Microsoft: Point and Counter-Point

On April 10, I wrote: Say Goodbye To Microsoft. On April 17, I wrote Say Hello To Microsoft 2.0. The two articles, when taken as a whole, argued that:

1. In the beginning, Microsoft’s business model was simple — create the personal computing operating system (Windows) and license it to as many hardware manufacturers as possible.

2. Microsoft’s vision was equally clear:

A computer on every desk and in every home. ~ Bill Gates, Microsoft chairman and chief executive officer, 1980

3. By the turn of the century, Microsoft’s singular vision and simple, yet powerful, business model had virtually achieved its audacious goal of putting a computer on ever desk and in every home and having Microsoft’s Windows operating system running on each of those computers.

4. Ironically, having achieved the seemingly impossible, Microsoft was left without a goal to power them and without a vision to guide them. They drifted from product line to product line and from business model to business model.

5. Microsoft long knew the Mobile Wars were coming but when the revolution finally arrived, the mobile wars were fought with weapons so unfamiliar to Microsoft, and the front lines shifted so quickly and so decisively, that the wars were all but over before Microsoft was able rearm themselves.

1. By the time Windows Phone 7 was released in October 21, 2010, ((Windows Phone 7 came out seven months AFTER Apple started selling the iPad. In other words, Apple had started the next revolution in computing before Microsoft even fired a single shot in the nearly completed smartphone revolution.)) Apple’s iOS had already sewn up the premium end of the smartphone market and Google’s Android had already locked down the low end.
2. By the time Windows 8 and Microsoft’s Surface tablet was released in the Fall of 2012, millions upon millions of iOS and Android tablets were already in the hands of consumers, and businesses and educational institutional buyers had already adopted iOS as their preferred tablet operating system. By the time Microsoft entered the fray, they found themselves fighting a war already over.

6. In a matter of only a few, short years, Microsoft went from being the only relevant company in computing to a company that was completely irrelevant in mobile computing.

7. Microsoft’s board, which sat idly by for over a decade, finally acted by forcing Steve Ballmer out and naming Satya Nadella as their new CEO.

8. It’s still early days, but it appears Satya Nadella is realigning Microsoft around a horizontal business strategy which strives to sell services in the Cloud layer resting atop today’s modern personal computer (phone, tablet, notebook, desktop) operating systems and to sell those services to every type of personal computer maker and user.

9. If Satya Nadella is truly moving Microsoft to a horizontal-first model, then it logically follows Microsoft will want to jettison unprofitable vertical hardware projects like the Surface tablet and the Nokia phone lines and demote the importance of vertical software offerings like Windows 8 and Windows Phone 8.

Push Back

The truth will set you free, but first it will piss you off. ~ Gloria Steinem

My twin articles produced some extremely thoughtful and thought provoking responses. So I decided to give one reader — RATIONAL GEEK — a chance to respond which, in turn, allowed me to refine my original thinking on the matters discussed above.

Microsoft’s Functional Re-Organization

KIRK’S TAKE:

Microsoft’s divisional organization may have been dysfunctional but, in my opinion, Steve Ballmer’s attempt to move Microsoft to a functional organization was a disaster waiting to happen.

First, Microsoft’s culture and product lines were simply incompatible with the goals of a functional organization.

Second, making a transition from a divisional organization to a functional organization in these perilous times is like changing the proverbial horse in the middle of the river — or perhaps more like changing the proverbial horse while plunging over a waterfall.

Satya Nadella’s recent job reassignments indicate to me he is starting to undo some of the reorganization that began during Steve Ballmer’s final days. Frankly, I’d like to see Nadella, like a new broom, sweep some people clean out of Microsoft. But — as I was recently reminded by Ben Thompson of Stratechery fame — Microsoft “fires” gently.

RATIONAL GEEK’S REBUTTAL:

In what way is Nadella undoing the reorganization? I don’t see it.

The One Microsoft reorganization is important because the old Microsoft would have powerful groups like Windows, Office and Enterprise hunker down and protect their operating margins at the expense of collaborating towards a common goal. One Microsoft is an attempt to “align the wheels”.

