The Future of Microsoft – Part 2

What is Microsoft’s core problem?  It missed both the consumer Smartphone and Tablet revolutions.  And then on top of that it failed to provide a compelling path forward for its traditional PC business.  So now it is struggling to recover from all three mistakes, and it isn’t at all clear that its possible to actually do so.  Anyone really disagree with that?

So why are so many discussions about Microsoft’s future dominated by talk of dumping Xbox and/or Bing?  How would dumping either of them help with Microsoft’s core problem?  It wouldn’t.  Certainly it would help improve short-term margins, but Microsoft doesn’t have a problem there (unless you are more concerned with driving short-term stock price moves then with the health of the company).  It would help with management attention problems, and that is indeed the best argument for getting out of these businesses.  But even that is a questionable argument.  Microsoft would still need search services, and dealing with a third-party or joint venture for obtaining them could actually be a bigger distraction than Microsoft maintaining its own search business, for example.  And it would still need an answer for “the third screen”.  The bottom line is that Xbox and Bing aren’t what is causing the core problem and dumping them won’t help solve it.  Keeping them might!

When it comes to discussions about the next CEO of Microsoft, and how he might break up the company, people are putting the cart before the horse.  The next CEO has to look at the vision Steve Ballmer is leaving behind and decide how to tweak, change, or completely replace it.  Then they have to look at the strategy of the company and each of its major units and again decide on tweaks, changes, or replacements.  Then they have to look at all the assets it would take to execute on that strategy.  They need to inventory the assets Microsoft has.  Then, finally, they can decide what existing assets are superfluous and should be divested.  And, create an acquisition strategy to make up for things that Microsoft is missing.  I doubt the board is looking for someone who has made a decision of how the company should be restructured without going through this thought process.  I hope they are looking for someone who will go through this process completely open to all the possibilities that could result!

Let’s switch gears for a moment and talk about Steve Ballmer’s legacy and what is going right at Microsoft.  Steve has set Microsoft on a “Devices and Services” course.  We’ll come back to Devices.  Services will go down as a huge part of Steve’s legacy and his greatest success.  The Enterprise-oriented side of Services is going gang-buster, with Office 365, Azure, and Dynamics CRM on the ascent and jockeying for leadership.  The consumer-side, things like Skydrive, are finally hitting home runs after languishing for a number of years.  Every company in the industry has given lip service to “the cloud”, but Steve wasn’t kidding when he announced “we’re all in”.  The next day budgets and goals started being altered to make this a reality.  For my own part, I pulled committed functionality from Windows 8 Server so I could speed up critical functionality for Office 365.   Around the company others made similar changes in focus.  When STB President Bob Muglia wasn’t moving the cloud focus forward fast enough, Steve replaced him with the Satya Nadella.

For all the things wrong with Microsoft, you shouldn’t forget that Steve has made Microsoft a force in the Cloud.  And if, or as my gut tells me when, Microsoft is the clear number one player in Services Steve should be remembered as the CEO who made that happen.

Microsoft’s move into Devices is a lot more speculative and fraught with risk.  Microsoft doesn’t really know how to do devices, and it is alienating its OEM partners with this focus.  This makes it a must-succeed for the company.  I know some think that Microsoft should abandon this strategy, but let’s explore that for a moment.

This week HP CEO Meg Whitman said Microsoft has gone from being a partner to being a competitor.  It’s an interesting statement coming from an HP CEO, because HP has never been one of the most committed partners for Microsoft.  On Servers, for example, HP gave more focus to Linux than Windows Server.  Look at the competitive space for System Management software and who is Microsoft’s top competitor?  While HP abandoned the classic database engine business decades ago, over the last several years they’ve made a major (and costly) push into the analytics space in direct competition with SQL Server.  A few years ago they bought Palm in order to have their own Operating System, in direct competition with Microsoft, for phones, tablets, and potentially PCs.  Then they talked about getting out of PCs entirely.

HP, under multiple CEOs, has treated partnering with Microsoft as no more than a necessary evil.  As an old-line Systems company it isn’t in their DNA to rely on outsiders as much more than suppliers.  The partnership has benefited both companies enormously, but has never warmed to the same level as Microsoft/Intel, Microsoft/Dell, or Microsoft/Compaq (before HP acquired them).  Those were true symbiotic relationships.  Correspondingly HP and other OEMs can continue to play a role in Microsoft’s future, but Microsoft can’t bet its entire future on them.  Particularly HP with its repeated attempts to distance itself from the relationship.

Obviously the move into Devices is not just about the shifts in the OEM industry itself, but about broader changes in the computing industry.  Apple all but died as Microsoft’s OEM model dominated the market for almost two decades.  But then Apple re-proved the benefits of the Systems model of delivering computing products.  While you can hold up Android as a counter-example that market is coalescing around a single player (Samsung) or perhaps two (Google itself) as Systems companies.  In the Windows Phone space, a single company (Nokia) bringing a Systems focus to the table pushed aside the companies that were merely OEMs.

