Microsoft and the 80/20 rule

Price and distribution matters more than depth of product

My colleague Mike (who has been around the block once or twice) will often remind our team of the 80/20 rule: most companies would prefer to pay for 80% of the functionality at 20% of the cost. Sure, some will pay 100/100 functionality/cost, but that’s the exception.

We get this sage counsel often when we are talking about competition from Google, AWS, Microsoft, etc. — name your large tech company with a big existing customer base. Worry being they’ll build a “fine” product and package it with existing offerings at 0–20% of the cost at which your company is trying to sell it. Microsoft Teams took a big chunk out of Slack with this strategy. And of course Microsoft got an antitrust suit for this type of behavior back in 2001.

Microsoft though… They always surprise me with the markets where they have truly enormous user bases / market share, when I wasn’t even aware they offered a product in the space / competed for a certain wallet. Sure fine Microsoft Office, Teams, 365, etc. — we all know those. But others have surprised me:

  • ETL / Warehouse Loading: Let’s take this recent Reddit thread in the “ETL” sub-Reddit. #1 mentioned product is SSIS, something until today I had never heard of. Microsoft’s SQL Server Integration Services. I was thinking I’d find more venture-backed startups like Census, Hightouch, and Rudderstack. But nope, SSIS. First released in 2005.
  • Private CAs: You see some big enterprises adopting private CAs, not wanting to use certs issued by the public CAs like Digicert, Sectigo, etc. Who has the biggest footprint in this space? Microsoft Active Directory. First released in 1999. Side note — Microsoft in Q1 ’21 passed $10B in security revenue, growing 40% y/y.
  • SQL Databases: I knew Microsoft had a product here, but I didn’t realize it was #1 in market share! Maybe #3 behind Oracle and MySQL according to other sources, but still. First released in 1989… 32 years ago.

How do they do this?

  • Distribution — Microsoft is the primary OS for some 1–2 billion people globally. Close to that number using Microsoft Office. ~250 million on Office 365. Exchange and Outlook are respectively the most popular email server and email client globally. 1/7 of the global population probably spends at least 2–3 hours with one of these tools daily. Plenty of eyeballs to put things in front of. Plenty of businesses looking for out-of-the-box solutions to better support their users on these apps & services, which brings up the next point:
  • Owning the ecosystem — The vast majority of companies want products that just work out of the box. They don’t want to spend time on integration — they just want email to work with Word to work with SharePoint. No huge expectations of bleeding edge tech — just pay $10/user/month, and you’re good to go for 80–90% of what you want.
  • Embedded in cross-company workflows — I’d argue Excel is Microsoft’s biggest point of defensibility. It’s the standard by which any financial or executive organization operates. It’s human-assisted data integration for the masses. Send your DB via email — not a sexy solution, but it works pretty damn well. Related to the famous “bandwidth of a Boeing 747” idea. It isn’t traditional bandwidth + the latency is not ideal, but it works pretty well on the most important dimension (get structured data from point A to point B). Not to stay that Excel helps Microsoft sell products like SSIS, AD, and SQL Server, but it gives them the time to do it.

I’m sure there are products of Microsoft that I’ve missed that carry similar characteristics to those above: huge footprint, 80/20 functionality/cost ratio, and flying somewhat under the radar. In any case, Microsoft’s track record here is impressive.

Investing at Brighton Park