Microsoft

Hands-On (or Heads-on) With HoloLens

What a difference a day makes in the tech business.

Having attended yesterday’s Windows 10 unveiling at Microsoft’s headquarters in Redmond, WA, I was one of the lucky few who got to try out an early prototype of Microsoft’s intriguing new holographic computing device: the head-mounted Microsoft HoloLens.

Though Microsoft showed the world a sleek, untethered headset, the demos they provided to attendees in their “hidden” basement labs were with much clumsier development systems that featured large, (what appeared to be) hand-built, camera and circuit-board-laden headsets tied to both an external circuitry box in a large metal case hung around our necks, and a large desktop PC. Microsoft vowed HoloLens will be released in the Windows 10 time frame—essentially by the end of this year—but it sure seems a long way between what we tried and what they unveiled. Nevertheless, the company did show a working prototype of the final device on stage, so I’ll just have to take them at their word regarding their release timetable.

The bigger question, of course, is what was it like to use? Overall, I have to say it was impressive. It is definitely not perfect and it’s still clearly a work in progress. However, I and other attendees got a pretty good sense of what it could offer and the general consensus was the product seemed pretty good.

In some ways, HoloLens is like other head-mounted displays I’ve tried in that the experience essentially projects a computer-rendered image you see in front of you and adjusts the image as you move your head around. It’s also very different than similar products; most importantly, it’s a completely standalone and not an accessory for or tethered to another device. In addition, unlike the Oculus VR, the HoloLens does not completely immerse you in a computer-generated image. While this may seem like a limitation to some, it’s a huge improvement to me. I feel somewhat nauseous and disoriented almost immediately after putting on complete virtual reality headsets like the Oculus. (I’ve been told you can get over that after extended use, but I think an issue like that immediately limits true VR headsets in their current form to a very small, rabid audience.) The HoloLens lets you see through the lens to the real world around you, thereby giving you a visual context that keeps you from getting disoriented. Bottom line, I didn’t have any motion sickness-like side effects when wearing it.

HoloLens is also very different from the currently on-hold Google Glass. (BTW, the timing of last week’s Google Glass announcement could not have been better for Microsoft—they must have been pinching themselves when they heard the news….) First, at a basic level, HoloLens is not something you’re going to wear outside or in social situations, nor does it record what you’re looking at, thereby avoiding the social stigma associated with Glass. Second, from a functional perspective, HoloLens provides a relatively complete field-of-view and isn’t limited to a small, transparent floating window as you had with Glass. HoloLens creates 3D (or in some case 2D) graphics in front of you and can either insert them within your real-world view or provide a more encompassing view that blocks out (though never entirely) some of your real world view.

Microsoft calls the images it creates holograms (and believe me, it still feels weird to say and type that with a straight face), hence “holographic computing.” While the company has yet to provide any details on exactly how HoloLens works, my sense is it leverages some type of projection display (one for each eye) that essentially replaces portions of what you are looking at through the lens with images it creates. Given the event, the company did say HoloLens runs Windows 10 (and made some still unclear points on how all Windows 10 devices will have access to “gaze” and gesture-oriented APIs for developers). They hinted it’s running some kind of x86 CPU and GPU, but they also said the HoloLens features a Microsoft-designed HPU (holographic processing unit) as well, which they said was necessary to perform the kind of calculations needed to create its visual world. Unfortunately, the company said nothing about battery life or pricing but, based on a few comments, I’m guessing it will be priced in the $799-$1,299 range—not cheap, but not completely ridiculous either. [pullquote]You couldn’t help walking away from the HoloLens demos, and this event overall, feeling Microsoft has clearly come roaring back as a force to be reckoned with.[/pullquote]

As you’ve undoubtedly read elsewhere, the company provided four different demos for us to see and each showed off different aspects of the device—from the immersive Mars rover experience, to building (and then 3D printing) 3D models, to a Minecraft-like experience using whatever room you happen to be in to play games in, to the highly practical Skype demo that helped people install a light switch with the help of a remote technician/helper.

Each was impressive in its own way, but more importantly, you couldn’t help walking away from these demos, and this event overall, feeling Microsoft has clearly come roaring back as a force to be reckoned with. Yes, they still face real challenges in mobile, but with this one bold move they have started the process of completely changing the conversation. In other words (he says half-jokingly), who cares about phones when you’re about to enter the Post-Smart Phone Era?

More seriously, I have no doubt there were a lot of very interesting and very serious discussions happening across the halls, meeting rooms and cubicles of Silicon Valley, and at tech companies around the world as a result of today’s news from Redmond. When was the last time that happened?

Welcome to 2015—it’s going to be a helluva year.

Mobile App Development Challenges

Despite all the hype around enterprise mobility, there are still significant challenges many organizations are facing. The simple truth is many organizations are finding the move to mobile applications more challenging than it might appear. Obviously, there’s going to be a great deal of pressure for IT organizations to start creating mobile apps—from their end users, corporate management, partners and others—but despite that pressure, the path to mobility can be long and arduous.

First, there’s often a resource constraint. It’s not that corporations don’t have access to in-house programming talent—they usually do. However, most of that talent is going to have experience on the Windows side, not necessarily on popular mobile platforms like Android and iOS. Of course, as discussed in a previous post, Windows can and should be a part of any mobile platform discussions.

Even if these organizations focus on adding Android and iOS programming talent, they also have to deal with recruitment challenges. Let’s be honest. If you’re a hotshot 27 year old mobile programmer, are you going to look for work on a corporation’s in-house app development team? Or are you going to try and join one of the seemingly never-ending supply of mobile startups that offer the promise of making millions with the latest hot app?[pullquote]If you’re a hotshot 27 year old mobile programmer, are you going to look for work on a corporation’s in-house app development team or join a startup?”[/pullquote]

Not only are there resource and experience issues in creating mobile apps within many companies, there are also organizational challenges. As mentioned in another post, some of the most compelling ROI stories for mobile apps can be made for line of business (LOB) workers, particularly those who are regularly out on the front lines or in the field. The problem is in many companies, LOB are not comfortable going to IT for custom solutions. In fact, the links between corporate IT and LOB in many organizations are relatively weak, making it difficult to organize meetings between the two groups to even start the process of defining a mobile application. On top of that, there are often serious questions about who manages, who funds, and who owns a mobile app created for a specific line of business group.

Another challenge for many organizations falls around metrics—or the lack thereof—for mobile applications. While most companies have clearly defined standards for measuring the success of desktop-based custom applications, many have yet to create solid standards for mobile apps. In some organizations for example, mobile end user performance does not matter to IT, because wireless network issues often fall under the auspices of a separate telecom group.

The desire and need for custom mobile application development is real, but many organizations are finding the reality of creating those apps is challenging on many fronts. The key issue is, in many IT shops, mobility is still more of an afterthought than a core guiding principle. In order to overcome this, companies are going to need to not only do some soul-searching regarding their development priorities, they’re also going to need to find resources and partners they can work with in order to help make mobile app development a key part of their strategy moving forward. It’s what the world is demanding of IT and it’s what IT needs to do.

Microsoft in 2015

This is the third in my series on what I see happening in the year ahead for major tech companies. Apple is here, and Google is here. One quick note: as an analyst, my coverage area is consumer technology, so although I will address Microsoft’s enterprise business throughout this post and especially at the end, it won’t be the main focus of the piece.

Windows 10 – symbolic of all the challenges facing Microsoft

The single biggest thing (we know of) on Microsoft’s agenda for 2015 is the public launch of Windows 10, its new, single operating system for all devices and form factors. I’ve written about Windows 10 previously here, but wanted to be a bit more specific about what I see happening with the platform in 2015. The preview is out already, but there is much we don’t know about the new OS, including the pricing and the business model. Microsoft has a consumer-centric press event scheduled for January 21, so it’s possible we’ll learn more about this then. But the biggest question in my mind is to what extent Windows 10 is offered as a free upgrade and to whom. Some possibilities include:

offering it as a free upgrade for Windows 8 users, many of whom have been unhappy about the removal of the traditional start menu and other features being restored in Windows 10. This would be mostly about pacifying those users.
offering it as a free upgrade for users of older versions of Windows, who are the important customers Microsoft needs to move to its new model of app development and purchasing. This would be mostly about getting as much of the base as possible onto a modern operating system.
offering versions for free to consumers (and possibly consumer OEMs), while still charging a fee for enterprise versions – something Microsoft has shown signals it may do with Office, with the new pricing for Office for iOS, and, of course, Windows is already free for devices under a certain size. This would be a recognition Microsoft is increasingly isolated in charging significant license fees for operating systems.

The other major possibility is a move to a different kind of pricing model for Windows. Microsoft has strongly hinted it intends to embrace a future of streaming computing, with Office 365’s subscription pricing as the model. But recent comments from Microsoft itself and commentators close to it suggest this may not be on the cards for Windows 10. Another big question is to what extent Microsoft sets a precedent for pricing future Windows upgrades with this release. It has done free upgrades in the past on a one-off basis, but can it really do a one-off giveaway (or heavy discounts) this time around without setting too much of a precedent for future upgrades? I also think it’s time Windows moves to an annual release cycle, much as Apple has with OS X and iOS – part of Microsoft’s current predicament is when it makes missteps with Windows, it takes years to fix them. More frequent updates would help with that, though it’s particularly challenging given Microsoft’s enormous and conservative enterprise base.

In some ways, Windows 10 may be seen as symbolic of all the challenges facing Microsoft — the dominance of Apple and Google and their mobile operating systems, the uphill battle Microsoft faces in continuing to charge for operating systems and productivity software in the face of free alternatives, Microsoft’s ability to differentiate itself based not just on cross-platform services but on its own platforms as well, and so on. The single greatest test may be whether Microsoft can successfully charge large amounts of money for a new operating system to consumers and still see significant uptake.

Office – the transformation continues

Two transformations are underway with regard to Office: firstly, the move from one-off purchases to a subscription model with Office 365, and secondly, the increasing availability of Office on non-Microsoft, non-PC platforms such as iOS and Android. The transition to Office 365 has been slow among consumers, with only 7.1 million subscribers at the end of Q3 2014, which suggests a certain reluctance to embrace an ongoing commitment to pay for Office rather than milk a sunk cost. In the enterprise, the transition is likely going slightly faster: SaaS models are far more established there and willingness to pay for software in any way is also greater. Microsoft has decisions to make in 2015 about how much to push the new model, especially as the new version of Office arrives for Windows. Does it abandon the old model entirely or at least strongly incentivize customers to switch to Office 365, or does it continue to allow customers to choose their own path?

The availability of Office on other platforms has also raised new questions about consumer pricing. It’s clear Microsoft intends to continue to charge for Office in the enterprise, though likely increasingly on a per-user rather than per-device basis. But it’s not yet clear whether it has given up on its ability to charge for Office in the consumer space. The recent shift of the dividing line between free and paid features in the iOS versions of Office suggest a fundamental move towards giving away more functionality for free. It will be interesting to see whether the same model is applied to consumer versions of Office on Windows. I think it’s possible Microsoft will indeed embrace this model broadly, sacrificing some revenue from consumer versions of Office in an attempt to maintain its status as the de facto standard and, with it, the scale necessary to ensure its continued success in the enterprise.

Lumia – playing both sides of Windows Phone

With the Lumia line, now manufactured by Microsoft Mobile following its acquisition from Nokia, Microsoft is now playing Windows Phone from both sides, as the only licensor and by far the largest licensee. It’s competing with its other licensees in the most direct and dominant fashion, even as it seeks to increase the number of OEMs using Windows Phone. Both the platform and Lumia’s part of it have stagnated somewhat in share and in numbers in recent quarters, and Microsoft needs to get both sides going again in 2015 if it is to have any hope of escaping its current niche status. I wrote recently about the challenges Windows Phone faces in general, so I won’t belabor the point here. But the key strategic imperatives for Microsoft around Lumia and Windows Phone in 2015 are creating a true flagship that can go head-to-head against the competition, avoiding a fate as a low-end-only operating system, and finding better ways to attract developers.

