This Silicon Alley Insider chart of the day, via Tim O’Reilly, caught my attention.  While Microsoft reports operating profit by division in their quarterly SEC filings, the chart does a much better job of telling Microsoft’s business story over the past 3 years.

Source: Silicon Alley Insider Chart of The Day

When the chart was first posted, the date range spanned September 2006 to September 2009.  Silicon Alley Insider added the December 2009 data after a comment on the blog post.  As a result, you’ll notice that the y-axis doesn’t actually span the size of Microsoft’s roughly $10 billion operating profit in the December 2009 quarter.

It’s no surprise that Office and Windows make up the overwhelming majority of Microsoft’s profits.  The Entertainment and Devices division (E&D) seems to be oscillating between profitability and loss, with profits being highest ahead of and during the holiday season.  However, as a commenter, Se7en, writes on the post:

“Wow. E&D still isn’t even making a dent. All the great press, accolades, bragging about the Xbox360 and how it won the console wars, took the war to the living room, and rejuvenated the company, and that’s what we get? A little blue smudge on the bottom of the graph?”

To which, ex-Wall Street analyst Henry Blodget writes:

“@Se7en: Yes. At least it’s not subtracting $2 billion a year, though. (See: Online)”

Entertainment & Devices and Online Services are two important investment areas for the company, made possible by Microsoft’s impressive profits in the Office and Windows divisions.  Whilst Microsoft has had some success attracting the hearts of users in these market areas, there’s a long road ahead before claiming success versus Apple and Google respectively.  Frankly, one has to seriously ask if these investments will ever amount to being the profit engine(s) for the company.  Note, I’m not suggesting that Microsoft abandon or minimize these investment areas.  Rather, I’m asking whether these divisions stand poised to replace the profits from Office & Windows in the face of open source and cloud-based competitors.

This brings us to the Server and Tools business.  With a healthy $1.5 billion in quarterly operating profit and growth over the 3 year analysis window, this division that could potentially offset erosion to the Office and Windows cash cows.  Keep in mind that Microsoft’s cloud, Windows Azure, recently moved into the Server and Tools division.  With the industry emphasis around cloud computing, and Microsoft’s success with .NET middleware, Microsoft likely its future linked heavily to the growth and profitability of the Server and Tools division.

Time will tell.

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

After my previous post “Cloud to boost proprietary software use?”, Tim Bray questioned whether the pricing comparison of “WebSphere/SUSE vs. JBoss/RHEL on EC2 was a transient anomaly”. JBoss’ Rich Sharples commented that I was comparing apples and oranges.  That was not my intention.  I simply picked the only two application server Amazon Machine Images (AMIs) that I could easily find pricing for.  And in retrospect, my intention was not to compare proprietary versus open source pricing in the cloud.  But rather to compare the price differential of proprietary versus open source products in the cloud versus on-premise.

Let me try again with Windows versus Linux.  Specifically, I looked at the price of Windows Server 2008 R2 versus Red Hat Enterprise Linux (RHEL) on-premise and on Amazon’s Elastic Compute Cloud (EC2).  I wanted to evaluate how, if at all, the Windows price premium differs on-premise versus in the Amazon cloud.  One can argue that “you need 2 Windows servers to do the work of a RHEL server.” Such an argument has no impact on this analysis.  If you do in fact need 2, or a higher number of Windows servers per RHEL server, this ratio would hold equally well on-premise or on Amazon EC2.

Here’s what I found:

On-premise license:
Windows Server 2008 R2 Datacenter Edition: $2,999
Windows Server 2008 R2 Enterprise with 25 Client Access Licenses: $3,999
Red Hat Enterprise Linux Premium Subscription for 1 year: $1,299
Windows price premium: 130% to 208% [See UPDATE below]

Amazon EC2 license on Standard-Small AMI:
Windows Server 2008 R2:  $0.12/hr
Red Hat Enterprise Linux: $0.21/hr plus $19/month per customer
Windows Price premium: -43% [See UPDATE below]

If you’re surprised that the Windows Server AMI is 43 percent less expensive per hour than the RHEL AMI raise you hand [See UPDATE below].

Maybe you think I’ve missed some important or potentially hidden costs for the Windows AMI.  I may have. I’m by no means an operating systems licensing expert.  However, it’s difficult to accept that these costs would add up to Windows being 130% to 208% premium priced versus RHEL on EC2.  Even if I’ve missed a pricing component that doubles the “true” price of a Windows AMI in a production setting, that would roughly put Windows and RHEL at par in terms of EC2 per hour pricing.  That’s a far cry from the 130 percent to 208 percent premium for Windows over RHEL in an on-premise environment.

