Asay the Alfrescan

You want to know what keeps Steve Ballmer up at night? Apparently, not specific competitors, but rather competitive industry trends that strike at the core of Microsoft’s software license business model: open source, advertising, and software-under-the-guise-of-hardware. (Thanks to Brady for calling out the BW article.)

Ballmer says:

Who are Microsoft’s top competitors?

Guys who can touch us in multiple places probably matter more than guys who can touch us in any one place. And actually we don’t really have our big competition from any one company. Any one company, we know how to compete with. It’s alternate business models that we will have to embrace or compete well with. You give me any enterprise software company, O.K., and I’ll say c’mon. We know how to go do that. We do do that. And we’re really pretty good at it. We haven’t gotten any worse at it. Boom. Boom. Boom. We know how to keep coming.

[Take open source.] Open source is not a new technology area. It was a new business model. In the last three or four years, we have competed very well by extending our value. Open source never goes away as a business model or competitor. We have learned how to compete with open source, and we will compete with it for the rest of time. But competing with open source will have to be something that’s burned bright on the foreheads of our senior people.

The second big competitive force is advertising as a business model. Typically, people just want to reduce that to Google, and if you want to do that, you can. But it’s do we embrace advertising fully enough as a business model? Because at the end of the day, anybody who comes at you with a cheaper-to-the-customer proposition, you got to worry about. And advertising looks cheaper to a consumer than something you pay for.

In the case of open source, we couldn’t adopt the business model. We adopted a competitive approach that so far has worked very well. In the advertising case, we can embrace that model. We don’t have to sit here and say it’s that bad.

A third model I could sit here and write down on this list is that there are cases where software gets monetized through hardware. That’s what an iPod is. iPod is a software thing. You just happen to collect the money on the hardware. You could say in China and India, it’s unclear whether classic software will get paid for as much as advertising, hardware, subscriptions, etc.

So our ability to embrace and benefit from or compete with new business models—and I would say ad-funded and open source, more than this hardware thing—is more the way to categorize the key competitive dynamic for us.

Fascinating stuff, and I’d encourage you to read the rest of the interview, too.

This isn’t revolutionary stuff (Clay Christensen has been talking about how to disrupt an industry for some time), but it’s interesting to hear the CEO of the world’s largest software company candidly explaining how to beat Microsoft. As with open source code, just because you have “the answer” doesn’t make it any easier to crack the code.

To disrupt a Microsoft product you have to cut off its traditional air supply. Open source is disruptive to Microsoft because it a) removes the one-size-fits-all approach that Microsoft imposes and b) the entry cost is $0. Microsoft knows how to disrupt with “free” (remember IE?), but it has yet to learn how to compete with someone else undercutting its prices by 100%.

Over the long haul, however, it’s going to be modifiability that beats Microsoft. This will sound odd to many, because the common industry wisdom is that no one wants to modify anything. We just want to passively consume software. My experience at Alfresco and Lineo, however, has been the complete inverse of this received wisdom. Many users want their Firefox customized to them. Many enterprises want their ECM customized to them. Etc.

Microsoft has been good about enabling a robust partner ecosystem to extend its products. The question will be whether it can allow its customers, non-customers, and non-partners to do the same. I don’t think it can, and I think that matters.

Slashdot carried a story earlier today entitled “Why Is Commercial OSS So Expensive?” He was referring to embedded software, and his experience is 100% contrary to my own experience. (My background is in open source embedded software.) He says:

Our startup honestly wanted to use OSS products. We do not want to spend time for any OSS bug fixing so our main requirement was -official support for all OSS products-. We thought were prepared to pay the price for OSS products, but then we got a price sticker shock….After all, we have decided that the survival of our business is more important for us then ‘do-good’ ideas. Except for that embedded Linux (slated for WinCE or VxWorks substitution), we are not OSS shop anymore.

Taking the author at his word - that commercial open source is, in fact, expensive (has he tried the alternatives?) - I think he’s asking the wrong question. Given that in his world the open source alternatives are actually better than their proprietary counterparts, his question really should be, “Why isn’t it more expensive?”

It surprises me that some people persist in wanting something for nothing, or next to nothing. Open source is about a superior software development and distribution methodology. It really has nothing to do with cost.

Today, it’s much cheaper. SugarCRM? A fraction of the cost of Salesforce.com, Siebel, etc. MySQL? Pennies on the Oracle dollar.

But maybe not forever. If in five years MySQL ends up being more expensive than Oracle (not sure how Marten and crew could find ways to jack up the price that much, but let’s assume he’s very creative , it won’t be for any other reason than the market will bear that price. And why would the market bear such price inflation?

Because it’s better software.

So, to the author of the article above, let me suggest that his projected switch to VxWorks or WinCE may get him exactly what he pays for:

Less.