Surface – make or break in 2015

Surface enjoys somewhat the same position as Lumia, in that it represents Microsoft competing with its licensees, but on a much smaller scale. Though Surface does compete against other Windows devices, its share of the total market is very small, and it represents much less of a threat to other OEMs than does Lumia. But it also reflects the same basic strategic tension: does Microsoft want to be first and foremost a licensor of operating systems, or a manufacturer of devices? Though Lumia is critical to the survival of Windows Phone as an OS, the same can’t be said for Surface. And as long as it fails to make money for Microsoft, the whole enterprise is questionable. I strongly believe Microsoft ought to make a decision in 2015 about whether the investment it is making in Surface is worthwhile, both financially and strategically, given the drag on its overall finances and the tension it creates with OEMs. In my opinion, it should choose to discontinue the line in 2015 and focus instead on helping OEMs create more compelling devices.

Xbox – the roundest peg in Microsoft’s two square holes

Xbox continues to be the most awkward fit with Microsoft’s new focus on platforms and productivity, as it aligns with neither of those focuses. It also doesn’t make much money for Microsoft, and the company has failed to use it as a launchpad for broader ambitions within the home. Even as competition and innovation in the home shifts from gaming to TV and home automation devices, Microsoft took a step back in 2013 and 2014 with the Xbox One by focusing more explicitly on gaming. It badly needs a TV device akin to the Apple TV, Roku, Chromecast and Fire TV, and an Xbox TV device seems an obvious extension of the current brand. Strip out the power hardware and gaming focus, and Microsoft could extend its strong position in gaming into the home more broadly. As long as Xbox remains one of the two major console brands, it’s likely worth Microsoft maintaining its investment, but it needs to find ways to spread the brand beyond hardcore gamers and $400 consoles.

Consumer services – focus on free stuff sends a mixed message

Microsoft is increasingly focused on cross-platform services, but its track record there is mixed so far beyond Office. Skype remains one of Microsoft’s most powerful brands, but the service itself has stagnated of late, especially on the consumer side (its ongoing integration with Lync on the enterprise side makes perfect sense). Microsoft has begun talking about Skype as one of the biggest messaging platforms in the world, and yet that’s not how most people see it, and there’s still startlingly little integration with Microsoft’s other properties. Even Windows Phone and Windows have relatively little integration with the service which could be the default communications method on those platforms, compared with the increasing integration of Hangouts into Android and FaceTime and iMessage into iOS and OS X. Other newer services such as OneDrive have been hits, but, at least in part, for the same reason as Skype has always been popular: they’re free. Microsoft has two major jobs in consumer services: create things consumers want to use, and then monetize them. So far, it’s doing OK at the former, but there’s little sign of the latter. Perhaps this is part of a broader recognition on Microsoft’s part it won’t be able to monetize consumer services, but it feels a bit early for that.

Car and home – two domains where Microsoft doesn’t have a story

Even as Google and Apple expand their ecosystems into the connected car and smart home, Microsoft has no real story to tell in those new domains. Its one success story in the car – Ford’s SYNC – has now been displaced by BlackBerry’s QNX, and it has nothing beyond its partnership with Insteon in the smart home space. Competing across these various domains will be increasingly critical for building a sustainable ecosystem, and unless Microsoft makes a play soon it risks being left behind. To be sure, the small market share of Windows Phone is a big barrier in a world where the smartphone is increasingly the center of the ecosystem, but Microsoft still has an opportunity to make a play as the Switzerland of the tech world. The Microsoft Band – for all its flaws – was a sign of what such a strategy could look like, but Microsoft needs to both iterate that product and extend the same model to other domains.

Enterprise – where Microsoft’s growth and profits will come from

There’s certainly a version of the future in which Microsoft’s various enterprise products and services – Windows, Office, Dynamics, Azure and so on – will end up generating the vast majority of Microsoft’s revenues and revenue growth as well as its profits, even as its consumer revenues dwindle in the face of ever stronger competition. It’s a good thing that these enterprise products and services, and especially the cloud business, are growing strongly and remain very profitable. The question is whether it can ramp those revenues fast enough to offset what I’m coming to believe is the inevitable decline in consumer Windows and Office revenue. If it is, then Microsoft can effect a slow transition to a new kind of company, one that makes all its money in enterprise, but has huge mindshare in consumer through various products and services it gives away for free (or at least heavily subsidizes). Such a company would be a more formidable competitor to Apple and Google (and would mirror more closely their focus on funding many activities from a highly profitable core elsewhere).

2015 – from vision to execution

Satya Nadella’s enjoyed quite a honeymoon period, benefiting from many early moves which appeared to set him apart from his predecessor (though the wheels on many of these things were likely in motion long before he took over). But much of what he’s done so far has been about articulating a vision of what Microsoft is, and what it wants to become. Though there have been early signs of the implementation of that vision, 2015 will be much more about execution – about showing what that vision really means in practice and, importantly, about whether it’s the right one for Microsoft.

The Danger of the $200 PC

There have been rumors of the return to netbook pricing in the PC market. We believe this could have an irreversible impact on overall PC prices. When we study the PC market, we see a high degree of health in the higher end segments of the market. Companies like Apple and other vendors who have legitimate premium offerings have secured their slice of the PC pie with a sustainable hardware strategy. Our concern on the Windows front is, if the price of Windows PCs drop significantly, those price points will become the “new normals” and eliminate any real chance of premium offerings by other Windows PC vendors. Currently, the ASP of notebooks is approximately $700 and desktops approximately $550. But those high ASPs are because of Apple’s Macs. The ASP of a strictly Windows PC is about $430 which is about as low as a full featured Windows PC has ever been (excluding netbooks). At that price, it is already difficult for many Windows OEMs to make much money on hardware. They are all currently looking for more software, services, and accessories revenue as a point of emphasis.

Competing with Apple is hard enough for vendors in the Windows ecosystem. A significant drop of ASP will likely eliminate any chance of premium offerings by them. There will still be an enthusiast Windows community but that community is already quite small. The build-it-yourself PC community and the hard core PC gaming category, while extremely healthy, are still too small to sustain the ASPs of the entire Windows PC market. So as of right now, this is a look forward forecast of the ASPs of certain categories.

However, given this article I posted a few days ago on low cost tablets, I’m already due to update my outlook for tablet ASPs in 2015. Should the notebook and desktop space truly become a race to the bottom, then I will have to adjust the 2015 ASPs of notebooks and possibly desktops to trend more into the negative than I think is healthy for the category.

Part of the drive to bring down the ASPs of PCs is to kick start the broader upgrade cycle in consumer markets and perhaps compete more with tablets in the entry level PC space (first time PC/tablet buyers). There is some sound logic to this. However, with “good enough” computing established in these markets, the concern would be that nearly the whole market would gravitate to these lower cost PCs and cause a sweeping shift in price points to the lower end where margins will be even further squeezed for the OEMs. Overall, our concern is the destruction of the “value and premium” segments of the market with “good enough” options being offered in the <$400 PC market.

Using my viewpoint of what happens with low cost tablets in consumer markets, I feel it would be smarter if vendors left the bottom to those tablets and focused on features and functions that will remain “valued” by end users. I can see a scenario where consumers start to gravitate to desktops in their homes instead of notebooks. They can use the tablet or their smartphone as their mobile PC and pair it with a desktop for their fixed PC usage. Due to the lengthy refresh rates, our research indicates consumers would spend more on these PCs because they intend to hold onto them because they want to them last longer than previous upgrade cycles. Those who need notebooks because they are traveling or are mobile workers will still utilize and spend on the product because of its value to them from a productivity standpoint. Bottom line, I believe there is still money to be made in PC hardware if Microsoft and the vendors can avoid letting certain players collapse the ASP of the PC category. Should the race to the bottom happen, even those who would pay more because of the intrinsic value the PC provides will no longer have to since they can get the same features as mid and even high end PCs at rock bottom prices.

Eventually, I can see the PC market going one of two ways. Either it becomes a race to the bottom and only a few current vendors are left standing or value can remain in the category. Ultimately, it is up to Microsoft and the Windows OEMs to decide which future they want.

The Microsoft Surface Is A Yachting Cap, Not A Yacht

Following Microsoft’s Earnings, a lot of people started talking about how “successful” the Surface 2-in-1 computer was becoming. That reminded me of the following anecdote:

A friend saw Tristan Bernard on the promenade at Deauville wearing a jaunty new yachting cap. When he remarked on it, Bernard replied that he had just bought it with his winnings from the previous night’s play at the casino. The friend congratulated him.

“Ah,” said Bernard, “but what I lost would have bought me the yacht.” ((Excerpt From: Andre Bernard. “Bartlett’s Book of Anecdotes.” iBooks. https://itun.es/us/sJzuv.l))

When we find ourselves tempted to congratulate Microsoft on the success of its Surface 2-in-1, let us remember that it is but a yachting cap, not a yacht.

Does Windows Stand a Chance With Enterprise Mobile Apps?

The buzz that’s built around enterprise mobility has reached nearly deafening levels with seemingly everybody and their brother working on solutions to mobilize enterprise applications. Not surprisingly, the vast majority of the attention has been focused on bringing business apps to iOS and Android, given their dominant roles on smartphones and tablets.

In the process, many organizations have glossed over Windows, assuming that there wasn’t really any interest or value in creating mobile apps for the platform. The assumption seems to be primarily based on the tiny market share that Windows has garnered in the smartphone and tablet markets. While that’s an understandable and legitimate concern, it turns out it doesn’t really reflect what many companies are doing about custom mobile applications.

According to a survey my firm, TECHnalysis Research, fielded earlier this year with over 300 US-based IT professionals split evenly across small, medium and large businesses, custom Windows applications are actually being built by a very respectable 41% of companies surveyed. As the chart below shows, the number reaches 58% for large enterprise with 1,000 or more employees.

While those figures may seem puzzling to some, I believe there are some very logical reasons why they are where they are. First, most organizations that have in-house programming teams have a strong bias towards Windows because that’s what they know. Custom Windows desktop applications have been the lifeblood of many companies for over two decades, so it should be no surprise to anyone that the majority of a company’s in-house programming teams are going to know Windows and want to leverage that expertise.

In a related way, most of the custom applications that a company already has in use are likely to be Windows-based. Given that many mobile applications are being written to build onto the existing custom applications and data files that an organization has, the choice of Windows for mobile applications makes sense.

In addition, Microsoft has been offering a broad range of programming tools for custom enterprise applications for a very long time. The company is widely known for the general quality and scope of their tools, so again, it makes sense to use the tools companies have available. While custom programming tools for the other mobile platforms are certainly growing at a rapid pace, it will be a while before they have the same range of choices designed specifically for in-house business application programmers that Microsoft does.

Finally, another point to consider is that given the growth of touch-based Windows notebooks and Microsoft’s move to a common set of APIs across various flavors of Windows, companies can build applications that will run both on Windows-based tablets, as well as touch-based Windows PCs or 2-in-1 devices. While Windows 8 and 2-in-1 deployments in enterprise have been modest to date, many organizations like to plan and build for the future. With the promising prospects for the new Windows 10 and the ongoing evolution of the notebook that 2-in-1s represent, again, you can make a solid argument for why the interest in building enterprise mobile applications for Windows is already as high as it is, and likely to go higher.

Windows 10 and the PC’s Tablet Complex

Yesterday, Microsoft showed the world the first glimpse of the new version of Windows. Oddly, Microsoft skipped a version number in the naming scheme. Rather than name it Windows 9, they choose the name Windows 10. While it is hard to form a fully fleshed out analysis of Windows 10 from the minor details given, there are still some key observations that can be made.

Firstly, from what I saw from Windows 10, it appears Microsoft recognizes some of the many issues that faced Windows 8. On Microsoft’s official blog post they made the following points about Windows 10:

Windows 10 will:

Build on our commitment to provide a common Windows platform and give you one consistent API layer with consistent UX design surfaces and flexible tools.
Enable Windows Store apps to run in a windowed environment on the desktop so that they perform better on a wider range of hardware.
Deliver one Store for all devices, making it easier for you to reach customers in consistent and compelling ways no matter what type of device they’re using. We’re also planning to make the Store more useful for corporations with volume app purchasing, more flexible distribution mechanisms, and the ability to create a custom or curated Store experience (note that the Windows 10 Preview contains the existing Windows 8.1 Store).

The first point may be the most important, although all three are related. Windows 8 had a two part problem. The first was developers were not taking advantage of creating new modern applications that embraced and extended computing to touch the same way developers were on the iPad. This led to the second issue — a schizophrenic user experience between legacy desktop mode and more touch/tablet friendly use cases. Microsoft converged a PC and tablet experience when they should have separated them. What should have been converged were the tools to create Windows apps for all screens in one environment, not the PC and tablet use cases. Microsoft is looking to fix this with their consistent API layer.

