Hal's (Im)Perfect Vision

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.