If you haven’t used one of the Windows Phone 8 Lumias then you probably don’t get the Systems reference.  Samsung and HTC make Windows Phone devices.  A Lumia is a Lumia with its own complete and compelling Windows Phone-based experience.  It’s so compelling that I probably wouldn’t move to a non-Lumia device no matter how cool the hardware.  To put a concrete example on it, a friend who carries the HTC 8X saw my Lumia 1020 a few weeks ago and immediately noticed the Glance Screen.  “I WANT THAT!” came out of his mouth before he’d even touched the phone.  I keep taking pictures with the Lumia 1020′s camera, and then zooming them, and my iPhone-toting wife’s jaw drops.  It’s not just the hardware that is letting me do that, it’s the software Nokia includes.  Or take a look at the Lumia 520/521 and all the goodies it comes with.  For approximately $100, no-contract required!  This is why Microsoft needs to be in the devices market.  And this is why it needed to buy Nokia’s Devices business.  Besides Apple I think Nokia is the only consumer devices business out there that really gets Systems (or as Charlie Kindel would say, Experiences, though he might argue Amazon is there too).

So is the Nokia purchase Steve Ballmer’s legacy?  Well, if Microsoft succeeds at Devices in the long-term then it will certainly add to the Services legacy he has already established.  But that remains a big if.  For now Steve’s Devices legacy is more centered around botching the manufacturing forecast for the Surface (the result of buying to achieve Apple/Samsung benefits of scale rather than buying to match an actual sales forecast).  And the huge number of missteps around the Xbox One launch.

Clearly one of the main tasks for a new CEO, assuming they buy into Devices as a strategic thrust, is to put this effort on a solid footing from an execution standpoint.  But that is still not the biggest problem they need to solve.

The biggest problem for Microsoft’s next CEO is the one about not actually executing on what Microsoft says the strategy is.  Particularly around where the Consumer and Enterprise meet.  The trend towards the “Consumerization of IT’ has actually been in place for decades, even if it wasn’t recognized until the iPhone launched.  I’m not going to spend a lot of time directly on this topic right now, so just take it as a given.  End-users have increasing influence over the devices and services they use for work, and we are hovering around the knee of the curve for that trend.  It isn’t just the iPhone/iPad phenomenon.  Salesforce.com succeeded because a sales rep or manager could choose to buy one less customer lunch a month and in a few minutes set up their own CRM system rather than wait for, and then deal with the ridiculous complexity of, a corporate deployment of Siebel or SAP.  Meanwhile Microsoft talks the talk but doesn’t walk the walk.

Outlook.com (nee Hotmail) is completely separate from Exchange/Office 365.  Outlook 2013 has much better support for Outlook.com than earlier versions, but that support is still frustratingly poor compared to its support for Exchange.  Outlook.com has added many amazing features that are not exposed in Outlook 2013 nor available in Exchange.    Exchange calendaring has been the industry leader for decades, but Google has better calendaring than Outlook.com.  So if you use Outlook.com for personal email and Exchange for work you are driven more than a little crazy.

Or take the Skydrive/Skydrive Pro discrepancy.  Although the names suggest that Skydrive Pro (Enterprise-focused) is a superset of the consumer Skydrive service the truth is that they aren’t related in any way beyond name.

How about Windows Phone 8 and Windows 8/RT?  Instead of having an actual family we only have some shared technology.  But the important sharing, like having a common app model, is something we are still waiting for.  And Windows Phone 8 is still struggling to catch up with the iPhone in suitability for Enterprise use; a decision stemming back to the decision to focus Windows Phone 7 almost exclusively on Consumer.

Or take the Xbox.  Many years ago a friend of mine was talking about all the ways that an Xbox could address Enterprise needs, but of course no one on the Xbox team was interested.  Or take the current Xbox One introduction.  One again Gaming has been put ahead of everything else.  In fact, while Microsoft was in a position to close the door on other devices competing for attention to be the center of home entertainment it failed to seal the deal.

A $500 device leaves a lot of room for $100 devices from Google, Apple, or others to dominate the non-gaming market.  Microsoft has made Xbox Video and Xbox Music central to making Windows Phones, tablets, and PCs successful consumer devices yet missed the opportunity to broaden the reach of those services by broadly owning home entertainment.  If I buy an Apple TV I’m going to further lock myself into iTunes, keeping the iPhone more attractive than Windows Phone and the iPad more attractive than a Windows 8/RT tablet.

