hot Kinect and its slick motion capture abilities to the mix, the Skype-Microsoft combination easily becomes the go-to platform for video meetings and long-distance collaboration. Who wouldn’t want to reach over, grab a .DOC off their desktop, and fling it into a Skype window to zip that fresh quarterly report off to a satellite office?

    “Finally, there’s one other thing that Microsoft is sure to love about Skype: it’s much more visible and widely-adopted than Google Voice, and CEO Steve Ballmer is sure to be excited about anything that can slow or dampen Google’s recent successes.”

    Once again the financial markets, dominated by Apple and Google lovers, voted thumbs down, as Microsoft stock was initially spanked for a couple of percent before closing with just a 0.5% loss. Anyone who owned the stock up to this point and sold it on this news is really just letting their impatience get the upper hand. So continues this fascinating real-time example of contrarian/value investing.

  90. Anti-Trust says:

    Did the Microsoft Case Change the World?

    Remember when Microsoft ruled the PC industry? In the 1990s, its Windows operating system became so dominant that government trust-busters took it to court. They spent four years and millions of dollars making the case that Microsoft was unduly using its power to wipe out rivals in the Web browser business and other domains.

    The settlement to that case, which put limits on Microsoft’s behavior and imposed a decade of government oversight on the company, expired last Thursday. Almost nobody noticed. Given the furious pace of innovation by companies like Apple, Google and Facebook, an inevitable question springs to mind: Did the biggest high-tech legal action of the 20th century make any difference, or was it a waste of money and time?

    Critics of the settlement, and there are many, argue that the Microsoft case did little to change technological development; it was Google, the Internet and bad business decisions that put an end to the dominance of Microsoft. The conditions imposed by the court, to stop forcing consumers to use Internet Explorer and preventing rival software from operating properly on Windows, had little relevance to the future path of innovation.

    This seems too narrow a reading of history. It is, of course, impossible to say what would have happened had the Justice Department and 19 state attorneys general not taken Microsoft to court in 1998. But beyond specific conditions imposed on the company, the case did seem to alter Microsoft’s behavior, taming its ruthless drive.

    Government oversight not only swayed Microsoft to pull its punches, it sent a signal to other innovators that it was O.K. to work on technologies that Microsoft was interested in — something they might never have done before. Had Internet Explorer become as dominant as Windows, Microsoft could have held more sway over the development of new services on the Web.