Microsoft courts governments in strategy shift

Having faced high-profile antitrust cases in both the U.S. and European Union (E.U.), Microsoft Corp. may not immediately spring to mind as governments’ favored friend. So it is perhaps not surprising that the software giant has waged a quiet campaign in recent months to change its image from that of monopolist to “good corporate citizen.”

Microsoft has been creating a new public sector organization charged with engaging and influencing governments’ technology buying decisions and has begun appointing regional and national chief technology officers (CTOs) to head its efforts. It broke out the public sector as one of its key business verticals early this year, and has ramped up investment in education, training and community projects.

In Europe, where earlier this year antitrust authorities took a somewhat tougher stance against the software vendor than their U.S. counterparts, imposing over US$600 million in fines and requiring that the company offer a version of its Windows operating system without the Windows Media Player software, it has grown particularly focused on the public sector market.

At a public sector event in London on Monday, Microsoft announced that it is creating a portal for governments to provision technology from itself and its partners, and that it is teaming with Accenture Ltd. to develop software and services packages for European governments in areas like e-government and public safety.

“In the public sector we have to be consistent, predictable and a good corporate citizen,” Pete Hayes, Microsoft’s vice-president of the public sector in Europe, the Middle East and Africa (EMEA) said at the event.

The makeover is necessary, analysts say, if Microsoft wants to find future success in the crucial public sector market, which is being increasingly wooed by Linux providers that preach a business model much different than Microsoft’s own. If the Redmond, Wash.-based company can change the way it is viewed, from a self-interested corporate giant, to a local as well as a global provider that gives back to the communities where it operates, it has a better chance of protecting its business, they say.

Given the antitrust suits, the rising profile of Linux as a desktop option and new public sector opportunities presented by emerging markets in Europe, Asia and Latin America, Microsoft saw that it needed to take on a community leadership role, said Eric Woods, government practice director at the research firm Ovum Ltd.

“It makes good business sense. The government is the biggest single client in any country,” Woods said.

Hayes is clearly aware of the importance of winning over the public sector. “Governments are extremely important in spurring the effectiveness of technology and wide adoption,” he said.

According to Microsoft, the U.S. Department of Justice and E.U. antitrust rulings against it have not stopped government customers from working with the company.

“I haven’t heard of any difference in our relationship with (government) customers since the E.U. ruling,” Dave Singer, Microsoft’s worldwide director of partner management in the public sector, said during an interview at the event Monday. Hayes expressed a similar experience: “Customers are moving together with Microsoft like they always have. So far, I haven’t seen a difference.”

But with Linux proponents nipping at its heels, preaching a business model that includes open development and free access to software, Microsoft realizes that it needs to appear more flexible and open to competition in order to stay in governments’ good graces, analysts say. Not only are governments influential, they are somewhat more amenable to Linux pitches given that they are often strapped for cash and under pressure from their constituencies to a least consider alternative solutions, the analysts add.

What’s more, public sector contracts often represent a vendor’s crown jewels — offering large investments, numerous users and, perhaps more valuable, providing a sort of de facto endorsement for a certain technology.

Given the importance of government contracts, even a few high-profile wins by Linux (government bodies in countries such as Germany, Italy and the U.S. have announced plans to adopt it) could be enough to prompt a shift in how the company deals with the public sector.

“Microsoft is a very aggressive company and it will actively pursue a competitor, even if an outside entity doesn’t perceive a threat,” said IDC analyst Dan Kusnetzky.

Indeed, on the surface Linux does not look like it will seriously undermine Microsoft’s core market: it represents under three per cent of worldwide desktop operating systems, according to IDC. However, its business model is worrisome.

“Microsoft is very concerned about the Linux development and support market. If it became a broadly adopted model, (Microsoft’s business) might fall apart,” Kusnetzky said.

And as evidence that the Linux business model is the true threat, Microsoft appears unfazed by competitors providing commercialized open source products, such as Sun Microsystems Inc.’s Java Desktop System and Red Hat Inc.’s new Linux desktop operating system (OS).

“We welcome the choice. We have no problem with the Linux OS, we have a problem with a licensing model that doesn’t allow people who invest in R&D to recoup their investments and build a thriving IT economy,” said Jonathan Murray, Microsoft’s vice-president and CTO of EMEA.

Murray is on the front lines of Microsoft’s current public sector push. He was among the first to be appointed to one of the new regional CTO positions aimed at the public sector, and leads a team that includes regional officers and specialists in the areas of security, privacy, systems technology and standards and interoperability.

“The (CTO) role is to establish key relationships with the people who make those decisions and also to influence those decisions,” Murray said. “We are able to drill deeper and manage those higher-level relationships in the public sector.”

In Europe the company has also moved to bolster its public sector sales team. Last month Microsoft Germany hired the SuSE Linux AG account manager who persuaded the Munich city government to switch from Microsoft to Linux last year. And the company will conduct a series of talks in the U.K. next month aimed at “dispelling myths about Linux” that it is cheaper, more secure and more flexible than Windows, according to Nick McGrath, Microsoft’s head of platform strategy in the U.K. (Microsoft is arguing that Linux has its own security issues and support costs and that Windows offers wide interoperability.)

The size, scale and market access provided by government contracts is also a main impetus for a changing public sector strategy, especially in emerging markets in Eastern Europe and Asia, Microsoft executives say.

“When you talk about developing or emerging markets a government customer represents 75 to 90 per cent of distribution for whatever product you want to sell,” Singer said. “In any country, the biggest customer is the government.”

Given the opportunity provided by emerging markets it’s fitting that the public sector event this week was held in Europe. With the recent accession of 10 Eastern European countries into the E.U., the time is right for vendors to target new public sector contracts in the region. The 10 new members that joined the union May 1 bring e-government and modernization mandates along with a healthy dose of E.U. funds.

A more thoughtful corporate image, as a vendor that will become a country’s partner rather than just a supplier, is crucial for entering these new E.U. markets, according to Zdenek Jiricek, Microsoft’s public sector director in Central and Eastern Europe.

The reasons are twofold: not only do these countries have tighter budgets than their Western counterparts, they also often have internal problems, such as high piracy and a lack of transparency, which they need to resolve to create fair and thriving marketplaces, Jiricek said.

“Compared to what we did in Western Europe, which was very transparent — our local Microsoft president would sit down with the government heads and negotiate investment — we have had to become more involved in community life (in Central and Eastern Europe),” Jiricek said.

The company, among other initiatives, has invested in education and employment projects, offered research grants and free training, and has supported local ISVs (independent software vendors) in the region. The efforts appear to be paying off.

“We’ve had the opportunity to sign cooperation agreements with some of these governments, like Romania, saying that we are supporting the government’s information society and on the other hand the government will support our intellectual property rights and maybe team up on some specific projects,” Jiricek said.

These kind of public sector partnerships involve serious investments on the part of the vendor, but the benefit is wide access to green-field markets.

“Obviously, it takes a significant amount of initial investment to enter these markets but we live off of licensing revenue and we need help protecting our intellectual property,” Jiricek said.

While Microsoft, by its own admission, may have learned a little late that being a good corporate citizen is ultimately good for business, it appears determined not to let the opportunity pass it by now.

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