For me this all just goes to the core that Microsoft’s next CEO must address.  That CEO is going to look at Xbox and go “I don’t need to be in the gaming console business, and it will never be profitable enough to justify owning it as purely a financial asset.  So it either has to be primarily focused on making the overall devices business a 2+2=5 equation or it has to go.”  For all the talk of Xbox being the key to home entertainment over the years.  For all the talk of it being the third screen.  The group has been allowed continue to make gaming its number one priority to the detriment of the real strategic need.  The new CEO can’t allow that to continue to be the case.

Want another?  Microsoft sunk tens (probably hundreds) of millions of dollars into the healthcare vertical yet is completely missing the boat on the consumer healthcare/fitness thrust.  None of the fitness or other personal monitoring devices work with Windows Phone.  Most don’t even work with a PC.  They link to the iPhone and Android.  Some of Microsoft’s businesses screw up by ignoring the Enterprise, others by ignoring the Consumer.  Few these days nail the right focus.

And that way of looking at Microsoft’s assets has to extend across the entire company.  In my view it isn’t that Microsoft has assets it necessarily needs to jettison, it is that it has many assets that it is not using optimally or even appropriately.  I think Steve made a major move towards improving the situation with the recent reorganization, but he didn’t go far enough.  For example, Outlook.Com and Skydrive still report to different EVPs than Office (and thus Office 365, Outlook, Exchange, and Skydrive Pro).  They will, at best, continue to inch towards better integration whereas what Microsoft needs is to smash them together into a coherent and compelling set of offerings.

And it’s not just that having separate offerings leads to consumer confusion, let me give you a concrete example of opportunities being missed.  In the wake of the NSA domestic spying scandal, and of the leaks that lead to its discovery, Microsoft has great technology for protecting emails from prying eyes: AD-RMS (Rights Management Services).  Now applying AD-RMS to Outlook.com is a non-trivial challenge, so don’t mistake what I’m saying as quick fix.  But wouldn’t it be a competitive grand slam to make this capability available on all of Microsoft’s email offerings, consumer as well as enterprise?  Microsoft’s organizational structure, and failure to really integrate consumer and enterprise offerings, makes something that should have been done years ago something that could still be years in the future.  If it can ever rise above the organizational structure and competing priorities.

So in my mind a lot of Microsoft’s current problems could be solved by someone who really owns the Execution Excellence part of the equation.  But that isn’t enough.

The thing that Microsoft has lost since Bill Gates gave up his full-time involvement is the “Where do we see the world in 10 or 20 years and what can we do to lead it there?”  In other words, the vision-thing.  Bill tried to leave processes and people in place to do this when he left, but within months they were dismantled.

Some argue you don’t really need this level of vision, that you can’t predict where things will be in 10 years so why bother.  They argue that all you need to do is figure out what the customer wants now, in the next release, and nail it.  In truth you need both.  Microsoft needs super high quality execution on near term things, and it needs a compelling vision of the future that it can drive towards.  It needs to get back to skating to where the puck will be rather than where the puck is right now.  Devices and Services is a statement of How.  But beyond the obvious that these are the two key trends in the industry right now Microsoft has done nothing to communicate, and I really don’t think they have, a vision of the future and how they drive it.  And that’s what they’ll have to do to return to a real position of industry leadership.

Fixing the execution problems is the easier (but not easy) part, solving the vision problem is hard.  Microsoft must do both, or permanently yield leadership to others while relegating itself to being a successful niche company.  Of course Steve Ballmer could have done these things, but he’s hampered by legacy.  The new CEO on the block, even if they are an insider, gets a few months to perhaps a year before he (or she) is caught within the grips of legacy.  We have to hope they take appropriate advantage of that grace period.

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33 Responses to The Future of Microsoft – Part 2

  1. Excellent, I totally agree with most of this. Though I didn’t quite grasp the point of the paragraph beginning “A $500 device leaves a lot of room for $100 devices from Google, Apple, or others to dominate the non-gaming market.” What are you saying?

    To my mind, Microsoft DID try to focus less on gaming with XBOX One initially, trying to tout it as a home entertainment hub, but, typically, botched the communication of this vision and this, coupled with the associated missteps you touched on with the XBOX One launch and Sony’s much slicker PS4 launch, caused them to scurry back to what they considered safe ground, trying to appease gamers.

    I don’t necessarily think that was the wrong thing to do. If I was to buy an XBOX One it would have to be much more than just a games machine. I’d love an excellent home entertainment hub integrated with all my things everywhere. But if gamers feel that the XBOX One isn’t all about them then they’ll be even more inclined to go to Sony (my sense among gamers I know is that most have already plumped for PS4), leaving it without an obvious audience and probably relegating it to the “uncool” territory which Microsoft is so good at finding as non-gamers hear their “cool” gamer friends telling them how bad XBOX One is.