Hat tip to William Vambenepe for astutely pointing out that the license cost differential between proprietary and open source products narrows in the cloud.

[UPDATE:  2009-12-11 @ 5:45p EST — PLEASE Read]

Based on public & private comments here is some new information for readers:

1] The version of RHEL on EC2 is supported by Red Hat at the Red Hat “Basic Subscription Web support” level.  This includes  2 business day response, and unlimited incidents.  Red Hat charges $349/year for this license.  As previously mentioned the equivalent RHEL AMI (with an equivalent level of support) is $0.21/hr plus $19/month.

2] The version of Windows 2008 offered on EC2 is Microsoft Windows 2008 Datacenter R1 SP2 64-bit. The AMI is not supported as part of the $0.12/hr AMI fee.  However, to receive an equivalent level of support for this AMI as Red Hat offers for the RHEL AMI, customers can purchase the AWS Premium Support at the Silver level.  The AWS Silver Premium level support is $100/month, or the equivalent of $0.14/hr. Alternatively, to receive 24×7 support for this Windows AMI, customers could purchase the AWS Gold Premium level of support for $400/month, or the equivalent of $0.55/hr.

3] The price comparison now becomes:

On-premise license:
Windows Server 2008 R2 Datacenter Edition: $2,999
Red Hat Enterprise Linux Basic Subscription for 1 year: $349
Windows price premium: 759%

Amazon EC2 license on Standard-Small AMI:
Windows Server 2008 R2 ($0.12/hr) with AWS Silver Premium support ($0.14/hr):  $0.26/hr
Windows Server 2008 R2 ($0.12/hr) with AWS Gold Premium support ($0.55/hr):  $0.67/hr
Red Hat Enterprise Linux with Basic Subscription: $0.21/hr plus $19/month per customer
Windows Price premium: 23% to 219%

Key point to take away:
Holding the product version and support level constant across an on-premise license and Amazon EC2 instance, the price premium of Windows vs. RHEL, if X% for on-premise, will be less than X% on the Amazon cloud.  Said differently, the license cost differential between proprietary and open source products narrows in the cloud.

[ /UPDATE]

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

See update at the bottom of this post.Based on public & private comments here is some new information for readers:

1] The version of RHEL on EC2 is supported by Red Hat.  The support level is: “Basic Subscription Web support, 2 business day response, and unlimited incidents”.  Red Hat charges $349/year for this license.  As previously mentioned the equivalent RHEL AMI is $0.21/hr plus $19/month.

2] The version of Windows 2008 offered on EC2 is Microsoft Windows 2008 Datacenter R1 SP2 64-bit. The AMI is not supported as part of the $0.12/hr AMI fee.  However, to receive an equivalent level of support for this AMI as Red Hat offers for the RHEL AMI, customers can purchase the AWS Premium Support at the Silver level.  The Silver level support is $100/month, or $0.14/hr.

3] The price comparison now becomes:

On-premise license:
Windows Server 2008 R2 Datacenter Edition: $2,999
Red Hat Enterprise Linux Basic Subscription for 1 year: $349
Windows price premium: 759%

Amazon EC2 license on Standard-Small AMI:

Windows Server 2008 R2 ($0.12/hr) with AWS Silver Premium support ($0.14/hr):  $0.26/hr
Red Hat Enterprise Linux with Basic Subscription: $0.21/hr plus $19/month per customer
Windows Price premium: 23%

But follow the niche alpha geek adoption carefully.

As with anything Google does, opinion ranges from revolutionary to lackluster.  Personally, I think it’s too early to tell.  More importantly, I think the success of Chrome OS won’t be based on the success of version 1.0.  Google has the uncanny ability to generate and maintain interest even in the face of negative initial reviews.

Chrome OS will be limited to netbooks, and more importantly, new netbooks that Google approves. Chrome OS is theoretically competition for Windows and Linux which represent approximately 80% and 20% of the operating system market for netbooks.  But Windows and Linux on netbooks allow a degree of user freedom that Chrome OS doesn’t.  Users can store files, be it pictures, songs, videos, spreadsheets, etc. on the netbook.  These files can be loaded, edited and saved with or without a network connection.  Chrome OS on the other hand, requires a network connection to access user files which are stored in the Google cloud.  This will be an impediment to Chrome OS adoption by average netbook consumers.  Rational or not, the fear of needing to get at files “in the cloud” but not having a Wifi/3G connection will diminish the allure of a netbook that starts in under 7 seconds to regular users.

