Exchange’s monopoly and its importance to Microsoft

The key position that Exchange Server occupies in the Microsoft firmament and some of the challenges that it faces in the future are laid out in an interesting presentation called “10 Hypotheses for Technology Investing” that’s given by Roger McNamee, managing director and co-founder of Elevation Partners, a VC company that has had some notable successes with investments in Facebook, Yelp, and Palm.

McNamee has been giving this presentation at various conferences for a while (the reason why many 2011 dates appear on the slides) in an effort to drive some debate about where the IT industry is going. Some interesting ideas are aired, including the impact of mobile devices on the fabric and function of the Internet; the impact of these changes on Google; how Apple’s closed-wall model threatens the kind of Internet that Google has built its success upon; and the disruption that has resulted from iPads (the first successful tablet) and what this means for other players.

His views don’t make great reading if you’re a Microsoft stockholder (I’m not). McNamee boldly states that software development for Windows has all but stopped as developers rush to embrace the app model or develop for the web. In addition, Microsoft’s subscription model imposes a “tax” of roughly $1,000 annually per PC and that these factors contribute to the fall in the percentage of Windows in the overall pool of devices connected to the Internet. In other words, Windows is vanishing, slowly but surely, as its share is gobbled up by Android, Chrome, and Apple devices.

Like all predictions, I’m not so sure that these assertions will be proven absolutely correct over time. For example, the introduction of Windows 8 will show whether Microsoft can convince software developers to adopt a new UI paradigm for applications, including an app store. It will also prove whether Microsoft can dent Apple’s success with iPad – something that I suspect will be important for hardware vendors also as HP, ASUS, Lenovo, Dell, etc. clearly need something to halt flagging sales by giving consumers something compelling to purchase.

McNamee says that “Microsoft can shift model to leverage Exchange monopoly” and that this tactic will drive growth in profits for five years. There’s no doubt in my mind that Exchange has driven a lot of success for Microsoft since its introduction in 1996. For example, would companies have invested in SharePoint if they weren’t already running Exchange (or SQL)? Would Office be as in dominant a position on the desktop if Outlook and Exchange didn’t work together so smoothly? In making this statement, I cheerfully acknowledge that there have been times when the Office and Exchange development groups have seemed to be in open warfare with each other, much to the bemusement of external observers.

Other companies have benefited too – would RIM (now in decline – perhaps a decent BlackBerry Enterprise Server product might have stopped ActiveSync eating its lunch?) have experienced so much success in the business world if its devices had not proved to have excellent connectivity to Exchange?

A monopoly can be defined as a situation where a company owns all or nearly all of the market for a particular product. For Exchange, I guess this can be interpreted to mean that Exchange is the de facto standard for email for the business world and has a large share in other markets such as education. The days of massive migration away from other email systems to Exchange are probably gone, if only because the traditional targets such as Novell GroupWise and Lotus Notes are in decline. New competitors do take market share, as in the case of Gmail, but usually in markets where Exchange is not dominant, like education.

Given its acknowledged monopoly, Microsoft has to encourage existing users to continue to invest more in the product. Microsoft can either encourage customers to upgrade to new software, including the new version of Exchange that they’re preparing to release, or they can change new and existing customers over to the monthly subscription model paid for Exchange Online as part of the Office 365 cloud service.

Convincing companies to upgrade to new versions of Exchange has always been a struggle for Microsoft. After all, if email works, why meddle with the server? Even the array of eye-catching new features in Exchange 2010 (archive mailboxes, high availability, and compliance) didn’t encourage fast adoption as lots of companies still run Exchange 2003 or Exchange 2007 (and some run older versions). It will be interesting to see whether the new features in Exchange 2013 (or whatever the new software will be named) convince customers to upgrade faster. If only because of history and human inertia, I have my doubts.

On the other hand, I think that the success of Office 365 in terms of fast customer take-up has surprised some and will provide a solid revenue stream for Microsoft that offsets the loss of part of its traditional base. Of course, Microsoft still has to pay a hefty bill to build and operate the set of worldwide datacenters that support its cloud services, but the signs are positive providing that Microsoft doesn’t lose customer loyalty, something that could happen if its services prove to be unreliable.

Elevation Partners clearly thinks that Exchange is important to Microsoft’s future. I agree. I’m just not sure about some of their other predictions, which is one of the reasons why I must not be qualified to be a venture capitalist!

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