University of Kassel

European Master in Business Studies

Winter semester: 2008/2009

Course: Distribution policies

Select a company/ an industrial area, describe/evaluate strengths and weaknesses of their distribution approach and make suggestions for their

future development

Table of contents

Pages

Introduction 3

I - Company presentation

I – 1.1 Microsoft corporation 3

I – 1.2 Microsoft Windows: Operating System 4

I – 1.3 Microsoft Live Search: Search engine 5

II - Distribution channels

II – 1.1 Distribution channel for Microsoft Windows 6

II – 1.1.1 Individual distribution 6

II – 1.1.1.1 Strengths and weaknesses 6

II – 1.1.2 Included with the purchase of the hardware 8

II – 1.1.2.1 Strengths and weaknesses 9

II – 1.2 Distribution channel for Live Search 11

II – 1.2.1 Strong points/Weak points 13

III - Conclusion: future development 14

Glossary 16

Sources 17

Introduction

Who never heard about Microsoft? The successful company which

started by the work made by a young student called Bill GATES who in some

decades became the richest man in the world.

Microsoft is like we want it or not a part of our life. Nowadays it is almost

impossible to live without technology. Behind it there is a terminal or more

commonly called a computer which is in 90-95% of the cases running by Microsoft

products.

It could seems at the first sight that studying the distribution channels of

such a company is a work without an end but actually it is not.

The reason is that Microsoft makes most of its benefits through only two

products: the Operating System Microsoft Windows and the Microsoft Suite

Office.

Studying the distribution channels of such software within the distribution policy course at the University of Kassel is a great opportunity to discover the position of a company which has a monopole on a market. It shows the rare case when a company can affords ways of distribution that other competitors do not have or cannot use in order to keep leader's position and to keep it for a very long time.

I chose as well to introduce another product: the Microsoft's search engine “Live Search” which help me for my personal research on my master thesis and also to show distribution channels of new products which are nowadays very fashionable: the free web applications.

I – Company introduction

I – 1.1 Microsoft Corporation

Microsoft has been created in April the 4th 1975 by

Bill GATES and Paul ALLEN. It is nowadays a multinational computer technology

corporation which develops, manufactures, licenses, and supports a wide range of

software products for computing devices.

Its best selling products are:

- Microsoft Windows(Operating System);- Microsoft Suite Office;

Microsoft is also present on the hardware market

with some accessories for computers such as mice and

keyboards as well as in the video game market since 2001 with

the Xbox.

In 2008 Microsoft counts 89,809 employees over the world located in

105 different countries.

The famous Bill GATES has been the

CEO of the company from his creation until 2000

when he decided to take some distance by taking

the position of chairman. The current CEO of

Microsoft is Steve BALLMER.

As we can imagine Microsoft has a wide range of products and services.

In order to make this presentation as focused as possible on the topic I decided to

choose two products provided by this company:

– One is the famous Operating System: Microsoft Windows, all

versions included: Windows 2000, XP, Vista... as well as editions for

example: Windows Vista Starter, Windows Vista Home Basic, Windows

Vista Home Premium, Windows Vista Business, Windows Vista

Enterprise, Windows Vista Ultimate...

– and the other one is the Microsoft web search engine: Live Search.

I chose Microsoft Windows in order to have a product which fits well the

requirement for the examination of the Distribution Policies course and Live Search

because I needed to continue my research regarding the world of search engines for

my final master thesis.

I – 1.2 Microsoft Windows: Operating System

Microsoft Windows is the famous Operating

System(cf. Glossary) which made the success of Microsoft.

This product is dominating the market of computers(desktop and laptops) with an incredible 90% of market shares(2008).

Xbox 360

Bill GATES Steve BALLMER

Microsoft Windows logo

Economist are speaking about a monopole of the market. This situation is moreover

enforced by the fact that his two main competitors

are not really playing on the same market: Mac

OS(from Apple) seems to be focus on a niche and

Linux(specialized in Web Server Operating System)

is more targeting advanced users.

In order to understand better this monopole we have also to take into consideration that most of the computers sold in the world are sold with Microsoft Windows. In customers mind it is even sometimes unthinkable(unfortunately for its competitors) that a computer cannot be sold without Microsoft Windows.

I – 1.3 Microsoft Live Search: Search engine

Before November 2004 Microsoft was

dependent on other companies technologies regarding

their search engine. But after this period Microsoft developed his own product by itself.

