How Microsoft’s Bundling Has Been Adding to Enterprise Costs for Two Decades

Author: Scott Braden

Has Ballmer’s regime sneakily turned Microsoft from the starry-eyed tech dreamers that Gates left, into flinty-eyed bloodsuckers now?

As the stock brokerage commercials say, past performance is no guarantee of the future… but what else do we have to go on?

So let’s review some Microsoft history:

After establishing market dominance with DOS (a story that itself is full of questionable business tactics), Microsoft quickly realized the value of bundling products together in order to claim market share and crowd out competitors.

Microsoft introduced Office in 1990, the same year that the US Federal Trade Commission began an investigation into Microsoft’s “potential” collusion with IBM. Industry watchers have long commented on the parallels between IBM’s business practices (and legal battles) and Microsoft’s…and Bill Gates has acknowledged that IBM was very influential on his business plans and inspirations.

Let’s be clear: there’s nothing wrong with offering a discount to customers who buy more of your products.

The complaint by Microsoft’s competitors is that by virtue of their effective monopoly over the operating system, Microsoft was able to introduce new products, such as Office, at lower price points than competitors could match.  With Windows generating enormous cash flows, the “new” Office suite could be subsidized for a few years until it established market share.  This is exactly what transpired, with Lotus 1-2-3 and WordPerfect and Quark – the incumbent market leaders – eventually disappearing from the market.

The saga of Microsoft’s decision to bundle Internet Explorer free with Windows 95, and the resulting lawsuits and eventual death of Netscape, is also well documented.  Bill Gates in his famous “Internet Tidal Wave memo” in 1995 demonstrated that Microsoft saw the sudden growth of the internet, and with it Netscape’s Navigator browser, as a threat to the future of the company.  Despite the legal challenges, Internet Explorer quickly crowded out Netscape Navigator, a product that was not only hugely dominant in terms of market position, but also seen by most as a superior product.  Now Netscape is defunct, dead, and IE went on to control some 90% of the market

All of this is old news, of course.  The point being, despite the end of the Federal trials and slipping from public consciousness, Microsoft’s bundling ways have not only continued, but increased.

In fact the company is now stacking bundles within bundles, and architecting products such that the most valuable functionality can only be purchased or used if the “full stack” is in place.

In 2001 Microsoft introduced the “Enterprise Agreement”, a volume purchase contract built on a bundle of bundles: Office (a bundled product suite), The Core CAL (a bundle of license rights) and, Windows, a product that customers had already paid for when purchasing their PC’s.

In the following 10 years, Microsoft has manipulated the list of products included in the bundles, in order to establish new products (by including them in the bundle) and then to reap enormous cash gains by pulling a product out of the bundle, requiring separate additional spends by customers.

Some examples:

– The Terminal Services CAL, originally included in the EA bundle, led to widespread adoption of this virtualization technology (a direct competitor to Citrix Corp’s solution)… now sold separately.

– SQL Server CALs, originally included in the EA bundle, led to widespread adoption of this database (a direct competitor to Oracle, IBM and others)… now sold separately and recently seeing huge price increases.

– Systems Management Server (SMS), was included in the EA bundle, leading to widespread adoption of this desktop management tool (a direct competitor to Altiris and many others) which has also been renamed several times.  It had various functionality added and moved into different products, and recently was revised into still another new bundle, resulting in a significant price increase.

These are not trivial exercises in smaller, sideline products.  Each of these products is a billion dollar plus business, grown from zero in a ten year time span, having started as inferior, “also ran” products against strong competitors who had a head start in their respective markets.

That’s quite a track record of success.  Can you think of any other company that has so consistently grown successful businesses?

Let’s take another example. SharePoint.  A product that at first glance looks an awful lot like Lotus Notes, a well-entrenched competitor, an enterprise standard with an entire ecosystem surrounding it, backed by an industry giant, IBM. If any product could be considered “safe” ten years ago, Lotus Notes would’ve been the one.

Microsoft bundled Exchange email into the Enterprise Agreement, and later introduced SharePoint, also in the EA.  No customers were asking about SharePoint in those days; I recall many conversations where clients, when told that SharePoint would be included in their EA, simply shrugged and said “go ahead, we won’t use it, don’t need it, we have Lotus Notes for that.”

Fast forward to today and see numerous quotes by Steve Ballmer congratulating SharePoint on becoming Microsoft’s fastest ever billion dollar product. I’m amazed at how rapidly it’s become an enterprise standard.

Would that have happened without the EA bundle?  I think not.  And in turn, the EA bundle wouldn’t have worked without Office… another bundle that piggybacked on the enormous success of Windows… which in turn was funded by MS-DOS, which succeeded in large part due to the illegal bundling that the Federal Trade Commission busted Microsoft for in the early ’90’s.

Looking back, we understand that Microsoft’s success in the enterprise today seems very unlikely without the power of bundling.

So what?  What does it mean to the enterprise CIO, whose company runs on Microsoft products, whose technical advisors are (mostly) happy with Microsoft’s products?

Here’s a hint:  Microsoft’s bundling strategy continues today; in fact it’s accelerated.

If you have an EA today, you get licenses for “Lync” … want to take a guess what’s going to happen to Lync licenses over the next few years?

But we’re getting ahead of ourselves.  We’ll talk more about the future in the next blog installment.

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