Can Microsoft Regain Its Edge In Software?

When it comes to the software industry, few academics have the knowledge and expertise of Michael Cusumano. Specializing in strategy, product development and entrepreneurship in the software industry, Cusumano is Sloan Management Review Distinguished Professor at MIT's Sloan School of Management and has authored eight books, including "Software: What Every Manager, Programmer and Entrepreneur Must Know to Thrive and Survive in Good Times and Bad." He also has consulted for more than 50 major companies worldwide and has been an adviser to numerous startups.

In an interview with John Roberts, CRN director of editorial research, Cusumano gave his views on the delay of Windows Vista, the escalating battle between Microsoft and Google, and how the Redmond, Wash., software giant can regain its competitive edge in software.

CRN: You have said that the latest delay in the release of Vista shows that Microsoft has "lost its way." Please explain.

CUSUMANO: I was referring to the early days when Microsoft had small teams of excellent people who could build products in a timely fashion. In those days, Windows was still 4 million or 5 million lines of code, with maybe 200 developers. But things have wildly expanded, and they've become bogged down by teams of thousands of engineers and tens of millions of lines of code in their products. And these days, they seem to be doing things more for strategic and political reasons, not for technology. Microsoft clearly made some adjustments after [postponing] Longhorn, but the newest delay in Vista suggests that they have not really made any fundamental changes.

CRN: So you think it's more a case of rearranging deck chairs, so to speak, rather than Microsoft changing its business practices.CUSUMANO: Right. They have made some changes, and that helped them get a beta version of Vista out. But within a year or a year and a half or so, they will probably be back in the same situation of too much to handle in terms of code, too many people and an inability to stabilize the product. By this time, Windows should already be a pretty mature product.

CRN: You have also said that Microsoft needs to build a new operating system from scratch because the Windows code is too bulky and has too many holes. Do you see any signs that Microsoft is debating this idea internally or that it might already be starting work on a from-the-ground-up rebuild of its OS?

CUSUMANO: I have no evidence that they are scrapping Windows, but one never knows. They threw out a couple of years of work on Longhorn and went back to the Windows 2000 server code base, which is now the base of Vista. There was a time in the 1990s when they did build a new version of Windows from scratch. That was Windows NT, which was launched in parallel to the existing desktop Windows product and grew out of Windows 3.0, 3.1 and Windows 95. But the system grew too large, and it was never really designed to be a network operating system or have rock-solid security. So they have had to make lots of ad hoc changes to the Windows NT code base over time to try to adjust threats from Linux or to accommodate the Internet. So it ends up being a patchwork of code.

At some point--and I think sooner rather than later--they need to build a new operating system to meet current requirements, to be a true network system that is secure and not prone to hacking, and [one that] could handle the different types of platform concepts. They are moving toward that, but they're doing it too incrementally. I'd like to see Microsoft go back to the old culture of putting smaller groups of their best people to work on a problem. This is the kind of culture you have at Google, and they are doing all sorts of wonderful things very quickly with small teams of really talented programmers.

CRN: How will the recent delay in the release of Vista affect business customers' loyalty to Microsoft?

CUSUMANO: Fortunately for Microsoft, Windows--and to a lesser extent Office--is protected by compatibility issues. When you have customers that have invested big sums of money in buying Windows applications or have written customized applications to be compatible with the Windows environment, they can't easily switch. So you are not going to see an overnight shift. You do see pockets within IT shops and corporations shifting to Linux, but are you going to see Linux on corporate desktops or on servers anytime soon? I don't think so. There are just too many Windows applications out there.Over time, as computing habits change and technologies change, there is a longer-term threat to Windows. If most applications ultimately move to the Web, you access them through portals like Google or go to a word-processing company [site]. Then you don't need a complicated operating system like Windows to run a PC. You can have much simpler systems--for example, Linux, Macintosh or a new Java OS that somebody builds. That is where the real threat is to Microsoft, but I think it will only unfold slowly because corporate habits change slowly.

CRN: So Microsoft still has time to address the growing threat from Google?

CUSUMANO: Yes, because of the compatibility protection around Windows. When Netscape appeared in 1994-95, Microsoft reacted pretty quickly. But again, the systems that they were dealing with at that time were much smaller. When you have to change 50 million lines of code to add new functions, search, instant-messaging or voice-over-IP services, it takes enormous amounts of time to tie everything together.

They started to pull all this apart with Vista because they realized that it just became too much of a pile of spaghetti, and there was no ship date in sight. But it looks like the Vista code is still too big, complicated and intertwined. It could take 15 years to stabilize the Longhorn code, for example, if it can ever be stabilized.

CRN: Microsoft recently announced plans to increase R&D spending by more than $6 billion and that it could possibly take a stake in Yahoo. Is that an indication that Microsoft is changing its way of operating, or is the company just trying to chase Google?CUSUMANO: I don't know. I don't see any evidence that they're trying to go back to smaller teams of better-quality people. They are throwing more money at R&D, which means they can hire more people, and I don't see how these two tie together.

