My Blueprint for the Future of Microsoft

by Tim Bajarin   |   February 4th, 2014

As an analyst I have covered Microsoft close up and personal since 1981. When I first went to visit Microsoft in 1982 they were in their red brick buildings in Bellevue, WA and had less than 100 employees if my memory serves me right. I remember being able to walk down the halls and see Gates, Microsoft co-founder Paul Allen and other top executives in their offices as I was shown the operations. If it weren’t for Microsoft, I don’t think we would have had the kind of PC business that exists today and its overall role in driving our industry has been enormous. Over the years, I have watched them grow to become one of the most important and profitable businesses in the world. I have seen Gates become a billionaire 55 times over and see friends I got to know in the early days become billionaires or multimillionaires as they steered Microsoft to software dominancy.

However, as they grew and diversified their business, they have had many challenges over the years. In this day and age when computing is going mobile and their past cash cow of Windows and Office suite software is under attack, it became clear to many that the company should to change its leadership from the top down. More importantly they needed to re-architect themselves for a world of computing that is much different than the one they have known over the past 30+ years. 2014 will become the pivotal year for Microsoft and how the new CEO guides them will determine their success and relevance in the future.

The choice of Satya Nadella as the new CEO of Microsoft is very important to redesigning this pioneering software company. I believe it underscores that Microsoft’s board understands the core of their future lies in business and enterprise. They looked for a leader who could keep them moving forward in this growing segment of their business and Nadella was their choice. In fact, servers, Cloud and IT software represent an area that Microsoft already has a powerful position in. They must innovate within this segment if they are to stay relevant. On the other hand, the PC business is now in stability mode and will never again be a growth market for them or anyone in the PC industry again.

Demand for PCs declined by 10% last year and although we do see some increased demands for PCs in the next 1-2 years due to IT refresh rates starting this year, the fact remains that demand for PCs will stay steady at about 280-300 million a year going forward and most likely will continue to decline in importance over the next 5 years. In fact, even with refresh rates in play over the next two years we believe that overall demand for PCs will still be down by 2-4% over last year’s unit shipments. Also, most IT refresh OS demands will be Windows 7 related, while Windows 8.1 will continue to be slow to garner any serious market share within the enterprise as well as consumer PC markets. Although we know very little about Windows 9, if it pushes a touch based UI to IT and Enterprise accounts, it too will get a poor reception as touched based systems are really not suited for the precision like functions you need with spreadsheets, databases and even word processing where a keyboard and mouse are a key part of the user interface. Also touch screens just add to the cost of the PC or laptop and that serves as a deterrent for upgrading to Windows 8.1 or even a touch based Windows 9.

Where Microsoft is really challenged is in mobile where the growth of smartphones and tablets continues to be strong. Competition by Apple’s iOS and Google’s Android, which together dominate 95% of this mobile market, makes it hard for Microsoft/Nokia to gain the kind of software and channel support they need to grow real strong demand for their mobile offerings. Although smartphones and tablets do cross over to business via BYOD, the role of mobile devices and especially its growth will be driven by consumers and Microsoft’s position in mobile for consumers is falling farther behind their competitors today.

With this in mind, here is my blueprint of how I believe Microsoft should deal with these challenges over the next two years.

Microsoft’s Trinity

Within 18 months I believe the company needs to be broken out into three distinct divisions or possibly separate companies. One division should be focused on IT, Enterprise and Business, Cloud Software, business focused OS and services. The second division or company should be focused primarily on mobile, which includes smartphones and consumer tablets. The third company should be focused on entertainment and games and includes the Xbox, smart TV and the living room.

As for the IT company, this group would have the charter of moving all of Microsoft’s software to the cloud, stabilizing their Windows OS PC business, innovating within server software and establish a set of software as a service solutions primarily for enterprise and SMB. I could see them even acquiring a dedicated services organization to enhance their current software services and consulting practice. This group would be responsible for evolving their Windows OS for enterprise, consumers and education but with full knowledge that the PC as an OS vehicle will never be a growth market again. This group would also oversee the Surface Pro business although if they were smart they would get out of the PC hardware business altogether and let their remaining PC customers handle that part of the business. Bing should also be run out of this group since it is cloud service.

The mobile division or company would be solely responsible for smartphones and consumer tablets. However, this group would have to understand that the Windows PC OS does not serve their mobile agenda going forward. Like Google with Chrome/Android and Apple with iOS, which have distinct operating systems for PC and Mobile, this group should scale Windows Mobile OS up for use on tablets and optimize this OS for various size tablet screens instead of trying to push a PC OS down for use on smaller mobile screens. However, even if they do this they need to fix a huge problem Windows has when it comes to software apps. Windows Mobile OS and Windows 8.1 will never have the long tail software apps that IOS and Android have today and in the future. This puts them at a huge competitive disadvantage. I believe that this group has to bite the bullet and find a way to bring Android apps into Windows mobile, thus giving them a fighting chance to compete with Apple and Google and their partners.