This developer point is why Microsoft threw the statistic out that there are 1.5 billion people using Windows every day. That is a little generous of a statistic given it includes IT workstations, Internet cafe’s, point of service workstations, and likely even server-based solutions. There may be 1.5 billion PCs in use but there are not 1.5 billion unique PC users. That number is somewhere in the 1.3 billion range and SHRINKING. This is what Microsoft, Intel, and the entire PC ecosystem is hoping to change. To do this, Microsoft hoped bringing tablet like functionality would spur growth to the PC industry. This, however, was a failure to understand why the tablet was successful and the role it played in the advancement of computing.

The Tablet Complex

From a platform standpoint, I still maintain Microsoft needs a phone/tablet OS and a desktop/notebook OS. Perhaps there are ways Windows 10 can be a dedicated OS for all these platforms. Time will tell. However, it is my conviction Microsoft, and Intel for that matter, suffered from a premature tablet complex. Meaning, they saw the iPad and its rapid success and created a number of flawed assumptions about the product that led them to create the schizophrenic Windows 8 and 2-in-1 PC category.

The tablet was never poised to be a replacement for someone who sits at a desk, needs a big screen, and does deep work. My belief was always there are simply a smaller number of people in the world for whom a large portion of their work use cases necessitate a desktop or notebook PC. What we saw the tablet (the iPad) do is enable more rich computing for those who were either intimated by computers and were less “computer literate” than others AND it brought computing to new customers who were not computer users before either in work or play. A good example of this was what I learned by being on a panel with the CTO of Chevron. He explained Chevron deploys over 30,000 iOS devices to field workers, and 20% of those were tablets. The primary use for these tablets people who used a clipboard to do security checks and other field work documentation. They replaced those paper tasks with iPads and deployed custom software which gave these field workers better tools to do their job. These field workers were not using computers in their jobs when in the field and would only use them for small portions of the day when they go to their desk to input data. Now all of it is done in the field in real time. I hear countless stories like this from field workers in construction, public safety, etc. The point is, tablets have enabled people who did not use computers before, for a wide variety of reasons, to use a computer regularly in a meaningful way.

This same philosophy is characterized again in this incredibly well written piece thanking Mr. Jobs for the iPad that brought the writer’s 83 yr old father meaningfully into the computer age. I particularly liked this part of the article.

His big, thick fingers found just the right touch. They found a groove and slid intuitively across the screen; soaring and gliding up and down and across. It was as if someone from the other side had taken over and was guiding his old mans’ fingers.

Then he discovered Facetime. He immediately dialed his oldest daughter, my sister. And that’s when he really came to life. He entered a new generation.

‘I can’t believe this is happening.’ He exclaimed.

The desktop and notebook form factor took computing as far as it could go with those designs. Those dedicated form factors, and the software they run, have a purpose and are not going away. The tablet, however, is extending computing to places it could not go before because of its unique form factor and software. As in the story above, the elderly who are connecting with their kids and grandkids in new ways are empowered. Kids can pick a tablet up and learn and play the instant they use it with no prior education or computer literacy training. Workers around the world who spend their day on their feet now have a tool practically custom designed for them as the ideal digital tool. This understanding is what companies with a PC bias missed. This is what Microsoft must solve for them to be a relevant platform player in the future of computing. However, as I will dive into in the near future, Microsoft’s upside does not depend on them being a relevant platform player, but rather resides in them becoming a platform agnostic software and services company.

What Minecraft Means to Microsoft

By all accounts, it appears Microsoft is about to purchase the maker of Minecraft – Mojang. This seems like a head scratcher of a deal, and, without knowing the details of the strategy, parts of it are. However, what this deal signifies in my mind is a broader trend for the 800 lb gorillas in our industry to battle for consumers’ time.

For much of Microsoft’s dominance, they did not just command the operating systems for computers but their software, products like Microsoft Office and Internet Explorer, held sway over the computing time of customers. Microsoft owning a large chunk of computing time is, by far, one of the biggest transitions the last decade has brought. Microsoft used to have some of the most popular products in terms of amount of time per day spent using them. Today, that is no longer the case.

This is why, at a high level, what we are observing from companies like Apple, Google, Amazon, and Microsoft is a battle for consumer time. Since consumer time is finite, this is the most important battlefield. This is why usage is one of the most common statistics today to gauge success. It is no longer just about how many customers one has — it is about how much time is spent using the product.

It is through this lens I view Microsoft’s acquisition of Minecraft. Outside of Office, the Xbox is the only ecosystem Microsoft has, outside of commercial products like Office, that gains any real consumer traction in terms of usage. Arguably, the consumer usage of Office products is exceptionally low, and Xbox is their only real traction with mainstream consumers and even that is limited. Minecraft, while primarily a PC game, is also available on Android and iOS. This game is not free but has shown great success in its ability to monetize its game. Beyond just being a healthy business, Minecraft has some incredibly engaged users. A non-public survey I saw data from earlier in the year suggested the average Minecraft gamer plays on average 2 hours per day. Not bad, when time is what is being competed for by the companies at the top of the industry food chain.

If you have played Minecraft, you know it can be addicting. If you have kids who play it, you know this fact even more fully. Minecraft is sort of “LEGO” for the digital generation. I think there are fascinating places Minecraft can go. Education angles perhaps being the most interesting.

Gaming is lucrative. Microsoft knows this as do many others. But a consumer’s time is even more lucrative. As products arise that begin to sustainably take consumer time, expect them to be purchased rather quickly from one of the 800 lb gorillas.

Windows 9 “Threshold” Could Pose a Real Problem for Microsoft’s Partners

For the last 30 or so years, Microsoft has created new versions of their OS, usually in four or five year increments and each new major iteration has driven strong growth in PC sales. Their hardware partners count on this to help them deliver more PCs to customers since demand for PCs rise when a new version of Windows comes to market and a company or individual may finally upgrade or refresh their PCs.

The last major upgrade that drove PC growth was Windows 7. Microsoft and their partners had expected Windows 8 to move the refresh needle again when it came out. Unfortunately, Windows 8 was a disaster and clearly did not help any PC OEM grow their PC business. Even Windows 8.1 has not helped drive new PC sales even though its iteration is clearly better than Windows 8.0.

What is important to any upgrade cycle in the past is, as with all new versions of an OS, Microsoft charges both the OEMs a licensing fee as well as charges new users a fee for upgrading. The OEMs in most cases add a fee for the new OS and, for them, it is a source of revenue. But the big thing is a new full version of an OS historically has driven PC sales as well as helped deliver new profits to the OEM partners who sell these PCs.

But for the first time in Microsoft’s history, we are hearing Windows 9, code named Threshold, will actually be a free upgrade to OEMs and any Windows PC machines that can run it. While Windows 9 does emphasize touch, like Windows 8.0 and Windows 8.1, it is designed to be backward compatible with most existing PCs. From a big picture viewpoint, this is good news for consumers as well as software developers. Indeed, the reason Microsoft would be making this upgrade free is to try and populate as many PCs still in use with a new OS and UI and show developers the amount of PCs that could use this new OS will be huge. By expanding the market for this new OS, Microsoft believes it will finally entice software vendors to write new and innovative apps for the Metro UI and Windows 9.

But there is a downside to giving this new OS away for free. The ODMs and OEMs are concerned this move could actually keep people from upgrading their PCs. Indeed, their fear is a new, free OS would actually encourage people to keep their present PC longer and, unless it was very old, they would not see a reason to upgrade. I don’t think this is a misguided fear. People are already keeping PCs longer than in years past and while Windows 9 is a major upgrade, there is a real possibility it would not cause any real growth in PCs for the next two years at the very least.

To be clear, demands for PCs have been down for the last two years, thanks to tablets taking some of the workload for business and consumer users. But surprisingly so far in 2014, we have actually seen an uptick in PC demand and, while we were off about -10% in 2013, researchers say we may be only off -3 to -4% in 2014 and could see even better demand in 2015 — since people now know where tablets fit in their lives and more and more are turning back to desktops and laptops to meet computing needs that are starting to expand.

But a free version of a major new OS could actually harm any new growth potential and, in the end, might help Microsoft but keep demand for new PCs from growing. If this plays out as I suspect it might, I expect the demand for PCs to contract in the new year and perhaps be stalled of any possible new growth for at least the next two years.

PC Computing Market Shares

Lastly, I’d like to take a look at the PC category. This is the one area where Microsoft is dominant. However, there is a clear shift happening in the PC segment many fail to realize. Let’s start with the platform share of traditional PC form factors.

I estimate the total installed base of the desktop and notebook form factor to be 1.52b devices. While PCs were significantly impacted by the monumentally fast rise of tablet adoption, we are starting to see PC sales return to balance as many enterprises begin refreshing old terminals, point-of-sale terminals, workstations, and laptops. 2014 will certainly be a better year for PCs than the past few years. Yet there are still many questions facing the category.

Windows: Microsoft still has a lot of work ahead for them. Luckily they have a partner in Intel who is equally hungry to right the PC ship. Annual shipments of PCs are in the low 300m range and I don’t expect to see a massive jump any time soon, excluding tablets of course. We are seeing a refresh cycle bump, which I alluded to, but I’m not sure the low 300m range of PC sales is the bottom for traditional form factors like desktops and tablets. After the next few years of refresh are complete it, is likely to be a famine again for PC vendors.This is what Microsoft is hoping to address by evolving Windows to be both a touch based computing system and a mouse and keyboard based computing system. If they are successful in this, their single platform can cover the range of use cases from desk to mobile. This attempt would be deemed a failure in my eyes if we were to just use Windows 8 and the existing 2-in-1 and convertible PCs. However, Microsoft never gets things right the first time so we must wait for Windows 9 or even Windows 10 to see if they have the right recipe to keep Windows dominant in the PC category.

OS X and iOS: While Apple with OS X is around the 4-5m Mac sales per quarter, I remain bullish that Apple has an opportunity to gain share with OS X in the overall PC category. More aggressive price points with products like the MacBook Air could be a catalyst. Should Apple move from Intel for a more mainstream priced notebook, this could also be a catalyst for lower priced Macs. Apple is sticking to their philosophy of the right OS for the right form factor. Counter to Microsoft but the right strategy I believe. Apple may be also looking to blur the lines even more between iOS and OS X. Tim Bajarin writes here about the possibility of an Apple-like 2-in-1 form factor. Looking at what Apple could do to start to move the iPad up into broader computing capabilities is interesting thinking. Should they do this, it would still run iOS in my opinion, since its primary uses would be more mobile, but the addition of an Apple designed keyboard, and perhaps a larger screen, could evolve iOS even further to become more capable as a general purpose personal computer.

Chrome OS: Chromebooks, while a small percentage of the installed base and annual sales comparatively, are devices to keep an eye on. They are continuing to rise in sales in the education channel and are challenging tablets in education. It is the commercial sector where Chromebooks are doing well today, but should they crack the consumer nut we could see these devices rise rapidly as a percentage of quarterly sales and overall installed base.

Now for the twist. The conversation, perhaps debate is more accurate, around tablets and PCs is relevant. Referring to my prior post on tablets, there are tablets that are being used for specific things like games, kids, TVs, etc. I would not consider those tablets more general purpose computing devices. The iPad, a few of Samsung’s tablets, and now even some Windows slate tablets fit this build. However, I believe at least the larger iPad should be counted among PC sales. For the sake of the point, I’ve created a chart looking at PC sales by vendor each quarter and have included Apple. For Apple, I added the sales of Macs and iPads.

From this chart, you will notice by including the total of Macs and iPads, Apple becomes the leading vendor in PC shipments. Now to fully see this landscape, we would also need to include Samsung’s PC sales plus their tablet sales but I don’t have Samsung PC sales. Vendors who sell Android tablets should also be included but those are very minimal and wouldn’t up their numbers much. But the point with regard to Apple is the role the iPad has actually played for them when it comes to the PC arena. The iPad no doubt either gave many consumers the ability to hold off refreshing their PC, or not refreshing their PC entirely. I view the iPad as a part of Apple’s play for the the PC market. Either way, the tablet, and in this case the iPad, is a product that steals time from the PC. ((Yes the smartphone does as well and ultimately we will have to debate the degree the smartphone steals time from the tablet)) That is why I’ve included their iPad sales in this chart. Apple was once almost entirely irrelevant in computers, and the iPad has helped them in a variety of ways in relation to the PC category.

The line blurring between traditional PC form factors and tablets is the narrative to watch in this market going forward.

