Uncommon Wisdom

Oct 26 2010   12:55PM GMT

In exit memo, Ozzie points Microsoft toward cloud: Is he right?

Tom Nolle Tom Nolle Profile: Tom Nolle

Tech guru Ray Ozzie is leaving Microsoft, and in the wake of the announcement, a memo from Ozzie was leaked to the media. In the memo, Ozzie asks Microsoft to confront an age without PCs, an age in which Microsoft’s traditional PC incumbency would be meaningless.

What Ozzie is looking at is whether appliances like smartphones and tablet PCs, combined with cloud-hosted services, could change the appetite of the public for personal computing. I think that the answer is already known, but it’s ambiguous.

The question is whether cloud computing services can absorb all the functionality of local applications. In theory? Sure. In practice, though, the problems are willingness to pay and profit. If the total market for computing and applications among consumers is seen as being ad-sponsored, we’ve collapsed a multibillion-dollar industry into something that’s likely a tenth its current size, simply because you can’t expect ads to sponsor all of content, all of software, and all of everything else when the world’s ad spend is only about $680 billion and isn’t even growing as fast as world GDP. Thus, we’d have to expect that the consumer paid in some direct way for the incremental application services. So whether that direct payment was less than the cost of central hosting of the applications becomes the question.

To answer it, we say that central IT resources are always cheaper — economy of scale, after all. But the Erlang curve shows that economies of scale taper off at volume, meaning that there’s a point at which no further economy can be gained. And you still need a screen, keyboard (even if its virtual and on-screen), CPU chip and memory to create a network appliance. The cost of making that into a computer isn’t incrementally enormous. I can buy a netbook for $300 and get free or cheap software for writing, calculating, photo-editing and more. Sure, I have to sustain the software, update it and secure it, etc., but most of the threats to security come from the Internet, so don’t I have to secure my appliance anyway?

My point is that Microsoft is as much at risk of overreacting to the future as it is to undershooting it. Its biggest problem is the same one it had before all the Internet appliance stuff hit the market — once everyone who needs a PC has one, what’s your future strategy for growing revenue? Microsoft needs to capture the incremental revenue from the appliance-and-cloud craze, not substitute that revenue for its current revenue stream. If it does the latter, it dies, pure and simple.

Revolutionary stuff is interesting, and in this mindless media age, the only thing that matters is “interesting.” Truth won’t create clickthroughs. But truth is what creates markets.

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