Live search is an online web search engine available at

http://www.live.com/ . It is a service which is in

direct competition with other big search and

worldwide well known engines such as

Google(created in 1998), Yahoo(created in

1994) and Baidu(created in 2000).

Microsoft Live Search is the fourth

most used search engine in the world after

Google, Yahoo and Baidu.

What makes this search engine

very interesting to study is that it is definitely not following his competitors for its distribution channels. Which actually is quite amazing because Microsoft has for reputation to be a follower regarding innovations on technology(except for the operating system).

II - Distribution channels

II – 1.1 Distribution channels for Microsoft Windows

The 90% Microsoft market shares according to Net Applications

http://www.live.com/?scope=web&mkt=en-US

The Operating System Microsoft Windows can be sold in two different ways:

– Individually;

– Included with the purchase of the hardware;

If the first one seems obvious the second one is a bit unexpected and

actually illegal according to the law.

II – 1.1.1 Individual distribution

I do not have the exact figures regarding how much does the individual

distribution of Microsoft Windows is regarding to the one including with the selling of

the software. But taking in account that the change of an operating system is driven

by the obsolescence of the hardware and that the operating system has always

been sold with the computer, then there are good chances that individual selling are representing only a small piece of the whole cake.

Regarding this individual distribution it can be divided into three parts:

– You can buy the product at any stores which is distributing the Operating System(specialized stores, supermarket...). Contrarily to Apple

with the Apple stores Microsoft does not have his own physical outlet;

http://www.bestofmicro.com/actualite/25967-Microsoft-Apple-Store.html

– You can buy it online. For information Microsoft online personal stores just

opened, it seems that it is the way Microsoft prefer instead of providing

physical stores

http://windowsteamblog.com/blogs/windowsexperience/archive/2008/11/13/i

ntroducing-the-microsoft-store.aspx

https://emea.microsoftstore.com/de/

– You can receive it as a donation, this is the case for Microsoft in Africa for

example; http://online.wsj.com/article/SB122332198757908625.html?

mod=googlenews_wsj

II – 1.1.1.1 Strengths and weaknesses of individual

distribution

Weakness:

As I said previously selling individually this product

has a very low demand because the operating system is always

sold with the computer and will maybe cover the whole life of the

hardware. The problem is that Microsoft has to provide this

solution anyway to its customers. A small market but divided a

bit everywhere means a lot of money to allocate to a marketing

campaign and of course a strong repercussion on the final price of the product.

If price is high then(and moreover in the software

industry) people will look for substitute products which means in some cases:

Piracy.

The best example we can find on the Internet is the one of the

introduction of Windows Vista in China.

Two weeks after his introduction in China only 244 copies have been

sold whereas Microsoft spent millions and millions of dollars in advertisement.

http://keznews.com/2726_Microsoft_Only_sold_244_copies_of_Genuine_Windows_

Vista_in_China

The reasons of this small amount of those copies sold are in fact two:

- The first one is the price of the software. Microsoft sold it initially to

201$ but then discounted until 66$ and this for two reasons: Chinese people cannot

afford a such price and in Chinese culture Chinese people are ready to pay a high

price for the hardware but not for the software(notion of service is different);

http://www.pcworld.com/article/135463/microsoft_cuts_vista_price_to_66_in_china.h

tml

http://www.mydigitallife.info/2007/08/06/microsoft-annouced-windows-vista-price-

slashing-for-china-market/

- The second one is the Chinese copy culture, a recurrent economic

problem.

A Chinese copy of Windows VistaDVD copies outlets in the street in China

Windows Vista Advertisement on a skyscraper in China

In most of the streets you can find a copy of the operating system.

http://news.softpedia.com/news/Windows-Vista-On-Sale-in-China-45008.shtml

Strength:

As Microsoft's chairman says “let them pirate software developed by Microsoft -that increases the overall number of Microsoft software users and

some of them may eventually convert into paying customers.”It is even profitable to Microsoft in one way because “Indeed, in China's

back alleys, Linux often costs more than Windows because it requires more disks.”

so Piracy is in one hand giving less profit to Microsoft Windows but on the other

hand is making rid off one of his main competitor.

http://labnol.blogspot.com/2007/07/we-love-microsoft-software-piracy-in.html

II – 1.1.2 Included with the purchase of the hardware

The most distribution channel used by Microsoft in order to sell the

Operating System is through hardware(desktop or laptop computers as well as

mobile devices such as cell phones).

You have of course here then several ways of distributing the final

product but it depends of the partnerships you made with the hardware

manufacturer.

