Based on the popular press announcements and prognostications, it would seem that Google is currently dominating and will continue to do so. What are some actions that Microsoft can take in order to become relevant again?

Some recent work on multi-period innovation in the presence of externalities, licensing and derivative products, Van Alstyne and Parker provide a model to frame puzzles similar to the one faced by Microsoft. A platform provider like Microsoft has several potential software developers in the ecosystem considering the prospect of using their platform to create derivatives and enhancements that provide value to consumers. Microsoft has three choices to make. The first is the free platform share, the fraction of the platform that they will allow consumers to freely adopt. The hope is that this will stimulate developer participation, which, in turn, will attract more consumers to adopt the platform. The second choice is the time period during which they will allow developers of derivative products to earn revenues from consumers. Once the time period for charging expires, the derivative product will be integrated into the core platform. The last decision, based on their model, for Microsoft to make is about royalty fee charges to the developer. Microsoft can charge developers a fee to use their development toolkit/APIs or give it away for free.

They should first recognize that they are competing in multi-sided markets and recognize all the constituents. They wrote the playbook on dealing with developers. Currently, they provide toolkits to developers for a very low fee and charge a licensing fee to the user. They should consider flexible licensing regimes. This is very expensive to implement when software is distributed via CDs or simply downloaded to a user machine. This should change with the announcement of Live. Now, given that every call to a Microsoft application goes to a Microsoft owned server, Microsoft can implement various licensing policies and business models and dynamically change them. One strategy would be give away basic functionality and charge for premium functions like Eudora or Adobe. The other option is to subsidize products through advertising, as done by Google. The third idea would be to let developers innovate on the platform and release new products to the market. Microsoft can then wait to see which one of these products actually find traction with users and then decide how to charge for it.

These options (mainly two and three) are enabled by the fact that the API control is dynamic. In the old PC model, Microsoft controlled APIs by allowing selective access to developers to build products that work on top of the Windows platform. In addition, changes to the API set were made during every release cycle. This typically took anywhere from two to five years. The list of functions that were enabled for API-based access was determined by Microsoft and this was done prior to user feedback. In the new Internet-based model, developers make their request for API access as and when they find the need and the platform provider gives them access. This is a very inductive and user driven way of releasing APIs. While this is similar to Google, Amazon, eBay and Yahoo, the major question facing Microsoft is the following -- is the organization ready to implement their new technology strategy? Given their prior success with the current structure and established practices, can they adapt to the new model?

Another change in thinking should be around the multiple multi-sided markets. Microsoft competes in many multi-sided markets using products like Great Plains, SQL Server, Office, MSN, etc. Each one has multi-sided market characteristics. Microsoft can make each one “Live” and treat them as unique multi-sided markets. This way, they increase their options.

We can see early indications that the company is indeed adjusting to the new reality. The next time you read an announcement from Redmond, check to see if you can identify multi-sided market thinking.