Year: 2010

With the end of the Microsoft fiscal year coming around I thought I would write a little about what my fellow co-workers make their living on – the licensing of Microsoft Software.  It actually is a rich and exciting history and  good insight to the future of Microsoft. In 1976 Bill Gates wrote a letter titled “Open Letter to Hobbyists” in the MIT Homebrew Computer Club newsletter which expressed his frustration that many were using Microsoft’s BASIC programming language and distributing it without having paid for the software.  This letter is probably one of the most important documents ever written, not only for Microsoft, but for the entire technology industry.  The Open Source community may decry my assessment of this as the most vile and evil thing ever written, but without this document they would have no enemy.  If you don’t have an enemy you really don’t have much of a cause.  The letter establishes what Microsoft was going to do to build a business model and lead to billions of dollars in revenue.  All in the name of the right to profit on intellectual property.

When I started in 1991 one thing that had been in place for a while and was generating a lot of revenue was the OEM model.  I wrote about this earlier but this was the simple process of licensing software (early on MS-DOS and later Windows) to hardware companies who manufactured PC’s.  It was a great model for a new industry that was still trying to find its footing.  All these new PC manufacturer’s needed an operating system and at the time MS-DOS was cheap and could be licensed.  Some of those names became big players in the industry like Dell, Compaq and Gateway.  It was cheap for Microsoft.  Once you had created the disc you just made some copies and shipped to eth OEM who installed on their hardware.  It was simple math.  My cost is $1 to duplicate the disc and I charged $75 (this is a rough estimation).  The margins in the intellectual property business are usually greater than 90 percent. It has become multi-billion empire within Microsoft.  Whenever you watch CNBC or read the  Wall St Journal and it says PC shipments are up, it means Microsoft is making hundreds of millions of dollars.

What was beginning when I started at Microsoft was the more structured process of licensing to businesses.  Like all things it started small, but it represented a real “green field” opportunity for Microsoft.  Remember at this time the idea of personal computing was still new to many companies and with it they received a whole host of benefits, but at eth same time they had new headaches they had not experienced before.  When a new operating system was released did the company have to go to the local reseller and buy new copies of the OS?  would they get a discount after they had purchased so many copies?  Why did they have to do this, why couldn’t Microsoft?  Bing (no pun intended), a new licensing model was created.  First there was Select Agreements, soon to be followed by Enterprise Agreements.  Stay with me on this one as I know licensing is about as much fun as watching paint dry, but it is super important to helping one understand how Microsoft makes money and the challenges they face in the not so distant future.

First lets tackle a Select agreement.  In simple terms this is just a negotiated price sheet.  Only two things occur here.  The customer and Microsoft negotiate what will be on the price sheet.  The second being what will the discount be.  They are always three-year agreements.  From a sales reps perspective it is pretty simple – when they sell additional software into a company they place an order through their reseller who provides the quote back to the customer and collects the purchase order.  Pretty simple stuff – there is one additional things – maintenance or the current term software assurance (SA).  I purchase this at the time of order and if I want all future releases of Office I pay for SA, when it ships I automatically receive as part of my contract.  Usually however a Select agreement is not alone. 

Now we hit the big agreement the Enterprise Agreement.  I will say my bias in this whole blog is towards these EA agreements as I spent over half my career at Microsoft calling on Fortune 1000 companies and working with our account teams to facilitate the growth of these large cash cows.  The EA in short is a commitment.  A three year commitment.  It is a large part of the Microsoft licensing machine.  For many sales reps it is their lifeblood (or death depending on how the deal goes).  So what exactly is it?  It is a list of products a customer commits to that includes a product (Windows) with Software Assurance and payments are spread out over three years.  If you do a $60 million deal then it..(I take it most of my readers are good at math).  So there you have it you are all now Microsoft Licensing Specialists.  There is a job title at MS for Licensing Specialist, so apply now you are qualified.