Everything they do is now with a common goal in mind.

We will see our product line holistically, not as a set of islands. We will allocate resources and build devices and services that provide compelling, integrated experiences across the many screens in our lives, with maximum return to shareholders. All parts of the company will share and contribute to the success of core offerings, like Windows, Windows Phone, Xbox, Surface, Office 365 and our EA offer, Bing, Skype, Dynamics, Azure and our servers. All parts of the company will contribute to activating high-value experiences for our customers. ~ Steve Ballmer

The old organizational structure was once one of Microsoft’s biggest criticism. In-fighting everywhere resulting in counter productive disconnects. We’ve all seen this amusing org chart comparison right?

The important takeaway is Microsoft recognizes their sacred cows of the past are no longer sacred. They’ll need to look beyond them towards cloud, devices and services to compete in the future.

Microsoft’s Surface Tablet

KIRK’S TAKE:

I think Microsoft should recognize the Surface Tablet for the disaster it is and drop it like a hot coal.

Surface business worsening? Q2: Surface lost $40 million on sales of $890 million. Q3: Surface lost $45 million on sales of $494 million. ~ Peter Bright (@DrPizza)

First, while it’s very true a few people definitely DO desire and desperately DO need a hybrid device — something between the tablet and the notebook — those road warriors are far fewer than Microsoft thinks (thought?).

Apple is right to shun the MSFT hybridization/bastardization. ~ Jean-Louis Gassée (@gassee)

For example, some people find hybrid utensils such as the spork and knock useful. However, the vast majority of utensil users stick with more traditional categories like spoons, forks and knives. Similarly, while the Surface and other hybrid tablets are extremely useful for some, the vast majority of users will stick to using phones, tablets and notebooks to satisfy their computing needs.

Second, Microsoft’s Surface tablet is in direct competition with Microsoft’s tablet manufacturing partners. How can people not see this is a bad idea? Let me illustrate what a god-awful strategy this is through the use of an equally god-awful joke:

Two Eskimos, sitting in a kayak, were chilly so they lit a fire in the craft. Unsurprisingly it sank, proving once again you can’t have your kayak and heat it too.

Microsoft needs to acknowledge reality and admit they can’t license their software to hardware manufacturers while simultaneously competing directly against those manufacturers too.

What you can expect from Microsoft is courage in the face of reality. ~ Satya Nadella

Third, I reject — and more importantly the market rejects — the entire concept of using the Microsoft Surface tablet as a “showcase” device.

Microsoft didn’t write off 900 million dollars on the Surface last year because they were trying to make the Surface their “showcase” device. Microsoft was all in with the Surface tablet.

One might argue Google’s Nexus devices are a successful example of how to do a showcase device right. One might argue that if one wanted to be wrong.

The concept of a Showcase device DOES NOT work. It’s been a great big zero for Google, it’s been far worse than a great big zero for Microsoft and it will forever and ever continue to be a losing strategy for anyone foolish enough to employ it.

Fourth and finally, while I agree the Surface tablet demonstrates Microsoft’s commitment to Windows 8’s dual OS (desktop and tablet touch) philosophy, I vehemently disagree with the notion a hybrid OS is something Microsoft SHOULD be making a commitment to. The philosophy behind Windows 8 is deeply flawed and it’s not going to be fixed by “committing” to it. On the contrary, the first thing Microsoft needs to do is to abandon, not commit to, the Frankenstein’s monster that is Windows 8.

It is better to run back than run the wrong way. ~ Proverbs

RATIONAL GEEK’S REBUTTAL:

There’s no denying the $900 million dollar loss is a good indicator people didn’t want what Surface, version 1, had to offer. I do however think it is not accurate to then conclude people are rejecting the idea of a converged device — one that is a tablet and can also potentially replace your laptop/desktop. I think the failure to sell has more to do with the painful transition from old style Windows to the new hybrid Windows 8. We are already seeing many small but significant improvements in Windows 8.1 that helps the two modes blend more seamlessly. This stuff happens. The first version tends to be rough around the edges but through iteration we begin to see a more polished product.

