Surviving on a smaller piece of the pie

I always cringe at the phrase “post-PC era”, primarily because it has such a poor definition.  Does it mean that desktop-devices no longer matter?  Does it mean that devices with keyboards no longer matter?  Does it mean that people will no longer create content, a primary differentiator between the classic PC and the trendy Tablet, but just consume it?  Following on to that, does it mean Information Workers are passe?  Or are people simply trying to say that Microsoft’s run is over?  And just what does that mean?

In truth we have crossed an important threshold in computing in that the “PC era”, epitomized by the 1990s in which two companies totally dominated the core of personal computing technology, is over.  Microsoft and Intel had 90%+ shares of their respective areas for a very long time.  But in any modern definition of personal computing their market shares have declined dramatically.  I’m not talking about the rise in market share of Apple’s Mac, although that certainly adds to the idea that the world has become less homogenous.  A modern definition of personal computing would have to incorporate both Tablets and Smartphones in addition to desktop and notebook computers, in which case both Microsoft and Intel’s market shares have already (by unit volume) dropped from 90+% to more like 50%.  That’s the new reality, and the fortunes of both companies are dependent on how well they understand that reality and what they do about it.  This is also a key point for analysts, reporters, and observers.  Most still look at Microsoft and Intel through the lens of companies that so totally dominated the market that their only possibilities are to (figure out how to once again) dominate or fade into oblivion.  That is nonsense.

Former GE CEO Jack Welch observed that you wanted to be number 1 or 2 in each business you were in, and Steve Ballmer is a fan of Welch’s business philosophy.  And so while Steve has said Microsoft always strives to be number 1 in each of its businesses, it is clear he is trying to adapt the company to a world in which being number 1 doesn’t mean having 90+% market share.  For example, we shouldn’t think of Windows 8 as a “Hail Mary” pass by Microsoft to regain its former dominance in operating systems.  No one is naive enough to think that they can sweep away Apple’s IOS, or keep Android from achieving a significant market share in tablets.  But they can take enough tablet market share to maintain their overall #1 position in (non-Smartphone) personal computing operating systems.  And perhaps (eventually) become #1 or #2 in the more narrowly defined tablet space.  Analysts also keep predicting that Windows Phone will achieve the #2 position in Smartphone operating system market share, a prediction many find far-fetched.  However, if true, not only would this meet Jack Welch’s bar for a business you want to be in, but it would allow Microsoft to maintain its overall #1 position in personal computing operating systems using the broadest definition of that market (desktops+notebooks+tablets+smartphones).

Take a look at Microsoft’s various businesses.  Server and Tools (STB), its second largest business last quarter, is neither number one overall nor does it have the market share that the Windows and Office businesses achieve.  But it has been the most consistent growth business within Microsoft throughout this century.  The Interactive Entertainment Business (IEB), which primarily means XBox, has achieved the leading position in gaming consoles but by no means is dominant (or even totally secure in its number one ranking).  Still, its position is strong enough that Microsoft has a good shot at have a long run as the leading home entertainment system vendor.  Take Bing, which has crossed the number 2 threshold.  It is slowly, very slowly, gaining market share and Microsoft can now focus on new opportunities (e.g., mobile) as a means of side-stepping Google’s browser-based search market share as well as generating greater revenue per search.  That’s a far cry from its position a few years ago of having to spend most of its energy just trying to create a credible offering.  It doesn’t need to take the number one position away from Google (not that Microsoft wouldn’t like to do so) to be successful.  Microsoft Business Solutions (aka, Dynamics) was envisioned as a potential $10+ Billion business when Microsoft acquired Great Plains Software and Navision a decade ago.  After years of trying to consolidate the product lines, enter the SaaS business, wavering on pushing up scale to address larger enterprises (vs. its original SMB target), and trying to decide if it was a supporting player to the Office business or a business in its own right, could the Dynamics business finally be ready for a breakout?  A $10B Dynamics business would provide another healthy dose of diversification to Microsoft’s revenue stream, as well as boosting both the STB and Office businesses.  But Microsoft isn’t going to have the dominance in this space that SAP had in the 90s.  And then there is Windows and Office.  While they are likely to remain the premier businesses for Microsoft for some time to come, in the long run they will start to look more like the rest of the portfolio over time.  Meaning, leadership but not dominance.

Besides Microsoft’s increased focus on businesses beyond Windows and Office there are other signs that Microsoft has (finally?) recognized that the era where it totally dominated the businesses it was in is over.  Most recently we are seeing a wave of support for non-Microsoft mobile platforms and browsers.  Xbox Live on IOS and Android as well as Microsoft CRM on IOS, Android, and Blackberry are a bit of a shock to observers.  Microsoft CRM support for Firefox, Chrome, and Safari also seems like a bit counter-strategic.  Bing has been producing clients for non-Microsoft devices for a couple of years now.  Plus we can expect Skype to continue to support the broadest possible array of clients rather than pull back to focus purely on those running Microsoft operating systems.  And it looks like Linux support is coming to Windows Azure.  This all runs very counter to the thinking of the 90s or even 2000s, where there was constant tension between those who thought multi-platform offerings made sense for their business and those who wanted to keep the focus purely on the Windows platform.  If only one business was coming out with an IOS client one could write this all off as that unit having decided to butt corporate culture, but with most businesses apparently looking for ways to use popular non-Microsoft platforms to reinforce their business objectives it seems likely that a broader corporate culture change has taken place.   No doubt it’s still Windows first and foremost, but it’s now culturally acceptable for targeted non-Windows operating system support when that is important to the overall business case.

The bottom line here is that people need to stop thinking of Microsoft as the dominant, and domineering, PC software company of the 90s and start thinking about it as the GE of the high-tech world.  A company that is in a lot of market segments, and wants to be number one in those segments, but who will never again achieve the market dominance it once had.  It will be different from GE in that Microsoft is a collection of mutually reinforcing businesses rather than a conglomerate of independent businesses.  It will also be different from its former self in that it can no longer rely on its dominance to leave the “messier” parts of the business to the ecosystem.  Microsoft will have to take on more of the end-to-end solution, as it did with XBox, in order to succeed.  These changes will, over the course of the next decade, make Microsoft a very different company from the one whose image still inhabits our brains.  It might also make it a more successful one.

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2 Responses to Surviving on a smaller piece of the pie

  1. Brent says:

    Totally agree that a huge share of the market has been lost, particularly over the past three years. Shockingly so. Surviving on a smaller piece of the pie is one logical conclusion. But isn’t it also self-limiting? Apple went from near bankrupt to dominant. Why can’t MS? Substantial leadership and strategy problems aside, they’re still in far better shape that Apple was then.

    “The bottom line here is that people need to stop thinking of Microsoft as the dominant, and domineering, PC software company of the 90s and start thinking about it as the GE of the high-tech world.”

    I think most have already conceded the former. Certainly the stock market did long ago. And the media now most often portrays MS as a laggard and laughingstock. I’ve read countless articles this year openly wondering if MS can survive. However the challenge with the GE model, or even the IBM one, is that MS still hasn’t proved they can reinvent themselves even partially. GE has completely done so several times, including quite substantially over the last five years following the implosion of GE Capital. Ditto IBM. MS? They’ve added the Entertainment division, which drives a fair amount of revenue but is only marginally profitable. In fact it’s still showing a loss for the entire decade plus effort. And of course Online is still a money pit. Until they can show more success on this front, I don’t think many will give them the benefit of the doubt. There have been too many past promises and subsequent failures.

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