The Android Paradox and Computing Inequality

Benedict Evans wrote a great article on android fragmentation. He and I have covered this theme a variety of ways but I wanted to add a few more elements for you to think about. I also tweeted over the weekend on this theme and faced fire from the twittersphere.

It is a paradox that one can do so much with Android’s “open” OS yet the majority of its users do less than the “closed” iPhone’s iOS.

— Ben Bajarin (@BenBajarin) May 17, 2014

Furthermore, Benedict makes a point in his post key to understanding the Android paradox:

Again, this is a paradox: Android is the platform best for early adopters and iOS the one best for late adopters who just want something that works, but the market adoption is the other way around.

There is no question Android is a unique beast. I’ve long heard Android compared to Windows. However, I have never been comfortable with this comparison. There are certainly some fundamental similarities but there are also a great deal of fundamental differences. They are similar in that they are both software platforms available for third parties. OEMs can take the software platform and create their own hardware. While those are basic similarities, Android has a fragmentation problem Microsoft never really had.

In the PC era, Microsoft maintained very strict hardware constraints for products running Windows. Intel, and AMD to a degree, also assisted with this a great deal to make sure OEMs had a certain bar that was maintained in terms of computing experience. This came crashing down with Windows Vista. This was an example of Microsoft having too computationally complex a piece of software which made machines with underpowered CPUs, and more importantly weak graphics capabilities, have many issues with Vista. I remember telling the OEMs around the time if everyone just shipped a discreet GPU on all their Vista machines it would be fine. But that would have driven costs up at a time they were all trying to drive costs down. For the most part, we have not had the same fragmentation issues with Windows we have with Android. Curiously, we saw the beginnings of the issue with Netbooks. For the first few years, these devices ran underpowered CPUs which consumers then attempted to use to do things they would do with more powerful computers. This is why early Netbooks didn’t play flash video well, or games, or other CPU intensive tasks. It brings us down an interesting thought trail of where we are today with computing power in lower cost devices. Which leads us to the Android paradox.

Where Windows seemingly was always designed to run computationally capable silicon, Android is and must be designed for the lowest common denominator. Android must run on an extremely low end CPU and an extremely high end CPU. This problem is outlined well in this video and in this post by Game Oven.

The point the folks at Game Oven highlight is the challenge of building a computationally complex piece of software and getting it to run on every Android device in the world. This is a significant problem for the future of computing and it begs a fascinating question. Architecturally speaking, is ARM or x86 better suited to address this particular issue? I do not have this answer yet, but it is a key question.

With my background in semiconductors, I look at this problem and doubt Google can solve it. Google can not maintain control of the hardware in smartphones the same way Microsoft could with Windows PCs. Mostly this has to do with the fact Android OEMs want to make a phone that can be sold for $100 dollars or less. Those devices, by sheer economics, will have to use an inexpensive and low powered CPU. That vendor will also have to make decisions on which sensors or other chipsets to include or not include in order to hit that price. Which means software developers like Game Oven simply can’t run their software on those devices. It emphasizes the point that a software developer Android addressable market is limited by hardware if they are looking to push the envelope of computing.

Going further down this rabbit hole gets even more interesting for the future of computing. With roughly 80% of the Android install base being lower end, underpowered devices, and even more so as we add another billion plus first time computer owners with a smartphone costing less that $150, we have an issue of exposing those first time owners to the full potential of handheld computing. Perhaps that isn’t necessary, since it is their first computer, but it is from the standpoint of personal computing.

However, this may only be a short term problem. When you look at silicon road maps and Moore’s Law, it seems it’s possible that, 4-5 years from now, some incredibly powerful CPUs will be able to run in devices that can be extremely low cost. That being said, as long as Moore’s law exists, software developers will hopefully exploit the new capabilities of latest generation silicon and push software to the limits. Until Moore’s law is passed, conceptually, there will always be an inequality gap with regard to computing.

Intel may have something to offer to solve this problem, as x86 brings many efficiencies to the table for complex operations. Should they get to a very low power yet high performance benchmark over the next few years and gain traction in smartphones, I will be curious to see if the fragmentation issue around what Game Oven highlights could be solved through an x85 Android environment. We will have to wait to see, but I am still skeptical fragmentation can be solved simply by all computing devices running the same application processor architecture.

Remarkably, Apple is one of the few companies who can solve computing’s inequality gap. Should they be able to bring their experience to hardware at lower costs, it could be a huge benefit to the future of computing. Until then, we remain firmly set in an environment where the capabilities of hand held computing are unequal.

Surface Pro 3: Future of a Laptop or Future of a Tablet?

There is a lot to read between the lines of today’s Surface event from Microsoft. Microsoft’s vision for the Surface continues to be of a device both a great tablet and a great laptop. Previous versions of the Surface were neither. From the looks of the Surface Pro 3, it may finally be a viable laptop replacement. The key question for Microsoft with this product is whether or not they believe this is the future of the notebook or the future of the tablet?

Assuming they believe it to be the future of the laptop, they are addressing a shrinking market, not a growing one. Microsoft’s sales of Surface tablets have been relatively small to date. I would confidently estimate them to be less than five million units and more likely closer to 4 million. But they may hope to get a piece of the nearly 200m notebook annual sales. Can they do this with the Surface Pro 3? Only time will tell, but given the trends around tablets and PCs I see and the many conversations I’ve had with CIOs and CTOs, I have a hard time believing the Surface Pro 3, at its current price point, will do much to dethrone the notebook. This is particularly true as Microsoft’s partners like Lenovo, Dell, and HP will remain aggressive in their designs and pricing. Microsoft may look to own the the ultra-premium price segment but there they are competing with Apple and that could be an uphill battle.

The Surface Pro 3, however, has added a new dimension I think is very important. They have added better support in portrait mode by going to a 3:2 aspect ratio. This has been, in my opinion, the limiting factor of Windows 8 in general, but particularly the Surface when used as a tablet. I’m glad Microsoft added this mode and it will make for a much more pleasant tablet experience. Even with the 3:2 aspect ratio, I still feel the Surface is designed more to be a notebook replacement and not a tablet replacement.

As I point, out in this article for Insiders, corporate installations of tablets are going specifically to people like field workers. A 3:2 aspect ratio will help this greatly. Do they still have a tablet dilemma? The issue they continue to face is so much of IT has begun to transition to iOS (phones and iPads) and they are already converting key software assets to iOS. Still, for the value of the tablet form factor and how it is used and deployed for field workers, those companies with field workers still reliant on Windows software and policies may very well like the Surface Pro 3’s approach.

Like most of Microsoft’s products these days, I see the Surface Pro 3 as having a much stronger commercial play than a consumer one. While I don’t think the pure “tablet” nature of the Surface Pro 3 is the “tablet” experience consumers are looking for, I do think there is value in the pure “tablet” experience for IT looking to deploy tablets to field workers. If there is volume upside for Microsoft then it will come from their sales teams being aggressive with IT.

In all of this, we have to remember the reason a form factor like this exists, something considered a 2-in-1 (both laptop and tablet features), is for the worker who needs to be both highly mobile but also stationary. Therefore, the tradeoffs of what a pure tablet or a good notebook offer are worth it based on this mobile workers use case. While a tablet designed to be the best tablet and a notebook designed to be the best notebook will always be better than a 2-in-1 form factor, there is a market (relatively small in the grand scale of things) who will value a device that is a good enough tablet and a good enough PC. In my opinion, the Surface Pro 3 is the first offering by Microsoft good enough at both.

The pricing is still a head scratcher. Why they don’t include the keyboard, given you can’t use all the features without one, is a puzzle. Given its positioning as a laptop replacement, the lack of bundling a keyboard is particularly questionable. Microsoft is minting a premium price point strategy which comes off as high but only if viewed from a consumer standpoint. Enterprise will likely get volume discounts and, since that is where this product will be most successful, that is where the pricing tactics really matter.

I remain confident some level of a PC refresh is coming. There are now over 300m PCs in use in the market that are very dated technologically and over four years old. A win for Microsoft would be if some percent of the coming refresh cycle appeals to Windows laptop upgrades.

At the core of Microsoft’s vision is to bring the mobile world and the PC world together. However, given current trends, it seems the two worlds do not want to come together. We will see in five or maybe even ten years if Microsoft is eventually right or entirely wrong.

The Windows Tablet Dilemma

We are at an inflection point in the tablet market. Something that grew as fast and as large as the tablet/iPad did is clearly not a fluke. There are many theories about replacement cycles, household saturation, device sharing, tablet over-serving, and the smartphones growing role in computing to name a few. However, I still believe this market is in its early stages. Consumers are still feeling out the tablet form factor and discovering how it fits into their lives. I remain confident the tablet market is a growing opportunity and consumers, along with software developers, will have an “a ha” moment and the rest will be history. While we wait for the consumer market to shake out, there is still a growth story in the enterprise. It is one Apple is winning but Microsoft must remain competitive in. However, Microsoft’s approach is actually a detriment to their success in the enterprise.

The more time I spend with IT managers and CIOs discussing their tablet deployments, the more clarity I get in how they are being deployed. There is a clear trend. Almost universally, tablets are being deployed to those workers who did not have a computer before. This is because their job was out in the field. They work for large construction companies and spend most the day in the trenches and on their feet. They are techs working for utilities companies who may have had access to a PC in their car but never out in the job site. They are public safety workers. They are delivery drivers. They roam around oil rigs or energy facilities doing routine safety checks and procedure documentation. They are people who used to go into the field with clip boards full of forms, blueprints, and other necessary documentation. These are the people getting computers in tablet form and it is empowering them in their job in ways not before possible with a clamshell PC.

Now enter Microsoft’s approach. Regardless of where you stand in the debate of why Microsoft did what they did with Windows 8, the bottom line is they misunderstood the job to be done by the tablet in the enterprise. Microsoft saw the iPad and assumed commercial workers wanted something more than a slate and no keyboard. When in actuality, the clamshell PC form factor works great for those stationary desk workers, and touch is not as much of a value proposition while stationary than it is while on your feet in operating a computer. I don’t hear from CIOs their field workers need something that is both a PC and a tablet in the same device. Their field workers need a supremely portable and easy to hold for long periods of time “pure slate”. This is Microsoft’s tablet dilemma. Their current approach with Windows 8 is not conducive to a 10 inch screen size pure slate form factor. For one reason, the entire OS is optimized for the 16:9 aspect ratio, so the hardware is quite a bit longer than it is wide. This makes the device larger, heavier, etc. While the Surface form factor, and a few from Dell, is the closest Microsoft gets to the pure slate industrial design, they are still quite heavy and, more importantly, hard to hold and use in portrait mode. Portrait mode is an easily overlooked feature for many field workers. Oftentimes when they are looking at blueprints, using a clipboard for forms, and other typical paper based parts of their job, the orientation matters. Filling out a form is better in portrait mode, for example, due to the orientation being similar to paper’s 8.5″ x 11″ dimensions. My key point is, for field workers, the ideal tablet is orientation agnostic. This point favors the iPad and is one of the reasons the iPad is being deployed more for field workers than any other tablet.

Steven Sinofsky (the original creator of Surface and Surface RT) observed a similar point about field workers in a post yesterday. His point is spot on — there is a transition happening for field workers where the tablet is becoming their central computing device for their job. The software transition of internal apps from PC to tablet is happening and it’s happening fast. Microsoft’s dilemma is they run the risk of being left out of these field worker deployments entirely. If this happens, enterprises will become more dependent on the iPad as they create custom software for iOS rather than Windows. Could the iPad become a trojan horse to the enterprise, which then creates the opening for more iPhones and Macs in the enterprise?

Keep in mind the original reason Windows PCs took off the way they did in consumer markets was because consumers used them at work. They were familiar with them and because of that, they bought Windows PCs. Could the reverse now happen to Microsoft as the iPad, iPhone, and other future iOS devices become the norm in enterprise environments? Windows in the enterprise was its trojan horse to the consumer market in the early PC stages. I wonder if the same may be true for the iPad.

Microsoft’s Two Big Announcements and Their Future Impact

Microsoft made a number of announcements at their Build conference this morning. While many were related to Windows 8.1 and Windows Phone 8.1, most feature announcements were simply playing catch up. But they did announce a few things I think are interesting.

Let me preface this by saying Microsoft is in a deep deep hole. Nothing they announced or will announce any time soon will immediately get them out of it. What I am looking for are things I can point to that signal they are building a step, or a ladder, to get out of this hole.

