Is 2012 Microsoft’s Year?

It’s that time of year when reviews of 2011 and predictions for 2012 are hitting the blogosphere (as well as traditional media). Well here is my Microsoft prediction for 2012 (or more precisely, Fiscal Year 2013): This is the year that Microsoft finally puts the “lost 5 years” behind them. It’s the year (forgive the baseball analogy) they “hit for the cycle”, and perhaps that home run is even a Grand Slam. I think it is also the make or break year for Steve Ballmer. A year from now he’s going to start showing up on the cover of business magazines whose articles extol Microsoft’s return to glory, or investor pressure for his ouster will become irresistible. So why is 2012 going to be the year of Microsoft’s return? Let’s put the year in context.

Microsoft doesn’t have Soviet-style 5-year plans, but its fate does seem to flow in roughly 5-6 year waves. For example 1990-95 saw 16-bit Microsoft Windows (3.0/3.1/3.11) become the dominant desktop operating system and saw Microsoft rise from a follower to a leader in information worker products.   From mid-95 through 2001 we saw Windows move to 32-bits as well as switch to the NT kernel, and solidify its ownership of the desktop computing space.  Office continued its dominance.  And Microsoft became a leading supplier of Server software on the backs of Windows Server, SQL Server, and Exchange Server as well as a host of smaller products.  It became a leading force in consumer products both with CD titles and its MSN (including Hotmail) offerings.  It had entered many areas, such as restaurant, entertainment, and travel that are today amongst the most popular uses of the Internet.  It launched the Xbox.  And then the bottom fell out.

In the late 90s the U.S. Department of Justice began its anti-trust lawsuit against Microsoft that resulted in the late 2001 consent decree.  The E.U. piled on with an anti-trust finding in 2003.  It’s hard to overstate the impact this would have on Microsoft, so I’ll just give a few examples.  To begin with, the pressures of fighting the anti-trust battles lead Bill Gates to turn over the CEO role to Steve Ballmer.  And it lead the leading product executive, Paul Maritz, to depart.   Volumes have been written about the former, but very little about the latter.  Not only is it likely that many of the mistakes of the 2001-2006 period would have been avoided had Paul stuck around, he remains the favorite of most insiders as a potential replacement for Steve Ballmer as CEO.  The anti-trust actions influenced business strategy dramatically, but they influenced product strategy nearly as much.  I still recall a new VP reviewing what his largest team was working on and discovering that 25% of its resources were kept busy responding to Technical Documentation Issues (TDIs) as required by anti-trust settlements.  Hundreds, if not thousands, of Microsoft engineers were tied down by the creation of the required technical documentation and then responding to TDIs from the early 2000s through 2011, when the load should have started to abate.  When you combine the impacts of the anti-trust actions, the collapse of the Internet bubble, and the post-9/11 economic turn-down you get a lot of business decisions that ultimately would turn out to be mistakes.  With little ad spending going to the Internet Microsoft sold off Sidewalk, the precursor to services like Yelp, TripAdvisor, and others that now are part of daily lives.  It ended efforts to get into Search.  It spun out Expedia, exiting the travel category that would grow to be huge on a transactional revenue basis as well as a key search advertising category.  But most importantly for this discussion, the anti-trust actions caused a “swing for the fences” move that would lead to Microsoft’s worst failure and the lost five years.

With anti-trust efforts limiting Microsoft’s freedom of action, and Linux making a play for the desktop, Microsoft decided to do a release of Windows that would represent a seismic shift.  Not only would the Longhorn project take Windows so far ahead of where Desktop Linux was trying to go that it would be hard for it to catch up, but other Microsoft products would simultaneously take similar (and related) leaps.  Unfortunately for Microsoft the entire effort failed and Microsoft was barely able to crawl out of the resulting crater to produce the Windows Vista release.  Basically Microsoft spent five years and produced something without enough compelling value for users and with too many negatives for it to achieve widespread adoption.  Along the way it forgot how to actually build software, and as it became increasingly desperate to fix the Longhorn damage it took its eye off of other areas.  Vista shipped at the end of 2006, five years ago.

