The Windows 8 Mistake

The CEO succession at Microsoft and the approaching Build conference have made Windows 8 a hot topic again, raising lots of questions about where the OS goes from here. While there are lots of theories, few people seem to be going back to where Windows 8 came from in the first place, which is really useful if you’re trying to figure out where it might go next.

Windows 8 was about pulling tablets towards PCs and away from smartphones

Microsoft missed the boat on the current generation of smartphones. Though it was a significant vendor in the early history of the smartphone with Windows Mobile, it misjudged the entry of the iPhone, its impact on the market, and the resulting dominance of iOS and Android. That history has been well covered and doesn’t need to be rehashed here. But the important thing is that, as Microsoft saw the re-emergence of the tablet category following the launch of the iPad, it saw that tablets were being formed in the image of smartphones, not PCs, and that was enormously bad news.

Why was this so horrifying for Microsoft? I believe they saw even then that tablets had the potential to displace PCs, but the smartphone model had several disadvantageous features from a Microsoft perspective:

• The smartphone space was already, by 2010, coming to be dominated by two models: a tightly-integrated hardware/software package exemplified by Apple (and by then less successfully by BlackBerry) and a free, open source software licensing model embodied by Android
• Operating system licenses on smartphones are much lower than on desktops for Microsoft, and non-existent for essentially everyone else, threatening Microsoft’s Windows revenue and margins
• Smartphones ran entirely different apps from the applications that ran on desktops, with no cross-compatibility, eliminating the opportunity to sell existing versions of Office
• Smartphones were based on ARM architectures rather than on Intel, making them fundamentally incompatible with all the existing Windows software.

The diagram below illustrates the situation as Microsoft must have seen it in 2010:

Tablets could, at that point, theoretically go either way, and Microsoft certainly had the power to decide which way it wanted to pull tablets, whether towards the smartphone model or towards the PC model. And it clearly decided that its future depended on applying the PC model, rather than the smartphone model, to tablets. A PC model applied to tablets would allow it to continue charging high licensing fees for Windows, make Office applications easily available on the devices, and make them compatible with existing Windows applications from third parties. But it’s important to note that this was a decision driven entirely by what was perceived to be best for Microsoft, but by what would be best for the actual users of the products (The one counter-argument is that Microsoft would make Office available on tablets in more or less fully-fledged form, and this could be user-friendly as well as helpful for Microsoft’s bottom line.)

This, then, explains Windows 8, as the supposed solution to these problems. Microsoft would make the desktop, and not the mobile, version of Windows the core of the tablet experience. But by doing so, it forced on the desktop experience lots of things that made sense in the tablet world (the Metro UI, touch screens and an app store) but didn’t make sense there. Instead of taking a consumer-led approach and unifying two fundamentally similar products, smartphones and tablets, with a single OS, Microsoft tried to bridge the gap between two fundamentally dissimilar products, the desktop and tablet. And all of this was in the service of establishing the PC operating system licensing model and not the smartphone OS licensing model on tablets. 

But of course when it came to tablets, Microsoft had to make compromises to compete on price and form factor: the choice of ARM rather than Intel for Windows RT, and the resulting limitations of RT devices, ironically made them a lot more like smartphones, while eliminating almost all the consumer benefits of creating tablets in the image of the desktop. As a result, whereas the other two major platforms have one big dividing line from an applications point of view – between smartphone/tablet on the one hand and PC on the other, Windows has two – between smartphone and tablet, and between tablet and PC.

Where do we go from here?

If Microsoft’s ambition was to pull tablets in the direction of PCs, it clearly failed. The iPad and now a range of Android devices have enthroned the two dominant smartphone operating systems as the OSs of choice for tablets too, and there is nothing Microsoft can do to stop this at this point. Its own tablets have sold poorly, and its OEMs’ tablets haven’t sold that well either. Part of the challenge is that Windows tablets are competing on an uneven playing field from a cost perspective – wrapping in a licensing fee for a full operating system significantly increases the price for Windows tablets over the price of iOS and Android devices which don’t have to cover licensing costs.

But that’s far from the only reason why Windows 8 has been a relative failure. The bad decisions described above, which flowed from a desire to bolster Microsoft’s two cash cows rather than to do what was best for users, have left it with an operating system (or two) which meets almost no-one’s needs well, and sales have reflected that. So, where should Microsoft go from here? The following should serve as a good to-do list for starters:

• Merge Windows Phone and Windows RT, mirroring the existing iOS and Android structures, and rename Windows RT as Windows Tablet.
• Make both flavors  of the merged mobile OS free for users and OEMs, eliminating licensing fees
• Do much more to promote consumer services, notably Microsoft’s own Music, Video and Gaming stores and offerings, across its consumer devices (smartphones, tablets and Xbox)
• Continue with Windows 8 as a separate operating system, making Metro an optional overlay UI for touch-screens, but allowing users to choose the old-fashioned desktop UI as their primary or only UI if they so choose.