The first and most important announcement is they are not charging any OEM making a tablet or smartphone less than 9 inches a fee for Windows Phone or Windows 8.1. The big one here is Windows Phone is now free to OEMs. Again, this announcement will not immediately get them out of this hole but several observations need to be made about it.

First, this move is geared at hoping to win over OEMs who are making smartphones for the low end of the market. This is the part of the market where the vast majority of growth will be over the next 2-3 years. My numbers tell the story that, over the course of the next 2-3 years, the market will add a billion new smartphone owners. Over 80% of these new users will purchase their first smartphone at a price point less than $150 and largely less than $100. In making Windows Phone 8.1 free, Microsoft is hoping to get a slice of the next billion smartphone owners who will be connecting to the Internet for the first time. Microsoft played a key role in connecting the first billion users via a PC, and are hoping to play a key role connecting the next billion via a smartphone.

Note this picture showing the growing ecosystem and the regions where each OEM is strong. Most of the OEMs that you may not recognize are serving the low end of the market in their respective regions.

The second observation, which is important to the first, is most of the vendors in this screenshot are paying Microsoft a licensee fee for their Android implementation. Which means for many of these OEMs, shipping a Windows Phone will cost them less than shipping an Android phone. The problem for Microsoft is if they can not monetize a shift in the mix of Android phones sold by these OEMs, then they are losing money by not monetizing the OS. For this to work, Microsoft must have services they can make money on, to the tune of $5-12 per year per device for this to make them as much money as they make on Android per device. A key point to this observation, however, is Windows Phone requires quite a bit of processing power. An OEM likely can’t ship a phone costing less than $100 dollars, given the tech specs necessary, that runs Windows Phone. For this strategy to even be remotely possible for Microsoft, they need Windows Phone to require less resources so it can ship on a lower cost device specification wise. Windows Phone hardware, and even the software, is now truly just a shell to Microsoft services — very similar to Google in this regard. To work, Microsoft needs services these new customers value and will use.

The second announcement is a bit more nuanced but could have interesting implications. Microsoft announced their own smart voice assistant on Windows Phone called Cortana. This is the name of the cloud computer based personal assistant for the Master Chief character in Microsoft’s popular Halo gaming franchise. While most of the things this solution enables are just catching up to Siri and Google Now, this service is fully powered by Bing. When I look at many of the services Microsoft is offering, Bing is the one I believe they have the best chance at monetizing with these new low end customers — assuming they win their allegiance.

I do believe the next big evolution of the smartphone is to transition the device from what it is today and move toward a true personal assistant to its owner. Artificial intelligence will play a key role in this. While this is not necessarily something a first time owner needs or wants, it is an important foundation for Microsoft to build upon.

As I stated earlier, none of this immediately gets Microsoft out of this hole. While neither announcement is a guarantee they are building toward a ladder, these are at least a couple of the things I think make the case they are moving in that direction.

The Genius Of Steve Jobs Or Why Google And Facebook Must Make Big Bets

The ghost of Steve Jobs haunts Google and Facebook. Unlike Apple, which has always aligned its interests with its users, both Google and Facebook must serve two masters: users and customers. They are not the same. Indeed, the divergent demands of these two groups has placed both web giants at a long term competitive disadvantage against Apple — one that will cost them billions to correct and will likely never be fully resolved.

Steve Jobs repeatedly veered from conventional Silicon Valley wisdom. His successes were legion. Given Apple’s current size and dominance, it’s easy to forget how so many of the big strategic gambles Jobs made were almost laughable at the time.

Vertical integration
Make both hardware and software
Keep design in-house
Create a global retail chain
Lock down your ecosystem
Make money on the hardware
Focus on fashion
Touchscreens are superior to physical keyboards

Google is, despite occasional shout outs to “openness”, absolutely following the Apple playbook which Jobs crafted decades ago. Facebook will follow as best it can, I suspect.

It’s not going to be enough.

Jobs made an even more profound strategic decision, one neither Google nor Facebook can ever match. It was a decision stunningly obvious in its simplicity, yet even today, despite Apple’s success, is still rejected throughout the Valley. That primal Jobsian strategy?

Your users are your customers and your customers are your users.

Sounds so simple, so obvious, yet think of nearly every start-up success in Silicon Valley this millennium, every hot new business model trend. Is the actual end user the actual paying customer?

In nearly every case, the answer is no.

In this disconnect, there is much weakness.

By linking Apple’s fortunes with the happiness of its actual users, Steve Jobs unleashed a slow-motion revolution that haunts Google and Facebook even now. Others, too. Even once dominant Microsoft, which remains radically dependent upon corporate buyers — not the actual users of their product — is hurting.

Obvious is not always easy.

The High Cost of Serving Two Masters

The divergent interests of users and customers is why Google and Facebook have been on such a massive buying spree recently. I do not expect a slowdown.

The latest acquisitions are not, as so many confounded analysts suggest, a sign Google and Facebook lack Apple’s “focus”. Rather, the fault lines in the Google and Facebook business models demand these acquisitions. That is, to make users happy and to make advertisers happy and to ensure an uneasy peace across both consumes enormous resources. Google and Facebook will always need to keep the checkbook handy. It’s not a lack of focus which explains their acquisitions. Just the opposite, in fact. Their focus is on a two-headed beast.

Before I go any further analyzing Google and Facebook acquisitions, I must acknowledge there are other, less critical factors at play:

Real Control
Fake Money

Google’s and Facebook’s founders have radically disproportionate voting control relative to their total ownership share. They can buy, even on a whim, and almost without explanation. Steve Jobs had no such control, nor does Tim Cook. Essentially, Larry Page and Mark Zuckerberg can buy whatever they wish without a single voice being raised.

In addition, the respective CEO-owners of Google and Facebook are fortunate enough to have inexplicably high PE values. $GOOG is at 31, $FB is 92 — that’s not a misprint. $AAPL on the other hand, trades at a stunningly reasonable 13. Whether you think the market is appropriately valuing these three companies is a separate issue. For now, the market is throwing money at Google and Facebook and money is of no use if it’s not being spent. I suspect if the market pushed Apple’s share price to a PE of 31, that Cook would likewise go on a shopping spree.

These two fortunate, albeit anomalous realities notwithstanding, the primary motivator behind the massive Google and Facebook spending sprees is, in fact, their respective CEO’s keen understanding of what their businesses require to succeed.

Think of a gushing well that nonetheless requires continuous priming.

Encourage. Capture. Present.

To continue earning billions, both Google and Facebook must:

Encourage use — to the point where they pay whatever is necessary to get billions more people online.
Capture our personal data — including where we are, who we are with, what we are doing, even how we are feeling.
Offer screens, tools, services and platforms so their paying customers — advertisers — can effectively present their message.

All their respective acquisitions are to maximize these three building blocks: Encourage. Capture. Present.

Thus, while couched in feel-good language, it’s shrewd business to encourage more people go online.

Last year Facebook and other tech companies launched Internet.org, a global partnership to make the internet available to the two thirds of the world’s population that doesn’t have it.

Thus, cool-sounding “AI” projects are really little more than a means of better extracting maximum value from the captured information of a billion plus users:

By teaching a computer to think, Facebook hopes to better understand how its users do too. So today the company announced that one of the world’s leading deep learning and machine learning scientists, NYU’s Professor Yann LeCun, will lead its new artificial intelligence laboratory.

Thus, a few years from now, when we spend as much time inside ‘virtual reality’ as we now do staring at our smartphones, Facebook will need to have a suitable platform for its advertisers to present their message. Enter: Oculus Rift.

SWOT

Of course, each company has its own unique strengths. As the graph below illustrates, I contend Google does a far better job of capturing user information — via Play, Wallet, Android, search, Maps, etc.

Both Google and Facebook do an equally good job of encouraging use.

Facebook offers advertisers more and better options to present their message — Facebook, Instagram, WhatsApp.

We should therefore expect both companies to acquire other firms, talent and technologies that enable them to further enhance their existing strengths and to shore up their weaknesses. For example, Facebook needs to build or buy tools to more effectively capture critical personal data. Might this lead to buying Foursquare, for example, with all its user-location data?

As we increasingly look to our wearables and smart watches, expect Google to buy or build tools to ensure their advertisers can present their message onto these new screens.

There’s still another consideration for potential acquisitions. The companies currently are split in the type(s) of information they are best at encouraging, capturing and presenting.

Facebook’s superiority is better suited for encouraging us to share how we feel, and its platforms allow users to more fully express themselves. Google by contrast, is far better at capturing what we want and what we are doing.

Given this, I suspect while both Google and Facebook will acquire companies that help them shore up weaknesses across the feeling-doing-wanting-expressing spectrum, the really big money will be spent on ensuring their current leadership is almost impossible to surpass.

Focused Acquisitions

Was $19 billion too much for WhatsApp? Likely. As was $2 billion for Oculus and $3+ billion for Nest. Fair enough. But, these acquisitions do not reveal a lack of focus – just the opposite:

Driverless cars will present ads and content in a captive environment without distraction.
Internet drones, lasers and balloons encourage more of us onto the web and onto the many and varied Google and Facebook platforms.
If any of us spends any appreciable time in the “metaverse”, then Facebook’s Oculus Rift gamble will enable advertisers to present a stream of messages into our eyes and ears, without any of the real world’s messiness.
Google Glass can (soon) present the latest reviews of the newest restaurant as we walk past — or instantly display where we can get a better price on our favorite gear.
Nest will help Google capture our home information.
WhatsApp encourages us to share a great deal of personal information.
Instagram encourages us to express ourselves.

The list goes on.

Therefore, when you read financial analysts, such as Felix Salmon, who insist Facebook’s latest acquisitions aren’t related, they are missing the big picture.

Look at his big purchases — Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I’m sure he promised something similar to Snapchat, too.

Wrong. It’s not about being “integrated into the core Facebook product.” Rather, it’s about encouraging use, capturing use, and maximizing its value to advertisers — which means enabling those advertisers to present their message to every user at any time, in all places, on all screens.

And it will never end.

Apple must make its customers happy. That’s no easy task. Google and Facebook, however, must make both their customers and their users happy. That’s much harder. The checkbooks will remain at the ready.

India And The Future Of The Smartphone Wars

Perhaps I should have titled this “India Is The Future Of The Smartphone Wars”?

The appointment of the highly capable Satya Nadella to lead Microsoft only partly explains why I am thinking more about India and technology. The other reason is that it increasingly appears that the future of smartphones, and the winners and losers of the global smartphone wars, will be determined in large part by what happens in India. Great news for Google, possibly even for Microsoft and Nokia. Less good for Apple.

Despite the rather remarkable success of Indians in Silicon Valley, many of whom, like Nadella, are now leading tech companies, I still meet far too many analysts who remain disproportionately focused on what’s happening in China, or in Europe, while steadfastly ignoring the speedy, highly iterative tech landscape in the world’s second-largest nation.

Consider the following about India:

There are over 1.2 billion people — that’s about 4 USA’s
The median age is 25 (China’s median age is 36 and the US is 37)
India is the world’s 11th largest economy — and still one of the world’s fastest-growing
Annual per capita income is a dismaying $4,000 (by comparison, China’s is $10,000 and in the US it is $53,000)

Populous, young, growing, eager for technology, eager for connectivity, albeit with relatively meager resources to spend. It seems to me that is the perfect mix for disruption. Likely, this disruption centers around what is now our most important tool, the smartphone.

There are already about 150 million total smartphone users in India. Despite that number, and despite the nation’s large population, India is the world’s fastest-growing smartphone market. The giant feature phone market is collapsing.

According to IDC, 44 million smartphones were sold in India in 2013. Phablets (smartphones between 5-6.99 inches) garnered at least 20% of the Indian smartphone market, though other sources place this number much higher.

Using IDC’s latest data, Samsung is the leading smartphone company in India, with India-based Micromax and Karbonn trailing. (Nokia, a leader in feature phones in India lags, though sales of its Lumia devices have steadily increased and the company now may have a 5% share of the market there.)