Microsoft clearly sees Google as a threat. It took everyone by surprise how quickly Google has grown. But we've known for 10 years or so that some of the Internet companies have this kind of "winner-takes-all" phenomenon. If there's some particular network dynamic around one kind of service that has everyone returning to that site, then everyone else ends up with dregs, so to speak. We've seen that with eBay. There is no reason for anybody to auction off items on a second- or third-rate site when almost everybody is going to the primary site, eBay.

It is the same with Google from the point of view of advertisers. It is the site where everyone doing search wants to go, and as a result, Google has been more attractive for advertisers than anyone else. This lets Google charge the highest prices for its advertising space, and it has a positive feedback effect. The more it goes on, the more powerful Google becomes. Microsoft clearly understands that dynamic. They are cautious, but they take it very seriously.

CRN: What does Microsoft need to do to overcome the threat from Google?

CUSUMANO: There are always better ways of doing something. The primary platform of Google is its search technology, and it is really not that good. You put in a search, you get 200,000 entries, and lots of them are garbage. There are much better ways of doing search, and many companies are working on this. Google knows this, so they have been building all these other services around the search platform to make sure that people keep coming to Google. That's why you have GMail and storage, Froogle and a dozen other services. And there will be more.

Google currently has the advantage because they don't have their legs tied together like Microsoft developers do. It is like Microsoft is constantly running a three-legged race. No matter how good its people are, their legs are tied because they have to work within the Windows framework. So they can't move very fast. Everything has to be retested and stabilized through Windows. That's what really slows them down.But if Microsoft sees something it needs to do, it has the ability to allocate people fast. As long as the product or technology isn't so big and clumsy that it takes thousands of people to work with it, then Microsoft can be tremendously competitive. That is what they need to try to get back to.

CRN: How could Microsoft answer back if Google decides to offer office applications for free over the Web, or for a fraction of the cost that Microsoft charges for them?

CUSUMANO: There is a stickiness factor, a point where people get very comfortable using a certain set of applications and it is not easy to get them to switch. And they usually buy this bundle when they buy a new computer. If Microsoft wanted to offer much cheaper upgrades to people over the Web or even bundled, they could do that. So if the Google model is the one that becomes dominant, it is certainly conceivable that over five to 10 years, Microsoft could shift to that model. Users could use Office for free, but they would need to access it through the Office Live site, which means that they might have to use MSN Search and view different advertisements. They are setting up the infrastructure to do that.

Also, I don't believe the world will shift 100 percent to any single model. You will still find millions of people buying new computers with software already installed because it is just too convenient. There will be a time when the entire world is wired, or set up for WiMax, but we're a long way from that. I think that Microsoft's franchise of selling packaged software is declining but is probably still good for at least a decade, maybe two decades.

CRN: So you think it will be more of a case of co-existence between the two companies, rather than Google taking over?CUSUMANO: Right. You have many companies, including Microsoft, attacking search technology, because as loyal as Google users are, it is not hard to get people to switch. If Microsoft came up with a better search technology, and you had a little screen come up and ask you if you would like to switch from Google Search to MSN Search, all you would have to do is click yes. And Microsoft can embed that.

Google has a tremendous head start, but with software, it can turn on a dime. There was a time when Alta Vista had a tremendous head start. Google wiped them out, and they in turn could be wiped out. Google knows it, and that's why they are lean and mean. Hopefully, they won't become so successful that they will get too big and too slow.

CRN: So if Microsoft can return to its roots, the days when it was an innovative, fast-growing company, then it can come back strong?

CUSUMANO: Right. But I don't know that they have the guts to do it. Microsoft develops all sorts of neat products and technologies that could work on different platforms, not just Windows. If they have a great media player and great browser or Office suite, these products can sell on different platforms. Office is what made the Macintosh a viable business machine. And the browser was always available on different platforms, although Microsoft always optimizes its code for Windows because it is trying to sell Windows along with its applications. But even if the Windows business were to disappear, Microsoft has the ability to make money in other ways, by selling applications, tools or services of different types, as well as advertising. They could compete head to head on the strength of their technology, not just on the strength of their ties to Windows.

CRN: Is that the key factor, not necessarily breaking ties to Windows but loosening them and supporting other platforms?CUSUMANO: Yes. Up to now, it has not made business sense [for Microsoft] to do that. But at some point in time, we will see whether Microsoft has the courage to actually go ahead and make the change.

*EDITOR'S NOTE: This interview occurred before Microsoft Chairman and founder Bill Gates' announcement last week that he plans to step back from daily responsibilities and hand over the chief software architect role to Lotus Notes pioneer Ray Ozzie, who's expected to drive the company's fledgling software-as-a-service push and spur other new initiatives.