For the last five years Microsoft has been focused on recovery.  Windows 7, by any measure a success, was as much about re-learning how to build software as it was about the end-result.  Realizing that the earlier decision to spin out or kill advertising and other e-commerce businesses had been a mistake, and then pouring massive resources and management attention into re-entering those realms.  Realizing that they’d let the Windows Mobile franchise go stale, just as smartphones were taking off, and revitalizing that space.  Realizing that the Cloud was going to become a threat to much of Microsoft’s existing business, and deciding Microsoft had to become a leader in Cloud Computing or risk irrelevance was another.  And so while there have been several unquestionable successes (e.g., Kinect) over the last five years, overall Microsoft has appeared to be a bumbling has-been.

The problem for Microsoft has been that digging out of such a deep hole was not something it could do overnight (though I’m not arguing they couldn’t have done it better).  In most cases Microsoft had to turn the crank at least once to fix its previous mistakes, and as 2012 dawns it is finishing the second major crank; the turn that puts it back on track for delivering new and exciting things.  So Windows 7 was the repair release while Windows 8 is the return to leadership release.  Windows Phone 7.0/7.1 (aka 7 and 7.5, with 7.5 being the real target release and 7 being what they had to ship to make the Holiday ’10 schedule) as the repair release, Windows Phone 8 as the strive for leadership release.  Internet Explorer has crawled back from the neglect of the Longhorn effort (wherein it was supposed to be replaced) to once again poised for real leadership in 2012 with IE10.  You can see similar moves across the board.  Take Hotmail.  The original leader in web-based email had gotten quite stale.  Over the last couple of years it has been updated dramatically, and with the round of updates they just finished rolling out it has once again taken a leadership position (in fact I’ve abandoned Outlook in favor of using the web interface to Hotmail because that offers so many goodies not available through Outlook or other mail clients).

Of course it’s not just the things that Microsoft neglected that are poised for new leadership in 2012.  Servers are an area that, while significantly impacted by the “lost five years”, never took a step backwards.  And in 2012 we’ll see a major release of SQL Server early in the year, Windows Server 8 later, and a likely refresh of the Office servers at the end of the year.  SQL Server 2012 looks to be a leadership release (e.g., Columnstore), and what little we know of Windows Server 8 suggests that the team nailed what customers are looking for.  Overall 2012 is looking to be a good year for Microsoft’s business customers.  Mary Jo Foley lists her 10 “sexiest” teases for business in 2012; take those as just a starter!

In March of 2010 Steve Ballmer made a speech in which he said Microsoft was “all in” on the cloud.  The offerings we’ve seen since that time were not what he was talking about, they were the result of the efforts already underway.  Steve returned from that speech and started changing strategies, budgets, and ultimately his leadership team to make “all in” a reality.  It was the fall of 2010 when I had to go make the rounds to partner organizations letting them know my teams were backing out of commitments for various on-premises features in order to accelerate cloud-related work.  And it wasn’t until February of this year that Satya Nadella took over the Server and Tools Business, a leadership change specifically designed to accelerate STB’s cloud efforts.  Hadoop for Windows Azure is one of the results of that acceleration, but it is the tip of the iceberg.  In 2012 I expect we’ll see Windows Azure, SQL Azure, Office 365, and other cloud efforts make major leaps forward.

And what about Xbox and Kinect?  With the introduction of Kinect at the end of 2010 (and thus the expansion beyond just the hard-corps gamers) and an Internet TV-oriented release of the Xbox software at the end of 2011, Microsoft has finally moved to stake out its position in the living/family room.  This was the strategic target from day one of the Xbox, though it seemed to always be on the back burner as Xbox focused on meeting the needs of gaming enthusiasts.  Today’s offering has a lot going for it, but it is still quite immature.  Will there be a “next generation Xbox” in 2012?  While initially there were rumors of such a 2012 release most observers now think it is coming in 2013.  I have no insight on this specific topic, but whether or not a next generation Xbox is in the cards for 2012 I suspect a lot of Xbox-related innovation is.  We will almost certainly see the next rev of the Xbox software that takes the TV experience to another level.  And beyond a rumored version of Kinect tuned for the PC experience (where you are sitting right in front of the screen) I suspect we’ll see an updated Xbox version as well.  For example, one that handles a wider range of distances (e.g., there is already a 3rd party lens you can add if you don’t have the 6-8″ Kinect currently demands) and a high quality camera to support Skype videoconferencing.

