How to make Devices and Services work for Microsoft

on February 28, 2014
Reading Time: 6 minutes

Back in 2012, Microsoft’s then CEO Steve Ballmer started talking about Microsoft as a Devices and Services company rather than as a software company. This was a major strategic shift, and it was behind major moves like the launch of the Surface and the acquisition of Nokia’s Devices and Services business. This is a signal that Microsoft recognizes the threats to its hitherto core software businesses, but also a fundamental move towards hardware and services-based models for monetizing software. Apple is arguably in many ways a software company, but it now monetizes essentially all its software through hardware purchases. Google is a software company, but makes none of its money through traditional software licensing models.

Two big questions arise from this: firstly, does it even make sense for Devices and Services to be the basis of a strategy? and secondly, if it does, what are the keys to doing this successfully? Let’s take each of those in turn. (Note: Microsoft’s Devices and Services strategy applies both to its Consumer and Enterprise businesses, but I’m going to focus here on the Consumer side).

Does Devices and Services even make sense?

Ben Thompson recently argued that a Devices and Services strategy is fundamentally flawed:

The truth, as I’ve written multiple times … is that a “Services and Devices” strategy is fundamentally flawed. Either be everywhere with your services, or differentiate your devices.

I see what he’s saying, but I don’t believe it’s right. I think there’s an enormously powerful link between devices and services which the two most successful players in the industry today – Apple and Google – have both exploited. When you have compelling services, and when the best way to experience those services is to use them on your devices, then there’s a virtuous circle between your services and your devices which allows each to benefit the other. As people find the services compelling, they seek out devices which provide the best experience for those services, and become loyal to them. As more people buy those devices, more people use the services, which makes them better and creates loyalty to the broader ecosystem of devices which provide similarly optimized experiences.

Apple and Google have approached these things slightly differently – Apple considers that its services should not just be best on its devices but exclusive to its devices (with the exception of the desktop iTunes software), whereas Google benefits greatly from wide adoption of its services across platforms but optimizes them for its own as a driver to get people onto the platform it can monetize best (Android). Both companies, though, are effectively combining devices and services, and if you ask people why they buy either iPhones or Androids the answer is many times that they want easy integration with services from each company that they’re already using (such as iTunes or Gmail).

The counter-argument to all this is that these two companies have each chosen either Devices or Services as their core business, and only participate in the other as a way of adding value to that core business. That’s true to some extent, and it’s what’s behind Apple’s exclusivity approach, but I’m also reminded of the Alan Kay quote Steve Jobs was so fond of: “People who are really serious about software should make their own hardware”. Ultimately, the most successful companies in this space will combine hardware, software and services to create compelling experiences. That’s certainly been true for Apple, and I’d argue it’s increasingly true for Google too as it gets deeper into hardware through Nest and Google Glass even with the disposal of Motorola.

What are the keys to success?

If combining Devices and Services does make sense, then the next big question is what it takes to be successful in combining those two at the heart of a strategy in the consumer technology market. Again, we can learn from Apple and Google here. I believe the keys to success lie in answering certain questions:

  • How will you make money?
  • How far along the better/exclusive spectrum do you want to go?
  • What are the compelling services around which you will build your strategy?

Business models

Although companies don’t have to pick either Devices or Services as a core strategy, they do need to establish a core business model. Which will they attempt to monetize: hardware or services? Amazon sells hardware, but does so with thin or negative margins as a way to sell more services (content). Apple makes large margins on hardware and gives away most of its software and services. Google sells some hardware (Nexus devices) essentially at cost, and services for free, and monetizes them through advertising. One of the key questions for Microsoft is how they want to make money going forward in the consumer market. Will it be hardware alone? Mostly services? Does charging for software still play a role? A big part of Microsoft’s current problems stem from the fact that, despite the headline shift to a Devices and Services company,  it still acts as if it sees Windows licensing – software – as its core business. In order to pursue a focused Devices and Services strategy, Microsoft needs to resolve this conflict.

Only on Microsoft devices, or better on Microsoft devices?