Given the size of the market, and its rapid growth, and the number of new users, current sales rankings may not matter much. As DNA India notes:

Tier one smartphone brands are ignoring the writing on the wall in the world’s fastest growing smartphone market in order to cater to a global market. This could be a dangerous thing to do especially at a time when the market is growing at a rate of over 150 percent and with 85 percent users still using feature phones. (emphasis added)

2014 could prove a watershed year, considering that:

225 million smartphones will be sold in India just in 2014 — compared to 89 million in the US
Of these 225 million devices, an amazing 207 million will be to first-time smartphone buyers — the largest proportion of new users to existing users anywhere in the world

More so than the spread of 3G/4G, and the rapid improvements in mobile-optimized services, it is the almost unbelievable low prices of new smartphones that are enabling the rapid jump to smartphones in India:

“The median price of a handset has fallen from 8,250 rupees (Dh490) in 2012 to 7,000 in 2013.”

That’s $115.

In fact, about 2/3 of all smartphones sold in India are priced under $200.

The derisively labelled “race to the bottom” is in truth, connecting India, and the world, and gifting us with unbelievably accessible technology.

Mozilla is seeking to create a $25 smartphone. Nokia’s X devices are all priced under $150. The new BlackBerry Z3 costs less than $200. This is amazing and laudable. Indeed, marketing firm Jana, has cleverly predicted that 2014 may be the year when a smartphone costs less than a carton of cigarettes.

The world will never be the same, and what’s happening in India offers us clues to our future.

As the Guardian notes, 2014 is when “the number of mobile internet users in the developing world will overtake those in the developed world.”

Connectivity is flowering in abundance. Equivalent access to everyone and to nearly every data resource will very soon be in the hands of the old and very young, male and female, rich and poor. This may be a first in human history.

We can’t know how this will change us, or change the world. But I suspect that watching what happens in India, and it’s happening so very fast, will provide us with many clues.

Predictions

Sorry. This market is too big, and moving much too fast for me to offer any reliable predictions. That doesn’t prevent me from sharing my thoughts, of course.

Apple

Meh.

Right now, Apple simply has nothing much to offer India. Offering the iPhone 4 for over $200 as they are again, when there are so many other amazing, new smartphones available for far less seems to me almost certain to fail. In fact, I think marketing very old devices against clearly superior ones, at the same price, only harms Apple’s brand. They shouldn’t even bother.

For example, India’s own Lava offers the following Android device for around the same price as the iPhone 4, but here’s what you get:

A sleek, sexy product running on stock Jelly Bean 4.2.1 with a magnesium alloy body, a 4.7-inch HD display, a MediaTek MT6589 chipset, 1GB of RAM, an 8MP camera in the back, a 3MP camera in the front, a panel that includes Sharp’s OGS solution, and Gorilla Glass from Corning.

Or, you can get a Moto G. Even the new Nokia X devices are all available for much less — and they carry the beloved Nokia brand name, look great, and include multiple popular Microsoft services.

In addition, India loves phablets — which pose a direct threat to iPads. Thus, even sales of iPad are hemmed in. Apple probably won’t have anything to offer India for years, in fact.

Will this harm the bottom line of the world’s largest tech giant?

Not so much, and certainly not in the near term. As long as Apple can peel off the world’s top 10% of buyers, they’ll be fine. It is a shame, however, that Apple and the world’s biggest democracy have so little a connection.

That said, Apple can certainly learn from the India market. For example, Indian handset makers are known for their ability to rapidly iterate, offer a host of new products, new models, all with the latest, most affordable hardware, and all at breakneck speed. Apple offers a minor iPhone upgrade about once a year, and a major upgrade about every 2 years. This has to change for success in the developing world — and it may already be underway. As the Wall Street Journal recently discovered, Apple is “hiring hundreds of new engineers and supply-chain managers in China and Taiwan as it attempts to speed up product development and launch a wider range of devices.”

Google

Android is the most popular (smartphone) OS in the world. This is especially true for India, where Google Android may make up 90% of the market. Google should do all it can to continue India’s love of Google Android.

Consider that nearly a third of “Android” smartphones shipped worldwide — that’s now over 70 million devices per quarter — come without Google apps and services installed. Blame, or thank, China, and don’t expect this to change soon. Chinese handset makers, Chinese app stores, Chinese web companies, and the Chinese government itself have little reason to embrace Google or to embed the company’s apps and services into their finished product. If Apple should ignore India for now, as I suggest, Google should similarly ignore China, which will continue to be unfriendly to the company, and instead embrace India.

Google should ensure that its very best tech, its latest services, its most amazingly affordable visions for computing devices all flourish in India, where value and accessibility are paramount. Efforts such as Project Ara, where Google hopes to offer a DIY smartphone for $50, should be heavily promoted and tended to in India, China’s manufacturing prowess notwithstanding.

Nokia

The widely mocked Nokia move to incorporate Android in its new Nokia X line could prove a rather bold, canny move. A feature phone stalwart in India, Nokia has to make an aggressive move to retain relevance in the country’s rapidly shifting phone market. Given the country’s speedy, almost wholesale adoption of Android, this may simply not be possible if Nokia remains fully wedded to Windows Phone.

Nokia’s new X phones will operate on Android, which is everywhere in India. However, they will carry the Nokia brand, retain the familiar Nokia design, keep the look and feel of Windows Phone Metro — and just might renew the company’s smartphone fortunes, all while potentially bringing millions more into the world of Microsoft services.

As Ben Bajarin states:

[Nokia X] is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Should the Nokia strategy fail, it’s hard to envision any other OS that is not Android finding any appreciable success in India, no matter the cost.

Where this might be wrong, although I think it unlikely, is if Chinese manufacturers such as the aggressively capable Xiaomi, successfully push out the top Indian mobile phone vendors (e.g. Lava, Karbonn), and thus effectively force them to offer something unique — Windows Phone, even Firefox OS, for example.

Understand, however, that India’s homegrown phone makers are formidable. I do not expect China’s own manufacturers, even such capable ones, to crush India’s leading vendors.

Not all aspects of India’s smartphone market will have a direct parallel elsewhere. The popularity of phablets may never be matched in the US and Europe. Features such as dual SIM are irrelevant in many parts of the world. Nonetheless, the smartphone skirmishes that take place in India will reverberate far beyond its borders. Analysts should pay more attention to this market and its users.

Why Nokia is Better Positioned Than Samsung

I wrote today about why Nokia’s move to support Android is bold, risky, but also filled with potential. As I watched Samsung’s press conference, the stark contrast between the big news items of both companies was evident. Samsung chose to focus on evolution rather than revolution. This is exactly what they should be doing. They took no risks and focused more on serving the market rather than over-serving it. Samsung’s press conference made it clear to me that they have accepted their role as a follower rather than a leader in this industry. There is nothing wrong with this strategy. However, once the basis of competition shifts, this strategy could be the undoing of their mobile division. What’s more, is that Samsung is playing it safe in the saturated areas of the market–the high end. This is not a growth segment. As this slide points out:

While Samsung continues to address all the price points in the above chart, their ecosystem is failing to lock-in consumers. This is what they hope to do with the Gear products but again those products are not focused on the low-end. Nokia, on the other hand, is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Nokia is including their own app store on the Nokia X as well as popular app stores from each region. This strategy will not just appeal to first time smart phone owners, but the Nokia X has appeal to existing smartphone owners at very aggressive price points. There is another interesting move Nokia has done with the X Android smartphone. They have leveraged their strong relationship with carriers and will offer carrier billing support for app store transactions with over 160 carriers worldwide. It is a little known fact that carrier supported billing for transactions can see up to 10x the conversion than when a credit card is the only purchase option. This means Nokia and Microsoft have a good story for developers looking to monetize. It is conceivable that in the near future Microsoft could have more developers in its Android ecosystem than its Windows Phone ecosystem.

Microsoft is quietly going to use Nokia to acquire customers and meet them where they are. The key word being thrown around is “embrace and extend.” This is exactly what Microsoft needs to do to begin to build a new foundation and serve new sets of customers. Interestingly, Nokia launched several other new low-end smart phones today. A feature phone and a new Asha line. Each one has some Microsoft service on it. Nokia sold over 200 million feature phones last year. This market is in decline. Still, devices such as the Nokia 230 at $49 dollars and Nokia 220 at $29 dollars will still sell massive volumes and these customers will touch a Microsoft service likely for the first time.

Ultimately Samsung is being eaten alive at the low-end. India is still one of their strongholds, but it is also a market where Nokia has brand affinity. Samsung has not created loyalty in the low-end, and this is an opportunity for not just Nokia, but Microsoft is in a position to capitalize also.

Imagining Office for the iPad

It’s no secret that Microsoft has been hard at work at a true touch-based version of its Office suite, not only for Windows’ Metro interface, but for iPad and Android tablets as well. But little has been revealed about its timing or its content. I’ve decided to let my imagination run free to create a mental picture of this office of the near–I hope–future. (I’m not the only one. Two of the most astute analysts of the tech scene, Ben Thompson (@monkbent) and former Windows and Office chief Steven Sinofsky (@stevesi) have been conducting on ongoing discussion of the future Office on Twitter.)

A key element in my thinking is that the Office users who really matter are in business, or at least professionals of one sort or another. Yes, a lot of consumers and students use Office today and will continue to. But they have many other options and are likely to continue to drift away from software that is more complex and often more expensive than what they need. Consumers are not the future of Office.

The new Office needs two drastic changes. The fairly simple one is to change the way Office applications connect to the cloud. Office 13, by default, saves files to SkyDrive/OneDrive, with SharePoint as an alternative. On Windows tablets there is a fairly simple workaround to connect with other services because they can be integrated with the file system. But neither iOS nor Android gives users file system access, so the Office tablet apps have to come with built-in hooks to a broad range of cloud services including private SharePoint sites, Dropbox, Box, and Google Drive (yes, really.)[pullquote]A good starting point is the realization that touch tablets are not going to be used much for the creation of complicated documents.[/pullquote]

The much hard part is designing apps that really work on touch interfaces. This will necessarily require a drastic simplification of the complex, menu-driven user interfaces which requires eliminating a lot of features. It’s long been a standing Microsoft joke that every user of Word utilizes only 10% of the functions, but everyone uses a different 10%. Of course, this is not actually true; I suspect a Pareto analysis would pretty quickly yield a common core of functions that nearly everyone uses and a galaxy of rarely used features.

A good starting point is the realization that touch tablets are not going to be used much for the creation of complicated documents. You might use a tablet, particularly if it has a auxiliary keyboard, to write a quick memo or do some simple spreadsheet computation, but you are not going to write a white paper or build a financial model. Those will be jobs to be done on desktops or laptops and only occasionally tweaked on a tablet.

In Word, for example, you will be able to dispense vast areas of functions, including many of the more complicated layout, formatting, and style options. It would be best if the applications embed any fonts use, since substituting from the limited range of fonts available on a table will almost always cause problems with the precision rendering of documents. No one in their right mind is going to be using a tablet to create footnotes, end notes, bibliographies, indexes, tables of contents, or tables of authorities. Does anyone really need WordArt, SmartArt, QuickParts or a long list of options that don’t believe I have ever needed, even as a heavy user of Office?

On the other hand, what is inescapable? I think that one scenario that will come up a lot is someone creates a document, then sends it along to a reviewer, who may give it a look on a tablet. The single most critical option will be the full palette of reviewing tools, especially Track Changes and Comment. For spreadsheets, tablets aren’t much good for creation, but they could be very useful for analysis of modest sized layouts. So while you can eliminate a lot of functions, you want to keep the analytical tools, especially pivot tables.

The process, in other words, is not the usual kitchen sink approach,but a very careful selection of essential tools based on a careful study of use cases. I can only hope that this process is already well along. It will take all the cleverness UI designers can come up with to get all of the functioned deemed absolutely necessary into a clean and functional tablet UI. As we have seen with apps such as Apple’s own iPhoto for the iPad, the UI is still a work in progress.

Another huge issue will be the price. I expect the logical solution for Microsoft is to include tablet versions with no additional charge in the consumer, education, and small business versions of the subscription Office 365, with a similar deal for corporate subscribers. That’s going to hurt a company that is used to charging a lot of money for its software, but it is the way the world works today.

The Inevitability of Office and How Microsoft Can Save It

When I am not writing for Tech.pinions, I spend a fair amount of my time doing a variety of things, and a significant part of my freelance life is helping to write responses to Requests for Proposals, most of them for large, complex IT deployments. The RFPs, and the nature of the response to them, very a lot, but one thing they have in common in the pervasiveness of Microsoft Office and related software.

One thing I have noticed in a great deal of tech analysis and journalism is that except on sites focused on an enterprise audience, such as InfoWeek or ComputerWorld, there seems to be very little sense of how dependent the enterprise is on Microsoft. As a result, they tend to grossly underestimate both the importance and staying power of Microsoft.