There are various ways to do this although Bluestacks Android on Windows solution is the best of breed that I have tested to date. Of course, the Nokia acquisition would be critical to this division and their hardware which could run Windows mobile as well as Android on smartphones and tablets could help this division gain serious ground against Apple and Google and their Android partners. This group could also become involved in wearable devices and any other mobile based hardware and software that shows market promise.

The Entertainment division or company would be highly consumer focused and take aim squarely at the living room. The new Xbox ONE already serves as a set top for OTT streaming services like Hulu or Netflix as well as delivering games, but they could and should expand its role as a set top box in the living room and tie it closer to their various consumer online services such as Bing and future consumer cloud apps. They could really kick this into high gear if they bought Roku and integrated it not only into Xbox one but push to get the Roku box and technology into actual TV sets like Roku is doing today and make an even broader play to get Microsoft software, apps and services into the home. This group could also oversee future work on the connected home and other IOE consumer related hardware, software and services.

I suppose this is a rather simplistic view of how I think Microsoft should proceed in insuring their future, but to try and do all of this under a single Microsoft umbrella I just don’t think will work. By creating three distinct divisions or setting them up as separate companies each would have a clear set of goals, charters and roles with a tighter focus, thus giving them more of a fighting chance to compete especially against Apple, Google and Samsung that today are dominating the world of consumer technology and have strong desires and goals to become powerful players in IT and enterprise over time. I have no idea if this new CEO will go down this path but I do believe that if they don’t do something drastic along these lines, Microsoft’s overall business will continue to decline and their relevance in the future will be seriously in doubt.

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.
  • Gary Brockie

    I agree with your recommendation that MS be re-organized into three division. I think MS as a software company is analogous to what GE is an industrial company. GE has organized into divisions depending on the industry involved in order to more effectively focus on those industries that they are involved in. This is also a good way in which to judge how each division is executing,

    Each division must be free to function independent of the agenda of the other MS divisions. This is especially true of Mobile.

    • qka

      Agree on the three divisions. MS’s first focus should be businesses, mega to SOHO. Tim’s suggestions for the home are the best I’ve seen; my opinion heretofore has been what is MS doing in Consumer, as a separate entity if makes more sense. As for mobile, I suspect it is doomed. Supporting Android apps sounds like OS/2 all over again, and this time MS will be on the losing side.

      Tim didn’t address Bing and MS’s other online endeavors. I think they should be looking at selling or partnering those efforts. Maybe there is a possibility in more partnering with Yahoo.

  • Mauryan

    Bill Gates as technology advisor might breathe hot behind the new CEO’s back. If he has any radical ideas, it would be hard for him to implement and steer the company in the direction he wants. It would be a tough task for the CEO to convince the founder of the company to think differently and look into the future. Mr. Nadella may not have the spine to stand up to Mr. Gates. If he decides to play up to the ego of the founder and become his carpet, Microsoft might find it a lot slower to move forward. But if he decided to rebel his way out of the power struggle, he won’t last for long. The first disaster would be his exit point. For anyone to steer Microsoft out of its stagnation, Bill Gates has to completely let go off any involvement with the company. I do not see that happening. So it will be “Windows” all over again.

    • Tim Bajarin

      I agree…Gates could still be a bottleneck if he does not let go. Will be interesting to see whether he helps or hinders their future.

      • Thorntondw

        With 7 independent Board members it is really up to them to move the Gates/Ballmer out of the picture.

    • aardman

      Seeing as he totally mis-envisioned (I just made that word up) tablets and the mobile revolution in general, I think Bill Gates would be a lousy technology advisor.

      Now if they needed someone’s advise on how to negotiate with and outmaneuver their partners and largest customers so that they are totally under MS’s thumb, then Bill Gates is their man.

      • Herding_sheep

        To be fair, Bill Gates didn’t completely miss the tablet revolution. He saw the tablet revolution but saw it with both eyes blindfolded, so I guess thats not much better. Again, he also didn’t miss the mobile revolution entirely, he just saw things very wrong.

        Their execution was what failed them. I doubt they truly foresaw the potential of either market, but their execution was lousy and their software was a joke. Thats the thing people seem to forget. Ideas are only 10% of the battle. Execution and leadership is key. Two traits that Steve Jobs embodied more than anybody else in an industry filled with engineers and techies.