For example the final product can be sold through: supermarket, special stores, online, partnership with public institutions such as schools etc...

It may surprise you but the way Microsoft is distributing his Operating

System is totally illegal because in fact when you buy a computer it is always sold with Microsoft Windows included in the price. The distributor is hardly ever

giving you the possibility to opt for a different Operating Systems. The only way to

do so is to build your own computer, to go to court or to find very specific computers.

We could think that this distribution is fair because there is no alternative

for the consumer but what about:

– if you want to go for Linux rather than Windows, why should you pay

179€ more for a software that you do not want and/or that you do not

need, Linux being free that is a chance but in some cases it is not so you

are paying for two Operating Systems;

– if you already paid an Operating System, the classic example is when

you have another computer that you do not use anymore, you could

easily uninstall your software from one to install it in the new one;

– if you receive the software from a donation or if you only want the

hardware for any kind of reason;

As you can see the way Microsoft is distributing his product is very

special and should be analyzed very well in order to understand how Microsoft can

be nowadays so profitable.

I mentioned previously a very interesting distribution channel that I

would like to emphasize, the one of government and public administration such as schools.

This is a very strategical way of distribution. People have two ways to be familiar with the operating system: or they buy/use the computer or the

product within their own circle(family, friends)or they are familiar to the

computer/product outside their own circle(companies, schools...).In the first case they have more or less the choice they want but in

the other case it is more or less imposed by the company or institution.As I said this is a very strategical approach because the strength of the

operating system is the dependence it is going to provide on the long run. More

particularly if you have been raised with this technology. For example when Microsoft has a partnership with a school and sell 500 computers with Microsoft Windows on it, it is not only 500 licenses that it is selling but the number of students who will use those computers and so raised with this technology who will buy Microsoft products and be dependent of them. The

more people use the technology the more they get addicted and the least they are

going to be ready to try another one.

II – 1.1.2.1 Strengths and weaknesses of grouped distribution

Weaknesses:

This distribution channel burst for Microsoft last year because of the introduction of low cost new products such as netbooks and mobile

devices(such as some cell phones which require an OS in order to work) which

brought new competitors. The problem of these new products for Microsoft is that

it makes cross the telecommunication software providers with the software computer

providers. The most recent serious competitor Microsoft has to face with on the

mobile market is Google which comes into the market with his Operating System

called Android. Google speaks about getting a market share of 4% on cell phones

with this technology in the US market before the end of year

2008.http://www.cellular-news.com/story/33726.php.

Another weakness for Microsoft is the introduction of these low cost

products(netbooks) which based their marketing policy on low cost(less than 300€).

If Microsoft wants to enter in this market it has to cut his price of Operating System if not the price of the netbook comes to be the same as the first prices

laptop.

Microsoft is looking too much about profit. Recently it lost a very

huge market share in Africa regarding the one laptop per child project which

consists in selling computers to African children at the cost of 100$. Microsoft did

not see the interest to go for this market so his competitor Linux took it. So sometimes you have to go for market shares rather than profit.

The major weakness of Microsoft Windows is that the way it is

distributing himself is totally illegal. http://fr.wikipedia.org/wiki/Vente_li

%C3%A9e#Fabricants_d.27ordinateurs_pratiquant_la_vente_li.C3.A9e In English it

is called “Bundled Sale” and consist in selling in an all pack including only one price,

several products without giving the possibility to sell them separately. The legislation

forbid the “bundled sale” is most of the countries with however some different

interpretations of the word product and a laxity regarding the application of the law.

In France several consumers went to court in order to complain and won the

process. http://www.aful.org/communiques/court-paris-ufc-darty Each computer or

laptop sold in the world with Microsoft windows includes in fact two products. The

normal price of any laptop in the market is in fact from 150€ to 210€ below. So

Microsoft is then theoretically under the risk of an incredible process for illegal distributions and partnerships.

Strengths:

Microsoft is currently almost unmovable regarding the distribution of his

operating system through computers.

The last example in mind is the market of netbooks.

Those computers came out in 2007 and was a total new market based on low cost.

Microsoft thought that this market was not profitable and did not get into it and let his

main competitor Linux entered in the market.

However it seems that people were sending back most of the netbook after seeing

that Linux did not fit with their requirements

http://www.thestandard.com/news/2008/11/09/netbooks-opportunity-windows-and-

threat-linux

finally Windows is taking back more and more the market shares that it was losing at

the beginning on this market.

