With SP1 and Yahoo bid, Microsoft becomes the new IBM

Microsoft built its empire by being faster and smarter than the behemoths of the old computing world, notably IBM. Today, with the release of Vista SP1, and the trench warfare in attempting to take over Yahoo, it's clear that Microsoft has become the new IBM. The question is, will it be able to reinvent itself as successfully as did the old Big Iron hardware maker?

Microsoft's entire business strategy, in recent years, resembles nothing so much as IBM's during Big Blue's heyday. Back then, IBM thrived because it was, in essence, a hardware monopoly. Nobody, it was said, was ever fired for buying IBM hardware, and so everyone bought it. IBM got an ongoing revenue stream from service and maintenance contracts, and from hardware upgrades. Innovation wasn't required; the money kept rolling in.

Today, Microsoft's business model is the same. No one gets fired for buying Windows or Office. Microsoft reaps money from continuing upgrades to both cash cows. Innovation isn't required. And the money keeps rolling in.

The release of SP1 is a continuation of that business plan. Whether or not you're a fan of Vista (and I'm one of the few people who is), you have to admit that its acceptance in the marketplace has been rocky at best. SP1 offers no significant new technology. A lot of what it offers could easily have been rolled out as a series of patches, rather than a single, big service pack. But Microsoft needs a big bang to convince corporations to jump onboard. So it rolled them into SP1. SP1 is about fixing a year-old problem --- getting businesses to accept Vista. It's about upgrading an existing product, and trying to keeping the cash rolling in. The fact that Vista took so long to develop, and that it took Microsoft a year to roll out fixes for it, shows that the company has become slow and old, in the same way that IBM had become.

The Yahoo buyout is aimed at a much longer-standing Microsoft problem, its inability to figure out how to succeed online. I've been covering Microsoft's failing attempts to dominate the Internet for years, and the mis-steps have been legion. Rather than riding the wave of the Internet, Microsoft has often been swamped by it. Back in the early days of its fledgling MSN Network, for example, Microsoft devised a bloated, unwieldy, proprietary online service, rather than using HTML. It followed the same IBM business plan --- hook people on something proprietary, and get an ongoing revenue stream.

Microsoft has been playing catch-up online every since.

In fact, you can make the argument that Microsoft still hasn't given up trying to figure out a way to turn the Internet into a proprietary service. The "Live" series of products, to an extent, relies on attempting to get people to use Microsoft for-pay products in concert with online. Microsoft Office Live Workspace, for example, is designed, from the ground up, to work with Microsoft Office. And Microsoft Live OneCare is a downloadable, for-pay product, despite its "Live" branding.

The fact that Microsoft needs to fix the problem by buying Yahoo, rather than being able to do it internally, shows that online at least, it's lost the ability to innovate.

IBM only turned itself around after it gave up manufacturing PC hardware and focused more on selling expertise and services, and less on hardware.

For Microsoft the big question is, how to re-invent itself? Both SP1 and Yahoo aren't reinventions, although Yahoo will certainly help it in its online struggles. Buy paying tens of billions of dollars to buy another company isn't going to solve the problem of Microsoft losing its ability to innovate quickly. To find its future, Microsoft needs to look at the company it knocked off the pinnacle of the computing world -- IBM -- and learn how Big Blue turned itself around.