    • halberenson says:

      A $500 device is going to sell in the millions to 10s of millions. There are how many hundreds of millions or billions of TVs in the world? The Xbox One, as introduced, would at best do little more than defend the market share that the Xbox 360 already captured. No one whose primary intent is non-gaming is going to buy one. Not with $100 devices that do the same thing. Botching the Xbox One launch means that Microsoft may actually lose market share. But even perfect execution would have left it unable to expand beyond the market for gaming consoles.

      • I would have expected the price to come down every year. My thought was they will get as much sale as they expect this year as the hardcore xBox fans will buy the device no matter what. Then when the sale curve starts to plateau out they will reduce price and focus on non gamers. Generally games are turned off with all the non game stuff in a console. IMO they are trying to balance it initially

        • halberenson says:

          It will be too late. Someone else will have grabbed the leadership position and Microsoft will spend $B trying to eke out fractional share gains. Their failure to seal the deal now means this is probably Web Search all over again.

          • Eolirin says:

            The Xbox stuff is really complicated. I do not think it would have been possible for them to have done anything to further compromise the focus away from gamers without such a massive negative response from their existing community that it would have poisoned the well entirely. As it is they’re getting a ton of slack from parts of the gaming community just for having the Kinect in the box, and it’s necessary for Kinect to be in the box in order to make the non-gaming parts of the system work. They’re also probably going to be supply constrained for a while, so price won’t be terribly relevant to sales. Later, if they can figure out how to make sure they don’t end up with Windows RT/8 like confusion, they can put out a cheaper version of the box that doesn’t support games.

      • The Xbox One is a gaming machine with a Windows 8-based system for apps (and TV/Entertainment). Paul’s blog posts mentioned that they had planned a cheap device that would only have the apps part, but that device was not announced.
        I think that the ecosystem around the Xbox apps is too weak at the moment, so Microsoft choose to only announce the device that would be easy to praise. I would bet that the cheap device will be announced in a year (if/when that ecosystem’s story looks better).

      • the problem of the $99 device is you’re competing with the set top box; if doing that in a way that gives you margin and still delivers more than the set top box you already have was easy, Steve Jobs wouldn’t have called it a hobby business.

        Also look at the Azure rights management service in preview; I think it’s pretty much what you want it to be – and free unless you want to admin in.

        • halberenson says:

          Outlook.com has to work with it.

          The $99 device itself won’t have much margin, the point is the service.

          It’s a hobby business for Apple not because of the price tag, but because Jobs hadn’t figured out how to make it such a compelling experience that they would fly off the shelves. Or at least, he didn’t figure it out in time to see it ship in his lifetime.

      • Eolirin says:

        None of those 100 dollar devices have sales even a third as good as the 360. There are many tvs, but currently there is no demonstrated market for anything except game consoles. It may be possible to change that, but it’s also possible that there just plain is no market for it.

        And none of those 100 dollar devices have Kinect, or anything that approaches the capabilities of the XB1′s app layer, so they definitely can’t do the same thing. Something like: http://news.xbox.com/2013/09/xbox-one-xbox-fitness-unveiled isn’t possible on an AppleTV or Roku box, and never will be.

  2. I see you weren’t kidding about the quick turnaround on Part 2 :) (Can we still hope for the last part of the WinFS story?)

    Overall, I think Microsoft’s biggest problem is its brand. It is excessively overshadowed by Apple’s and Google’s (and many others who shouldn’t even be considered to be in the same league).

    As you’ve pointed out in part 1 & 2, Microsoft, as a business, is doing quite well. It could do better (as any company), but it is definitely a successful company (even when compared with the other “best” companies in the world).
    However, the press and the investors (and, to a lesser degree, the IT community and the consumers) have a fairly negative perception of Microsoft.

    That’s the one thing that I think they should improve.
    But even that isn’t such a huge problem. Their brand is in the top 10 of the most valuable brands.

    I see the devices and services strategy as the latest chapter in the “usual” business: Microsoft identified areas where they would like to do better, and is now executing on that. Every company does that. Of course, the level at which Microsoft plays means that every strategic decision carries high-stakes. Hence, all the discussions (which can be negatively tinted because of the brand issue).

    • joe0507 says:

      I disagree with the Microsoft has negative public image mentality that some in the tech media seem to think is true.
      Microsoft’s problem in marketing on the consumer side. They don’t need to Market themselves as much as what some of the products do, The surface was an excellent idea but hobbled under a confused message of Windows RT VS Windows 8.

      I think the true purpose of Windows RT has been very well covered in this blog and Hal has certainly pointed to the true purpose and long term goals of Windows RT.
      Yet I have yet to see any serious Tech writer, Even Paul Thurott point this out.

      The tech media suffers from its own form of echo chamber tunnel vision and seems incapable of moving past this until forced to and prefers a sort of weekly soap opera drama in favor of gaining web traffic vs. objectivity.