So I would say that one of their main strength is that they are almost

unmovable because people are so dependent some customers even do not know

that a computer cannot be sold without Windows.

A computer is very often sold with Microsoft Windows even in countries

such as China. As an example you can give a check at Fujitsu website in China,

even if everything is written in Chinese the name of Windows Vista appear in the

characteristics of the computer. This information has been confirmed by local

Chinese people that I know who told me that they never saw a computer sold

without an Operating System. They even thought that it was a gift...and actually they

are not the only ones. So Microsoft is losing profit regarding the individual pieces of

Windows sold in China but actually has “real market shares” because on his main

distribution channel everyone is buying it at the price fixed by Microsoft.

http://www.fujitsu.com/cn/services/hardware/pc/lifebook/s/

Even if a hypothetical trial can make Microsoft goes bankruptcy can we imagine the consequences that it will have on all Microsoft users(90% of the world computers and all companies are based on computers data process), a such scenario is economically unthinkable.

II – 1.2 Distribution channel for Live Search:

The distribution of a Web Search engine is for sure far different that the one of an Operating Systems. Firstly because this is a technology which is

available to anyone who has an Internet access and because his use is totally free.

His economical model is based on the advertisement it will provide to the company

in exchange and the revenues which come from the ads which are posted in. What

is very interesting to see with “Live Search” is that it has a technology which is far

more recent that its three main competitors which concretely means that it has a technology which is below the others. Microsoft often played the follower position regarding R&D.

It however has 4th comfortable position whereas other competitors such

as Lycos or Ask(two other small competitors) have better technologies, the reason is

because Microsoft is not using the main distribution channel.

So the distribution channel examples I am going to give you are very interesting

because they show how to distribute a bad product to the all world, how avoiding competitors and how to force people to use a product they do not want.

I until now counted 5 distribution channels for Live Search:

The first one which comes into my mind is Internet.You can use it in an indirect way(you go to a website which have a link toward it:

catalog, blog, websites) or you can directly type the Internet address.

The second one is through Web applications:Last one in date is the partnership with Facebook the number one social web

network application. Microsoft invested in 2007 240 millions of dollars in Facebook

shares. It seems that this large investment contribute to the acceptation of this

partnership. So now concretely when people are using the Facebook application on

Internet they can look for information through the web without leaving the

application.

http://www.readwriteweb.com/archives/facebook_integrate_microsof_live_search.ph

p

This partnership has been sat up in July 2008.

Facebook is only one example among others. This is a channel which is

very fashionable for example you can see on the portal of the university of Kassel

that it is Google search engine which is included. The Kassel university website is

then a distributor of Google.

Through his own products and services:

Here is a very interesting channel because it is not that used by its competitors. The

reason is that you need for this to have a wide range of products and services and

that they produce a dependence on you. For example Hotmail(Free Microsoft

Webmail services) which has more than 260 millions users includes Live Search.

http://en.wikipedia.org/wiki/Hotmail#cite_note-users-2

Same thing if you launch some research from Microsoft Office.

We can imagine the impact of such a channel when you have as Microsoft a huge

number of users of his products and services which of course do not end here

because Microsoft provide a very wide range of other software and services such as

blog(space.live), instant mail exchanges(MSN).

So even if you are not providing the best service you can get an important

audience.“No matter what are the characteristics of the product it is before all a

question of how you can show you off.”

The fourth Channel is the one of software. The last example in date is

the one of the Java software("Java is installed on 800 millions of computers in the

world, then 91% of the computers which have an Internet connection"), November

the 10th 2008. Which one download users will have the possibility to download what

we call the Microsoft research bar http://benefice-net.branchez-

vous.com/actubn/2008/11/le_moteur_de_recherche_de_micr.html

The last one is the hardware distribution. This is as well a very

important distribution channel which is moreover very dynamic with the rising up of

the mobile technology. Two years ago Live Search made a partnership with Nokia

the cell phone maker in order to include his technology as default search engine:

http://www.numerique.ca/production-site-internet/actualite-160-live-search-sur-les-

telephones-nokia.cfm

Of course such partnerships have already been developed with

computers, for example recently Microsoft did a partnership with Hewlett Packard to

set up their search engine by default on the computers they sold in the USA and in

Canada: http://benefice-net.branchez-

vous.com/actubn/2008/06/lengin_de_recherche_de_microso.html

"According to a Microsoft analyst, 40% of Internet users use the search engine

installed by default on their computer” even if by reputation Microsoft statements

have for reputation to not be that accurate it is for sure a distribution channel that we

cannot deny is strongly efficient.

