How to Think about Windows 10 S

A few weeks ago, I went to NYC to be at the Windows 10 S launch. Leading up to the event, there had been many rumors floating around about a potential new OS from Microsoft on the horizon aimed at education that would take on Google’s Chrome OS. Various rumors suggested it would be called Windows Cloud or be a “skinny” version of Windows.

Now that Microsoft has unveiled this new OS, we know its official name is Windows 10 S and it is indeed aimed at education markets. However, Microsoft is also seeing interest from some enterprise accounts who like its tighter security. It could be used in deployments where a full version of Windows might be overkill for some workers.

Although this new OS is looked at as a lighter version of Windows and could especially be attractive to schools, I believe Windows 10 S is much more important to Microsoft’s future. In fact, Windows 10 S may actually eventually become the version of Windows used by most people in the coming years. Many people who use Windows 10 now do so because most of the PC apps they use are Windows-based and they need whatever the newest version of Windows is available today.

But if you talk to many IT users and especially consumers, Windows 10 is viewed as a very rich OS but they acknowledge that, in most cases, they probably use less than 30% of Windows’ actual power. On the other hand, there are many professionals in graphics, engineering, finance, government, etc. that are power users and, to them, a full blown version of Windows 10 is important to the work they do day in and day out.

With Windows 10 S, Microsoft introduces a new metaphor for their apps. It has a new type of store that sandboxes these apps and only apps that are vetted can be purchased or downloaded to Windows 10 S. This adds a powerful new level of security compared to the ad hoc access and delivery of millions of Windows apps on the market today. Only apps in this store can run on Windows 10 S along with with web apps that use their Explorer browser.

Sounds familiar? It’s what Apple does with both the Mac and iOS app stores. All of their apps are vetted and sandboxed to increase security and give Apple more control of their ecosystem. The important idea is that, by creating a sandboxed store with only vetted apps, Microsoft can take more control of their app ecosystem and deliver a more secure environment to those who use Windows 10 S. This is one reason Windows 10 S could be more attractive to consumers and many IT customers as well as education.

When I think of Windows 10 S, it is easier for me to understand what this new OS’ goal is by thinking of it in terms of Mac OS and iOS. Today, macOS is really targeted at their power users while OS 10 is targeted at the masses.

Of course, Apple is still bullish on the Mac and macOS continues to get richer in both features and functions. However, iOS-based devices dwarf Mac sales by a scale of 13X per quarter. In that sense, Apple has already transitioned their core market to iOS and, with the new iPad Pro with keyboard, they are giving users a better option for using iPads for productivity.

Of course, Windows machines used on PC’s are still selling well and the ASPs on Windows hardware has continued to decrease over the last 5 years. But even with lower ASPs, the PC market continues to shrink and we estimate in calendar 2017 vendors will only sell about 275 million PCs compared to Apple selling at least 300+ million iOS devices this year.

To be fair, most of Apple’s iOS device sales are coming from iPhone. iPads represent only about 20% of overall iOS sales. However, Apple sees iOS as their most important OS and is banking on it to drive sales of their smartphones and tablets in the future into every market they compete in around the world.

One key reason for iOS’ existence is that, while it is a powerful OS in its own right, it was designed for a much smaller form factor than a PC. In starting with a small form factor and then introducing larger hardware with the iPad, Apple could scale this OS up and make it even more powerful for use in larger iPads and perhaps even a small laptop of their own in the future. However it uses the same source code as the Mac.

With Microsoft’s Windows 10 OS, Microsoft is doing something I had recommended to the Windows mobile group 12 years ago when I worked on that project for them. At the time, there were two distinct OS camps. One was focused on just Windows and the other was given the charter to create a new mobile OS from scratch. I felt they needed to scale down Windows and use it as the core for Windows mobile but that is not what happened. Besides some political squabbles that kept the two groups apart, I was told the OS core of Windows back then could not be scaled down and used for a mobile OS.

But, over the last 10 years, I am told the Windows base OS has become much more portable and this has made it possible to create a version of Windows that can be used more like a skinny version yet be as powerful a product for many who never need the full power of a robust version of Windows 10.

While the comparison of Windows 10 S to Apple’s iOS is not exactly accurate, it still helps me think about Windows 10 S in terms of its market promise. This is an OS that, with its sandboxed apps, greater security and streamed down Windows OS capabilities, gives Microsoft the type of OS that will be very attractive to education, IT users and, most likely, a larger mass market audience. (BTW, I wonder if Microsoft realizes 10 S is very close to iOS.) And, because it appears to be a more scalable version of Windows, it could be used not only for less expensive PC’s but also new types of Windows hardware including 2-in-1s, tablets, and maybe even smartphones.

Microsoft also makes it possible for a Windows 10 S owner to upgrade to a full version of Windows 10 for about $30. This is not something Apple could do with OS 10 and it will force them to keep the Mac OS and iOS as separate operating systems. But should a Windows 10 S user eventually need more power to handle their workloads, this upgrade path will be very attractive, especially if it is used on a laptop or 2-in-1.

While Windows 10 will dominate the PC landscape for at least the next two to three years, I see Microsoft eventually transitioning their market to Windows 10 S to give their users a more secure OS platform and, more importantly to Microsoft, allow them them to take more control of their ecosystem. In the end, this could benefit both Microsoft and their customers in many ways.

I see Windows 10 S as one of Microsoft’s most important new operating systems for the end of this decade and central to their future well into the next.

The Windows 10 S Dilemma for PC OEMs

I flew out to New York city for the Microsoft education event earlier this week as I was extremely interested in this new education version of Windows 10 S just introduced. This new OS is a lighter version of Windows 10 and optimized for education. It is Microsoft’s answer to Google’s Chrome OS. Microsoft has sandboxed their app store so only those apps run on Windows 10 S along with any Web apps. You have an option to upgrade to a full version of Windows 10 for $50 but, for education markets, Windows 10 S would work fine.

They also used the event to introduce their first Surface Laptop. This is their first foray into a real laptop and this has interesting implications for Microsoft and their partners. We’ll get to this product shortly but first I want to discuss the dilemma Microsoft’s OEM partners will have with this new version of Windows 10 S.