      • Thorntondw

        Great word. Mis-envisioned describes Microsofts lost decade perfectly.

  • goodbye

    Microsoft needs to push two people and one OS out the door forever: Steve Ballmer, Bill Gates, and Windows. If they don’t, they’ll continue descending.

    • Bill Smith

      That’s a rather simplistic view of the situation. I’m not the biggest Microsoft fan, but it still takes great skill to run a company that is larger than most countries.

  • peter

    Someone with detailed knowledge of Microsoft will undoubtedly find many reasons to think these proposals are too simplistic. However, I can see a lot of merit in your prescription. Particularly, because as it stands:
    1) these divisions are holding each other back,
    2) Microsoft is too complex to turnaround in one piece (management’s attention span is smaller than what this turnaround would need),
    3) Microsoft in its current configuration is fettered by its past antitrust trespasses and may not be able to pursue certain approaches that would help it (e.g. buying a large consultancy business in support of its enterprise business and/or striking aggressive deals in the mobile space).

  • Thorntondw

    Spot on! I do strongly believe they should separate into three separate companies with separate Boards and whatever cross-licensing agreements needed.
    I don’t see a future for the hardware business but, if it has one, it must be independent of the IT company.
    The IT company should make Office a world-class product suite on every OS. It would be a real cash cow for the rest of the decade, at least. Focusing on mid-to-large enterprise is a must for the IT company and the Metro touch interface should be abandoned. Buying a consulting company (HCL Axon, for example) would allow them to compete head on with IBM.

    For the Mobile company, scaling Windows Phone OS for all mobile devises is the way to go. If they did it right the business might survive and even grow. I agree, buying Roku could turn the Entertainment company into a powerhouse.
    I have been thinking along these lines for a long time. Moving Bill Gates out of the Chairmanship makes it possible.

  • Defendor

    Wow you have some bombshells in there.

    I can’t see a an actual company split in any scenario between desktop/mobile. Common software drives nearly all the lines. Would you say the same thing about splitting an Apple Mac company, from the Apple Mobile company. The software comes from a common root, and continues to cross pollinate between them and build strong inter-working. Splitting into separate companies would stymie that.

    As much as I detest Metro, I really like Microsoft’s latest developer model using Xaml to create more flexible UI designs, which should make it possible to more easily have targeted phone/tablet/TV UI’s for applications that share a common code base.

    Microsoft baking in Android support. I really don’t see that either. This almost never works out for anyone. It reminds me of OS/2 baking in Windows support. Who did that end well for? Also part of the problem with Microsoft’s current implementation is confusion.

    Those are two big ones that I don’t see happening in this universe.

  • Defendor

    “… should scale Windows Mobile OS up for use on tablets…”

    You have mentioned this a few times. But this is moot. They have already scaled the NT kernel down to the phone in Windows Phone 8. The old mobile core of Windows Phone 7 was simply an inferior non starter that was best killed off.

    What they should do next is more partitioning work to have separate Desktop/Touch (AKA Metro) modules that runs on top of the common kernel. Those Desktop/Touch modules are optional loads, reducing the footprint for both desktop and touch users that only need one mode. It might ship something like this:

    Phones: Touch module only
    Low end/small tablets: Touch module only.
    Larger Tablets/convertibles: Touch/Desktop modules included, defaults initially to touch only.
    Desktops/Non Touch laptops: Touch/Desktop modules included, default initially to desktop only.

    They just need a more modular approach to desktop/Touch instead of trying to cram everything together.

    • JoeBest

      “They just need a more modular approach to desktop/Touch instead of trying to cram everything together.”

      That’s an interesting approach that I think could work for Microsoft. Another angle that I think Microsoft should rethink is their initiative of Windows running on ARM. If Microsoft wants to persist in having two processor strategies, they should make Windows RT compatible with the Windows Phone ecosystem and let the market decide which tablet approach works best for them: ARM/Windows Phone or x86/Windows 8.

  • http://www.BarnesFamily.com/ davebarnes

    “had less than 100 employees”
    FEWER
    not less

    • orienteer

      Bravo, brother grammarian.

  • Another_Lurker

    Gates’s role is the potential disaster. MS needs to confront with honesty the market has changed. MS needs to decide what they really want to be and move forward with that vision. They most choose been software/app house that dabbles with hardware or a hardware house that sells software. The first allows them to stay in higher margin businesses while the later saddles them with the lower margin hardware division. The reason Apple can get away with their “walled garden” approach is because they have always been a hardware manufacturer that does some software inhouse.