      Google’s reputation as a search engine and it’s free apps have gained plenty of mind share, but the companies true business model which is advertising goes almost unnoticed by the general public and the fact that Google makes very little comparatively from Android and is still deriving 90 percent of it’s income from advertising goes unchallenged.
      As of now, Google has not introduced any additional successful business models to supplement it’s now 10 plus years old advertising model.

      Apple is a company which has it’s own mounting problems that as expected is conveniently glossed over.
      They’re primary business model is devices with high margins, I found it alarming that the full size ipad’s sales began to trail down after only two or three years thanks to the shift to smaller tablets, at first addressed by the ipad mini, yet now that is feeling the pressure of cheap android tablets and Apple is not a player in enterprise services and has never really been.
      Apple has no services business outside of it’s app store to offer and the largest generator of profits is still the iPhone which itself is being squeezed on the high and low end once again by Android powered smart phones.

      The Microsoft stores are very important start but is itself too small in footprint to generate a major impact in Surface sales and is still some time off from becoming a destination store in malls across America and elsewhere as the Apple stores have become.

      Does Microsoft need a new CEO, yes because on the consumer side and internally, it needs a CEO who has the right combination of diplomatic skills, technical skills and brute force if needed to pull it together.
      Externally this CEO will have to appeal to what can sometimes appear to be an immature tech media made of largely unpolished bloggers and a smaller group of professional journalists who actually check facts before they publish any print or opinions.

      • dave says:

        My impression is that outside of the USA , MSFT has better brand value, overall. But this is just based on anecdotal impressions, not any research I can point to.

        However, that advantage overseas is under constant pressure from Android in less developed economies, and Apple in more affluent economies.

        I wish MSFT had thought of WiFi balloons across Africa.

        • AS147 says:

          “My impression is that outside of the USA , MSFT has better brand value, overall. ”
          Sorry not true, well at least not true in Australia and other Asia Pacific countries. MS is a bit of a joke to many in the consumer market. Example, shoddy PC store displays for new Windows 8 tablets, almost every PC store in Aus had the premium Apple stand setup, spotless and at the entry/exit so it was the first thing you saw. They are well manned with well informed staff pushing the Apple thing. Then after nearly 10 months of waiting for the surface, RT shows up in these stores amongst all the other non descript displays of cheap PC’s. Then another few months of waiting for the Surface pro because there still isn’t a decent convertible Windows 8 PC on ANY shelves ANYWHERE the Samsung /Android stands become the second most prominent display in the stores. Again with staff pushing them because they don’t know/like Windows 8. Eventually MS gets its act together and gets a few MS sponsored staff with a surface pro which still isn’t setup distinct from other cheap PCs’. Finally The OEMs have only JUST started shipping nice ultra books but now another 14 months has gone by and a bucket load of Apple gear walked out the door under the arms of new adoring Apple fans. The MS and Apple fans know this and mock MS for being asleep at the wheel. MS products at work are laughed upon by most staff (even though there is nothing else yet that can do the job). Perception has truly swung the other way and why…because MS is asleep and the wheel, its marketing/advertising is terrible/woeful/horrific (like a car crash) and MS seems to care less about anything outside of the US as evidenced by its comparatively terrible Bing services and the data it uses.

          MS isn’t under pressure from Apple and Google, it has already lost the mindshare and it is only the fact that it was here first in numbers that in the consumer space it is still alive.

          Now get a CEO to take the fight back to the consumer market and when I say fight I mean F I G H T because they are losing the battle and they wont be able to buy themselves back into this market without marketing and innovation.

          Lastly, where is the common sense of selling Office for the iPad considering MS are just about to have an answer for tablets with all its OEMs finally waking up. If that fails then sure but encouraging people not to buy Windows OS licenses and new PC’s because they can buy an iPad that does that is just plain dumb in my book because the OS and Office license brings a lot of money and the Office license without the OS does not bring as much!

          • dave says:

            That Australia, a more affluent economy is leaning Apple, and that Asian brands are starting to dominate in Asia is perhaps not surprizing.

            And I agree that enough deadly poison is circulating in the MSFT beast, it just hasn’t reached the heart, yet.

            if MSFT can’t win back the 12-20 year old consumer, its got a much shorter future ahead of it.

            One of the problems for MSFT is that where it has excelled is not what consumers are looking for in new computing devices. We want cool, new, fun and useful – not more deep features in WORD.

  3. I second that regarding xBoxOne. They did and are trying to make it more than gaming device. In fact the first ad we see does not show gaming. On gaming sites one constantly hears this gripe over loosing gamers because MS is more focused on entertainment.
    But what they set out to do they could not execute upon which is the point you are making and which is true.
    With MS everything seems so close yet so far. The assets they have are amazing and spans both consumer and enterprise. If and when they figure out execution I will not be surprised to see it surpass all its competition.

