Microsoft, the leading manufacturer of personal computer software with its windows based operating systems and application software, has decided to expand its influence beyond windows into the Linux freeware operating system world. The means for entry into this rapidly growing segment of the server operating system market is through a takeover of the Red Hat Linux Company. Currently Microsoft Corporation now owns 51% of the stock for Red Hat Linux.
This expansion directly into the Linux arena will provide Microsoft with the ability to attack competitors in the network server market with the Windows NT and Windows 2000 operating systems on one flank and with the extremely stable Linux operating system on the other flank. Microsoft expects to use this one-two punch to significantly gain market share in the server market and to shape the future of business LANs, WANs and the internet. Additionally, Microsoft expects to gain a controlling market share of the Linux office application suite with a Linux version of its Microsoft Office application suite.
Red Hat Linux is one of the recognized pioneers and leading distributor of the freeware operating system called Linux. Although Red Hat Linux does not have wide name recognition outside of the computer industry, the name is synonymous with Linux among computer professionals. Red Hat Linux is the preferred operating system for the network server program Apache, an extremely stable server program that currently runs on 49% of the internet servers. The current Red Hat Marketing strategy has been to stress three basic points to consumers.
First, Linux is the most stable operating system available. Second, Linux is easy to use and has user friendly graphic user interfaces that facilitate the functionality of the operating system. Third, Red Hat is the ‘David’ competing against the ‘Goliath’ Microsoft. This approach has huge appeal for the ‘free thinkers’ of the computer world. Microsoft’s strategy for maintaining market dominance in the computer software industry clearly rests in its ability to develop or control the operating software for the majority of the computer market.
This strategy has propelled Microsoft to the dominant position in the personal computer operating system market and, with the acquisition of Red Hat Linux, now has the opportunity to decisively control the network server market. Ultimately, Microsoft will use both the Windows and the Linux operating systems to force its major competitors, such as Sun Microsystems and Hewlett Packard to either consolidate or exit from the server operating system market. A key element of the two pronged attack on competitors is Microsoft’s decision to provide a Linux version of Microsoft Office applications for distribution to Red Hat Linux customers.
In addition to creating additional revenue for Microsoft, this move will ensure application compatibility between businesses using the Windows operating system and the Linux operating system. Red Hat Linux, who already controls a significant share of the Linux distribution and services market, is in the position to leverage the Microsoft distribution system, financial resources and suites of application software to gain market share and achieve market dominance in the Linux distribution and services segments.
The takeover of Red Hat Linux by Microsoft Corporation has necessitated that a marketing plan be created to capitalize on this opportunity. This marketing plan will outline the current Situation Analysis, Financial and Marketing Objectives, marketing strategy, action programs to execute the programs and a projected profit and loss statement. The system-level software industry comprises operating systems, operating systems enhancements, and data center management software. Its worldwide market increased 15% in 1998, to $41 billion.
This figure should exceed $68 billion by 2002, implying a 13. compound annual growth rate . The competitive intensity of the computer operating system industry is extremely high. Although there are considerable incentives for competitors to enter the market, the industry is characterized by significant expenses for up-front development, marketing, and technical support infrastructure for initial versions of software products. Subsequent products based on the first version become much less expensive to develop. The software products within this industry often enjoy gross margins of 70 to 80 percent.
The capital support costs to support a software company are relatively small, with labor for software development comprising the largest expense item. Development often involves working in multiple teams of 6, 12, or even 100 persons with long lead times between different versions of software. The most significant entry barrier, however, is the entrenchment of currently used operating systems. Selection of previous versions of a specific computer operating system by a computer user has a tremendous influence on the buyer. The operating systems for computers are not compatible and operate application programs exclusive of each other.
The choice of operating system determines the type of supplemental application programs that are chosen and installed. The expenditure of individual capital for operating system specific application programs creates a monetary incentive for the customer to remain loyal to the selected operating system. This ‘financial loyalty’ plus software compatibility issues and high entry costs combine to create a very large entry barrier to companies attempting to penetrate the market with alternative operating systems. A unique aspect to the computer operating system industry is the lack of influence by suppliers.
The product produced is software, intellectual property, written and published by an individual or company. Supplier influence is limited to the producers of the media that the software is published on and the availability of trained personnel to physically write the computer code. Currently there is no shortage of either, although exceptionally high quality computer programmers are sought after by software companies. The cost of a premium programmer, however, is miniscule in comparison to the profit margin on mass produced magnetic media. Buyer influence in the market is likewise tempered.
Once the investment for an operating system and applications has been expended, there has to be a huge difference in perceived value for the buyer to switch to another operating system. In the software industry a typical buyer response is simply choosing not to upgrade to a new product. This response, however, is constrained by the requirement to remain compatible with the rest of the computing/business world. This pressure is becoming more critical as technology and e-commerce evolves. Eventually the buyer is forced to upgrade or fall behind competitively.
This is not to say that software companies can fix prices with impunity, the challenge to the software vendor is develop the pricing for their product that does not cause the buyer to delay upgrading and is not so exorbitant that the perceived value of a competitor’s software becomes attractive. Industry wide, software is distributed through streamlined distribution networks to software wholesalers and retailers. Microsoft has refined their distribution into a new integrated distribution model combining the best of both indirect and direct sales.
The resulting hybrid model allies the supply channel and vendors into a supply channel paradigm that leads straight to the customer. Product/Product Line and Market position. Microsoft is the industry giant, completely dominating the personal computer operating system market and office productivity software suite applications segment. Microsoft Windows 98 and Windows 95 are installed on 79. 6% of the world’s personal computers; Microsoft Office suite is used by 79% of the market . Prior to the acquisition of Red Hat Linux, Microsoft held a slim advantage in the network operating system’s market with 37% of the servers running Windows NT.
The addition of Red Hat Linux to the Microsoft stable of operating systems brought an additional 17% of the network operating systems that currently use Linux into the fold. Currently the Microsoft family of server operating systems controls 54% of the server market. Major Customers and Market Segments Served. Microsoft has an extremely wide customer base, as one would expect with the market dominance that they enjoy. Major customers for the operating systems market include Compaq, Dell, Gateway, IBM, Hewlett Packard, Micron Enterprises, and CompUSA.
Within the network operating system segment Microsoft has aggressively sought out the full market spectrum of small, medium and large companies, advertising the scalability of their Windows NT software. To complement the scalability of the operating system Microsoft utilizes a Value-Added Provider (VAP) program to provide the customer with a total package of network management, network security, legacy system integration, web design and integration, and project management and e-mail servers. This strategy seems to have paid off, especially among network servers in manufacturing plants.
Among operating systems in plants Microsoft NT is currently operating on 50% of the platforms . Additionally, Microsoft has made significant inroads into the governmental and educational server sectors by stressing cost effectiveness of the windows based systems, legacy program integration and application software compatibility. Historically Microsoft had a difficult time penetrating the internet web server software segment, controlling 22% of the market share among the internet servers . The acquisition of Red Hat changed the playing field.
Red Hat is the leading Linux provider of open source software and services, controlling 60% of the Linux distribution . Most significant, however, is that Linux gave a Microsoft operating system the ability to run Apache Server, the dominate internet server software. Currently Apache Server is operating on 49% of the internet servers. In addition to operating Apache Server, the growth potential for Linux is huge. Growing by 212% in 1998, Linux now controls nearly 20% of the commercial server market. . This growth is expected to continue at a 25% annual rate until the year 2003 .