What is very important to highlight is that the four last distribution

channels are imposed whereas for the first one you are free to choose it or not.

II – 1.2.1 Weaknesses and Strengths of Live Search distribution

Weaknesses:

Not giving the choice to people can increase their unsatisfaction. Let's imagine that

they are forced to use Live Search and that they discover that the results coming

from one of his competitor is better then they will really have the feeling that

Microsoft is cheating them by not giving them the possibility to change. So Microsoft

has to provide an equal or a better technology in order to handle this problem. It can

jeopardize his image and moreover provide general unsatisfaction.

Strenghts:

Microsoft has a definitely strong advantage on some distribution

channels: it can afford very large investments so strategical partnerships, it has a

wide range of well known software and applications.

He can go above unavoidable barriers that its competitors cannot

overcome such as nationalism like in Russia or China. Here it is his channel of his

own products that it will use. You can avoid Google but you cannot avoid Microsoft.

III- Conclusion: Suggestions for future developments

Regarding Microsoft Windows:

It is hard to say something because Windows is the world leader regarding this

product. They however made some mistakes regarding the launch of the netbooks.

They taught that it was not a profitable market which actually is right but it should not

be Microsoft priority. They should better think about their image and market shares

rather than profits. Since some years Mac OS and Linux distributions are getting

more and more market shares. Mac OS does not seem to jeopardize Windows

because they do not play on the same market. However with the netbook

market(low cost computers) gave a great opportunity for Linux to be known. I do not

think that customers are ready to switch from Windows to Linux, on a short term

period Linux has no chance, but the thing is if Linux came to be more and more

known then people will be curious and then Microsoft could lost more market

shares.

The recent example of the Eee PC.

Equipping Linux on a computer costs about $5, compared with $40 to $50 for XP

and about $100 for Vista, according to estimates by Jenny Lai, a Taipei-based

analyst at CLSA Ltd.'

according to http://mobile.slashdot.org/article.pl?sid=08/11/08/1842212

Regarding Live Search:

Here I find that the distribution channels are perfect, actually Microsoft has the

reputation to be very good tactician. I however really think that it is time now for

them to care about quality and image. They are for me by using their lock in strategy

focusing too much more on dependence profiting of their monopolistic position and

they have to be very careful about it. Because once a customer feels cheated if you

let him one opportunity to escape he will took it.

And this reverse situation could happen far faster than we think because Google is

coming on Microsoft market with a far more better image on customer's point of

view.

In order to conclude I would like to use two sentences that one told me

one day about Microsoft:

“Bill Gates was not the best computer programmer but a genius of marketing.”

“I do not think that a company such as Microsoft can think one day to close”

Those two sentences that I got from my elder brother and from an

employee at my last internship company(both computer programmers) are the

reflect of nowadays Microsoft's situation.

All here is about distribution channels. Microsoft is leader and will stay

the leader during a long time because it has a monopole on this distribution and

because it can afford ways that others cannot.

I however think that Microsoft should start to think about his image for a

long term strategy.

Glossary

Operating System: An operating system (commonly abbreviated OS and O/S) is the software component of a computer system that is responsible for the management

and coordination of activities and the sharing of the limited resources of the

computer.

Microsoft Suite Office: Microsoft Office is a set of interrelated desktop applications, servers and services, collectively referred to as an office suite, for the

Microsoft Windows and Mac OS X operating systems. The most famous

applications it contains are: Excel, Word, Access and PowerPoint.

Netbook: A netbook is a small to medium sized, light-weight, low-cost, energy-

efficient laptop, generally optimized for internet based services such as web

browsing and e-mailing.

Sources

http://www.microsoft.com/france/windows/products/windowsvista/buyorupgrade/win

dowsanytimeupgrade/overview.mspx

http://en.wikipedia.org/wiki/Operating_system

http://en.wikipedia.org/wiki/Microsoft_Office

http://en.wikipedia.org/wiki/Windows_Vista#Editions

http://en.wikipedia.org/wiki/Ubuntu

http://en.wikipedia.org/wiki/Live_Search#cite_note-0

http://en.wikipedia.org/wiki/Netbook

http://en.wikipedia.org/wiki/Bill_Gates

http://hardware.slashdot.org/article.pl?sid=08/10/04/1827200

http://www.thestandard.com/news/2008/11/09/netbooks-opportunity-windows-and-

threat-linux

http://laptop.org/en/index.shtml