  4. Execution is job focus number one. There was little revolutionary in *what* Jobs made (portable music player, portable computing device). But the execution was unlike anything anyone had ever seen.

    But you’ve only barely touched on what I’d consider the other major need at Microsoft.

    After execution, Consumer sales are driven largely by marketing and brand prowess. I don’t mean just advertising–I mean real marketing. Understanding and positioning products and scenarios. Telling your story through advertising and other means. Building a brand.

    Ballmer didn’t appear to have a strong sense of branding, on a corporate or personal level. Compare the persona of Steve Jobs to the persona of Steve Ballmer. For all his great work, nobody is making movies about Ballmer. The premiums that Apple is able to command on devices? It’s due in no small part to the strength of their brand (#1 in the world). Why do people choose Coke over Pepsi, assuming the two products are equal? Brand.

    Reading about the Jobs’ iPhone launch, you learn that you must execute, but then you must tell a story. Jobs could launch a product like no one every has or will. Samsung is attempting to replicate some of that effect with a ridiculous marketing budget.

    Microsoft’s brand in the consumer space is minimal, and maybe even negative. Almost no one deliberately buys Microsoft Windows in the consumer space (they buy our OEMs). J Allard (who understood personal and corporate branding) helped establish a strong Xbox brand, but that’s been diluted by the confusing launch and attempts to bring all media services under the label. Even when Microsoft spent a lot of money bringing in Seinfeld, the best the elicited was a collective, “huh?”

    Enterprise sales can be largely driven by an army of sales guys, even if your execution skips a beat here and there. Microsoft has an intimidating sales force. What they need to break into the consumer market is an equally potent marketing prowess.

    • AS147 says:

      Agree, mentioned this massive miss in marketing in the comments in part 1 of this article.
      However you can’t separate the sales in the Enterprise with the consumer appetite. Todays youngsters will be tomorrows workforce and they do not have a legacy of windows experience. If someone doesn’t value MS products for themselves they will come into the enterprise with that mentality. It is a behavior that will be almost impossible to change. It is even happening today with the current workforce. So not only do they have to lift their marketing game in the retail market but they have to lift it in the enterprise. Trust, with years of experience they are not good at either and many companies I do business with make MS sales and marketing folk look anemic.

  5. dave says:

    Hal – you present tons of great ideas here to chew on.

    Let me drop in a few more thoughts for the discussion.

    As a consumer, I wish MSFT would be the Cross-Ecosystem Company. The Google, Apple and Amazon ecosystems are creating walls as they create better integrated services across their lines. MSFT are doing the same thing of course, but my belief is were MSFT to do more to bridge ecosystems , rather than focus on walling in their own, consumers would be able to continue to pick MSFT devices and services and not 100% abandon the MSFT world (which seems to be the trend across consumer segments).

    Also, and this is also a choice to be reckoned with – set pricing on devices at no more that 50% above median pricing for a device category. Which of course makes it critical to understand and acknowledge device categories from the CONSUMERS’ point of view.

    So, these are two elements of a strategy and philosophy that could help, but not to say they are more important than all the points your raised.

    As a side note, I entirely agree with your Nokia “experience” remarks. Nokia have been showing themselves to be the “Apple” of Windows Phone. Let’s hope the Nokia team can continue to bring their “customer experience” (double-entendre implied!) to the mobile phone/tablet devices. That’s the differentiator that has created such Nokia brand loyalty over the years.

  6. Brent says:

    So many great insights. I’ll have to read it a couple more times to fully digest everything. But I found myself agreeing with almost all of it.

    I’m hoping the company pulls it off and averts your niche player scenario. But I’m concerned it should have started years earlier, and that not doing so has set up a kind of Catch-22, whereby the new CEO (whoever they are) has to solve for two conditions that may not be compatible, at least in the short term. The first being fix the various current problem while better positing them for the future. The second being at least maintaining the current stock price if not growing it. I get the sense Wall St and even retail investors aren’t resetting the clock to 2013. Instead they’re evaluating the entire dead money period 2000-current and quickly running out of patience. And given what’s happening to Windows and less so Office (on the consumer side mostly), it seems maintaining or growing EPS (required to keep the stock alive) will require major expense cuts elsewhere, be it layoffs or divestiture of certain businesses. Thoughts?

    • halberenson says:

      A new CEO will get a grace period from investors, but yes you have a valid concern. However, as we’ve seen in the past improving EPS isn’t enough. Investors are looking for an accelerated growth rate before they really start buying the stock, and without buyers the price remains flat (at best). If a new CEO makes strategic changes then certainly some areas could have excess people, and other areas could be short-handed, and that will cause disruptions. But I wouldn’t put cutting expenses as the first order of business for a new CEO.

  7. andisimo says:

    Disclosure: I work for Microsoft. However, everything I say here represents my own opinion and not those of Microsoft.