On the other hand, geeks will be chomping at the bits to pick up a Chrome OS netbook to try out during the 2010 holiday season.  Yes, the “geek” audience is without a doubt a niche market.  So it’s easy for Microsoft or Apple to write off Chrome OS.  But that’s a mistake. As John Gruber wrote in his excellent piece, “Microsoft’s Long, Slow Decline“:

“People who love computers overwhelmingly prefer to use a Mac today. Microsoft’s core problem is that they have lost the hearts of computer enthusiasts. Regular people don’t think about their choice of computer platform in detail and with passion like nerds do because, duh, they are not nerds. But nerds are leading indicators.”

Microsoft’s losses to Apple aren’t based on “regular people” choosing the Mac.  Rather, these “regular people” were encouraged to do so by the geeks in their lives who had made the switch to a Mac years ago.  Consumer technology vendors can ignore the alpha geek niche at their peril.

Truer words of caution couldn’t be said to Apple, Microsoft and Linux desktop vendors in the face of Google Chrome OS.

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

Microsoft announced a new “Spark” program targeted at small web development shops with fewer than 10 employees. WebsiteSpark provides the following Microsoft development and production software licenses:

  • 3 licenses of Visual Studio 2008 Professional Edition
  • 1 license of Expression Studio 3 (which includes Expression Blend, Sketchflow, and Web)
  • 2 licenses of Expression Web 3
  • 4 processor licenses of Windows Web Server 2008 R2
  • 4 processor licenses of SQL Server 2008 Web Edition
  • DotNetPanel control panel (enabling easy remote/hosted management of your servers)

These licenses are provided at no cost for the first three years.  After this term, the web development company, or individual consultant for that matter, must decide whether to continue using the licenses for $999 or $199 per year.  There’s an option to stop using the licenses all together.  But after three years of building skills with the Microsoft stack, I don’t see a significant portion of participants leaving the program.

To monetize the WebsiteSpark program, Microsoft will help participants find a hosting provider for the website/web application developed for their end clients.  Hosting providers offering a Microsoft runtime stack pay software license fees to Microsoft.  Even if the web development company decides to leave the WebsiteSpark program after the three year term, their clients whose website/web application is already running will continue to pay for hosting.  As a result, Microsoft will continue collecting license fees from the hosting providers.

Additionally, since there are only 3 licenses of Visual Studio, Microsoft could also generate license revenue from the fourth through tenth employee at the web development company.

So who exactly should care about this program?  Well, early-stage web development companies or a consultant just starting out is probably the target.  This company or consultant likely has .NET skills, but would prefer to see their business take off before paying for software licenses.  In other words, they are Microsoft customers to lose.  In the past the company or consultant would have been forced to look at (L)AMP because of the upfront cost consideration.

The response on ScottGu’s blog announcing the program has been overwhelmingly positive. Again, that’s because the target are Microsoft friendly ISVs or consultants who now have one less reason to look at (L)AMP.

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

MySpace announced that they’re open sourcing Qizmt, a MapReduce framework used by the MySpace Data Mining team. Unlike other leading MapReduce frameworks that are typically implemented in C++ or Java, Qizmt was developed using C#.NET. MySpace’s Chief Operating Officer, Mike Jones writes:

“This extends the rapid development nature of the .NET environment to the world of large scale data crunching and enables .NET developers to easily leverage their skill set to write MapReduce functions. Not only is Qizmt easy to use, but based on our internal benchmarks, we have shown its processing speeds to be competitive with the leading MapReduce open source projects on a lesser number of cores.”

Count me surprised by the claims that Qizmt can perform comparably with open source MapReduce projects, even while using fewer processing cores. I’d love to hear more about the performance benchmarks. But that’s another story.

Here’s why this story caught my attention:

“Many companies leverage Microsoft technologies in their BI platforms and Qizmt is a natural extension to these platforms. As companies deal with continued data growth and deeper analytics needs, Qizmt becomes a more integral part of BI both from a data processing and a data mining perspective.”

