Pain and Paradigm Shift

Microsoft CEO Steve Ballmer told analysts last week that ultra-thin PCs will be the answer to the growing popularity of netbooks. I doubt that, but I can certainly understand Ballmer’s interest in backing the ultra-thins, and this obviously has implications for larger issues like cloud computing.

By now, the sides have been clearly marked out in the debate about on-demand vs. on-premise. One side says everything will go to the cloud; the other manages to carve out a plausible scenario wherein conventional computing continues into the indefinite future. I have a third view, namely that we are in a transition state between a past that was all about licenses and premise-based computing and a future that will be all or mostly in the cloud. But that future could still easily be a decade away.

In a recent piece, I wrote about how revenues for the on-premise vendors still look good. Some of the biggest premise-based suite vendors continue to score impressive deals, and even in a recession they show revenue gains — or at least show that they are keeping up with the prior year. That’s all good, but when do you know you are on the down side of the curve and that the new paradigm will eventually win out?

The Netbook Factor

There are many answers and a stubborn realization that most people faced with decline — or at least paradigm shift — refuse to believe it or do much to avert the inevitable. I think there’s some of that going on in Redmond with regard to netbooks.

Netbooks, I should say, are small computers that don’t do much on their own. They have small screens and small disks, smaller processors and memory — just enough to get their users to the Web, where they can access applications and data stored there. Netbook computers represent a new style of computing that harmonizes nicely with cloud computing.

Netbook owners use these appliances for purposes such as email and other office tasks as well as accessing cloud-based applications. Tien Tzuo, CEO of Zuora, told me recently that he runs his whole company from the cloud. They use Google Apps for office productivity tools, Salesforce.com for CRM and their own cloud-based billing system to send out bills and receive payments. There might be some premise-based accounting applications in the mix, but the point is that Zuora is a cloud computing company in many senses of the word. Tzuo’s story is interesting to me because he still uses a conventional computer — a MacBook Pro, and not a netbook.

I think Microsoft has misunderstood the market. Microsoft’s approach with ultra-thin devices coming to market later this year is to provide high-end processing power in a lightweight package that travels well. There’s nothing wrong with that; I am certain there is a market for this kind of device. But these devices will replace older, heavier laptops, not netbooks. Promoting ultra-thins as netbook alternatives says a lot about Microsoft as a company worried about losing its franchises in Windows and desktop applications like Office to stripped-down operating systems like Google Chrome (if and when it sees the light of day) and Google Apps. It is also a serious misunderstanding of the market.

A Painful Move

A new market is opening up that is situated between conventional computing and handheld devices like BlackBerries and iPhones. The new market represents a computing paradigm shift. Whenever paradigms shift, you can bet the establishment paradigm will do what it can to extend itself and kick a little sand into the face of the new guy. Ultra-thins as netbook beaters strike me as this kind of paradigm extension.

At the same time, Microsoft is positioning itself to profit from a cloud paradigm. The company is beginning to offer SaaS versions of its CRM, ERP and Office solutions, for example. But even if these offerings are eventually successful, there will be a significant adverse impact on this company’s top and bottom lines because monthly service fees are inevitably smaller than one-time licenses. That’s what makes paradigm shifting so difficult.

Wall Street has expectations about public company revenues. Changing a business model with the result that revenues dip — even if the change has long-term positive implications — is not well-tolerated. Microsoft has done a great job over many years at delighting Wall Street, and central to that record is the company’s portfolio strategy of innovating in multiple directions at once. So while the CEO talks about ultra-thins as netbook beaters, the company is also building a cloud infrastructure.

However, this time could be different. Regardless of the product mix, cloud computing will cost less, and unless that swells the market significantly, it’s hard to see how revenues will not dip. It’s hard to construct a scenario in which Microsoft doesn’t thrive, but as consumers, it’s important to keep a bigger picture of the whole market in mind.