To some extent, that is not surprising. Not many writers have much experience in the enterprise world. Journalists, in particular, do most of their work in content management systems that don’t use Office components. (When writing for Tech.pinions, for example, I either write directly in our CMS, WordPress, or use a markdown editor. Occasionally, I’ll use Excel to analyze data and generate a chart or table, but that’s about it.[pullquote]Microsoft also needs to come to grips with the reality that iOS and Android, not Windows Phone and Surface, are going to be the dominant players in the mobile enterprise.[/pullquote]

But other work is all Microsoft, all the time. The RFPs themselves are often published as word documents, and even if they are PDFs, it’s a good bet they began life as Word docs. And the RFPs generally specify response be in Word, Excel, and PowerPoint. The teams writing the responses depend heavily on the Track Changes and commenting capabilities of Word. SharePoint is used as the document repository and for version control. Team members communicate using Exchange/Outlook and Lync. (All of this, by the way, is supported on Macs, although the Mac Outlook client is pretty bad and the Mac SharePoint tool (Microsoft Document Connection) is extremely finicky.)

As for the systems described in the RFP, the back ends may be based on software from SAP, Oracle, or Microsoft, among others, but the presence of these systems being accessed by desktops or laptops running Windows and Office is simply taken for granted. In most cases, especially in government RFPs, mobile access is often an afterthought and is handled through a smartphone or tablet browser, if at all. iOS or Android support is starting to show up a bit more, particularly for HR self-service applications.

All of this is important because it shows that predictions of doom for Microsoft are grossly exaggerated. Microsoft clearly has long-term problems that will affect its dominance of the enterprise if not addressed successfully. One of the features of Windows 8 that could appeal to enterprises is sophisticated baked-in support for both public and private clouds. But Windows 8’s user interface mess is a non-starter for enterprise customers, and it is unlikely that windows 8.1 Update 1 is going to move the ball far enough to be of much help. It’s imperative that Microsoft come up with a Windows 9 that both gives enterprises the user experience they want (i.e., one that imposes a minimal retraining burden) while building the on ramp to the cloud services that are Microsoft’s future.

But a successful future for Microsoft, even in the enterprise, has to go far beyond hanging on to Windows PCs. While they are not going away, neither are they growing and are more likely to shrink as those workers not tethered to their desks trade their traditional PCs for more mobile devices. Microsoft needs to find a way to extend its software and services into the mobile space.

Jean-Louis Gassée argues in a Monday Note that the key is a radical invention of the Windows tablet:

Microsoft faces a choice. It can replace the smashed bumper on its truck with a stronger one, drop a new engine into the bay and take another run at the tablet wall. Or it can change direction. The former — continuing to attempt to bridge the gap between tablets and laptops — will do further damage to the company’s credibility, not to mention its books. The latter requires a radical but simple change: Make an honest tablet using a version of Windows Phone that’s optimized for the things that tablets do well. Leave laptops out of it.

I believe that’s the right track–I have maintained for a long time that trying to build a tablet OS down from desktop Windows rather than up from Microsoft’s phone software was a strategic blunder–but unless Microsoft has been quietly working that approach for many months, it is going to take too long to pull off a new tablet software design.

Microsoft also needs to come to grips with the reality that iOS and Android, not Windows Phone and Surface, are going to be the dominant players in the mobile enterprise. The company has taken small but important initial steps with SkyDrive (soon to become OneDive) and Lync apps for iOS and Android. But it needs to take the big step of providing solid Office and SharePoint apps for tablets, sooner rather than later. It will have to do a lot better than existing third-party solutions (not all that hard) and signal to the world that it will support its vital Office infrastructure on a heterogeneous world of mobile devices.

The Future of Microsoft, Apple, and Google

It seems today like the dominant players in computing, social media, infrastructure, services, and many other big industry segments is settled. It is easy to look at the current environment and say Google and Apple have both won. Both have large thriving ecosystems in the hottest segments of technology. Yet as Benedict Evans and I discussed on our last podcast, while everything seems settled, in reality, the future is still very much anyones game.

Taking into all the major players strategies is essential. Here are some thoughts on a few of the major players.

Microsoft faces some of the most difficult questions in my opinion. What kind of company is Microsoft going to be in the future? This is the key question a new CEO must address. The market where they dominate market share, the PC, is contracting in annual sales every year. They are not participating relevantly in any of the growth sectors like smartphones and tablets. Is Microsoft a commercial company whose destiny is to focus on backend services like IBM and be a much smaller company than they are today? Are they going to choose to only focus on commercial applications and ignore consumer ones?

If their current commercial which aired during the Super Bowl yesterday is any indication then lets hope they see themselves as a technology company rather than just an operating system company, software company or an enterprise services company.

Microsoft is among the top spenders in research and development. Ranking #2 of the top 2,000 companies according to the European Union. Samsung was number 2, Google number 13 and Apple number 46. Samsung should not be a surprise given the number of businesses they are in. Microsoft on the other hand is not in nearly the same number of businesses as Samsung but spend nearly as much as them in RND in 2013. If Microsoft can commercialize their R&D spending in a meaningful way they can evolve beyond their own platforms and enable a broader ecosystem. While I have serious questions and doubts about Microsoft going forward, I’d be more optimistic about them if they evolved into a broader technology company driving growth for themselves and others out of their R&D.

Apple

Apple may always have the smaller ecosystem. A fundamental question to explore is now much this matters. There are industry executives who have seen and participated in key paradigm shifts in this industry who believe that the smaller ecosystem always loses. Yet there is no clear answer from them as to why. It is not a foregone conclusion that the smaller ecosystem always loses. As long as an ecosystem is supported by a long list of third parties the ecosystem will thrive. There does come a point in time when an ecosystem is too small to support, take RIM and Windows Phone as examples.

I believe Apple can successfully acquire and maintain an ecosystem of around 800-900m ((I have logic and deeper analysis from my firm Creative Strategies to justify these numbers)) install base of core device hardware. By core device hardware I mean computers small, medium, and large. Apple will inevitably offer peripheral businesses to the hardware core, and those may be software or other hardware businesses (new categories) but they will all revolve around personal computers small medium and large. At least for the foreseeable future.

Assuming Apple can maintain this core user base, which will err toward the higher more profitable segments of the market, then I am confident their ecosystem will sustain and thrive, despite what many believe about ecosystems (800-900m is not really a small ecosystem).

Apple’s latest ad 1.24.14 is an excellent insight into Apple’s product future.

30 years ago we introduced Macintosh. It promised to put technology in the hands of the people.

By the end of the video you get the sense that the iPhone is the promise and full manifestation of that vision. It ends making the point that the entire video was created with the iPhone in one day.

Personal computing is the focus. In the hand of many is the goal.

Google

Interestingly, while many seem to have established Google’s future being secure, I’m still not so sure. At least I’m not sure about what they offer today as being what sustains them or secures their future. Android is actually still a moving target for Google. It seems established but it is actually a quite fluid product and strategy. Android may look entirely different in 5 years if it even exists.

As evidenced by the recent Samsung and Google patent deal, which likely includes a lot more than the patents, Google is able to leverage their services to bend OEMs to their will. Which gives us a clear line in the sand between Android OEMs using Google services and those that are not. The focus then should not be on Android but Google’s services. Services like search, maps, the play store, and more are at the core of what Google uses to push their agenda.

This is what makes China so fascinating. 90% of the Android install base in China is Android Open Source Project (AOSP) and have not been certified by Google to receive their services. China is unique in that Google’s services are mostly blocked at a network level inside the country. This is why so many alternatives to Google’s services exist in China and are used by the masses. Android AOSP makes it very simple for a hardware company to install a platform and in essence create their own unique platform. This is the case with Amazon, Xiaomi, and many other OEMs. I estimated the market share of Android AOSP vs. Google’s Android with their services in the chart below.

Developing regions like India, Latin America, and Africa are all big continents with lots of people where smartphones are growing the fastest. India has many local smartphone OEMs like Micromax, LAVA + XOLO, and Karbonn. While these devices do utilize Google’s services, what is stopping regional upstarts or entrepreneurs from creating their own set of competitive services to Google’s specifically designed to only serve the unique interests of that region?

Google is a services company that monetizes those services through ads. Whether advertising is their business model or something else in 5yrs time, or longer, I believe Google will see increased competition in many of their services which they depend heavily on.

Microsoft Needs Their Hell Froze Over Moment

In a simple tweet today from Katie Boehret. As she was cleaning out her desk for her transition from the Wall St. Journal to the new venture with the All Things D team, she found a poster from when Apple released iTunes for Windows. The famous catch phase Steve Jobs used when he announced this was Hell Froze Over. I was at this event and I recall this moment vividly. Tim and I did a number of media interviews after this announcement and we pointed out the importance of this move in driving the growth of the iPod and what in essence has become the foundation for the iTunes ecosystem and Apple’s iPods and now iPhone.

As I reflected on this moment and how Steve Jobs and Apple positioned this moment, it made me think that Microsoft needs its hell froze over moment. What this is exactly for Microsoft I am not sure. The obvious one is simply bringing Office to other platforms in a more rich and meaningful way. However, a more controversial strategy could be for Microsoft to fully embrace Android.

BlueStacks has developed solutions that allow Android apps to run in a Windows environment. Whether Microsoft works closely with BlueStacks on this or does something on their own, this could be an interesting strategy where Microsoft embraces an environment foreign to their own but uses it to strategically advance their larger agenda. Windows Phone needs apps. They must adjust their tablet strategy as Windows 8 is not the answer. Embracing Android could be an ecosystem booster if it is done right and the useful parts of the two solutions are integrated seamlessly.

All of this assumes, of course, that Microsoft does have a larger agenda and strategic plan, although I am somewhat skeptical of this assumption and its validity. Perhaps a new CEO can straighten out their path. But it remains true that Microsoft is reaching a point where they need to be willing to take more risks and be more hungry to not be passed by the mobile phenomenon.

Tablet Metaphysics

Are you ready for some Tech Metaphysics?

“Aristotle drew a distinction between essential and accidental properties. The way he put it is that essential properties are those without which a thing wouldn’t be what it is, and accidental properties are those that determine how a thing is, but not what it is.

For example, Aristotle thought that rationality was essential to being a human being and, since Socrates was a human being, Socrates’s rationality was essential to his being Socrates. Without the property of rationality, Socrates simply wouldn’t be Socrates. He wouldn’t even be a human being, so how could he be Socrates? On the other hand, Aristotle thought that Socrates’s property of being snubnosed was merely accidental; snub-nosed was part of how Socrates was, but it wasn’t essential to what or who he was. To put it another way, take away Socrates’s rationality, and he’s no longer Socrates, but give him plastic surgery, and he’s Socrates with a nose job. ”

~ Excerpt From: Thomas Cathcart. “Plato and a Platypus Walk Into a Bar.”

Now what the heck does all of this have to do with Tech and Tablets? Well, I’ll tell you.

One of the major mistakes that Microsoft and its OEM partners are making is that they are failing to properly distinguish between the “essential” and the “accidental” properties of a tablet. Here’s two opposing examples to illustrate that point.

KEYBOARD

If you take away the keyboard from a Notebook computer, it is no longer a Notebook computer. It can’t function. But if you take away a keyboard from a Tablet, it is still a Tablet. Using Aristotle’s definitions, a keyboard is ESSENTIAL to a Notebook computer but it is ACCIDENTAL to a Tablet computer.

With me so far? Here’s a second example.

TOUCH

If you take away the touch user interface from a Tablet, it is no longer a Tablet. (See Microsoft’s failed attempts to create a tablet from 2001 until 2010.) It can’t function. But if you take away the touch user interface from a Notebook computer, it is still a Notebook. A touch user interface is ESSENTIAL to a Tablet but it is ACCIDENTAL to a Notebook.

Just one more step and we can bring it home.

PIXEL INPUT IS INCOMPATIBLE WITH TOUCH INPUT

Both Pixel input and Touch input require a metaphor that allows our minds to grasp the use and usefulness of that input. For example, menus and scroll bars are standard fare on Notebook and Desktop computers but they are anathema to Tablets. Why? Because menus and scroll bars are too small for multi-pixel finger input. On Tablets, menus are replaced by large buttons and scroll bars by replaced by “flicking” the screen up or down. This is not minor matter. A wholly new, built from the ground up, Touch User Interface is ESSENTIAL to a Tablet.

