Modular windows

There is a nice article on Ars discussing Microsoft’s business practices regarding windows and how they appear to be not quite working lately. It used to be that your PC came with windows whereas nowadays you have to select from a around five different versions and Microsoft is rumored to go to an even more modular and subscription based model. The general idea is to be able to squeeze out as much revenue out of the market as possible. On paper it sounds good (for MS that is).

Rather than buying an overpriced OS with everything and the kitchen sink you buy what you need. There’s a huge differences between what businesses and some individuals are willing to spend and the typical home user that just wants a browser + skype + the sims. Typically the latter group ends up buying the cheapo version and the former group ends up buying the everything and the kitchen sink version. The problem is that there is unmonetized value in the latter in the sense that some owners of the  cheapo versions might be interested in getting access to some of those features in the expensive version but not in all of them.

Now to the obvious problem with the discussed solution. By selling cheapo versions with most of the value removed and factored out into separate chunks you have to pay for, you dilute the overall value of the OS. So instead of buying an OS that can do X, Y, and Z out of the box you are buying an OS that can’t do X, Y, and Z out of the box. Marketing an OS that can’t do stuff is a lot harder than trying to sell stuff that can do things.  Worse they are opening the market to third parties that might do something similar to X, Y, and Z for a better price, or in some cases for free (beer & speech). Or even worse to companies selling an alternative OS with X, Y, and Z.

That in a nutshell is what is discussed in the Ars article and why Apple Mac OS X marketshare is approaching double digit percentages. I’ve been giving it some serious thought lately and I’m also noticing the spike in Safari users in my web site statistics.

Anyway, the reason for this write up is that the article overlooks an important argument here that I believe is relevant for more markets than just operating systems. In general, the tie between OS and features such as photo galleries, online backups, or TV UIs is artificial. Microsoft only adds features like this to make the overall OS more valuable. That is, they are looking to improve the value of the OS, not the photo gallery. However, ongoing and inevitable commoditization of software actually shifts value to new features. Especially when bundled with online subscriptions, things like online photo galleries can be quite good business. For example, Flickr has many paying subscribers.

Naturally MS is interested in markets like this (which is why they are interested in Yahoo). However, the tie-in to the OS constrains the market. Why would you not want to sell these services to Apple users? Why would you not want to sell this service to Sony Playstation owners? Why would you want to want to artificially limit who can access your service just to boost sales of your OS? As long as you were trying to artificially (and apparently for MS illegally) boost value of your core OS, bundling was a valid strategy. However, as soon as your value shifts, that becomes a brake on market growth. The OS market has commoditized to the point where you can get things like Ubuntu for free, which for the low end market is about as good as what you get with the cheapo version of Vista (see my various reviews of Ubuntu for why I’m not ready to claim better yet).

So the difference between MS and Google who is eating their lunch in the services arena is that the latter is not handicapped by 20 years of Windows legacy and can freely innovate and grow marketshare without having to worry about maintaining a revenue stream from legacy software. Google doesn’t have to sell OS licenses and so they give away software on all platforms to draw more users to their services which is where they make their money.

Naturally, Google has a lot of software engineers that are working round the clock to create more value for them. Where possible Google actively collaborates with the open source community because they know that while they won’t make any money from commodities like browsers, file systems and other important software components, they do depend on those things working as good as possible and keep evolving in the right direction. Few people appreciate this but this and not ads is why Google sponsors Firefox. It’s a brilliant strategy and it is forcing their main competitor to keep investing in internet explorer rather than being able to shift resources to directly competing with Google. 50 million $ is pocket money if it is making your main competitor crap their pants and waste resources on keeping up with you in a market where you are not even trying to make money.

You might have noticed that I have carefully avoided discussing Google and Microsoft’s mobile service strategies and also noticed that yours truly is working for Nokia. Well, my readers ought to be smart enough to figure out what I’m trying to say here aren’t you :-)?

Leave a Reply