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Microsoft Beating VMware 'Every Single Day'

Microsoft doesn't miss an opportunity to poor-mouth the economy these days, and I'm beginning to think that this posture isn't a way of making excuses for lackluster performance, but actually a way of driving business.

Today Bob Muglia, president of Microsoft's key server and tools division, and a member of the inner circle that includes Steve Ballmer and Bill Gates, told Bank of America Merrill Lynch analysts during a technology conference that, in contrast to previous economic recoveries, "we're not expecting to see massive growth coming out of this [recession]."

I've said previously that Microsoft may be hiding poor management decisions behind the economy's skirts, but Muglia's comments made me realize that Microsoft is actually pinning its hopes for growth on tough times. As Muglia responded to questions from BoA-ML analysts, the overarching theme that emerged was, "we're less expensive than the other guy," whether the other guy in question is VMware, Salesforce, IBM, or Oracle.

  • Muglia said improvements Microsoft is making to its virtualization technology (to be released in October) will force server virtualization market leader VMware to "move to higher and higher end features to differentiate [itself]." Muglia noted that while virtualization software helps customers lower the cost of running servers, Microsoft is "now three to five times less expensive than VMware" running the same kind of technology. "The cost differential between Microsoft and VMware is so dramatic that every CIO" will have to take that into consideration.
  • because Microsoft is the underdog in this market, it offers system tools that manage both VMware and Microsoft virtualization technology, further lowering the cost of working with Microsoft software. "Microsoft is the cross-platform vendor here. [VMware] doesn't manage [Microsoft's] Hyper-V" virtualization tools. As a result, he said, "Now, every single day that goes by, we are gaining share against VMware."
  • Microsoft has always been the leader in helping customers create mission-critical applications more cheaply than the competition, and this will continue to be the case as it rolls out its Azure cloud platform. After years of deriding the idea of running software in the cloud, Muglia noted that "customers can get an incredibly good experience at a cost lower than they could by running it themselves," he said.
  • The irony that Microsoft not only now "gets" SaaS, but is trying to come across as its biggest champion should be lost on no one, least of all Marc Benioff, whose "it's the end of software" mantra has apparently been picked up by his favorite whipping-boy.
  • Muglia noted that it's not only cheaper to run Microsoft Exchange email servers in the cloud than on premise, but it's much, much less expensive running than IBM's Lotus Notes. Exchange in the cloud costs enterprises approximately $10 per mailbox per month, compared to an average of $12 for Exchange on premise and $18 for Notes. "Some of our biggest wins are Notes conversions," he said, adding tartly that Notes "is also looking kind of old these days."
  • Muglia said Microsoft will enjoy better margins that Salesforce, which are in the 17% to 18% range, because Microsoft's "ability to do cost containment will become a stronger and stronger component for us -- it's a muscle we're developing."
  • If Oracle really does hang onto the hardware business it's inheriting with the Sun acquisition, competing vendors like HP and Dell will be driven into Microsoft's arms. That development will lower the overall cost of owning Microsoft branded servers and tools.
Server and tools is Microsoft's second largest operating segment, behind the Client division but clearly the foundation on which Client builds its own business. Over the years, and particularly during the economic boom, Microsoft sought to grow in areas as disparate as entertainment and applications used to run businesses. But the foundation for the company's success has been the stack of application servers, system tools to help IT departments run them, and then its ubiquitous desktop clients and productivity tools. Microsoft's hallmark has been to make things easy -- when Muglia said, "with Visual Basic, almost any developer can build a GUI [graphical user interface] application," he meant literally anyone. And that ease of use bought Microsoft legions of loyal developers and IT administrators. The company lost this focus as it sought easy growth elsewhere, and its complex and unfair licensing schemes angered customers and opened the door to cloud-based competitors who offered fairer and simpler pricing. The need for increased discipline brought about by the recession may be a blessing to Microsoft in more ways than one, by forcing it to return its focus on what it made it successful to begin with.
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