Monday, March 3, 2008

Seven Categories of Software

After looking at all the major RDBMS companies and the entirety of their businesses, I'm ready to expand my working definition of the "software industry" and its major elements.

Consider four categories of "general purpose" software:
  1. Software that companies use (example: SAP's R/3)
  2. Software that individuals use (example: Microsoft Word)
  3. Software that entertains people (example: Guitar Hero)
  4. Software that makes other software work (example: VMware's products)

And three categories of "specialized" software

  1. Custom software (example: Accenture's consulting engagements)
  2. Embedded software (example: Boeing's avionics systems for its aircraft)
  3. Proprietary software (example: D.E. Shaw's trading algorithms)
A software company may participate in one or more of these categories. By my initial count, Microsoft participates in five of these categories, IBM in four, Oracle in three, SAP in two, and Activision in one.

This categorization may help with industry analysis in several ways.

First, the cost structures of companies within each category may be fairly similar, whereas the cost structures of companies across categories may be radically different.

Second, the marketing strategies of companies within each category may be fairly similar, whereas the marketing strategies of companies across companies may be radically different.

Third, each category of software is likely to exhibit its own unique business trends. For example, "software that individuals use" has been undergoing a major shift from consumer-pays to advertiser-pays, thanks mainly to Google. Another trend in this category is for businesses to adopt personal software to improve the way their employees interact with each other, with their suppliers, and with their customers.

Fourth, the answer to "what does it take to succeed?" may bear similarities within each category but differences across categories.

Fifth, this categorization provides a language for describing and analyzing the strategies of companies who participate in multiple categories. For example, it allows the assertion, "Company X believes that to be successful in Category Y, it must also participate in Category Z." Or, "Company A believes that it must grow beyond Category B in order to be successful, and the most attractive avenue is Category C".

Microsoft's RDBMS Strategy

Microsoft describes their overall company strategy in terms of technology and opportunities, and Microsoft sees SQL Server and Access (their main RDBMS products) in this light.

Unlike IBM, however, Microsoft has not clearly defined its target customer base, articulated its sources of competitive advantage, or provided a compelling reason to understand why it will be successful in the future. Moreover, Microsoft's strategy is so open-ended that it is hard to see what the strategy does not include.

Business and Product Development Strategy. Innovation is a key factor affecting Microsoft’s growth. Our model for growth is based on broad adoption of innovation, willingness to enter new markets, and embracing and acting on disruptive trends. We continue our long-term commitment to research and development, including advanced work aimed at innovations, in a wide spectrum of technologies, tools, and platforms; communication and collaboration; information access and organization; entertainment; business and e-commerce; and devices. Increasingly, we are taking a global approach to innovation. While our main research and development facilities are located in Redmond, Washington, we also operate research facilities in other parts of the United States and around the world, including China, Canada, Denmark, England, India, Ireland, and Israel. This global approach will help us remain competitive in local markets and attract top talent wherever it resides.

Based on our broad focus on innovation and long-term approach to new markets, we see the following key opportunities for growth:

Consumer technology. To build on our strength in the consumer marketplace with Windows Vista, the 2007 Microsoft Office System, Xbox 360, Microsoft Windows Live, Windows Mobile, and Zune, we are focused on delivering products that we believe are compelling and cutting edge in terms of design as well as features and functionality. To succeed in consumer technologies, we also are working to define the next era of consumer electronics. In the past, consumer electronics was a hardware-centric business; today, the innovation in consumer electronics devices lies in the software that powers them. This is creating new opportunities for us to deliver end-to-end experiences.

Software plus services. Underlying our opportunities in consumer technologies, and in all of our businesses, is a company-wide commitment to fully embrace software plus services. The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses. As we continue to build out our services platform, we will bring a broad range of new products and service offerings to market that target the needs of large enterprises, small and medium-sized businesses, and consumers.

Expanding our presence on the desktop and server. While we enjoyed success in fiscal year 2007 with the launches of Windows Vista and the 2007 Microsoft Office System, we see potential for growth by delivering more value per customer. With the planned releases in fiscal year 2008 of Windows Server 2008, SQL Server 2008, and Visual Studio 2008, and the possibility to provide additional value in security, messaging, systems management, and collaboration, we believe we are well-positioned to build on our strength with businesses of all sizes. We will continue to pursue new opportunities in high performance computing, unified communications, healthcare, and business intelligence. Emerging markets are also an important opportunity for us. In fiscal year 2007, we announced the expansion of our Unlimited Potential program as the foundation for our efforts to reach the five billion people around the globe who do not have access to PCs and digital technology today.

Source: Microsoft 2007 Form 10-K, pp. 8-9