I couldn’t agree more. With the number of companies and ISVs that rely on .NET, Qizmt could become an important technology for .NET ISVs and customers. This is where CodePlex.org steps in. By helping Microsoft ISVs and customers get comfortable with contributing their IP into Qizmt, CodePlex.org could help Qizmt mature a lot faster than is likely with MySpace simply hosting the project on Google Code, as is the case today.

For appearance sake, CodePlex.org may not want Qizmt as the first project it shepherds. Qizmt’s strong .NET and Microsoft linkage will not go unnoticed by those of us watching how the CodePlex Foundation will shift from vision to execution. But here’s an important fact; us watchers, don’t have skin in the CodePlex Foundation game, and likely won’t for some time, if ever. The CodePlex Foundation should start with an audience that could have skin in the game, namely .NET users. As the Foundation demonstrates its independence and value to the community, the Microsoft/.NET linkage will dissipate. But to get there, the CodePlex Foundation needs to show value to developers and to projects soon.

What do you think?

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

It appears that a portion of Microsoft’s “Windows 7” training materials have been released into the wild by a BestBuy employee.  Why is this news?  Well, a section of the training compared Windows 7 to Linux.  The education material provided information that could help better position Windows 7 versus Linux.

You can view the Windows 7 training screen shots related to Linux here.

The Windows vs. Linux comparison material is likely defendable, but does not paint Microsoft as the open source enlightened company that they’d like to become, or at least be viewed as.  I should clarify “likely defendable”.  Most of the screen shots are, in my view, accurate.  It’s difficult to argue that any other OS has broader support for printers, digital cameras, video cameras, applications or games than Windows.

On the other hand, it is easy to argue with claims that:

“There’s no guarantee that when security vulnerabilities are discovered, an update will be created. Users are on their own.”

Or that Linux does not have “Authorized support”.

These claims are accurate if you’re comparing versus an unsupported community distribution of Linux.  But these claims are plain wrong if you’re comparing versus a supported Ubuntu or Red Hat Enterprise Linux Desktop.

Microsoft could have handled this potential for misinformation by adding another column for “Supported Linux” or adding a note at the bottom of each table.

Now here’s the surprising thing.  BestBuy doesn’t sell Linux machines.  So why in the world would Microsoft want to provide this information to BestBuy sales representatives?  I understand that these types of marketing enablement material is created once, and used essentially as-is for several audiences.  Some of Microsoft’s sales channels certainly also sell Linux machines.  Hence, this education was intended for them, and not necessarily BestBuy.

Note to Microsoft; tailor these materials by audience in the future.  Or even better, don’t deliver marketing enablement for certain audiences that you wouldn’t feel confident publishing on your public website.  This applies to Microsoft as much as any vendor.

What I don’t understand is why Microsoft is even putting Windows 7 on the same page as desktop Linux.  This may be a comparison that I or other open source proponents want to see.  But it’s not a comparison that typical PC buyers consider.  Why isn’t OS X in that comparison table?  Shouldn’t Microsoft be comparing with the operating system that PC buyers consider to be comparable, if not superior, to Windows 7? Maybe that was another section of the training material?

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

A poll from SMB marketplace Accredited Supplier suggests that Microsoft risks losing Microsoft Office share amongst UK small businesses.

Accredited Supplier conducted a survey of 1400 existing Microsoft customers and found that nearly 15% of respondents were ready to switch to Google Apps.  That clearly is the risk:

Respondents considering switching to Google Apps (from Microsoft Office):
13% Switching
29% Not aware of Google Apps
22% Undecided
36% Not switching
Source: Accredited Supplier, 2009

Now for the opportunity, which is unlikely to be news to Microsoft:

Preference for accessing business applications through a browser:
34% Prefer browser
28% Strongly prefer browser
12% No preference
8% Unsure
18% PC software
Source: Accredited Supplier, 2009

The reason that customers are considering the move to Google Apps appears to be linked to how the applications are accessed and interacted with.  The published survey results do not point to dissatisfaction with Microsoft office or cost concerns, although these may be contributing factors.  The data does show that respondents want a SaaS access mechanism to their business applications, office productive suites included.

Microsoft has been working on this problem for some time, and the existing Office Life Small Business offering is a step in the right direction.  The missing piece with Office Live Small Business is the hosted office productivity applications.  That missing piece is crucial, and Microsoft needs to fill it soon. Today, Office Live Small Business lets users share documents, but the actual editing of documents requires a desktop install of Microsoft Office.  Microsoft knows this needs to change, least it cede its small business share to Google and others.

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”