Early on in the early to mid 90’s this was all greenfield opportunities for Microsoft sales reps.  Most companies needed an agreement with Microsoft and the products were really not many – in fact the first ones would be dominated by Windows and Office.  It was a great time to be in the field.  It created an odd sales model as well as when reps made and exceeded quota they were not compensated with huge commission bonuses but stock options.  As we all know in those days the stock options were the road to riches. It also created a very Redmond centric environment where the Product groups were all-powerful and the field was simply a delivery vehicle.   I only say the sales model is odd because to a large degree that mindset remains today and though bonuses are available the Microsoft field rep is not compensated like other industries.  Redmond still holds the view that they are the kings of the company.  It always cracked me up and made me angry when product managers would say “the field does not know how to sell our product”.   This despite the fact that they spent so little time in front of customers. This is why so many senior leaders who have joined Microsoft say that Microsoft truly lacks a sales culture.

To follow-up on this some more the days of stock options are gone and the EA agreements that were originally Windows and Office have grown.  Early on that was a good thing as Microsoft added more and more value into the EA.  However starting even before the financial market meltdown the agreements had encompassed so many products from Windows to Office, development tools, Server products (SQL, Exchange, BizTalk, OCS, MOSS etc..) all with client licenses, it had become apparent companies were in many instances paying for stuff they did not use.  When the market meltdown hit companies really started taking a closer look at not just Microsoft agreements but all agreements.  The challenge the field is now facing at Microsoft is how do you grow a business when companies are trying to shrink what they buy from you?  The answer from current Microsoft COO Kevin Turner has been “you take share from your competitors”.  I always found this a bit simplistic since in my view you are always trying to take share from your competitors – in the good times and the bad.  When it comes right down to it the acct execs and other sales professionals at Microsoft get brought into a spreadsheet excercise and provided the account team has done their job the numbers either go up or go down. 

Moving forward and looking towards the horizon there are big changes in licensing under way as the industry starts to look at cloud computing and subscription based services and move away from the traditional licensing of software.  It is not entirely new.  I was there at the beginning when we introduced at Microsoft Service Provider Licensing Agreements (SPLA) in 1999.  It has just taken a while for the technology to catch up and the market to be ready to make this move.  For sales reps it represents an entirely new “green field” opportunity.  You can see based on the latest sales hiring activities at companies like VMWare and SalesForce.com.  For Microsoft it represents both an opportunity and a challenge as they have to transition from traditional licensing models to new licensing models.  It is the challenge of having a legacy, which many companies entering the cloud do not have.  I have no doubt Microsoft will overcome th technical challenges it faces but the ability to handle the financial transition from “old school” licensing of IP to the modern world, in my view, will play a huge part in determining the success or failure of Microsoft in the next five years. 

Good Night and Good Luck.

Hans Henrik Hoffmann July 1, 2010

This title is a tale of two stories. On the one hand you have YouTube, which is the world’s favorite place to post a video on-line.   On the other hand you have Silverlight, Microsoft’s entrant to compete against Adobe Flash.   The big question is how does one affect the other.  This to me is one of those mediums where consumer behavior can dictate  technology adoption even when what they are using is inferior. In simple terms it is like beta versus VHS all over again (For those who want the more technical details I have added this link, as Stephen Shankland wrote a timely article on the issues around YouTube and Flash CNET June 30th.)

Recently I was in Denmark and I was visiting with friends in a little place called Herlev, part of greater Copenhagen.  One of my friends was someone I knew from my Microsoft days. He has since retired from Microsoft and runs his own consulting business as well has pursued his love of music.  He now plays the drums for a band in Denmark.  When he went to build his band’s website he had to select a design tool(view CeoNeo Website).  What he said was that it seemed by default the only tool to select was the Adobe tool sets.  He was not aware that Microsoft had its own set of design tools under the Expression brand name.  This despite the fact that his consulting company is a registered Microsoft partner.  This is typical of a lot of things in technology, but in particular in the developer and designer world, it’s what you know.  It also points to a Microsoft problem in promoting the Devsigner Tools.

In an internal interview for a job at Microsoft in the mobile group I remember my interviewer talking about a specific study done in business school where it pointed out tha sometimes certain companies obtain such a huge lead in a specific business that you will never catch them.  Points being Microsoft Office and Windows and Google Search.  I think that is fairly accurate.  The one exception to the rule is when the landscape shifts. The great thing about technology is the landscape is always moving.  The reason companies fail when they go head to head with an established company is they try to play by the rules that the market leader invented.  Which brings us back to the Silverlight versus Adobe Flash challenge.

