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Tuesday, August 10, 2010

Quo Vadis, Microsoft?

Alco, Baldwin, and Lima. Do you recognize these names? They were major forces in the U.S. economy between 1900 and 1950, but hardly anyone remembers them.

Alright, I’ll stop the suspense. Alco, Baldwin, and Lima were the top three manufacturers of steam locomotives. They provided railroads with thousands of locomotives during the heyday of steam.

This post is about technological discontinuity, not railroad nostalgia. In the 1930s, diesel locomotives entered the market. World War II required the diversion of almost all diesel engines to military usage, but after 1946 diesel locomotives rapidly displaced steam. Who became the dominant providers of diesel locomotives? General Motors and General Electric. Neither had been in the steam locomotive business.

Alco, Baldwin, and Lima tried to compete in the diesel business. All three failed. Their engineers and assembly workers didn’t have the necessary skills; their management didn’t want to cannibalize their traditional product line; their accountants opposed investing in new production facilities, given the uncertainty of success.

The truth is, it’s exceptionally difficult for a manufacturer to thrive over a long period of time. Corporate demise is natural. This leads me to Microsoft, a company that has been fantastically successful since the 1980s. I believe Microsoft has hit the wall.

PC technology has become stagnant. Businesses are continuing to adopt Unix, which is anathema to Microsoft. Consumers crave smart phones and media products like DVRs; but aside from the Xbox -- which is getting old -- Microsoft has gained little traction in the consumer space.

Microsoft continues to get most of its profit from the Windows operating system and the Office application suite. In my opinion, neither of these products is significantly better than versions of 10 years ago. The world is tiring of throwing big bucks at Microsoft for mediocre upgrades, and anti-trust laws have largely negated the strategy of changing the Office proprietary file formats periodically so that users are compelled to upgrade.

Will Microsoft go the way of Alco, Baldwin, and Lima? Ten or five years ago, that would have been a foolish question to pose. Not now.