The Microsoft Hustle

Despite their cringeworthy hardware, software, cloud services, and acquisitions, Microsoft is still a brilliant company in this day and age and you would be foolish to underestimate them in this regard. Sure, their last three operating systems have been complete turds and they have been reduced from being able to charge hundreds per license to giving Windows 10 away for free while having to place ads on it, implement invasive telemetry that can’t be disabled, and resort to malware-esque distribution tactics; Windows 7 still has almost twice the market share of Windows 10 and it is almost a decade old. Their Surface line of laptops are even hated by internal employees and their quality is so poor that Consumer Reports had to pull their recommendation. Even worse, they spend more on marketing than R&D, $14.7 billion vs. 12 billion in 2016, which essentially means that they’re a marketing company with a software problem. So what makes them so brilliant? Their partner network.

To those unaware, Microsoft’s partner network consists of consulting firms, software resellers, and the like and is responsible for 95% of Microsofts commercial revenue; making them ol’ Softy’s predominant customer. Most partners offer a wide range of services surrounding the Microsoft stack, including but not limited their implementation, management, and support (IMSs). But, they don’t stand behind Microsoft products because they happen to provide the least defective or most efficient solutions. Instead and on top of having 19% higher profit margins than their nearest competitor, for every $1 of revenue that a partner firm steers towards Microsoft, the firm stands to earn an additional $9.01 through their IMSs at the expense of their clients. For example, if Microsoft products were a $50,000 car that a company depended on, it would come attached with $450,500 in subsequent maintenance costs.

However, the businesses that are trusting Microsoft partners are paying significantly more than the cost of their IMSs, which are less often than half of the story with regard to IT finance. Even in a well-managed environment, productivity loss is almost always the largest IT expense for businesses, regardless of their size. After productivity loss, IMSs come in as the second most costly with hardware/software costs coming in third. Simply put, while the $50,000 car may cost them $450,500 directly through maintenance, it would also see productivity loss ≥ its maintenance costs because of the inherent downtime, increasing the overall financial burden on the company to a minimum of $960,000.

Unfortunately, what is profitable for a typical consulting firm comes at the expense of their clients and there are few situations where Microsoft offers the most economical or productive solution than their competition. In a blog post to their partners, Microsoft even suggested that they “create stickiness” with their solutions, which is slang for “creating profitability” and I have been all but forced to accept that their own products are created with this same mindset. Because of this ploy to make things more profitable, even companies like IBM, the inventor of the PC, have migrated to Apple products after realizing that their Total Cost of Ownership (TCO) was reduced 1/3 that of a Windows PC, which is significant.

“Creating stickiness is all about looking for opportunities to entrench your (our?) solutions and increase switching costs.” -Jen Sieger, Sr. Business Strategy Analyst @ Microsoft

It shouldn’t be difficult to see that how defective or “sticky” an IT solution is relative to how costly it is to implement, manage, and support. As IT solutions become less defective over time, the cost and frequency of their IMSs would also decreases. Conversely, as IT solutions become more defective over time, the cost and frequency of their IMSs increases, becoming more profitable for partner firms. For software companies and just as software becomes more defective over time, it also becomes more expensive to market just the same; re: marketing company with a software problem. I digress, but it is easy to see how partner firms can profit immensely off of defective software solutions while minimizing less profitable and less defective solutions that generate less necessity for their services, not to mention how a conflict of interest can emerge between Microsoft and its partners because of this dynamic between them.

Rather than putting their clients first and aligning their business model with their best interests, Microsoft partners seem to be in complete alignment with Microsoft for obvious reasons; hence the designation of “partner”. Seemingly, in exchange for Microsoft “creating stickiness” or shipping turds if you’re into that whole brevity thing, their partner firms generate the majority of their revenue through their IMSs which Microsoft products generate the most revenue for. Combined with having 19% higher resale profit margins, Microsoft Partners have a significant incentive to stand behind Microsoft products while also also fending off or ignoring competing solutions, regardless of the potential impact to their clients.

Because of this, Microsoft actually seems to have more of an incentive to maintain an ideal amount of “stickiness” or “profitability” for their partners at the expense of their clients and can accomplish this by simply controlling how defective their software is. More defects lead to more downtime, more downtime leads to increased IMSs and productivity losses while consequently becoming more profitable to their partners. Even though Microsoft can’t directly go into their code and create bugs intentionally, they can absolutely impact how defective their code is. On top of laying off a significant amount of their QA and SDET resources which will have an obvious effect on how defective their software are, Microsoft can also tune their defect density by limiting employee headcount elsewhere, which increases the volume of work relative to their employees along with the likelihood of a mistake. Such practices are much more plausible for Microsoft since they also have strong vendor workforce which can pad their FTEs from the attrition.

In a way, Microsoft has found a way to profit off of defective software, which is brilliant in itself and you have to give them credit where it is due. Even though such a relationship dynamic between Microsoft and their partners may actually be a violation of the Sherman Antitrust Act if they’re doing this intentionally, it would still be a brilliant crime if that were the case. They may be the Buick of software companies and their logo may look like painted Borg cubes doing their best Voltron impersonation, but they are anything but stupid and you would be wise to remember that they do not generate almost $100 billion dollars per year by accident.

“High-quality software is not expensive. High-quality software is faster and cheaper to build and maintain than low-quality software, from initial development all the way through total cost of ownership.” -Capers Jones

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