EDIT: This just in! Gartner’s latest report shows “hybrid PCs” are on the rise as iPad sales slow down.

This is notable because with all the talk of a declining PC market – if you combine hybrid PCs with traditional PCs, that segment is actually trending upward for 2014. No, this is not worthy of a victory lap just yet but it may be the beginning of a bright future for hybrid PCs.

I confess I am a bit biased, but not blindly. My bias is based on reality. My primary PC is a Surface Pro 2. It connects to a 27″ monitor, mouse and full sized keyboard when I’m at my desk. On the go, it’s just the Surface Pro 2 and a Type Cover. It easily morphs into a tablet when I want one – giving me a great touch experience – AND a laptop when I need it with full desktop support. Who else might be interested in a device that fits this flow? Possibly anyone carrying around an 11″ MacBook Air AND an iPad. Oh! and add to that everyone trying desperately to turn their iPads into laptops with various 3rd party keyboards. That’s no small market.

Regarding Surface itself, we should consider the state of the Windows OEM market at the time Windows 8 launched. Most had no idea what to make of Windows 8. It was new and confusing and expensive to include a touchscreen for their mainstream offerings. They weren’t sold. Left to their own devices, it’s not hard to imagine them abandoning the concept altogether.

Microsoft producing Surface did a couple of important things. One, it showed without a doubt their commitment to Windows 8. There was no hedging. This was their idea of a device that fully embraced the concept of Windows 8. If Microsoft didn’t believe in it then neither should their partners. Two, it represented *one* form factor but left the door wide open for OEMs to build and fill in the rest. You probably won’t see a Surface Ultrabook or a Surface desktop and everything else in between any time soon.

This is somewhere in the middle of old Microsoft where OEMs built the entire range of devices and Apple who builds all their devices. Understandably, Apple’s hardware selection is limited because they can’t make them all. For example, there is no 17″ MacBook Pro but I bet many would love there to be. Microsoft’s new approach is effectively the best of both worlds. They can produce a showcase lineup – though limited – and rely on their partners to build everything else.

Lumia+Surface+Xbox = Microsoft sells several billion dollars worth of hardware per quarter now. ~ Alex Wilhelm (@alex)

EDIT: Two hundred million IT workers want Windows tablets. ~ Forrester

Microsoft’s Nokia Phone

A reminder: Microsoft now is the world’s biggest software company, and 2nd biggest phone maker by sales. ~ Shira Ovide (@ShiraOvide)

KIRK’S TAKE:

I don’t think Microsoft should be making phone hardware any more than I think they should be making tablet hardware (See “Microsoft’s Surface Tablet”, above). Unsurprisingly then, I think Microsoft’s acquisition of Nokia — which was just completed this week — was a huge mistake.

I would like to blame Ballmer for the monstrously confused and strategically backwards Nokia purchase. It was, after all, done on his initiative.

But the Microsoft board has to take the lion’s share of the blame. Apparently, the board didn’t agree with Ballmer’s pursuit of Nokia — but they let the purchase go through anyway, even as they were forcing Ballmer out the door. What the heck were they thinking?

The best thing — perhaps the only thing — the Microsoft board did on Microsoft’s behalf in the past ten years was to replace Ballmer with Satya Nadella. The second best thing they could do now would be to resign, en masse, in order to allow Nadella to get on with the job of fixing the mess they allowed Ballmer to make.

Please understand, the purchased portion of Nokia is still capable of making great products. But that is irrelevant. What is relevant is having one consistent business strategy. Microsoft can’t expect phone manufacturers to make Windows 8 Phones if Microsoft is making them too. It’s just common sense.

Further, you can’t justify the purchase of Nokia by pointing out Windows 8 phone sales are bad. This is tortured logic. If third party Windows 8 phone manufacturers are having trouble selling their wares now, how the hell is that situation going to be improved by having Microsoft compete against them too?

