Web 2.0, Microsoft, and the Costs at Scale

Nat just pointed me to a year-old article from Fortune about the strategic thinking that Ray Ozzie was bringing to Microsoft. Nat pointed in particular to Ray’s thinking about infrastructure costs as Web 2.0 reaches scale, something we’ve written about previously on Radar:

As massive as that infrastructure is now, Ozzie says it pales in comparison to what will be needed when everyone is using the Internet for high-definition video and other data-rich goodies. He says he has a 300-page printout on his desk that shows where telecommunications and power assets are located globally, country by country.

“Just think about where there are windmills, dams, and other natural power sources around the world, and that’s where you’re going to see server farms,” he says.

Though he won’t get very specific, Ozzie says that he is amazed at the amounts Microsoft is spending, and that the cost of building the physical infrastructure for Web services will be a major barrier limiting the number of players in this business.

“The people who could build a viable services infrastructure of scale,” he says, “are companies that have both the will and the capacity to invest staggering amounts of money – staggering amounts.” Think billions, many billions.

This is the point so elegantly summed up by Microsoft’s Debra Chrapaty with the statement that we quoted in the Radar post linked above: “In the future, being a developer on someone’s platform will mean being hosted on their infrastructure.” Yet despite Microsoft’s insight into this trend, it’s Amazon’s S3 and EC2 that seem to have actually begun to capitalize on that opportunity.

The article also highlights another key strategic point, namely that we’ve hardly scratched the surface of advertising as a business model:

But the companywide excitement about the potential of online advertising is palpable. MSN’s Blake Irving calculates that annual worldwide advertising spending amounts to about half-a-trillion dollars, vs. total software industry revenue of about $120 billion.

“Only 3.6 percent of that half-a-trillion today is being spent online,” he says with relish, “even though 20 percent of all media viewership – including instant messaging, et cetera – is online now. So just assume that 3.6 percent grows to match the media opportunity. We want to be part of as much of that 20 points as we can.”

Again, despite the strategic insight into the power of advertising as a model, it’s not Microsoft that is seizing the palm. It’s far too early to count Microsoft out, but a year after the fanfare of Ray’s hiring at Microsoft and the justified celebration of his strategic insights, Microsoft continues to struggle. As science-fiction writer Frank Herbert once said to me, “Ideas are a dime a dozen. It’s execution that counts.”