Recap

Touch is ACCIDENTAL to a Notebook computer. It’s plastic surgery. It may enhance the usefulness of a Notebook but it doesn’t change the essence of what a Notebook computer is. A keyboard is ACCIDENTAL to a Tablet. It’s plastic surgery. It may enhance the usefulness of a Tablet, but it doesn’t change the essence of what a Tablet is. Further — and this is key — a touch input metaphor and a pixel input metaphor must be wholly different and wholly incompatible with one another. It’s not just that they do not comfortably co-exist within one form factor. It’s also that they do not comfortably co-exist within our minds eye.

In plain words, it’s no accident that tablets and notebooks are distinctly different from one another. On the contrary, their differences — their incompatibilities — are the essence of what makes them what they are.

Big Tablets Could be a Big Trend

There continues to be a lot of talk around tablets which are larger than the traditional 10″ screen sizes. Rumors have it that Apple is working on a larger iPad and that Samsung is as well. While I don’t think it makes sense for Apple to make a larger tablets, and Samsung will experiment with every screen size, there may be a small role for larger tablets. Before I dive into this topic I want to level the discussion by establishing some definitions.

By tablet I mean a device that is designed as a pure slate. Something like the iPad for example. This can be used with our without a keyboard but is not dependent on one as a part of the design. Devices like convertibles and hybrids (which Intel now calls 2-1 computers) are not tablets in my opinion. Some of them may bleed over and include tablet features but they are not pure tablets.

There is no question in anyone’s mind that tablets are stealing sales from traditional PCs. IDC estimates that 2013 will end at a negative 9.7% for the year. In their press release from last a few months ago they stated”

The market as a whole is expected to decline through at least 2014, with only single-digit modest growth from 2015 onward, and never regain the peak volumes last seen in 2011.

Thanks to tablets, the market will never regain the peak volumes last seen in 2011. Very telling.

Yet even with this “PC is dead” narrative there are still many complexities. For example, if you have used a tablet for any length of time to do something considered more productive then you know these task are better experienced on larger screens. In fact in our consumer interviews they continually explain how when they go to edit a video, image, write a lengthy email or document, manage finances, etc., they choose to go to their PC to do these tasks. So in line with the theory that people love their tablets but also want a larger screen to do some tasks the question is whether or not there is a market for larger tablets.

The answer is yes. How big of a market there is for larger tablets is still the real question. In the short term I don’t believe it is that big but as certain technologies evolve the demand could get larger. But in the short term there is an interesting exception happening in the market.

The One Interesting Exception
I have been using the Dell XPS 18. Which is a tablet disguised as a desktop PC all-in-one. This product has been an interesting experiment for myself given my questions both around big tablets and my ideas on how the technology evolves to make the market interesting.

The first thing worth pointing out is that these larger “slates” actually have much more appeal from a collaborative standpoint than anything else. Things like working together, learning together, playing together, etc., all start to become more interesting when we can gather around a large touch screen and interact at the same time.

Imagine doctors being able to show patients digital images or other material and interact with it in real time. Or teachers using these larger screen tablets to collaborate on an assignment or teach something specific to a student. Even at home my family has been using the XPS 18 to play board games together. One of my daughters is taking piano lessons on it. But then as soon as you want to use it as a PC with a mouse and keyboard you place it on the dock and it is ready to go.

Large tablets have a place in certain verticals this I am sure. I can see tablets at 13-20-inches doing well in these spaces where the value of a larger touch screen for productive and collaborative use cases are more prevalent. For the mass market consumers, I’m not sure sure. For this market I can see tablets playing out differently when it comes to big screen use cases.

I mentioned that the technology may not be there yet and this is specifically where. I believe that consumers would find value in “docking” there existing 7″ or 10″ tablets into a large screen set up. And by large screen I mean something 20″ or greater. My view on this is the crux of why I am skeptical of Intel’s 2-1 category and personally feel it is a solution in search of a problem. It seems to me the more interesting solution for buyers interested in tablets is to get a pure slate tablet in the 7-10″ range and then also get a larger tablet like the XPS 18 and use them together as a solution. This way you get the benefits of a smaller more portable tablet for mobility and then the larger tablet/detachable desktop for more big screen productive desktop modes as well as more collaborative ones.

This is the advice I would give to hardware companies asking me about screen sizes. I would say for tablets focus on 7-10″ because those are the volume sellers. Then look to innovate around these larger screen detachable all-in-ones and create value in having the small tablet and larger tablet being used together as a solution.

In an ideal vision of the future, consumers will use their 7″ or 10″ tablets as their primary computing devices. Given that consumers primary needs are not that intense and mostly consumption over productivity, this device is well positioned for that. However, when they want to do something like edit a video, picture, write a long document, etc, they can “dock” their tablet to a larger screen and begin using the tablet + dock as a full desktop PC.

This vision has been shared before by many but for technical reasons has not made it to a useful reality. In the future if the technology enables this solution, it could literally mean the end of the notebook as we know it.

Whether big tablets would be an instant hit with certain verticals I’m not sure. But the common wisdom is that the larger the screen the more productive you can be.

It’s Bottoms Up For The Windows Phone

Recently, I’ve been reading a lot of upbeat reports regarding Microsoft’s share of the smart phone market. This has been accompanied by claims that Microsoft has finally gotten developers to adopt their Windows Phone 8 platform.

Microsoft’s Windows Phone boss, Joe Belfiore, claims that Microsoft will have completely eliminated its app gap with rival platforms by “the end of 2014.” Writing on his Twitter account, Belfiore has been crowing that “the 3rd ecosystem is decidedly here!”

All well and good. and I congratulate Microsoft on their increased market share. Only here’s the thing…

All Of The Windows Market Share Is Coming From The Bottom Of The Market

Windows Phone’s impressive growth in 2013 has been driven almost entirely by low-end and mid-range smartphones while it’s languished in the high-end market. ((Kantar agrees, stating that a large chunk of Windows Phone sales come from lower-end devices.))

“In Britain, almost three quarters of Nokia Lumia sales in the latest period were low-end devices such as the Lumia 520 and 620 — a pattern that is similar across other EU markets,” said Sunnebo.

Just 1 of the top 4 Windows Phones in the world is a high-end model while the rest of the platform’s top devices are in the low-to-mid-range market.

What’s particularly interesting is that AdDuplex found that the Lumia 1020 — which is not only the best Windows Phone device on the market but has also received a very strong advertising campaign — doesn’t crack the top 10 in any market.

The most popular Windows Phone in the world by far is the Lumia 520, a budget model that accounts for more than one-quarter of all Windows Phone devices sold in the world.

Here is the AdDuplex report showing that the low-end is the driving force behind Windows Phone success:

This is what the Windows Phone device ecosystem looks like over the past 13 months:

If you look carefully at the above chart, it reveals that the low end is growing, the “other” is growing and the high end is being squeezed between them.

The Battle For The Bottom With Android

Android — via Google — isn’t just sitting still and letting Windows regain market share. Google’s recent KitKat OS seems to be designed to run best on low-end devices. Further, Motorola’s Moto G phone may be an attempt to directly attack Microsoft’s new found low-end base.

Biggest Moto G impact could be on Lumia. Great majority of sales are <$200, where quality is better than cheap Android. Not for much longer. ~ Benedict Evans (@BenedictEvans)

It’s difficult to say who will win in the battle for the low end. However, since Microsoft’s ultimate goal is to make money from licensing their software and Google’s goal is to disrupt that business model by giving away their software for free, I believe that Google holds the better cards and — to conflate my metaphors — the upper hand.

Market Share Is Not The Goal

There’s so much talk of market share that we sometimes forget that market share is not the goal. The goal is:

1) To create a viable platform; and
2) Make money.

Taking the bottom of the market will not accomplish either of those goals for Microsoft.

…OEMs are trying to go upstream not downstream. ~ Ben Bajarin (@BenBajarin)

We’ll see. But if Microsoft is going to become a genuine player in phones, it’s going to be a long, long, hard slog. They’ve got the money to stay in the race. But staying in the race is not the same as winning.

Here’s to you, Microsoft. Bottoms up.

The State of Tablets in 2013

Tablets represent one of the greatest opportunities to expand and enhance computing. However, it is a very mis-understood product. I want to share some statistics about tablets and then add some key points on the market as it stands today as well as a projected outlook for Q4 and beyond.

85% of tablets sales have been to existing PC owners
Sub $100 make up 20% of quarterly tablet sales
55% of those who spend less than $200 had buyers remorse
52% of those who spent less than $200 intend to spend more on their next tablet purchase
More tablets will be sold in the US in 2013 than any other region

What this data tells us is that consumers are latching onto the idea of a portable larger screen device. Currently, there is a heavier mix of lower-cost small screen tablets being purchased primarily as media devices. But it seems that early market data suggests that while these low-cost media centric tablets are being used primarily for media today, consumers appear to be graduating to tablets that are more capable than just consuming media. In fact, consumers in many emerging markets primarily appear to want to use this tablet form factor more like PCs than smartphones.

The Current Landscape

The real point of clarity needed for the tablet market as it currently exists is the two distinct tablet markets emerging. On one hand we have tablets in which a degree of computing is possible. That is tablets that can be used and to a degree replace PCs. The large iPad, Surface, and many 2in1 devices coming from PC OEMs running Windows 8.1. At the moment we are looking at breaking these out by screen size. 9.7-13″ tablets would be considered computing tablets. 8″ and below would be considered media tablets. But right now any and all slate devices are being counted as tablets. So while this works for now as a category, it will need to become more granular in order to gain the right perspective about what is happening in the market for tablets.

While the 9.7″ and above more computing centric tablets are cleaner to understand and track the sub 8″ devices are where all the growth is and have a much more blurry picture. Branded OEM tablets from Samsung, Amazon, LG, Apple, etc., in the sub 8″ screen size form factor are clear but it is the ‘other’ category that muddies the waters. In all conversations with service providers from areas like China and India we do not see much evidence of the existence of these tablets showing up on anyones networks. We here more often then not they are simply being used as portable TV players to side load movies on to watch. We have heard of upticks on Flash media in certain regions so this theory could be plausible. Another explanation is evidence pointing to smartphone chips like a Cortex A5 being used in many of these low-cost white box tablets. Which would mean they would run a smartphone OS and perhaps show up on service providers networks as smartphones. Lastly, it is possible that the numbers of white-box tablets are simply inflated and not accurate. There are a number of new SoC vendors popping up giving out numbers to the tracking firms and these new companies could be inflating their own numbers simply to get attention. Those are a number of the theories I have but it is extremely difficult to confirm any of them.

What is interesting as well is what is happening in the US in two areas.

Subsidized Tablets: Carriers are beginning to offer tablets at a subsidized rate with the purchase of a new smartphone and tablet data plan. As well as the tablet alone subsidized with the purchase of a data plan. We have heard from a number of sources that Samsung’s 7″ tablets have been doing well on certain carriers offering this discount. AT&T is also offering a free Samsung small screen tablet with the purchase of a Galaxy Note 3 or Galaxy S4. These promotions will clearly drive sales of tablets even higher for this calendar year.

New brands and unbranded: Nabi Tablets are a brand to watch in the US. They are sold in US retail and are specifically targeting kids at different age ranges. Most of these run on Android. The appeal is parental controls for the devices. They even have a tablet with a keyboard accessory that looks to compete more in the 2in1 category products like the Microsoft Surface. From retail sources I have spoken with, there is evidence to suggest these Nabi tablets could sell in the millions this Q4 in the US.

Outlook for Q4 and Beyond

We are projecting tablet sales WW in the 72m range for Q4. Interestingly we are also projecting PC sales to be below 80m for the first time since 2008. The sales of PCs and tablets are likely to be very close in volume this Q4. We remain convinced that WW sales of tablets will overtake WW sales of PCs sometime in 2014.

The CEA research department highlighted that tablets made up 29% of the Black Friday weekend and cyber Monday sales. They also reported continued increases in tablet purchasing intent. Their Chief Economist Shawn Dubravac pointed out that there were over 300 tablet specific promotions in US retail over the holiday shopping weekend.

Tablet sales in 72m range would be a 38.4% increase over last years Q4 of 52.2m. We are projecting total tablet sales in the 215-220m range for CY’13. Which would represent a 76% increase from 2012.

We expect the US and Asia to be the largest consumer markets for tablets going forward. Currently the US has the highest tablet ownership at 45% which could be as high as 55% by the end of 2013. Below are the forecasts I’ve assembled from other sources, as well as our own internal estimates.