And what of Skype?  Microsoft (and specifically Bill Gates) has long believed in the importance of telecommunications and that VOIP changes everything.  Despite numerous investments (adding video to Messenger, Lync, the ill-fated Response Point, etc.) Microsoft failed to find the secret sauce to become a leader in this space.  It remedied the situation by buying industry leader Skype earlier this year.  During 2012 I think we’ll see Microsoft exploit Skype to add pizzaz to nearly every one of its offerings (that has human interaction).  In other words Skype will join Kinect and TellMe as part of the “secret sauce” that defines Microsoft’s future.

Speaking of TellMe I suspect that 2012 will be the year that Microsoft finally takes full advantage of that technology.  It was already going down this road, but Apple’s Siri will spur it on.  If you take a look at TellMe’s ability to recognize human speech and generate out the equivalent text then it is every bit as good as, and probably better than, Siri.  Using TellMe to perform Bing searches on a Windows Phone or XBox works extremely well.  It is on the back-end, where the natural language text is translated into computer commands that Siri has an advantage.  Quite simply Microsoft never wired the two decades of work it has done on natural language recognition in to its operating systems, requiring the user to speak in the operating systems command structure rather than natural language.

As you can see during 2012 Microsoft will refresh nearly its entire product line.  And this time the releases aren’t about fixing past mistakes or catching up with where they should have been a few years ago, they are about starting to re-establish leadership.  Can Microsoft go all the way from Bum to Hero in a single pass? Probably not.  But they can demonstrate they’ve gotten their Mojo back.  And they can make Fiscal Year 2013 an exciting one for shareholders!

What could go wrong with this scenario?  Obviously the products could turn out to be unsuccessful because they aren’t well received by customers.  Or Microsoft could have great products but screw up the marketing.  Or some of the predictions could turn out to be wrong (e.g., if a next generation Xbox isn’t until 2013 and Microsoft holds off on Xbox SW improvements until the new hardware; or if something happens in development of Windows 8 or Windows Phone 8 that delays them or causes what Microsoft delivers to be less than expected).  Undoubtedly some of the predictions will be wrong, but hopefully just the minor ones.  If that’s the case then the overall assessment remains, 2012 is going to be Microsoft’s year.   And likely the first of a good five or so.


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5 Responses to Is 2012 Microsoft’s Year?

  1. Alique Williams says:

    An anonymouse source once told me that Gates was basically forced out of the CEO position and did not relinquish it volunteerily due to his poor job handling those anti-trust hearings. I also heard him and Ballmer got into it a lot pre-Ballmer CEO era.

  2. Brent says:

    I agree with almost all of that except the central premise. In fact I see an almost inverse scenario playing out in 2012. Starting in January, I expect MS to surprise on the downside when they report earnings and provide very subdued guidance for the rest of the year. PC sales are terrible and getting worse, and that’s still the main determinant of MS’s results. That should be sufficient for Google to join Apple and IBM in passing them on market cap, which will be another embarassment for Ballmer and will reinforce the meme that Google is the future and MS is the past.

    By fye (12), I think the continued decline in the stock, his plunging employee approval ratings, and the declining financials results for the company will force Ballmer to announce a replacement, though that person may not take over officially until CY13.

    It’s a make or break year for MS. I hope you’re right (make) and I’m wrong (break).

    • halberenson says:

      You’ll note my (too) subtle push that the financial discussion is really about FY13, which begins on July 1 2012. SQL Server 2012 is the only thing in my predictions that appears during the first half of 2012, and that is probably not a financially material event. Most of what I predict can’t start to produce revenue until the October quarter. So from a financial perspective we are well over a year until we see results.

      • Brent says:

        I caught that and it’s an important distinction. I just don’t see where growth is going to come from even by fy13. W8 will arrive three years late to the tablet market. Optimized apps and content will probably be very limited at lauch. And if Android tablets have established themselves better by then, as they’re starting to do with the Kindle Fire, OEMs may only pay lip service to supporting W8, as they did WP7. Any success there will probably take several quarters and perhaps even a year or more to assert itself, particularly in Windows revenue overall. Also, Ballmer still has to survive fy12. I think that’s unlikely.

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