In September 1993 Nathan Myhrvold the Chief Technology Officer of Microsoft wrote a remarkably prescient memo. In ‘Road Kill on the Information Highway’ he looked at two powerful trends; the increase in computer processing power and the growth of the internet. He then tried to forecast the effects of these two forces over the next ten years or so. Which industries would be the most affected. Who would be the winners and losers.
Myhrvold got most of it right. He forecast that print based media, the music industry and broadcast television would be seriously threatened by the internet. He thought that they might become road kill on the information highway. He also foresaw the development of cloud computing [he called it Internet Highway Computing] and the threat this would represent to Microsoft’s Office franchise. Remember that this was three years before the internet went mainstream, and five years before Google was founded.
The memo did not do Microsoft any good. They were warned, but they were not listening. The internet happened, Google appeared and Microsoft looks like a dinosaur. The action has moved from the desktop [where Microsoft is dominant] to the internet. Web applications are replacing desktop applications. Search is the key technology now, and in search Google is the shark and Microsoft the minnow.
Many people see a similarity between what Google is doing to Microsoft and what Microsoft did to IBM twenty years ago.
The IBM lesson
Until the early 1980s IBM completely dominated the computer industry. There were references to Snow White and Seven Dwarfs, where IBM was Snow White and the other companies in the industry were the dwarfs. IBM maintained its dominance with proprietary technology. IBM mainframes worked with IBM peripherals and ran IBM software. It was very hard for competitors to break into the market.
The first personal computers were not suitable for business use. Each PC manufacturer had its own technology, and none of them had the muscle to make their technology a de facto standard. Also, there was a high mortality rate amongst the manufacturers. If a company bought PCs from different manufacturers they could not transfer data from one machine to another. If they bought a batch of machines from one manufacturer that company might be out of business when they went to buy another batch. Then the company would have two sets of completely incompatible machines.
A standard was needed and IBM established one when it produced the IBM PC. Unfortunately, it produced the machine in such a rush that it lost control of two key technologies; the microprocessor and the operating system. These were bought in from Intel and Microsoft. The IBM PC was a great success but Intel and Microsoft sold their technologies to other companies. Clones appeared and IBM lost control of the PC industry.
Intel and Microsoft made a lot of money, and IBM suffered a near death experience. The problem was not only that IBM mishandled the introduction of the PC. IBM had been too dominant for two long. It had become sclerotic. When the computer industry moved from the mainframe era to the PC era it allowed lean and hungry competitors to emerge and IBM was too fat and slow.
Now we have moved from the PC era to the internet era and a new pack of lean and hungry companies have emerged to harry Microsoft.
Microsoft still has Windows and Office and is still very profitable, but the only way is down. Like IBM in the 1970s Microsoft’s problems are being compounded by attacks from regulators. IBM had the US Justice Department, Microsoft has the EU.
The IBM PC is a lesson from history, but the lesson is not only that dominant incumbents are doomed when a major technology shift occurs. There are two other lessons. The first is that it will be a slow decline, there is a lot of inertia in the system. The second is that Microsoft is going down but not out. IBM managed to pull back from the brink and is a 90+bn dollar company. It is still much larger than Microsoft. After Microsoft has had its bad times it will probably still be bigger than Google. There will still be a place for Windows and desktop applications. What will happen is that Google will trim the fat off MS by cutting its profit margins from the present 40%+ to something more like the 15% that IBM is currently earning.