I remember about 10 years ago I listened to a former ATT Bell Labs guy talk about the challenges the internet provided the traditional Telco’s.  The Telco’s created an environment where the business value they provided was in their network or in their cloud, to use a current trendy term.  With the advent of the internet more of the intelligence was being pushed to the edge of the network, to be specific the PC. YouTube is maybe one of the best, if not the best example of end users displaying their content (and content they have no rights to!) in a form beyond the reach of the traditional power players.  What these end points have done is make Flash the default means of creating and viewing online videos.   YouTube today is the third most visited site on the internet.  It would be interesting to see the average amount of time people spend on YouTube?  Is YouTube getting the advertising revenue a major television network is receiving?  Could they? Will they?

In short Adobe is the company withe the huge market share and YouTube is the primary means of accessing the online content created using eth Adobe Toolsets.  Microsoft’s response to all this has been to go toe to toe with the Adobe/YouTube monster.  They are taking the contest to Adobe on Adobe’s playing field.  The results to date have been less than stellar. Does anyone remember SoapBox?  This was a reaction to the success of YouTube.  I should note it was done before Silverlight.  It carries with it the name of online Bob.   I can understand the Microsoft mindset as in the early days it won wars like this against WordPerfect and Lotus.  But as I have said over and over again in my blog, the internet is not the place for the patient.  The rise and fall of internet empires is not measured in centuries or decades, it can happen within a five-year span.

Until either Microsoft or someone else establishes an “internet” channel that uses Microsoft Silverlight, it will always be a bit player as long as it exists.  At the end of the day an end-user when they click on a video, just really want to watch a video, that is their expectation.  It is the right expectation.  What the format is, is not really relevant.  That is for the technology companies to figure out.  It is a big challenge to create “buzz”  around specific bits of technology.  It requires marketing in the big picture view of things, which Apple seems to have perfected.  At the same time doing the grass-roots movements to get the people and companies who are going to support the technology stack to deliver the applications that people will use.  Microsoft is really good at the latter but not the former.  You need the former to generate the market excitement.  When developers and designers see an excited market they will flock to the opportunity.  How else do you explain that Apple has turned Object C into a popular programming language?  When I was with Microsoft in my last year they had a number of “evangelists” out in the field promoting Silverlight.  They worked hard and traveled all over the country.  Talking to developers at company locations, at industry events, did road shows – but they did this without any air cover.   Even if you convert five developers or designers how many have you not touched?  You need to generate the industry “buzz” through smart and directed advertising campaigns.  But to date it has not been the primary focus of Microsoft (I suppose I could dedicate an entire blog to Microsoft’s disjointed sales and marketing campaigns…so much to write)

Moving forward there will be significant challenges for Microsoft Silverlight, not just from the YouTube/Adobe Flash behemoth, but the industry push towards more open standards, specifically HTML 5.  The split between Google (and Adobe) and Apple could help Microsoft.  Microsoft can focus on the technology and not get caught up in a fight that has been very public.  The downside is people love a soap opera and Flash and HTML 5 seem to be getting a significant amount of press over this.  As of this writing the internet destination of choice for video is YouTube.  As long as that stands people will continue to use the Flash format as what they will use.  The more designers experienced in Flash the harder it will be to convert.  The reason is that the demand is there and the revenue is yet to be fully realized, but make no mistake it is there.  Until a “new” channel emerges with a huge audience Silverlight will simply remain a cool technology.  If that channel happens you could see hundreds of millions of people using Silverlight,…they just won’t know it.  The best technology for consumers is the one they don’t know about, but they just have to have it.

Good Night and Good Luck

Hans Henrik Hoffmann June 24, 2010

Congrats to the US National Team on advancing to the next round in the World Cup!!

I try not to delve too much into the political arena my blog but this is a subject I have thought about many times in my career at Microsoft.  What spurred this on?  Unfortunately an old friend who has gone through a rough patch in life that has taken him down some dark and unfortunate roads.  One of those paths has led to an age-old ill in society as old as mankind.  The need to blame others for ones own failings, not based on rational thought but on skin color and religion.  It gave me pause to think about my internal beliefs and explore some of the thoughts I have had for some time about my life and the industry that I have been fortunate to work in. 

