The Register had an article about how Microsoft is trying to hold back the open source tide by levying royalty payments on Acer and Asustek for their use of Android.

The article also talks about how Microsoft is failing to come out with a business model to compete against open source projects/products like Android.

I think though, that the question is not really one of open source versus proprietary or closed source.

The real Microsoft vs Android question is what is today’s new business model?

Is it one whether the software product itself is the end to itself? Or whether it is a means to an end? Whether or not the product uses open source is irrelevant.

For traditional Microsoft products (Windows, Office etc), the software is the end. Microsoft gets its revenue at the point of purchase of the software.

For Android, the software is the means to the end. Google does not get meaningful revenue when you buy an Android device. Rather, Google gets its cut when you use the device.

This difference reflects the economics of the new millenium: the product itself is no longer the major part of the business model. It is only a means to executing on the business model.

With the old approach, the consumer lifetime value is limited. Once the product is sold, there is no additional revenue. That is why companies like Microsoft come up with frequent and sometimes useless version upgrades: to get additional revenue from existing users. A subscription model is a variation of this.

With the new approach, the consumer lifetime value is practically limitless. As long as the consumer is using the product, she is generating revenue for the company. Since the product is basically “free”, there is almost no barrier to user upgrades and continued usage.

As a product manager, this new approach presents its challenges. You can no longer just focus on the product itself. The latter is now part of a larger ecosystem: the business/revenue model. This will mean integration with other services and products.

On one hand, you have to make sure that your product is usable, that consumers want to use it. On the other hand, you also have to make sure that the product is sufficiently well integrated with your company’s monetization products and that the users will use your product in such a way that they will generate meaningful revenue.

The upside is that the revenue potential is enormous. Just look at Google.

Does anyone remember the UMPC aka the Ultra Mobile PC?

It was only about 3 years ago that the press was all agog with the idea of UMPCs and MIDs (mobile internet devices). Even consumers were excited by the idea: a super small handheld PC that you can use on the go; no keyboard or mouse needed, thank you!

The Asus R2H was one example of a UMPC. It came with a 900MHz Celeron processor and Windows XP Tablet edition. User input/interaction was via a pen/touch screen combo. Versions of this UMPC even included a GPS module.

The resulting product was completely unusable.

The CPU was too slow, the operating system was original intended for a large screen/keyboard/mouse paradigm and everything, from the on-screen keyboard to pop-ups, dialog boxes and application windows got in the way of what you are trying to do.

As part of my work, I actually went through the OOBE (out of box experience) of the R2H and could not even set the screen resolution: the change resolution dialog box was outside of the visible screen area.

Fast forward to today and look at the Apple iPad and Android devices. At the IFA show in Berlin, manufacturers from Archos to ViewSonic will be unveiling a number of Android-based tablets.

Any one of these devices will beat the R2H hands down in performance, size and usability. For a size comparison, just look at the photo comparing the R2H (left) with the Dell Streak (right). Interestingly, both devices have the same screen resolution (800×480):

For the question of performance and usability, the answer has to do with using the right hardware and software.

The Dell Streak, for example, uses an ARM processor. One that is optimized for running at low temperatures, with low power consumption, yet at a 1GHz clock speed that is fast enough for driving a web browser.

The software is also not skin-deep derivative of a desktop operating system. Instead of taking a standard desktop Linux and grafting some “tablet” features onto (as some earlier Linux devices have done), Google made deep enough changes (including branching the Linux kernels) to enable a user experience that was more appropriate for the type of devices that Android was going to run on: small screen sizes, low resolutions, using a touch screen user interaction paradigm.

As a result, you don’t have multiple overlapping windows that get in the way. You have an onscreen keyboard that is not trying to duplicate a real keyboard in functionality (down to that Windows key).

This hardware/software confluence or alignment is what makes a great product.

And all of the above also applies to Apple’s iPad and iPhone products.

As far as the UMPC is concerned, the problem in retrospect, was Intel’s and Microsoft’s obsession with keeping the legacy parts of the company happy. So we had a derivative of a desktop processor and a derivative of a desktop operating system that were both trying to do something they were not designed for.

Intel made a mistake selling off its StrongARM product line. But it is trying to make up with lower power ATOM processors. The launch of the iPad resulted in HP canceling its Windows 7-based slate product and Microsoft is back to the drawing board to develop an operating system more suitable for a tablet device.

The question is whether Intel and Microsoft will be willing to break enough with their legacy businesses to be truly innovative.

There are reports of Microsoft offering to buy Yahoo’s search business.

My take on it?

Yahoo should sell.

Although it’s too early to declare that Internet search is being commoditized, Google’s lead as the preferred search engine means that anyone else trying to compete in that space is just wasting time.

Think of it, in order for Yahoo to continue to compete with Google as a search engine, it needs to invest in continually improving the search technology. Then there’s all the storage and infrastructure costs etc. At the same time, Yahoo’s search monetization is much less than that of Google.

It is going to be difficult for Yahoo to give up search. After all, that company started off in that space. All that emotional attachment to the past and talk about “core business” will get in the way of cooler heads. I don’t know if Jerry Yang will have the clout, guts and objectivity to jettison the search business.

Yahoo has a bunch of other properties which, IMHO, have more value than the search engine: Flickr, Yahoo Groups, YIM, www.yahoo.com etc

Flickr, in particular, has a pretty good future. Almost all popular social networking sites allow you to import photos automatically from Flickr. This makes it the default choice for social networkers who have tons of photos to share. Adobe’s new Photoshop Express also links to Flickr, which I thought was very clever of Adobe. I have not tried out Flickr’s new video capabilities, but I think that Flickr has a lot of room for growth.

Likewise for Yahoo Groups. If you are looking for dedicated mailing lists for your running club or MBA classmates, you don’t have to look further than Yahoo Groups. I have used Google Groups and Yahoo is still much better.

So Yahoo should objectively identify properties that have real value to users and room for growth. It should then dedicate resources to building up these properties to make them the “default” destination for their respective categories. Yahoo should also find ways to link these properties together seamlessly so that end users don’t get the impression that they are dealing with very disparate websites. Google does a really bad job of this.

Monetization? Well, just go with Google.

Oh, and take that money from Microsoft for the search business.