Reports indicate Satya Nadella originally opposed the idea of purchasing Nokia but later agreed it was the right thing to do. I take this as a good sign. I don’t think Nadella truly changed his mind. Instead, I’m hoping Nalella still thinks the purchase of Nokia is a mistake — but he was politic enough to know the Nokia acquisition was going ahead whether he was on board or not and he choose to climb on board rather than risk being left standing at the dock.

RATIONAL GEEK’S REBUTTAL:

This one is interesting because if the circumstances were different, i.e. Windows Phone was not dominated by Nokia and was getting traction with other OEMs, I would agree. But because the exact opposite is true, Nokia is too important to be left out of Microsoft’s control. Microsoft has recently announced WP will be free of charge. This should help entice more OEMs to build Windows Phones. Carriers have incentive to see a 3rd platform emerge and OEMs do as well. The fact Microsoft is now making WP free is a great example of OEMs benefiting from this competition.

Also, I wouldn’t compare Microsoft’s Zune to their current foray into hardware. Side note – the Zune was pretty great! 🙂 The big difference is the MP3 player market was a dead end. Apple completely dominated it and by the time Zune came along people were already transitioning away from dedicated players to their phones.

Unlike the MP3 player, no one would dare say the mobile phone market is a dead end. This space is full of potential – and it keeps growing!

Cash Cows

KIRK’S TAKE

Microsoft has two cash cows — Windows and Office — that are NOT fully aligned with Microsoft’s new horizontal strategy.

In my opinion, Microsoft should milk those cash cows for all they’re worth. However — and here’s where it gets hard — they should always, always, always favor their new horizontal strategy over their cash cows whenever conflicts inevitably arise. For example, they should release Office for iPad, regardless of how it affects the sales of Windows licenses, Surface tablets, etc.

Oh wait…Microsoft just did that!

Tim Cook says he’s happy to have Office on the iPad. “If it had been done earlier it would have been even better for Microsoft, frankly.” ~ Harry McCracken (@harrymccracken)

And Microsoft should give up the notion that they’re going to be able to make a profit from licensing mobile operating system software.

Oh wait…Microsoft just did that too!

These are, in my opinion, signs that things are changing at Microsoft and changing in a very positive way.

Ideals may tell us something important about what we would like to be. But compromises tell us who we are. ~ Avishai Margalit

RATIONAL GEEK’S REBUTTAL:

I think we mostly agree here. Microsoft should definitely continue to milk their cows except I don’t think abandoning Windows and Office should be part of the goal. The strategy to move to the cloud should not require they abandon Office and Windows. In fact, the ultimate goal for Microsoft would be for people to continue using Office and Windows while leveraging Microsoft’s cloud and services. The key difference here is it is not “all or nothing”. Microsoft understands the current reality. There will be a mix of users on different devices and platforms and Microsoft wants to be a part of their flow. But their goal should still be people will get the best experience using all of Microsoft.

In the world of ubiquitous computing, we want Windows to be ubiquitous but that doesn’t mean one price or one business model. It’s actually a market expansion opportunity and that’s how we’ll execute on it. ~ Satya Nadella

Microsoft’s Universal Apps

KIRK’S TAKE:

Microsoft has announced Metro and RT apps will run across the phone, tablet, PC and even Xbox form factor. I am DEEPLY suspicious of the concept of Universal Apps. It sounds as if Microsoft has done a wonderful job with them but this “write almost only once and run almost everywhere” concept has been the Holy Grail — desired by all, found by none — of personal computing ever since there were two or more form factors or two or more operating systems to choose from.

I am willing to wait and learn but I am not willing to give Microsoft the benefit of the doubt. They can’t just tell me universal apps can be done. They have to show me they can be done.

RATIONAL GEEK’s REBUTTAL:

Yes I’m old enough to remember Java’s promise a long time ago. I think one of the big challenges for Java was it depended on Virtual Machines installed on various platforms, i.e. Windows, Mac, Unix, Linux etc. The same Java code would need to be interpreted and translated to each operating system’s specific language. I don’t think it’s unreasonable to say this model had many variables working against it. Contrast this to Windows RT. You are no longer dealing with multiple operating systems. There is only one – Windows. The universal app developer should be able to leverage the bulk of their code while focusing on adapting their User Interface to various form factors.