Make no mistake I am not naive enough to believe that racism does not exist in the technology space, as my title might suggest, nor are we necessarily better than other industries, but one thing I do know, in particular,  the technology industry craves strong technical talent.  It does not care about where you are from or what color your skin is, it just wants really smart people. Through my 18 years at Microsoft I do not know how many times I heard Bill Gates interviewed as to what he viewed as the key ingredient to Microsoft success and over and over again it was always the same answer, “We start by hiring really smart people”.  In the early days that really meant computer scientists, engineers etc…These were the people who were going to drive the company forward.  A great many came from India and later more and more would come from China (especially as Microsoft got aggressive in speech recognition and search)..But in reality it did not matter where you came from  and I met or heard people present from almost everywhere in the world.  The thing I liked best about Microsoft in the early days was it really was about open and passionate debate, from everything as big as the future of the PC to the more granular areas of what should happen with the ANSI C Standard.  If you had a passion and were smart enough to engage in the debate, race did not enter into the equation.  To paraphrase Martin Luther King, “we should judge people by the content of their character”.

The nice thing about Microsoft even when I started back in 1991 was that it really was a multi-cultural environment.  You would walk the halls and see and meet Sikhs, Muslims, Hindu’s, African-Americans, Chinese, Japanese etc.. The list would probably cover every country and religion on the globe.  The internal Global Address List (GAL) usually had an alias for everything – could be Indian’s at Microsoft or Germans at Microsoft. The company had events internally from time to time to highlight our diverse culture.  As the company grew Microsoft started opening research and development departments all over the world, most notably in India and China.  There was so much talent coming to the surface on the planet you had to go where the talent pool was.

I do not believe this is at all unique to Microsoft.  When I visited customers like Cisco Systems they seemed to have a whole lunch menu catered towards their large contingent of Indian engineers.  When I did their yearly vendor event called Toolapalooza, most people I interacted with were not born in the US.  If you remember the dotcom boom how many start-ups were either led by or had on staff a significant amount of people not of american birth?  Did anybody really care?  In those days the only question was what are you doing and how will you make money. 

To date the technology sector has represented the best and brightest from around the globe.  In the end the industry will continue to become a more and more ethically diverse as the need for talent in an increasingly competitive environment grows.  This challenge will bring us all closer together as we jointly try to solve the next great technical challenge.  We will need the collective input great minds, regardless of race or creed. It will require us to put differences aside and to listen to one another.  It’s a challenge that those in  the industry will meet.  In the broader sense in the end it’s a challenge our society has to meet or otherwise we all fail.  I leave you with the words of the author H.G. Wells, “Civilization is a race between education and catastrophe”.

Good Night and Good Luck

Hans Henrik Hoffmann June 17, 2010

Early on in my career at Microsoft a battle opened up between Oracle and Microsoft over who was going to deliver on-demand TV.  The idea being that the customer could control their viewing experience and see the content they wanted delivered when they wanted it. Microsoft started up a project code-named “Tiger” to deliver this new service.  It would launch the start of a new era of something that has since seemed destined to failure within Microsoft, but not before a lot of optimism along the way. 

At this time in the industry the internet was not in play and the idea of IP delivered services through digital content was still a long way from reality.  The early tests were humorous from what I heard through the grapevine.  It literally was a customer made a request (not sure how) and someone in a back room a person found the video, ran it to the VCR and hit play.  Anyone ever see the movie, “Broadcast News“? .  Around this time Microsoft CTO Nathan Myhrvold was espousing the next big thing in computing which was going to be interactive TV.  He was not on board with the whole internet wave at the time.  In his defense interactive TV is happening and will continue to morph in the coming years, but the internet will be a huge part of the equation. The interesting thing at this time was this was really a “verbal” battle between Oracle and Microsoft as to whose database was going to store and deliver all the content.  At the time Oracle’s database technology was way ahead of Microsoft, so upon reflection it was probably a good thing for Microsoft the internet came along to help settle or at least delay the debate so Microsoft could catch up.

As the internet began to take hold it was apparent that the idea of Digital TV and user self-determination was only going to get stronger.  There were numerous “small” victories along the way for Microsoft TV.   In 1999, and as was typical during that time, Microsoft invested to take a small  equity stake in Portugal Telecom, because you had to pay to play.  A big press release was done with Steve Ballmer to highlight this huge win for Microsoft TV.  It was around this time at the yearly Microsoft Global Sales Summit I heard from the Microsoft TV Product Group.  The presentation was done by a young program manager named Alan Yates.  He followed the Windows Mobile presenter.  He was a talented presenter and I remember he started with a question, “How many of you own mobile phones?” About 90% of the hands went up (this was 1999).  Then he asked “How many of you own TV’s?”.  The crowd laughed as everyone’s hands went up.  He then proceeded to talk about Microsoft’s plans and the future potential of interactive/digital television.  The future potential of a new market is an easy way to get people excited about a green future, I am talking dollars not the environment.  Microsoft people really gravitated towards future potential.  In those days any future potential in technology was believed to be Microsoft’s market to own.  Based on our track record at the time it was a sure bet we would succeed.  It was our birth right.