    Regarding devices. There’s a mixed reaction to the announcement of Surface 2 (I’m personally pumped, but that’s neither here nor there). I recently had a conversation about a new Amazon device that sells for $229. Someone pointed out, to my initial disbelief, that the device is actually packed with high-end hardware specs, better than most competitors (including many Windows devices). For $229.

    Compare this to Apple, who sells expensive devices that don’t always have the best specs. They make a huge margin.

    In Microsoft’s foray into devices, which model is it better positioned to pursue? The approach with Surface seems to be patterned after Apple’s strategy – premier devices with high margins. Resistance to the trend in declining prices. Focus on the device itself as the primary container of value. The problem with this approach is that Microsoft has to buy Nokia to get manufacturing capabilities to pursue this strategy, has to develop (through trial and error) a successful approach to device marketing, and, most of all, has to beat the most successful company of the last decade at their own game to even crack the market.

    But what about the Amazon approach? How does Amazon sell high-spec hardware for such a low price? It’s a loss-leader for the services that almost any user of the device will purchase. Kindle books, Amazon Prime movies and music, etc. They’re not trying to beat Apple at their own game; they’re introducing an alternative device at a much lower price that will make a big portion of the market balk at even the iPad mini, which is $100 more.

    As I understand it, Microsoft’s entry into the hardware business with Surface was a reaction to the disruption of its Windows revenue stream caused by alternative devices like the iPad and even the iPhone. Doesn’t mimicking Apple’s premium device strategy undercut this goal by keeping people off of Windows? It does, unless the device is *wildly* successful. Incremental gains in devices are bad for Windows in the long run.

    In my opinion, Microsoft is much better positioned to employ a strategy like Amazon – create loss-leader devices that draw consumers away from the premium (expensive) but stale iPad products and keep people using WIndows and the great services in the Microsoft portfolio. Office, Xbox, Bing – these are services that could come pre-loaded on the devices. The devices serve as loss-leaders to get people into the services. This is a strategy that makes sense to me.

    I get the impression that one of the main reasons Microsoft doesn’t have a strategy like this is because we’re resisting the commoditization of technology and the ensuing “race to the bottom” of pricing. But in my mind, commoditizing hardware (which has already been commoditized for many years and is, perhaps temporarily, enjoying a renaissance of high value) to sell more of the things that represent Microsoft’s true value proposition is a good strategy.

    • dave says:

      Someone please buy Andisimo a drink!!
      I 100% agree.

      As an aside, why are the Surface 2 and Surface 2 Pro sitting side by side in Best Buy displays??? They are in different categories from each other. One should be placed with the ultrabooks, the other the tablets. Placing them side by side just promotes confusion as they are not in the same category of device. And it removes them from comparison to the hotter selling devices. Arg!

  8. opensourceguru says:

    Having worked in Office365 and Outlook.com, I can attest to the fact that they are both running on the same stack now (Exchange)…physically separated but same infrastructure.

  9. Steven Weiss says:

    While I agree with most of what Hal says, I believe the new CEO will be faced with fixing long running internal cultural issues, fixing the fact that Microsoft has broken many of the immutable laws of brand extension , and and the consumer vs. enterprise debate. Never having worked at Microsoft, I can only comment on my perception of the broken decision making processes, the “internal combustion” aka infighting which consumes so much of managements time leading to the type of dysfunction we are all experiencing out of Washington today and relatively low employee morale as compared to a place like facebook or google.

    The brand extension fuck ups will become good food for Stanford and Harvard business school marketing professors to write about and discuss. This type of fiasco happens when one guy gets a bee in his bonnet and can’t let go and no one is strong enough to tell the emperor he has no clothes which has been the case there for many years, maybe since the beginning.

    The consumer vs. enterprise decision is relatively easy one if you ask me. Consumers are very fickle and hard to build and maintain a loyal base. Yes, Apple has done it for now. But I just switched over to Samsung S4 after many years of having an iphone. We all know enterprise switching costs are much higher. So Microsoft switching to a device company seems like one that will be an up and down business with or without stellar execution and vision. As I posted before, when walking by the Microsoft store at the Burlington Mall on a busy day, 20 sales people standing around and 2 or 3 customers in a very large store. Long way to go here, baby!

  10. Eric Newcomer says:

    Yes, that vision thing is hard to buy all right.

  11. Brad Shantz says:

    Brilliantly written, Hal. I agree on every point.

  12. AS147 says:

    @Andisimo, perhaps driving to a lower cost item will work but MS can’t do it. They never have, their OEMs have but they too created crap hardware. Until MS learns like Samsung and Amazon have how to execute well by delivering powerful hardware at astounding levels of quality in order to sell services it will just be a price war to the bottom. A war they can’t win. However because of their position they don’t have to be the cheapest, get just close enough to convince those in the MS eco system that the innovation, build quality and value is more than good enough to make the change not worth the effort.