Some vendors who put out low-cost laptops, like Asus and Acer, who have pushed Chromebooks in their line for some time will most likely sell Windows 10 S laptops to both education and consumers and be OK with the slim margins. But, for their major partners like Dell, HP, and Lenovo, Windows 10 S is a challenge. Although these three do sell Chromebooks as part of their education offerings, Chromebooks are mostly loss leaders for them. The real money in education is selling full-priced laptops to the teachers and administrators and, while they move some Chromebooks in volume, their low margins make it hard for them to make any real money on them and instead really just use them to get their higher priced laptops into the schools.

But Windows 10 S, even with its sandboxed apps, is a real Windows machine. It would not surprise me that, when they go calling on educators and teachers, these folks will be more than willing to abandon their interest in more pricier Windows 10 models and just opt for a lower cost Windows 10 S laptop instead. In this case, if a Windows 10 S laptop from HP or Lenovo is actually priced at $189 or even $299, a simple $50 is all that is needed to upgrade to a full version of Windows and it will be easy to justify instead of buying more expensive $599-$999 models they would be buying if a lower cost Windows machine was not offered.

With Chromebooks, this is not even a consideration. Chromebooks are for the kids. Teachers and administrators use Windows PCs for their lesson plans, running the administration, and managing the kids’ Chromebooks. This dilemma for OEMs is a real one and it will be interesting to see how much they are willing to back Windows 10 S, given both the margin challenge and the potential threat it brings to their education PC business.

They also introduced the Surface laptop, which looks very much like a MacBook Air and is priced about the same at entry level, which is around $999. Up to now, Microsoft’s hardware business was in the Surface tablet 2-in-1s and even the Surface Book is a detachable form of a laptop. But the Surface laptop takes direct aim at products like Dell’s XPS 13, Lenovo’s ThinkPad Yoga and a couple of HP thin and light models they sell to business and higher ed students. I talked with multiple OEMs and, although they heard mumblings about Microsoft doing a laptop, until this week they really did not know Microsoft was going to be a direct competitor.

To say the OEMs were not happy with this move would be an understatement. Microsoft will not do a Windows 10 S notebook and expects the OEMs to do their hardware bidding for them in this competitive low end of the market with thin margins, while Microsoft takes direct aim at their partners’ laptop cash cows.

Although many OEMs were at the Windows 10 S launch, it will be interesting to see how many of them really get behind the low end while now having to do battle with Microsoft at the higher end as well.

To be fair, Microsoft had to do Windows 10 S to try and reclaim some of the market they lost to Chromebooks. But the fact Microsoft is not doing their own low-cost hardware for education to support this new lighter version of Windows 10 is telling.

The next few months will be interesting to watch since Microsoft has already lost the sell-in to education for the next school year as these products are bought in April and May. On the other hand, the Surface laptop will come to market by late August, early September and they will then be directly competing with their partners for higher ed back to school. I would bet this new Microsoft laptop will be hot in this market in the fall.

Microsoft’s hardware partners now have a stronger love/hate relationship with Microsoft because of these moves. They need Microsoft yet struggle with their new hardware prowess as well as their new expectations for them. I sense Microsoft’s relationship with their OEM partners will be even more strained in the future and how they all deal with each other will be even more challenging.

Microsoft and Qualcomm’s New Partnership for Low Cost Laptops

Chromebooks have been selling well, especially in education markets. These stripped-down notebooks basically run web browsers and anything you can do in a web browser can be done on a Chromebook. Education markets value them because they are cheap; some go as low as $179 while others with a few more bells and whistles can go for as much as $299.

While IT departments in schools like them because of price and the IT-related software administration tools, many teachers do not like them as they are too limited when it comes to having kids use them for more than just web browsing and web apps. Google will soon add the Google Play store to Chromebooks, which means they have found a way to run Android apps on Chromebooks and that should give kids and Chromebook users more versatility in what they can do with a Chromebook.

While the sales of Chromebooks are small compared to “normal” laptops, it is a market that has potential. Even some mainstream IT departments have used them as terminals and for other functions inside an IT shop, although their use in business so far has been minimal.

But the low end of the laptop market is an interesting one. Although there is not a lot of money to be made at the low end, it turns out that, with smartphones and tablets becoming the major way people connect, there appears to be a real interest by some consumers — should they buy a laptop if they have a cheaper option available to them? This is where we see consumer interest in Chromebooks and low-cost Windows laptops showing up and, while it may not be a big market, it is a real one that could pick up steam over time.

At WinHec in Shenzhen, China a few weeks ago, Microsoft and Qualcomm announced a new reference design for a 32-bit, Windows-based laptops that uses Qualcomm’s 835 processor and runs a full version of 32-bit Windows 10. While one might be tempted to say this is a rehash of Windows RT, Microsoft has assured their customers this is a newly designed version of Windows 10 that will work seamlessly with all Win 32-bit apps.

While we already see some basic Windows laptops on the market for as low as $299, the processor and features of these systems are at the bottom of the performance barrel. But what makes the Qualcomm/Microsoft spec interesting is that Qualcomm’s 835 processor is one of the most powerful mobile processors and delivers significant performance that, when applied to a low-end laptop, gives these devices more bang for the buck.

If Microsoft has really solved the problem of being able to run a full Windows 32-bit 10 experience and all Win 32 apps on ARM, plus give these low-end systems more powerful speeds and features than either a low-end Intel solution or even an ARM-based processor in a basic Chromebook, laptops using this new spec could be a very promising alternative to those who want a low-end laptop but still want some oomph in their portable computer.

Conceptually, a laptop using this spec could also become a solid alternative to a Chromebook although, at the moment, Microsoft has not stated how a laptop with these specs will be positioned.

Either way, this new spec Qualcomm and Microsoft announced at WinHec needs to be to watched. This could evolve into an interesting new laptop option in 2017 that could garner real interest for those who don’t need a powerful laptop but want something more powerful and with more functionality than a current low-end laptop or perhaps even a Chromebook.

