If I had twenty minutes with Bill and Steve, I would discuss the following recent farewell letter from ex-MSer David Stutz. I think this is a tremendously insightful critique of MS's core strategic vulnerabilities.
This letter reinforces my belief that the biggest strategic vulnerability staring MS in the face is a software paradigm shift that is outperforming MS at its own game -- commoditizing software. This shift is what IBM calls the "network" era and what some of us a META call the xWeb era. David Stutz refers to it variously as "networked ways," "the network integration model," and "networked software." Whatever you call it, open network protocols and the open source implementations enabling them are redefining the economics of software.
The (indirect) "network effect" value of widespread Windows use pales in comparison to the (direct) "network effect" value of the Web services protocol stack being built under the leadership of MS. But just as Sun has not been able to monetize its leadership of the Java API/software stack as it is being built, there is no guarantee that MS will be able to monetize the WS protocol stack as it is being built. As document formats drive towards XML-based standards and collaboration protocols do the same (e.g., SIP, Jabber IM, BPEL, UIML) and open source implementations of these protocols arise, how does MS low pricing strategy still save the day? This cuts across IW, .Net, and Windows product families.
So my question would be, "Bill and Steve, Do you think you really turned MS around to catch the Internet wave back in 1995, or did you just survive the initial "tidal wave"? I am linking Bill's infamous May 26, 1995 "Internet Tidal Wave" memo because it reinforces for me how clearly Bill saw the magnitude of the change being wrought by the Internet, but how poorly he or anyone else saw at the time the details of how the Internet would upend everything. (FYI, the ONLY place I could find it was at the DOJ site listing government evidence in the case!) You can see in the memo an understanding of the threat that Internet "protocols" are to MS APIs, but a lack of understanding that simply offering up a MS protocol to run over the Internet was not going to cut it. Microsoft seems to only now be aware that only open protocols, not owned by MS, will achieve significant "network effect."
And so how will MS thrive as a software company as the economics of software fundamentally change underneath the commoditizing effect of open Web services protocols? This is ultimately a question about how Microsoft gradually reinvents itself from a software products company to a services company. No not professional services (although it will need to have a strategy here); rather a services company in the direction of MSN, Hailstorm services, Passport services, MSDN developer subscription services, Project Summit, etc., but moving beyond the challenges and failures of these initial attempts.
In doing so, MS's biggest challenge will be to change its image. I would pick up on David Stutz's comment that "Recovering from current external perceptions of Microsoft as a paranoid, untrustworthy, greedy, petty, and politically inept organization will take years." It certainly took IBM several decades and a near death experience and outside leadership to overcome its monopolistic image.
Thus the three big strategic opportunities/challenges for MS over the next decade or so are: (1) the changing economics of software--MS being out-commoditized; (2) transforming MS into a services company, especially network-based services; and (3) changing public perception of MS from a monopolistic bully to a trustworthy strategic service provider.