Comment Contrary to increasingly popular belief, Microsoft is not a “dead” company, nor at immediate risk of collapse.
I do, however, believe that Microsoft’s “Windows on the endpoint” monopoly days have passed, that Microsoft’s senior management are aware of this and are actively taking steps to compensate. Similarly, I believe that during the inevitable period of transition that occurs during such a corporate restructure Microsoft remains vulnerable.
It has become a popular internet pastime enjoyed by many – myself included – to hurl invectives at CEO Steve Ballmer and the rest of Microsoft's management. This is done largely because the decisions made regarding many Microsoft products have resulted in changes that many of us strongly dislike. Many more get added incentive for vitriol because Microsoft is insistent on keeping the exciting new stuff (such as VDI) licensed under what I can only honestly describe as "completely insane" terms and price points.
The truth is that Microsoft can't keep us all happy. The traditional desktop and productivity suite monopolies were never going to last; a basic analysis of history should be able to dig up enough examples to prove that. Let's put all the "death of the PC" fear mongering to one side and take a look at the big picture of Microsoft's world. The raw economics, strategy and the competitive landscape it occupies.
The end of the desktop monopoly
For decades human interface to data stored on a computer network (endpoints) was accomplished through a small number of operating systems. Microsoft (and to a far lesser extent Apple) has held the lion’s share of this market, dwarfing the share of any competitors.
Other operating systems have seen significant deployments in embedded devices and servers. Until recently, however, Microsoft’s domination of the endpoint has been unrivalled. The explosion of mobile device usage has changed this; in 2011 Windows’ share of the endpoint market was surpassed by the combined might of Apple’s iOS and Google’s Android for the first time.
In 1983 Microsoft held a 25 per cent share of the desktop computer operating system market; commendable given the diversity of available platforms and the fierce competition that existed during the early days of the PC revolution. 20 years later its Windows OS had achieved endpoint penetration of 96 per cent; a functional monopoly. By 2012 Windows’ endpoint share had been reduced to 35 per cent.
Competing against free
Android and other 'good enough' rivals ... We're HEEE-ERE!
The day that Android was announced, Microsoft's endpoint monopoly was done for. Apple sitting up in the high-margin area vacuuming money from a niche was no real threat to Microsoft. Google's strategy, however, is lethal.
The hardware side of endpoint economics has been ground down into the dirt for ages now. You can't play the game unless you are using cheap Asian labour to make your parts; even then, you have to "value add" with software just to break even. This was fantastic for Microsoft; theirs was the biggest value-add stack for endpoints out there and they ate the lion's share of the margins in the PC industry for decades.
Along comes Google and they just give the operating system away for free. Unlike traditional open-source OSes this was a system developed with a focus on the end-user experience and backed by a Goliath. Microsoft was no longer competing against "free", it was competing against free that was "good enough". With Android, Google started to gain knowledge about how to build and design an operating system. Limited functionality "good enough" operating systems served a strategic purpose for Google and an entry into the traditional "PC" space was all but assured. Sure enough; Google announced Chrome OS less than two years later.
The initial versions of Chrome OS were absolute pants, but they were enough to demonstrate Google's commitment to commoditising the desktop. The strategy was simple: Google wanted to provide a simplistic, reliable platform for users to engage Software as a Service (SaaS). Google can monetize that. Google didn't – and doesn't – have to win with the first move. It has years to slowly chip away at traditional notions of computing.
A decade ago "the cloud" was a joke. Today few seem to make entirely local applications; everything from management applications to my new thermostat all have a "cloud" component. A decade from now even the embedded systems powering "the internet of things" will be utterly dependant on the SaaS cloud, and we'll be looking at entirely local apps as niche and quaint.
Milk the market dry
From one perspective, Google has already won: the endpoint is a commodity. Microsoft is aware of this and they have demonstrated no interest in trying to reverse this trend. The strategy instead seems to be pragmatic: suck every last possible dollar out of the market before they finally give up. Bad for end users – and certainly something that makes many of us quite angry – but comprehensibly opportunistic.
In addition to the end of Microsoft's endpoint glory days, the productivity suite monopoly is under siege from all sides. While it retains a powerful and loyal userbase, Microsoft's Office monopoly is no more eternal than that of Windows.
Defending a monopoly is unbelievably difficult and ruinously expensive. Microsoft cannot compete on price and the competition is getting "good enough" for many.
Microsoft has largely run out of things to add to their productivity apps except more layers of "integration" with their own applications and services. This is also known as "lock-in" and is increasingly viewed by a once-bitten public as a bug, not a feature.
Microsoft's management aren't blind; they see the writing on the walls and have already shifted gears from market-share defence to milking the Office market dry, backing off only when faced with overwhelming outcry from their existing userbase over licensing.
Good news, everyone!
When focussed only on Microsoft's failing monopolies, doom mongering is easy. What's easy to miss is that Ballmer and the rest of the Microsoft management crew have been preparing for this for some time. Instead of an empire built on one or two monopolies, Ballmer has been busy diversifying.
What occupies the time of Microsoft's management team isn't whether or not Windows 8 has a start button – I'm positive most of them don't actually care – it is building up as many billion-dollar businesses units as they can.
Server and Tools Satya Nadella: $19bn in revenue ... sweet
The crown jewel of today's Microsoft is its Server and Tools Business (STB). STB contains a number of excellent products and they regularly crank out industry-leading technologies. They are at the top of their game and every potential challenger (with the exception of Oracle and possibly VMware) is functionally irrelevant.
Even if every other aspect of Microsoft's business collapsed tomorrow Microsoft could still get by on nothing more than STB for at least another decade. This gives Microsoft massive cash flow and a totally dependent user base.