Of course, the proof will be in the pudding. The announcement was just a spec and we have yet to see any actual products based on this to understand its performance capabilities and how Windows 10 works on this Qualcomm processor. But if Microsoft and Qualcomm do deliver a low-cost laptop with good power and that works with all Win 32 bit apps, it could revive the low-cost laptop market in the New Year and give consumers who want a basic PC with more flexibility another good option.

Reflections from a Day with Microsoft and a Day with Apple

Getting Thing Done vs. Doing New Things – by Ben Bajarin

My friend Benedict Evans had a great post a while back where he outlined how, when a technology is toward the end of its cycle, it tends to be at its best. This sticks in my mind as I reflect on the last few days with both Microsoft and Apple releasing some of the best PCs we have seen in some time. In fact, if you look at the modern PC lineup from all major PC OEMs overall, they are they best we have ever been.

This makes sense for a category over 30 years old. By now, we know exactly what people do with these devices and are able to focus innovations in hardware and software on the tried and true behaviors of PC users. Here again, Steve Jobs’ metaphor of the PC being a truck is proving true. When you look at the modern innovations of trucks — how much they tow, innovations in the truck bed for more durability and heavier loads, the lowering of the tailgate with a gesture, etc. — they are optimized for workflows of a very specific type of worker. This is exactly what we are seeing with the PC category.

The focus of all hardware and software in the PC category is not about doing new things. It’s about doing the things we need to do even better. There is a hyper-optimization trend for the specialized user who values things like a full tough screened all-in-one computer, or pen input, or a TouchBar. But we must not forget this is a very small segment while also a valuable one. It makes perfect sense for Apple and Microsoft to focus their innovations in hardware for a group who values it. This, again, is exactly how trucks are made and why trucks are not cheap.

We are expanding our tools for computing so that we are now in a space where the type of job you have will dictate the type of tool (PC) you use. This reminds me of hammers. I have a hammer. It is a very basic hammer and, as far as hammers go, there is nothing special about it. My brother-in-law, who is a carpenter, has a different kind of hammer. His hammer is specialized to the task he does every day and makes his life easier. He has a framing hammer which has a longer, curved handle, larger head, better weight distribution to drive framing nails into studs with less effort, yet innovations in wood, carbon, and steel make it lighter than my hammer. It also costs $100. He hammers nails every day and I hammer maybe once a month. Hence, I’m not spending $100 on hammer. Yet, while he could get away with using my hammer in his day job, he uses a tool better suited for the task. This is exactly what we have now in the PC category.

When you hammer nails all day, you look at framing hammer features and functions and can see why they are valuable to you. You are self-aware of your pain points and what products have features which speak to you and help you do your job better.

Looking back, competition is what got us here. It was Microsoft’s desire to respond to the competition of the iPad that led them down the path of an ecosystem of touch-based PCs in the market today of all shapes and sizes. I’d argue it was competition from touch-based PCs which led Apple to the TouchBar. All desktops and notebooks used to look the same in form and function but now we have a diversity of the portfolio, each focusing on a piece of the pie instead of the whole pie itself. This is good for everyone who needs a PC on a daily basis to get stuff done.

From a hardware standpoint, what I found interesting was how the difference in philosophy between desktops and notebooks and between Apple and Microsoft have led the Mac to be on an island all by itself. No touch screen, but TouchBar. Which, in my mind, means the iPad Pro is what is actually competing with Windows PCs and tablets that are pushing touch experiences and software as a part of their work flow. If consumers compare the tools this way, I think things may get very interesting from a sales perspective.

Now, thinking about the future. Everything from this week is about getting things done, not doing new things. The big question facing the industry is, what’s next? Inevitably, letting humans do things not possible before with any previous tool is part of what is next. My gut says it is something in the AR/VR/AI spaces. This is where Microsoft’s announcement around Windows that the upcoming release will support Windows holographic VR and AR experiences is interesting. Arguably, by the end of next year, Microsoft could have well north of 400 million PCs in the market capable of having an AR/VR experience with hardware built on the Windows Holographic platform which can start as low as $299. As software developers start enabling humans to do new things, then we are breaking new ground. This is exciting and the next decade is going to be very interesting but the PC, as we know it, is nearing its end. Parts of the old will still linger in the new but it will be all the new things made possible with the latest tools that will lead us to look back at PCs of old and reminisce.

What Was at Stake this Week for Microsoft and Apple? – by Carolina Milanesi

Ben focused on the touch approach of these two companies and the impact of what was announced this week might have on the market. I would like to take a moment to talk about how different these two events were as far as the impact they will have on the two brands.

For Microsoft, we were at their device event yet we were asked to imagine what we could do with Windows 10 and with the Creators edition in particular. It took almost an hour to get to the new devices in Microsoft’s attempt to continue to balance a platform for all the partners and their own portfolio of devices. Overall, however, the day did a lot to lift the Microsoft brand and Windows ecosystem.

Paint 3D and the whole focus on bringing 3D to the masses; People, the new app that puts people at the center of your communication flow; HoloLens in B2B and B2C — all point to a Microsoft really focusing on setting the foundations for the next era of computing and investing in becoming the go-to brand for the next generation. As I mentioned on Twitter during the event, it is so refreshing to see Microsoft looking ahead to the next generation of users without letting the current users drag them down and limit their possibilities.

Surface is the best showcase for that next vision. A vision that started with Panos Panay’s team rethinking the PC in 2012. A vision that, while from a hardware perspective required a few iterations, it was one others within the Windows ecosystem as well as Apple and Google validated by launching similar products. What we saw yesterday however, is even more powerful than the first Surface as software, apps and hardware really came together with the Surface Studio to an extent we have not seen before. Validating Steve Job’s vision: “People who are really serious about software should make their own hardware.”

So let’s forget about the fact the Surface Studio might not be for everyone because of pricing and the focus on drawing/sketching. Let’s focus on the excitement the device is bringing to the Microsoft brand and Surface by drawing people into stores. Let’s look at the impact the Surface Dial might have in having developers think of how to take advantage of it. Finally, let’s think of the people that might end up considering a Surface Pro because of Surface Studio.