I’ll address each of these below in more detail.

Windows RT has largely been a flop, precisely because of those compromises and the confusion created in consumers’ minds about what it is and how it relates to the full version of Windows 8. It shares much more with Windows Phone than it does with Windows 8 in its limitations and in its architecture, and as such the answer is to rebrand Windows RT as Windows Tablet and merge it with Windows Phone, while leaving Windows 8 as a separate entity that works primarily on desktops, laptops and a few convertibles including things that look a lot like tablets but behave more like laptops in their functionality. This would be a recognition that Apple and Google were right all along, and thus a painful one. But it would also open the door to a couple of other strategies Microsoft could pursue.

Next, it should stop charging for licenses for Windows Phone and Windows Tablet.  By my own calculations, Microsoft likely makes under $1 billion from Windows Phone licensing annually, the vast majority of which comes from Nokia anyway. By ending license fees for Windows Phone, Microsoft would remove one of the competitive disadvantages every Windows Phone vendor labors under, allowing them (including Nokia) to either reduce prices or increase margins on their device sales. This doesn’t solve the other fundamental problems with Windows Phone, but it should at least accelerate growth. Microsoft ought to capture far more than $1 billion annually from growth in the hardware market.

Making Windows Tablet free would solve some of the same problems for Microsoft and its OEMs in the tablet space as it would in the smartphone space. It would reduce the cost of making the more consumer-centric Windows tablets, allowing them to be more price-competitive, potentially stimulating demand for the Surface among other tablets, which would also benefit Microsoft on the hardware side. Microsoft could then sell Office RT as an add-on for these devices (or continue to bundle it for free as a unique selling point), but should recognize that the primary reason most people buy tablets is not to do work on them.

The corollary here is that Microsoft needs to do a much better job selling its consumer services, the other half of its Devices and Services strategy. Microsoft now has competitive Music and Video stores, which are available across Xbox, Windows 8 and Windows Phone, but which it does very little to promote. These devices can absolutely be viable entertainment devices, whether by using Microsoft’s own services or the Netflix, Hulu and other entertainment apps available on them. But Microsoft says very little about these in its marketing of any of its devices, whether Windows Phone, tablets or PCs. Apple has built up an installed base of 500 million iOS devices by most estimates, and the associated content and application stores now generate almost $10 billion in net revenue for Apple annually. Microsoft’s massive base of Windows PCs combined with a stronger base of Windows-based smartphones and tablets could come to rival the size of this services and content business quickly, on top of the existing $7-8 billion annual revenue from the Xbox platform. Together, this revenue stream could easily outweigh the lost revenues from Windows RT licensing, which must be minimal today.

The desktop/laptop version of Windows 8 should continue more or less as it is. There’s nothing fundamentally wrong with it, especially in its desktop UI version, but Microsoft has caused itself huge heartache by imposing a user interface designed for touch screens on tens of millions of non-touch devices. The Metro interface is fine on smartphones and tablets, but both unfamiliar and poorly suited to a traditional trackpad/mouse and keyboard device. As such, it should make the Metro UI an optional overlay for those users who see value in it (probably mostly touchscreen users) and allow other users to banish it entirely and revert to the desktop interface. Another lesson Microsoft can learn from Apple is that, although it has driven significant convergence between the desktop and touch versions of its operating systems, it’s all been in the systems and infrastructure rather than in the UI, and there are good reasons for that.

To sum up, if Microsoft is to become a Devices and Services company on the consumer side and not just on the enterprise side, it needs to do what it can to stimulate the virtuous circle that exists between the two: compelling services drive device purchasing, and device purchasing drives usage of services, which in turn creates greater loyalty around the ecosystem. Today, Microsoft is so obsessed with driving Windows and Office revenues that it often takes steps which are either irrelevant to, or at worst, counter-productive to maximizing device sales and installed base and the usage of services. Taking the steps outlined above would stimulate device sales by lowering costs, incentivize OEMs who are on the fence about making Windows smartphones and tablets to give it another go, and at the same time foster Microsoft’s own burgeoning hardware business. On top of it all, it would finally give Microsoft a shot at building loyalty around truly consumer-centric services such as content consumption rather than insisting that Office and Windows are the only things around which it wants to build loyalty in the consumer market.