Fast forward to 2005 and a new strategic direction in Microsoft TV land.  Microsoft and AT&T signed an agreement to deliver uVerse, which is AT&T’s entry into digital TV based on Microsoft’s IP TV technology.  I saw some initial demo’s several years ago at the Microsoft company meeting.  They did a demo using baseball as an example.  Being a big sports fan I could relate.  They had a game on and up at the top they had three smaller windows.  When something big happened in the game I was not focused on I could at the click of a remote control button (you can do all sorts of things with technology, but take a man’s remote away he is no longer a man), I could bring that particular game into the main screen and demote the game I am watching to a small pane.  It was paradise.  There has been a lot of work done with AT&T since the announcement and Microsoft is getting money from AT&T through the deal.  However as far as I can tell the service is still not available in many areas.  It’s not available in mine.  To be fair the challenge is not Microsoft’s alone.  The Telco providers are still learning this business and beyond the technology there are a lot of relationships with content providers (Disney, Time -Warner, News Corp etc..) that need to be managed.  All this being said though there are other deals for IPTV a vast majority of Microsoft’s eggs are in this one basket.  As ATT goes so will Microsoft TV.

With the recent announcement by Google of a joint pact with Sony and Intel, the idea of digital TV and user self-determination may be poised to take a huge step forward.  After a trip abroad I am increasingly of the belief that Google’s acquisition of YouTube will pay huge dividends for Google as digital TV becomes universal.  By universal I mean that Television programming will not only be more under the control of the end-user, but will be accessible from a multitude of devices not connected to your living room.  Today you YouTube experience is pretty much everywhere but your living room.  Google is big on the media and publishing space and I am sure will leverage those relationships to further their quest into ad revenue through media content, not just search.  It is a challenge for Microsoft in that the Microsoft historical view is we will create this great technology and then partners will deliver great solutions.  What you are seeing in the industry are companies who take technology to leverage existing relationships.  A good example is the Amazon Kindle.  Amazon had relationships with all the publishers so they struck deals to deliver content to the device.  Microsoft had “reader” technology ten years ago which they never were able to monetize.  Microsoft wanted partners to create the next great technology trend using Microsoft’s technology.  It’s early and I can only guess at what Google will eventually try to do, but if they can get ad revenues from an internet TV service that would be another huge  revenue source.

Looking forward Microsoft has developed a strategy they call the three screens approach.  The three screens being the PC, television and mobile phone.  On Microsoft’s part this represents some really good thinking, and if you think about what Google is doing they are more or less following this vision.  Now the real focal point will be on execution.  There are certainly big challenges in the way.  For Microsoft it starts with mobile.  I recently chatted with an old friend in silicon valley and he said as far as mobile development goes in the valley, Windows Mobile is non-existent.  In addition to ATT uVerse the launch of Windows Phone 7 has to develop excitement.  If it falls and Microsoft has to wait until the next release the industry will have moved on and they will be too late.  Another area that will be interesting to follow is Apple and their TV initiatives.  Apple has released products for the TV space, and though the initial reviews of Apple TV were middle to not so good, given Apple’s hot hand, fanatical community, and great ability to generate “buzz” via sales and marketing it will be interesting to see if they come back with a stronger offering to start tying the three screens together.  They have been successful with the desktop, over the top with the mobile phone and now just have one screen to go with a browser to tie ut all together. 

Given the start stop history of Microsoft TV the next few years will be critical to see if it has a future.  The IPTV solution cannot fail.  If Microsoft had to change strategic and technology directions the window of opportunity may pass. In technology waves come and go.  If you catch a wave and can ride the crest success will not be far behind.  However if you are slow and are late when the wave crashes you will be pulled under and thrashed about trying to come back up for air.

Good Night and Good Luck

Hans Henrik Hoffmann June 10, 2010