At Apple, the story was different. Apple did not need to re-energize its brand. Nor did it have to show they can deliver a piece of hardware very much in tune with its software. Apple needed to deliver a new MacBook Pro many have been waiting for. Apple could have easily followed the trend and delivered a touch-screen enabled MacBook Pro – at the end of the day they said they would never do a pen for the iPad until they did a pencil. Instead, they remained true to their idea that, when you have a keyboard, touch should be close to where you fingers are most of the time — is close to the keys, not the screen. So the MacBook Pro gets the Touch Bar. Apple reinvents the MacBook Pro, not its brand or its vision.

As I looked at the Touch Bar, I started thinking about how iPad Apple reinvented Mobile Internet Devices and Tablet PCs by focusing on apps and building on the ecosystem they created for the iPhone. Through apps, we did things differently. The Touch Bar has the potential to do the same for the MacBook Pro. Touching something with my finger in the same way as I would do with my mouse does not necessarily change my workflow. But we saw today how Photoshop and Final Cut Pro took advantage of the bar to perform common editing tasks differently. This is the power the Apple ecosystem has over Windows. While the Mac app store has not been as vibrant as the iOS one, the Touch Bar might ignite more interest, especially as the MacBook Pro is now clearly positioned as a higher-end device with users that are prepared to invest more in their tools both for work and play.

Apple also had to explain where the MacBook Pro and the iPad Pro sit and, although the rationalization of the story here might be a little more difficult to follow, I believe it boils down to one thing: Apple offers choices. Their computing offering spreads from the iPad Pro 9.7″ all the way to the MacBook Pro 15”. This explains the pricing we saw today – aside from the fact Apple might also want to make a statement this was not a simple refresh.

Two school of thoughts on touch, no right or wrong. Two brands that, despite their differences, have done a lot this week to show that the PC market still has innovation and, while sales will not bounce back overnight, we might see much more engaged users going forward.

Context for Microsoft and Apple’s Events

This week will see PC-centric events from both Microsoft and Apple, with Microsoft launching its latest Surface devices on Wednesday and Apple updating its Mac line on Thursday. As such, it’s interesting to think about the context for these announcements as a way of thinking about what might be announced and how we should see it. It’s also interesting to think about these things in the context of earnings – Microsoft reported earnings last week and Apple will report on Tuesday this week. In both cases, ahead of these announcements.

Microsoft – a growing but small Surface revenue line

Microsoft’s earnings (see here for a deeper dive) showed the Surface revenue line is growing at a decent clip – 29% year on year and 38% on an annualized basis. Trailing 4-quarter revenues for the Surface are shown below:

Surface 4 quarter revenues

However, quarterly revenues are settling into a pattern where the fourth quarter is the biggest and each subsequent quarter drops off a bit until the next refresh of the hardware. So, if the trend is to continue, this week’s event needs to give the line as big a boost as previous years’ events have. However, it seems more likely we’ll get modest spec bumps to the existing hardware alongside a new all-in-one PC. If that’s the case, revenue will more likely dip year on year for the first time because spec bumps alone likely won’t drive a new buying cycle for the existing products and an all-in-one won’t drive the same demand as the existing Surface products. Microsoft has effectively conceded as much, as its guidance for this quarter suggests a drop in Surface revenue.

In the grand scheme of things, Microsoft’s Surface revenue, though useful, is still a tiny fraction of overall PC revenues, or even of Mac or iPad revenue at Apple. This is a narrow strategic play for now and, although the all-in-one will expand the addressable market, it won’t do so dramatically. The original purpose of the Surface line was to show OEMs what could be done – what’s the purpose of this line now? Satya Nadella is famously more skeptical of the value of first-party hardware than Steve Ballmer was, so why stick with this product and what’s its future?

Apple – if iPad is the future, what is the Mac?

The question for Apple is quite different. The Mac was always Apple’s core business until first the iPod and then the iPhone came along, but has recently been either Apple’s second or third largest hardware product line by revenue and is consistently the third by shipments after the iPhone and iPad. Mac sales have been slipping lately, in part because it’s been such an unusually long time since much of the Mac line received a significant refresh.

Perhaps more significantly, Tim Cook has recently referred to the iPad Pro as “the clearest expression of our vision of the future of personal computing” and recent iPad Pro ads have referred to the iPad Pro as a computer. So, if the iPad Pro is both a computer and Apple’s vision of the future of computing, what is the Mac? In an interview with Backchannel a few months ago, Phil Schiller suggested a possible answer in talking about his philosophy of Apple products. He first said the philosophy should be to use the smallest or most portable device that was up to the task and then, when asked about the role of the desktop Macs, said:

“Its job is to challenge what we think a computer can do and do things that no computer has ever done before, be more and more powerful and capable so that we need a desktop because of its capabilities,” says Schiller. “Because if all it’s doing is competing with the notebook and being thinner and lighter, then it doesn’t need to be.”

The role of the laptop was described as basically doing almost everything a desktop could so, in some ways, it’s Schiller’s vision for the MacBook line, too. Given how the recent iPad Pro ads have highlighted the capabilities of that device relative to traditional computers, what is it that computers – and Macs specifically – can do iPads can’t? I’d guess we’ll get some answers to that question on Thursday. Given Schiller’s remarks, this will probably be about sheer power, among other things, but I’m curious to see what else is part of this story.

The broader picture – hardware capabilities versus philosophical differences

Despite all the individual motivations for both companies, perhaps the most interesting thing to think about is how competition between the Windows and Mac lines has evolved over time. For quite some time, Macs enjoyed meaningful hardware advantages – they were better looking, more portable, had better battery life, and so on, especially once the MacBook Air launched. It took several years before Windows laptops even came close in terms of some of these key features and so the hardware advantages were an important element of the competition between the two.

But recent advances in Intel chips and other enablers have permitted Windows manufacturers to get a lot closer in terms of hardware performance. While design differences are a matter of opinion, at least some Windows laptops are better looking and a number of premium Windows laptops now combine MacBook Air-like thinness and battery life. They even have trackpads that perform well too, something Windows laptops seemed bafflingly unable to achieve for a ridiculously long time. At this point, I’d argue the main differences between Macs and Windows PCs are philosophical rather than grounded in meaningful hardware performance differences. Do you prefer the Apple or Microsoft approach to software? Do you prefer the Apple or Dell (or HP or Lenovo) approach to hardware? Does the tight integration of those things matter to you and who does that better – Apple or Microsoft?

