Charles Arthur’s Digital Wars: Microsoft’s lost decade

The Guardian‘s technology editor Charles Arthur is an incisive observer of the tech business world. So it’s no surprise to discover that his book Digital Wars is a revealing account of Apple, Google and Microsoft’s battles for dominance in search, digital music and smartphones.

The clearest message from the book is that the 2000s were a lost decade for Microsoft. At the time of the millennium, it seemed invulnerable. Its dominance of the PC software market for consumers and businesses made it a hugely powerful and profitable corporation. Windows and Office were huge money spinners. The biggest cloud was the anti-trust actions taken by the United States Department of Justice and the European Commission. By contrast, rivals seemed powerless to confront the Redmond juggernaut.

Yet Arthur makes it clear that the anti-trust cases had a profound impact on Microsoft. In his words, the US case ‘reached down into the company’s soul’. Although Microsoft escaped the threat of being forced to split in two, Arthur quotes analyst Joe Wilcox’s verdict that the actions ‘hugely affected’ the way the company operated. ‘Microsoft was unequivocally less aggressive [and ] there was a lack of certainty and aggression in Microsoft’s response to Apple or other companies’.

There were other factors at work. For Microsoft’s leaders at the turn of the millennium, the internet was something they got used to in mid career, rather than in their formative years at college. They were set in their offline ways, and had to adapt. By contrast, the pioneers at Google were starting out with instinctive understanding of the net, email and networking. Their business was built online.

The other critical factor was the classic symptoms of bloated corporations: poor decisions and internal politics. Arthur explains how Microsoft blew the chance to compete with Google’s fast developing search and advertising business. It failed to buy Overture and even worse overlooked the fact it already owned a company called LinkExchange that enabled small advertisers to bid for their names to appear next to search results. (Exactly what Google was developing with AdWords.) Arthur recounts that Microsoft’s new chief executive Steve Ballmer closed the LinkExchange-based ‘Keywords’ project at just the time Google launched AdWords, because other Microsoft tribes feared it would cannibalise banner sales.

Later, Microsoft ploughed countless millions into search, but the anti-trust actions cast a long shadow: building search into the browser would invite a repeat of those courtroom years. The smart alternative, embedding search into Office was the obvious way to go. But the boss of Office wasn’t interested.

This story was repeated across the other battlefields: digital music (where Apple won the day) and smartphone systems (where Apple and Google, with its Android mobile operating system, shared the prizes).

Commentators have pointed out that Microsoft is largely a business-to-business (B2B) culture. With a few exceptions (Xbox and 1990s triumphs like Encarta spring to mind), the company does not have a consumer outlook. By contrast, Apple has set a new standard in how technology should be designed for everyday people who aren’t geeks. My painful experience with Microsoft’s Pocket PC software persuaded me not to buy a Windows-based smartphone. (My Dell PDA was lovely, but the Windows OS was appalling. How could they make hooking up to wifi such a ghastly experience?) Many will have the same view, yet by all accounts the latest Windows Phone system is a delight. Microsoft’s problem is that so many people have now fallen in love with Apple’s iPhone or Google Android-based phones. Switching will be hard.

It would be foolish to write off Microsoft. Or to assume that Google or Apple are invulnerable. (That’s where we came in – when Microsoft was all-conquering.) The one rule of the tech world is that no-one rules forever. The next chapter of this story will be just as compelling.

3 thoughts on “Charles Arthur’s Digital Wars: Microsoft’s lost decade

  1. Don’t write off Microsoft, but don’t expect them to prosper when they try to compete on Apple’s, or Google’s territory. Both of them have been doing it exactly right: come up with an idea, try it out, repeat.

    Microsoft’s efforts have been slow, behind closed doors, and unresponsive to the new realities of free OS competition and polished hardware/software/service integration.

  2. I totally agree, Walt. Incidentally I should have acknowledged in my post that Microsoft is still a very successful and profitable company compared with most. Windows and Office continue to be money spinners, and although the rise of mobile and tablet devices will eat into this, companies and consumers will still be using Windows for a long, long time.

  3. It was indeed a lost decade for Microsoft, but not for the reasons that Charles Arthur mentions.

    The genius of Google was that it married an incredibly good search engine with an ad-based revenue model. The revenue model is the easy part! The search engine is the hard part. Just ask Yahoo — which ended up making the Overture acquisition that Microsoft spurned.

    Linkexchange was more like Adsense than Adwords. Adsense accounts for only 1/4 of Google’s net income. 1/4 of multi-billions is still multi-billions, but it was the search engine where Microsoft really fell down.

    Interestingly, iPod was the other way around. The technology was the easy part, it was the rest that was hard. Microsoft saw itself as a platform company and envisioned an n-to-n market — you buy the device from one of n hardware makers, you buy the music from one of n music stores, and Microsoft DRM connects the hardware to the music store. Horizontally integrated middleman — the Windows model. But Apple bundled up all three roles, pocketing money at every stage. Vertically integrated — Apple could polish the entire experience relentlessly to remove friction at every stage. Microsoft could not, because they only controlled the middle tier.

    Tech histories have a short lifetime, because things change so quickly. People thought Linux would be the downfall of Microsoft, but it turned out to be something completely different. What will ultimately cause Google and Apple to stagnate? I don’t know, but I know that it will seem obvious in hindsight.

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