Azure cloud is a hosted platform for SaaS developers to stand up services. The Azure unit is looking to take gold from the lair of the Amazon dragon. They've got good technology and a tightly integrated development cycle with the STB group that will see the technology on offer get even better. Azure is nowhere near its peak yet; there is a huge market yet to conquer and it has the tools to do so.
While many focus on Office 365 as being a productivity suite replacement, that isn't where the true play lies. Office 365 plus Skype offers a unified communications platform aiming to commoditise and monetise telecommunications. The world's telcos are seemingly allergic to innovation and Microsoft sees an opportunity to do what the telcos should have done 10 years ago.
Xbox is a content delivery platform with games being just one type of content. Microsoft has invested in generating television-class material under its own banner and ties up with organisations like Netflix to ensure you can get even more. Microsoft is not only gunning for the cable networks here, but ultimately could well spawn its own content production network challenging the likes of Disney, Fox and Warner Brothers.
"Services" is where Microsoft has lumped Bing and all the other online ventures aimed at advertising things at you. It will be a long, miserable battle to unseat Google's monopoly in this area… but Google's grip on the advertising market is no more eternal than Windows' moment in the endpoint sun.
Whatever vitriol you or I may have to fling at Ballmer and crew for their maiming of our favourite products and milking the markets we depend on, they've done something strategically sound in moving Microsoft towards a more diverse economy. Soon they will be at a point that you can raze multiple pillars of Microsoft's business and the edifice of Microsoft will not fall. That's good business.
Where's Microsoft's soft underbelly?
While the basic strategy is sound the execution is far from guaranteed. In today's world execution requires balance between strategic initiatives, tactical initiatives and community engagement. The inability to get this right is Microsoft's soft underbelly.
Strategic initiatives are long-term. They generally cross product lines and business units. A great example of a functional strategic initiative is One Microsoft. The tie up between the Azure and STB teams has worked well and produced fantastic technologies. Breaking down the warring fiefdom culture of Microsoft on a wider scale will take time, but if they succeed then great things could happen.
The flip side of that are ideas like Windows 8's Metro interface. The strategy was to get everyone familiar with the Metro-style touchscreen-focussed user interface on desktops, tablets and slablets; this familiarity was to cascade into adoption of Windows Phone and Microsoft's Metro-themed SaaS services. Microsoft's grand strategists didn't count on botching Windows 8 and Windows RT's community engagement so thoroughly that the backlash would drive users away from Metro-themed products instead of towards them.
Tactical initiatives are simply money grabs. Building userbases and exploiting short-term events to extract the maximum cash possible. Microsoft certainly has a proven track record of parting businesses and individuals from their money, but their tactics are increasingly leading to enmity. Poor tactical execution is limiting future strategic options.
Competitors can defeat Microsoft simply by capitalizing on Microsoft's community faux pas. Neglect, ignorance and intermittent blatant hostility from those within the Redmondian echo chamber towards those without is where Microsoft is vulnerable.
Developers, developers, developers
Metrics has been core to Microsoft’s product design, marketing and go-to-market planning for some time. Unfortunately the human element remains something we can't yet quantify. Social media has – like it or not – changed the way we do business. Humans have always been social creatures, but now we can be social at scale. In a world that's "always on" one tweet can cost a company billions.
In the past few years Microsoft has variously alienated large chunks of the systems administrator, SME, developer, power user/enthusiast, partner and office end-user communities. Worse, many of Microsoft's competitors were never populist organisations to begin with. These companies don't have a history of caring about their users' requirements. The leaves the error bars of successful interaction wider for them than they are for Microsoft; put simply, their user bases are more tolerant of mistakes.
The irony is that Microsoft used to understand this. Ballmer's oft-quoted "developers, developers, developers" moment (see video below) is a great example: the CEO knew then that keeping the various communities underpinning Microsoft's success happy was critically important.
Somewhere along the way, Microsoft lost sight of this.
Choose to succeed
In my experience many of Microsoft's developers and product managers are open, receptive, and even eager to look at things from new angles. They are creative people who like considering new use cases but are visibly afraid of both marketing and licensing. "One Microsoft" does not extend to integration here and this barrier prevents the creation of go-to-market strategies that would excite (rather than alienate) the user communities that Microsoft depends upon.
For every market segment Microsoft operates in I believe there are simple and cost effective ways to regain and sustain user trust, support and even admiration. Unfortunately, my personal experience (as end user, Microsoft Partner and a technology journalist,) is that the inner layers of Microsoft’s management structure are heavily insulated from criticism.
Microsoft has surrounded itself with individuals and organisations that largely agree with it. Microsoft asks its chosen few for opinions and they repeat back what it wants to hear. Microsoft exists in an echo chamber of its own making, increasingly disconnected from the user communities it relies on for revenue.
Microsoft makes some of the best technology in the world and the recent reorganisations look set to make it an increasingly efficient creator of excellent and useful technologies. But having good – or even the best – technology simply isn't enough.
The next 24 months is Microsoft's true window of vulnerability. If the wrong calls are made Microsoft's competitors will shred them. It will take a decade or so for Microsoft to die, but if there is a chance for a fatal wound it is now. If the right choices are made, however, Microsoft becomes functionally untouchable for the rest of our careers.
The disconcerting question that I keep returning to is "are the many individuals in charge of Microsoft even aware that their vulnerability lies in how they handle community engagement?" If they aren't, why has this not been conveyed to them? If they are, will Ballmer and company make the right calls to deal with the human elements of the business equation? We'll know soon enough. ®