With that in mind, one of the most interesting questions in my mind with regard to this week’s events is how this competition looks at the end of the week. Has Apple re-established a meaningful hardware advantage that will again take Windows PCs years to claw back? Or does Apple reinforce the philosophical differences that have arguably become more important over recent years? The release of the 12″ MacBook last year suggested Apple could still open up hardware advantages in portability relative to Windows laptops but did so at the expense of performance, much as the original MacBook Air did. Can Apple now bring some of the same hardware chops to the more powerful members of the MacBook line, improving their portability without sacrificing power? Or will we see more subtle improvements in hardware performance combined with an emphasis on the power of macOS?

I’ve focused here on Apple’s role in moving this competition forward because we largely know the state of the Windows PC market. Yes, it’s possible Microsoft may innovate in interesting ways on the all-in-one side, but I think we’re all expecting more meaningful across-the-board updates from Apple rather than Microsoft this week. But Microsoft’s event may also change these competitive dynamics subtly. Rumors of a revamped Paint app for Windows would highlight an attempt to hit Apple in one of its traditional strongholds – bundled creativity software – so it will be interesting to see how that plays out as well. All told, I think what we see this week from both companies will set up a new phase in the competition between these two companies and their respective ecosystems.

Microsoft Doubling Down on AI

This week, Microsoft announced improvements to Office 365 and a new camera app for iOS called Microsoft Pix. While these two products are very different, in nature they clearly demonstrate how Artificial Intelligence for Microsoft is much broader than Cortana and bots.

Keeping Word competitive by adding smartness

As Matt illustrates in today’s article, Word, the unquestioned word processing tool of choice, has been challenged by new tools especially around cloud and collaboration. Even users like millennials, who clearly favor it for some of their work, look elsewhere when it comes to collaboration. Keeping up with competition is essential and, while there are areas where I think Office should invest more such as real-time collaboration, this week’s additions – Researcher and Editor – are certainly welcome.

Researcher lets you incorporate reliable sources and content into your paper. Within the document you are writing, you can look at material that is relevant and add as a proper citation. Researcher uses the Bing Knowledge Graph to pull content from the web. Researcher responds to Google’s introduction of Google search into Google Docs. This tool should be particularly well liked by students for their research papers.

Editor is really where AI comes in. In the blog announcing the enhancements, Kirk Koenigsbauer, corporate vice president for the Office team, described Editor as follows:

“Leveraging machine learning and natural language processing—mixed with input from our own team of linguists—Editor makes suggestions to help you improve your writing. Initially, it will help you simplify and streamline written communications by flagging unclear phrases or complex words, such as recommending “most” in place of “the majority of.”

At first, Editor will help with writing style suggestions to improve clarity. In the Fall, it will add the ability to explain why words or sentences may not be correct, becoming more like a teacher versus just a correction tool.

As I mentioned, Editor is a “smart” editor so it will improve over time; not just as it gets more features but as it learns about how you write. The fact Microsoft chose to give these new features a name reflective of a person’s job certainly speaks to wanting to develop a relationship with the users to increase dependence. As I’ve discussed before, humanizing virtual assistants helps deepen the relationship with the user. In our interviews with millennials, it was clear the high-level of dependence on Google Docs for their collaborative work has developed an emotional connection of sorts that drew feelings of sadness and loss at the thought of losing access to it. These connections are much harder to break.

As someone who has worked with human editors over many years and, as much as it was always a love-and-hate relationship, I came to depend on them and appreciate that my work was better because of them. Editor has the potential to do the same for many, especially as it becomes a teaching tool versus just a quick fix.

Microsoft Pix is a smart camera but also a smart business move

On Wednesday, Microsoft introduced a new iOS camera app called Pix that uses artificial intelligence to eliminate human error by capturing several pictures to find the best color, exposure and focus. When Pix detects a person in the shot, it optimizes for him/her. It assumes if you are pointing the camera at a person, that’s who you want to get a picture of. Pix also has an option to mimic Apple’s Live Photos by using the burst set of pictures captured and combines them into a loop video. This functionality is only triggered when movement is detected and cannot be manually set.

Pix is not just a smart app for users. It is a smart solution for Microsoft to get around the fact there are not millions of Windows phone in the wild. Microsoft is clearly following the “If you can’t beat them, join them” mantra and creating apps for iOS to increase user engagement in different ways than through owning their hardware. If I look at my iPhone and iPad, I now have about ten Microsoft apps I use regularly and I’ve come to depend on while being very aware they are Microsoft apps. This is ultimately what will help Microsoft’s AI aspirations. The more I use those apps, the more Microsoft will know about me and, in return, the more useful my interactions with those apps will be. Of course, this is not the ideal scenario as not being embedded in the hardware as much as possible has limitations. With Pix, for instance, the biggest hurdle to adoption will be the fact most iPhone users access their camera from the lock screen. Getting to Pix will require an extra step users will take only if the product delivered is considerably better. I need to use the app more to decide if that is the case for me.

Microsoft will have to continue to be smart, balancing the deeper integration on its own devices and devices running Windows as well as leveraging as much as possible the interactions with users on other platforms. While not as deep, there is still learning and data to be had from those platforms too so why not?

The Big Six in Q1 2016

Every quarter, once earnings season is over, I put together a set of comparisons for the “big six” consumer technology companies: Alphabet, Amazon, Apple, Facebook, Microsoft, and Samsung. The full analysis goes into a deck which is part of the Jackdaw Research Quarterly Decks Service, which you can read more about and sign up for here. This post summarizes some of the key findings from that analysis in the form of four charts, representing four of the key metrics I look at. As I’ve said in past quarters, Facebook isn’t in the same league as the others in terms of scale – it’s significantly smaller. But it’s one of the most profitable mid-to-large-sized tech companies out there and also one of the fastest growing, so that’s why I include it in this analysis.