Making the decision about how it wants to make money will help Microsoft make the next decision: does it want to take the Google approach (available on many devices but best on Android) or the Apple approach (exclusive to Apple devices), or land somewhere in between. If the main monetization strategy is hardware, then Apple’s exclusivity approach makes the most sense. If it’s services, then going big makes the most sense. Microsoft faces two fundamental challenges here which are somewhat unique to the company: firstly, it’s used to providing market-dominant services and software, and secondly one of its most compelling services – Skype – didn’t start life as a Microsoft service. But it needs to decide how exclusively tied Microsoft’s services will be to Microsoft devices, and if they’re not exclusive then how to make them better on Microsoft devices. The latter is a lot harder to figure out, but there are some lessons from Google’s approach:

  • Better features / functionality, or earlier access to new features – Google Maps’ navigation features, Google Now and many others both started on Android before moving to iOS and continue to enjoy some advanced features on Android which iOS doesn’t offer.
  • Single sign-on. I’m a heavy user of Google services on my iPhone, and there’s nothing worse than having to sign in to every separate Google app, especially if you’re using two-factor authentication. The Android experience significantly simplifies this by having single sign-on for all Google services and apps (much as Apple does with iTunes / iCloud accounts on iOS).
  • Unique features – Google Keep, Google Wallet, Google Play Movies and other apps are all exclusive to Android in their full form.
  • Tighter integration with core services – Chrome and Google Voice can be set as the default apps for web browsing and phone calls on Android devices, but can’t on other devices.

Microsoft is already doing some of this with its services on Windows Phone Windows 8, but there’s a lot of room for improvement.

Creating compelling services

But the biggest single question, and the one I think Microsoft is going to struggle with most, is what are the compelling services that will drive people to Microsoft’s devices? So far, Microsoft has made its two biggest money-spinners – Windows itself and Office – the centerpiece of its marketing around both Windows 8 and Windows Phone. But the fact is that neither of these is all that compelling to consumers, and they have nothing like the driving force of iTunes or Gmail or Google Maps in bringing people to the platform. So what’s the answer?

The two key things people use their personal devices for are communications and content, and the solution to Microsoft’s challenge is to develop, create or acquire compelling services in both of these areas. A quick look at Apple and Google’s most compelling services reinforces this point:

  • Apple – iTunes (content purchasing and management), iMessage and FaceTime.
  • Google – Gmail, Google Maps, Google Play.

These services are big reasons why people buy iOS and Android devices respectively, but what are the equivalents for Microsoft? Windows Phone’s biggest single problem is that it doesn’t have a compelling set of services that are driving people to buy it. Today, the best selling devices on Windows Phone are the cheapest, suggesting that the purchasing decision today is much more about the price/quality equation than any apps. The Surface continues to sell poorly, despite the tight Office integration, suggesting that this isn’t the solution. Microsoft has several assets in the communications space, not least Skype but also Outlook.com, and it has stores for purchasing apps and content. But it needs to go significantly further both in developing and creating compelling apps and making the experience on Microsoft devices better than on any others.

Until it does these things, Microsoft’s Devices and Services strategy is doomed to fail. Nokia makes some great hardware, but so does HTC. Neither company is selling bucket loads of devices despite the great reviews the hardware regularly gets, which is further proof that combining devices and services is critical for success in this space. Microsoft desperately needs to create compelling services, and then find ways to make those services perform best on Microsoft devices, if it is to spark interest in its devices and make a success of the Devices and Services strategy.

In this context, it’s useful too to think about the Nokia X line announced this week. How does that fit into a Devices and Services strategy? The whole thing is built on Android AOSP rather than Windows Phone. But if the strategy at Microsoft is around Devices and Services rather than necessary operating systems that may be OK, especially since the Nokia X line will reach parts of the market Windows Phone can’t address today anyway. The key thing is that (a) this is a platform that Microsoft can control, even if it doesn’t own it, and (b) it can put Microsoft services front and center, optimizing for them in the same way it would on Microsoft’s own platforms. As such, I think it fits fine with the overall Devices and Services strategy. The key problem is the same though: Skype, OneDrive and Outlook.com just aren’t all that compelling as a set of Microsoft services around which to drive loyalty, on the Nokia X line or with any other Microsoft devices.