Microsoft’s Muddled Thinking

KIRK’S TAKE:

In my opinion, having a horizontal business model that emphasizes services in the cloud AND having a hardware business model that sells Surface tablets and Nokia phones AND having a proprietary operating system model that licenses software and tries to create operating system lock-in, is muddled thinking. A company should have only one, not multiple, business models.

The response I often get when I suggest Microsoft has to choose one business model or another is: “Why? Why can’t Microsoft do it all? In fact, it’s Microsoft’s ability to do it all that makes them unique; that gives them a competitive edge.”

I’m sorry, but that kind of thinking is not just wrong, it’s dangerously wrong.

There is nothing worse than a sharp image of a fuzzy concept. ~ Ansel Adams

A company’s products are like the wheels of a car. They support the vehicle and enable it to speed ahead. A business model aligns the “wheels” of a company. If they’re not aligned, the vehicle will shimmy and shudder and run inefficiently.

Having multiple business models that prioritize different things is like pointing the wheels of your car in four different directions and expecting that to make your car go faster. What’s going to happen instead is you’re going to get a lot of wheel spinning, a lot of rubber burning, a lot of noise, a lot of smoke, a lot of engine wear and tear and not a lot of traction. In other words, you’re going to get the old Microsoft.

Satya Nadella has said “It’s gold rush time” in the cloud and SaaS markets. There are just a couple of companies positioned to capitalize on the dual opportunity of SaaS and infrastructure services and Microsoft is one of them.

Well, there are two ways to make money in a gold rush. You can pan for gold or you can sell the pans to the gold miners. This is the key — YOU CAN’T DO BOTH.

Microsoft is a big company but it’s not now, nor was it ever, so big that it could ignore the laws of business. If it wants to be good at any one thing, then it has to stop trying to be good at multiple things.

RATIONAL GEEK’S REBUTTAL:

I look at all of this in the context of ecosystems. The ecosystem story is important – maybe the most important. Microsoft, Google and Apple are all working very hard to keep users in their world. I think it would be quite compelling if Microsoft is uniquely capable of offering users the ability to buy an app on the phone once and download a version on a tablet and PC for free – or in any order therein. This is a value proposition easy to understand. With respect to apps, Google’s Android ecosystem starts at the phone and ends at the tablet. Same with Apple and iOS. With Windows RT, Microsoft can complete the circle.

I’d also like to note that competing ecosystems can be hostile. Take Apple for example. Their move to drop Google Maps from iOS and use Bing as Siri’s default search engine is a good example of why relying on another platform to deliver your services can be risky. Then there’s Google who’s still denying Microsoft any native Youtube application for Windows Phone. It would be wise for Microsoft to take necessary steps to control as much of its destiny as possible.

Microsoft’s Satya Nadella

Satya Nadella has really impressed me. The tone at Microsoft has completely changed since he’s taken charge and he’s saying all the right things.

In particular, Nadella has said Microsoft needs to “ask the hard questions” and have the “courage to face reality.” To many, these seem like mere platitudes. To me, they are an accurate diagnosis of what ails Microsoft and a prescription for how to fix it.

Your Turn…

One of the quickest ways to find out if you are wrong is to state what you believe. ~ Penn Jillette

I want to thank Rational Greek for helping me with this point/counterpoint experiment. He went above and beyond the call of duty. Truth be told, I’m not sure I agree with a single word he’s written (and I think the feeling is mutual – he doest agree with a single word of what I’ve said) but I do deeply respect his arguments. They were rational and well thought through. They were just built upon a different set of premisses than my own.

Fencing with Rational Geek has helped me to hone my arguments and further clarify my thinking on the future of Microsoft.

The aim of an argument or discussion should not be victory, but progress. ~ Joseph Joubert

You’ve heard from me and you’ve heard from Rational Geek. Now it’s your turn. What do you think is going to happen to Microsoft? Let us know in the comments, below.

The point of seeing both sides isn’t to hover between them but to be able to come down on the right side with the right degree of conviction. ~ Julian Baggini