Revenue growth – Apple falls to last place

This quarter was notable, among other things, for the fact that Apple, which was briefly one of the fastest growing of these companies, dropped to last place as its revenue growth was negative for the first time in a long time. Even Microsoft, which has struggled with growth since the anniversary of its acquisition of Nokia’s devices business, grew slightly faster in Q1 2016:

Screenshot 2016-05-13 15.33.31

It’s notable Facebook continues to be far and away the fastest growing of this group and has been for the last three years. Apple came closest to matching its growth rate in the throes of its iPhone 6 year but even then was several percentage points behind. Meanwhile, Microsoft continues to ride the doldrums of the maturity of its business, while Samsung is beginning to recover in earnest from its own crisis and was back in positive territory in Q1. Amazon and Alphabet, on the other hand, have been duking it out for second place since Apple’s growth stalled, with Amazon consistently slightly ahead.

Margins – Facebook back on top

The chart below shows margins on a trailing four quarter basis, which helps to eliminate some of the cyclicality in each of these companies’ margins. As you can see on that basis, Facebook came out on top this quarter, having dipped below Apple and Microsoft last quarter:

Screenshot 2016-05-13 15.31.28

Despite Amazon’s recent progress in generating more operating profit, this chart also puts into stark perspective just how little margin it still generates compared with its peers. Even Samsung, whose margins were squeezed by its shrinking mobile business from 2013 through 2015, is now back well into the mid-teens. Alphabet, meanwhile, has had the most consistent growth trajectory over this period, with modest increases over time.

Capital investment spikes at Facebook, falls at Alphabet

Facebook has always been one of the heavier spenders among this set of companies on capital expenditures, but this quarter its capex spiked to over 20% of revenues, a milestone it hasn’t hit for three years and hasn’t exceeded regularly for even longer. On the other hand, Alphabet’s spending has been trending downwards for the better part of a year, though it saw a brief blip this quarter:

Screenshot 2016-05-13 15.32.04

It appears Apple curtailed capital spending fairly significantly this quarter, perhaps in response to its lower revenues and a broader attempt at greater fiscal discipline to try to keep margins on track. It’s often been the lowest spender in this group in percentage terms and occupied that position again for the last two quarters, but this quarter was also the lowest in dollar terms for the first time. Meanwhile, Facebook’s spending, in dollar terms, eclipsed Amazon’s for the first time this quarter as well.

Revenues per employee – Apple and Facebook closer than usual

For the most part, Apple is miles ahead on the metric of revenues per employee, generating almost half a million dollars per quarter on average. This quarter though, with the overall drop in revenue, revenue per employee dropped as well to just over $400,000, a level it’s only hit once before in recent memory, in Q2 2014. Meanwhile, Facebook’s revenue per employee keeps rising and this quarter was just barely behind Apple:

Screenshot 2016-05-13 15.32.16

Amazon continues to be the laggard on this list, with declining revenue per employee as it continues to hire ten thousand or more new employees each quarter. In the past year, Amazon added 80,000 new employees, which is more than Alphabet employs in total and over five times as many as Facebook employs. Microsoft continues to widen the gap with Amazon on this metric, thanks largely to its workforce reductions over recent quarters, though its numbers are still declining, as are Alphabet’s.

Microsoft has to Demonstrate that it’s Building Momentum

This week, Microsoft will hold its Build developer conference in San Francisco, kicking off the now customary season of developer events that will continue with Google’s I/O in May and Apple’s WWDC in June. Last year’s Build covered a number of bases, but Windows 10 was clearly the focus. The challenge at this year’s Build is to demonstrate that momentum is – ahem – building around Windows 10, in the face of several indicators that things aren’t going as well as the company would have liked since last year’s event. Incidentally, this is something we talked about briefly during this week’s podcast as well.

Counter-indicators abound

At least year’s Build, Microsoft set a goal of 1 billion Windows 10 devices of all kinds within 2-3 years of the launch of the operating system. At this point, the most recent number Microsoft has provided for Windows 10 adoption is 200 million as of January 2016, roughly six months after launch. That’s a decent start, but it’s not earth-shattering – Microsoft will need to demonstrate enterprise adoption in particular will accelerate significantly over the coming months as businesses prepare for upgrades and new deployments if it’s to meet that longer-term goal.

A major thrust of the Windows 10 push, especially when it comes to developers, has been the Universal Apps concept. So this is another area where Microsoft needs to demonstrate to developers that users want these apps and to users that developers are creating them. However, here too the evidence of momentum is scarce – relatively few new major Windows 10 universal apps that truly run on mobile and PCs have been created since last year and Windows continues to run months or years behind other platforms when it comes to attracting major apps while some apps don’t ever arrive on the platform. Just in the past few weeks, major partner HERE has announced it’s pulling its apps from Windows 8 and Windows 10 — not exactly the message Microsoft wants to be sending about the platform. In fairness, HERE’s mapping data is available through the preinstalled maps applications on Windows but, even so, it’s a vote of non-confidence in the attractiveness of Windows as a development platform.

Thirdly, Microsoft made much at last year’s event of the tools it would make available to developers to enable them to port apps from other platforms, notably older versions of Windows as well as iOS and Android. Since that time, Microsoft has made a little progress on two of these tools but has killed off the Android porting tool. The iOS bridge is available to developers but the .Net and Win32 tool (codenamed Project Centennial) won’t see the light of day for some time yet. Microsoft can’t afford to go so long between the announcement of these tools and their availability and killing off tools before they’re even launched doesn’t inspire confidence either. The logic for killing the Android bridge is sound – most Android app developers also have iOS apps and, as such, could simply use the iOS bridge – yet that’s not universally true.

The messages Microsoft needs to send

Given these counter-indicators, Microsoft has to ensure the messages coming out of Build 2016 are:

  • Adoption of Windows 10 by consumers continues to expand rapidly – perhaps we’ll see a new milestone around 250 million devices in use announced
  • Adoption of Windows 10 by developers is growing – we need some numbers around how the Universal app approach is stimulating development for both PCs and mobile devices
  • The range of devices running Windows 10 continues to expand. HoloLens has been an interesting though not yet in-market example of a non-traditional device running Windows 10. Microsoft needs to continue to highlight both traditional devices and new devices running the platform to demonstrate the breadth of its applicability
  • Microsoft continues to support developers beyond Windows 10, both by making it easier for them to bring existing apps to Windows and by enabling them to develop for other platforms through tools such as Azure and recently-acquired Xamarin

If developers don’t leave Build feeling confident about these trends and the momentum around Windows 10 in general, Microsoft will have failed in its mission. Windows 10 is at a critical time in its life when it needs to demonstrate real traction with both customers and developers, and the conference can either help or hinder it in that effort.

