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"Bill Gates'... Head Explodes"

The Economist has an article in this week's issue on Microsoft's ability (or lack thereof) to adapt, "Spot the dinosaur":

Microsoft earns more than half its $40 billion or so of annual revenue -- and the vast majority of its profits -- on just two products: the Windows operating-system and Office, a collection of personal-computer (PC) applications including word-processing and spreadsheet programs. Both, however, are coming under threat from new technologies...

The threat to Microsoft comes from online applications, which are changing how people use computers. Rather than relying on an operating system and its associated application software... computer users are increasingly able to call up the software they need over the internet. Just as Amazon, Google, eBay and other firms provide services via the web, software companies are now selling software as a subscription service that can be accessed via a web-browser...

[O]nline applications clearly threaten the way Microsoft makes its money. Its licensing agreements are geared for a world where software is a physical product, purchased on discs, and paid for at once or in regular instalments. But its online competitors charge each user a subscription: some like Google are even supplying software as a free online service, financed by advertisements. Last month Google acquired the firm that created Writely, a popular online word-processing program that is an obvious potential competitor to Microsoft Word.

Online competitors have also mastered quick development and deployment times that Microsoft cannot match. Meanwhile open-source software... is also gaining ground. George Colony, the boss of Forrester, a technology-research firm, believes Microsoft faces the biggest challenge in the firm's history: "Bill Gates knows how to compete with anyone who charges money for products," he says, "but his head explodes whenever he has to go up against anyone who gives away products for free."

How profoundly ironic. Over the years, Microsoft has made mincemeat of one software firm after another simply by developing comparable technology and bundling it with its operating system -- in effect, giving it away. Now Microsoft is under threat from firms who are doing the same thing to it, using the Internet as their distribution medium.

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