By Andreas M. Antonopoulos, SVP and Founding Partner, Nemertes Research Inc.
July 7, 2006

Microsoft (NASDAQ: MSFT) is reluctantly opening Office up to interoperability with competing products. This highlights the pressure Microsoft is facing in some of its strongest markets and shows innovation to be brightest when competition is strongest.

Microsoft's flagship office-productivity suite, Office, has been the de-facto leader in a market with few competitors. After effectively relegating all its old competitors to small niche status, the lack of competition is evident in the lack of innovation. But the greatest barrier to competition, the proprietary document format, is beginning to buckle. Microsoft's shift to an XML-based document format and the OpenDocument format (ODF) are making it harder to fence users in.
Microsoft innovates most strongly in the areas where it has the least market clout. In areas of dominance, such as the core OS, Office and until recently Internet Explorer, innovation goes stagnant until a serious enough challenge emerges. For long-time users of Office, this may seem counter-intuitive: What about all the new features, what about SharePoint? Well, there has been innovation, but it is slow. The lack of modularity and interoperability mean that Office stands as a monolithic block, immune to new technologies and external innovation. You can see a similar scenario unfolding with Internet Explorer (IE): for almost three years, time stood still. As soon as Firefox started nipping at IE’s heels, IE suddenly discovered tabbed browsing, RSS feeds and better CSS compatibility (seen in the beta of IE version 7). Office is next in line for a transformational rendezvous with competition.

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