Fairly Confident Predictions for 2016

A couple of other Tech.pinions contributors have already outlined some predictions for 2016 but, in my first Insiders post of the year, I thought I’d chime in too. The predictions below are mostly ones I’m fairly confident about, but I’ll sprinkle in a couple that are a little more “out there” and identify those clearly.

Amazon: Both AWS and E-Commerce Driving Growth

The big success story for Amazon over the last several years has been AWS, even as its e-commerce business seemed to lose some steam and margins evaporated. But, in late 2015, it became clear Amazon still had a lot of headroom left for its e-commerce business, as that business regained momentum and the combination of AWS and better-performing sales in e-commerce helped boost margins. I still believe Amazon faces some major obstacles in replicating its US model (which relies heavily on infrastructure density) in some overseas markets like India and China, but it’s likely to have success in 2016 in expanding in the UK and other markets where its infrastructure is already strong and the geography and population density are more favorable.

Apple: Continued Growth, Including iPhone

The biggest single question about Apple in 2016 has to be whether it will grow revenues significantly, which in turn is heavily dependent on its ability to grow its iPhone business. I wrote a piece a while back in which I did something of a deep dive into the various factors driving (or holding back) Apple’s growth in 2016, so I’ll refer you to that for the details. But I believe the iPhone will grow for Apple in 2016, albeit at a significantly slower rate than in late 2014 and 2015. However, I don’t think the iPad will return to growth just yet, even with the launch of the iPad Pro. I also think we’ll see significant investment from Apple around iMessage in its 2016 software releases, including peer-to-peer payments and other advances. My long-shot prediction for Apple is it will launch its own smart home hardware in 2016. Its HomeKit strategy just doesn’t seem to be delivering results, and I think the only way to fix that is for Apple to get into the business itself.

Facebook: Another Acquisition, Possibly an Asian Messaging App

Facebook has made several high-profile (and high-value) acquisitions in recent years, including Oculus, Instagram and WhatsApp. I suspect it’s not done yet and one big gap in its strategy continues to be messaging in Asia. As I and others have written about here, Asia continues to be a fragmented market when it comes to messaging and Facebook’s presence in Asia in general continues to be weaker than elsewhere. Acquiring one of the major Asian messaging apps might be one way to help address this weakness, with LINE and Daum Kakao being the obvious candidates.

Google: Alphabet Split Reveals Dichotomy in Businesses

One of the biggest things that will happen in Google’s world this coming year is the first reporting under the new structure created by the new Alphabet entity. What we know is this reporting will come when the company reports its results for Q4. What we don’t know is what those financials will look like and financial analysts have widely divergent views on the performance of the “other bets” business in particular. My prediction is the core Google business will emerge from this new reporting structure looking better than ever but, conversely, the other businesses will look pretty awful from a financial perspective. That increased transparency will, in turn, lead to more pressure and scrutiny for those “other bets”, and my out-there prediction is one of these businesses will be shut down, spun off, or otherwise scaled back as a result in 2016.

Microsoft: Surface Phones Launch, With as Little Success as Lumia

With the launch of Windows 10 and new devices optimized to work with it in 2015, Microsoft has got some of its biggest news out of the way already. But there are signs and reports Microsoft still intends to launch a revamped line of Windows Phones, possibly under the Surface brand, and it’s possible this will happen in late 2016. However, I predict these phones will ultimately suffer from the same fundamental challenges as Windows Phone in general and Nokia/Microsoft’s Lumia line in particular. As such, Windows Phone will continue to struggle, though it will likely limp on in some form indefinitely, especially if it gains any sort of meaningful traction in the enterprise, which is clearly a major focus now.

Samsung: Smartphone Business Fades, Chips Ascendant

Samsung spent 2015 stabilizing its smartphone business, at least in terms of revenue and shipments, but at the expense of margins. 2016 will likely see more of the same, even under new leadership, with an inevitable tradeoff between driving shipment growth and falling selling prices further pressuring margins. It’s going to become clearer than ever in 2016 that Samsung’s heyday as a consumer electronics powerhouse is behind it and that its future lies at least as much in providing components to other manufacturers as in making its own consumer-facing goods. Its chip business should continue to flourish, driving more and more of its revenue and profits and helping to offset the poorer performance in smartphones and elsewhere.

Twitter: Still no Core User Growth, Slowing Revenue Growth

As a heavy Twitter user, I’m invested in its future and its success, but it’s becoming increasingly difficult to believe Twitter will get user growth going again. Jack Dorsey’s leadership seems to have breathed some new energy into the company and he’s outlined a plan for returning user numbers to growth, but I suspect we’ll see very little of it in the core, monetizable, user base (i.e. excluding “SMS Fast Followers” and “Logged-out Users”). As user growth continues to stall, it will be harder and harder for the company to grow revenues as it has to date and revenue growth will slow.

Augmented vs. Virtual Reality

Over the course of 2016, you are likely going to hear a lot more on the subject of virtual reality and augmented reality. Samsung just released, in limited quantities, their Gear VR solution based on technology from Oculus Rift. For $99, consumers can experience virtual reality but, sadly, the product is not quite where it needs to be. I’ve had every head mounted virtual and augmented reality demo out there. All of them have elements of the experience which feel profound. But only one really made me feel like I was experiencing the future today. That was from Microsoft and the product is Hololens.

With nearly 20 years working professionally in the tech industry, there are moments where I made mental notes and savored the moment because I knew I was witnessing history being made. Hololens was one of those moments. Whether Microsoft is a major player or not, we will look back in many years and recall stories of where we were when we first experienced the Hololens.