  13. Eric says:

    Great stuff, Hal, especially the part about Xbox One missing the home entertainment market. I tried to use the ridiculously complex solution called DLNA for about a week, and then I bought and Apple TV, which in 5 minutes allowed me to pipe all of my iTunes music all over the house, and now I frequently rent movies on it. I posted the question on some Microsoft forum at least a year if not two years ago, where is the $99 device from Microsoft that let’s me stream my music to my home theater system. There was no answer and there still isn’t. This is an epic failure on their part.

    • AS147 says:

      I know I am biased but the other best kept home media device is…..your PC! Windows Media center has been there for free for ages. But once again this powerful great PVR and media manager was poorly executed. It needs a reasonable level of technical ability and a reliance on an almost invisible architecture (media center extender) and almost no OEMs available. I have a cheap <$170 Linksys media extender and my PC in the home office is connected to the TV stations via a cheap TV card. I record up to 4 programs simultaneously, the menu system is Metro before metro existed and is blindingly and uncharacteristically simple and intuitive. I have several hundred ripped dvd's, home movies, all my music collection, and photographs on this one average run of the mill PC. Whilst it is streaming content and ripping DVD's the kids or I use it as a normal PC without any issues. Its a great asset at the kids' parties as we play a screen saver of all the home photos with their favourite music etc. At night the wife and I have a huge library of ripped or recorded content to watch. All for the price of a PC (which I needed anyway) a cheap TV tuner card, and an extender.

      But MS is looking at reducing support for it by making it an add on in Windows 8. So I expect I will stay on Windows 7 as I don't even know if Windows 8 media center works with my windows media center extender. Right hand, left hand !MS does it again!

      If they put a bit more effort into this they could make it a kiosk, brain simple setup but nooo now we are moving down the DLNA path – yeah ! RIGHT!!!

  14. apsimm says:

    I’d be willing to bet the next CEO isn’t in the job more than 2-3 years and I believe this may be part of the plan. Bring in someone to fix the culture, fix the decision making process, etc. And then once that is in place, find the ‘visionary’ to take them forward. The ‘visionary’ is going to have a hard time fixing the culture.

  15. CriticalThinking says:

    Sorry Hal, have to disagree about services and about a new CEO having a fair shot at fixing the myriad of problems.

    Even when Steve leaves, he is leaving behind numerous hand picked execs that were part of Ballmer’s poor execution record. Ballmer doesn’t know how to hold executives accountable. So many failures but very few got fired for that.

    You are praising Ballmer’s services strategy. On what basis? Microsoft got into the services business in 1993 (released MSN in 95). Got started in search in 1998. 15+ years later, tens of billions later, we are still losing billions per year when numerous start ups that came after became market leaders and extremely profitable.

    Azure isn’t profitable yet. Office 365 certainly got started successfully, but that is by converting existing office customers to an online offering.

    Microsoft has been in the services business for very long and has, in sum, huge losses accumulated over the years. If the execs who ran those businesses haven’t managed to turn a profit, how will they do it in the next few years under intense competition from companies such as Google and Amazon?

    Devices are racing to a bottom. There is no money to be made selling an OS license. I argue that it is going to be the same with services. Microsoft convinced itself that it can push devices (at a loss) and somehow make money off of services. Its track record in services argues that this belief has no basis in reality.

    Services is as tough a business as devices. There is huge capex. You need to run the data centers efficiently and take full advantage of available hardware. Underestimating or overestimating demand means you are losing money. Microsoft so far has been fortunate to have huge cash cows to feed its excessive and rapid investments in services (all of them).

    Microsoft has been very reactive the last 10+ years. It starts chasing big opportunities after someone already captured a huge lead. Then it throws huge sums of money and mismanages with poor execution. The same execs and board members that have been responsible for that are in charge of finding the next CEO and running the show.

    And one more thing. Why is the board/company so desperate to pay top dollar for companies that have already lost their luster? It is hard enough to take a successful company and merge it. What was the board thinking when it pursued Yahoo (which got disrupted by Google) in that mega deal? Not to mention the billions paid to aquantive (reacting googles acquisition of dclk) or Nokia. This is a clear sign that the board is merely throwing huge sums out of desperation.

    All of these point to huge problems at the top (board and execs). How will they lead Microsoft after all these lost opportunities if they couldn’t tackle those challenges when they had the chance (such as doing a good job on bing in the early years and reacting to iOS at least as rapidly as Google did).

    Sorry if this is a bit tough, but someone has to point to recent history and ask how one new person (CEO) can turn all that into a happy ending by pursuing a brand new devices and services strategy in a rapidly maturing devices and services market.

  16. Bob - Former DECie says:

    Hal, are you tired of retirement, yet? :-)

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