Microsoft, like a company called Magic Leap, is focusing on “mixed reality”, a cross of virtual and augmented reality. All computational elements are accomplished via holograms, but a key part of what sets Hololens apart is how the head mounted unit is cordless. Every other solution requires a cord constantly tethered to it for it to work. Hololens lets you roam around the room freely and see and interact with your environment more freely. I want to talk about one particular demo.

I had four demonstrations of different examples of how Hololens can and is currently being used. One really struck me. It had to do with Mars. Microsoft has been working with the Mars Rover program to capture the vast amounts of 360-degree images captured by the rover and stitched them together using their software to assemble the surface of Mars, as captured in tremendous detail, into a Hololens experience. Put on the headset and it instantly feels like you’re on the surface of Mars. Because the headset is cable free, you can walk around the room and explore different objects in the area. Since it is three-dimensional, you can bend down and look at rocks up close and even under nearby ledges. It was easily the closest thing to walking on the surface of Mars I’ll ever get and it honestly felt like you were there. It was mind-blowing for lack of a better word.

What sets this combination of mixed reality/augmented reality apart from full virtual reality is that you can still see parts of the world around you if needed. In this particular demo, you could still see and interact with the computer screen in front of you and the Mars setting around you. You could alter settings or bring in a different scene of the Mars surface using the PC then look up and see the new scene around you. The mouse even goes off the PC screen and into the virtual space if needed. This ability to see and use the physical world alongside the digital one opens up significantly more possibilities than virtual reality and overcomes its limitations.

I was on a panel a month ago with one of the co-founders of Oculus Rift. He was articulating the limitations of virtual reality and was quite eloquent in explaining why something like a first person shooter or driving game or roller coaster simulation will simply not happen in pure VR solutions because of the high probability of motion sickness. After spending more time talking to him in private, I became convinced of a number of core limitations of VR which something like Hololens can easily overcome.

Right now, the holographic elements can only take up a decent sized square in the middle of the goggles, so your peripheral vision can always see real world elements. In the future, it will be possible for the holograms to take up the full wide angle view of the goggles — essentially making it feel like a full virtual reality experience. Essentially, this solution will give you the best of both worlds.

It is early. As with so many things I’m analyzing these days, we are in the early stages. The technology is truly mind-blowing for a version one product and knowing it will get dramatically better makes it even more impressive. One thing to watch for is when they can fix virtual elements to real ones. For example, I would want to be able to play an Iron Man game or simulation and have the virtual suit fix to my actual hands and body. This is step two or three as the technology evolves but I can certainly see a component roadmap that gets us to some exciting places with this technology.

There are many applications for this tech over the next five years and many of them will be in more commercial than consumer areas. But I’m convinced Hololens may be the best modern manifestation of the next computing platform, one that brings the digital fully into the real world, that I’ve seen to date.

A number of announcements have come out recently around Hololens, but if you haven’t seen the most recent one with Autodesk, check out the post and video to get an idea of how Autodesk is integrating the Hololens technology.

Comparing the “Big 6” Consumer Tech Companies

After earnings season ends, I always like doing some comparisons between some of the largest and most important consumer technology companies to see how they measure up on key financial and operating metrics. I’ve shared some of this data with Tech.pinions Insiders once before, and I thought I’d do so again now we’re through the Q3 2015 earnings season. The charts here come from the Jackdaw Research Quarterly Decks Service. You can sign up for them here. The full deck, with about 15 charts, has gone out to subscribers today. The companies included in this comparison are Amazon, Apple, Facebook, Google, Microsoft, and Samsung. I used to include Sony, but it seems to be exiting more and more aspects of the consumer technology business so I’ve dropped them this time around. It’s also worth noting that capex figures for this quarter and employee figures for all periods aren’t available for Samsung.

Revenues – Apple is now the biggest of the big 6

The last time I did this analysis, Apple had just barely passed Samsung as the company with the highest trailing 4-quarter revenue of any of these companies and, since then, its lead has only expanded. As Samsung has suffered revenue declines due to its struggling mobile business, Apple has gone from strength to strength with its strongest period of revenue growth in years, thanks to the new iPhones. Further down the pecking order, Amazon has also now passed Microsoft, which benefited from the acquisition of Nokia’s devices business for a time but is now seeing revenue declines year on year as that business shrinks and currency effects detract from overseas performance in general:

Big 6 Revenues

As you can see, Facebook is by far the smallest of this “big 6” and is included for its outsized influence in the market and its margin performance, not for its modest financial scale.

Margins – Facebook is taking a dive

From a margin perspective, Facebook has been the leader for quite some time, but was pipped by Apple and Microsoft over the past four quarters on operating margin:

Operating margins

What’s behind the decline in Facebook’s margin? Acquisitions of new businesses such as Oculus and WhatsApp, which incur substantial costs but no revenues. At the same time, you’ll also note Google’s margins have been steadily improving, while Samsung has begun to turn its performance around in the last couple of quarters, largely thanks to its semiconductor business. And of course, Amazon comes in last place, even with its recent uptick in profitability thanks to AWS. In dollar terms, Amazon’s operating profits over four quarters continue to lag even those of Facebook, which has revenues around one sixth those of Amazon:

Operating profit

Amazon is out-hiring everyone else

As I’ve written elsewhere, Amazon is on a hiring spree at the moment, adding 72,900 employees in the past 12 months alone, significantly more employees than Google has in total:


At this point, Amazon employees around 225,000, or twice as many as either Apple or Microsoft. Apple, Google, and Facebook have been hiring significantly too, but at nothing like the rate of Amazon, while Microsoft has been laying off workers following the Nokia acquisition. Because many of Amazon’s new employees are warehouse workers, and because its revenues are growing at a much slower rate, its annual revenue per employee has been steadily falling and now sits at under $500,000, at the bottom of the pile. Meanwhile, Apple has crossed $2 million per employee in annual revenue, and Facebook passed Google sometime last year.

Very different business models drive these financials

The last thing I’ll mention here is these companies have fundamentally different business models behind their financial performance. Facebook and Google share ad-based business models, with around 90% of their revenues coming from that single source, while Apple and Samsung are most similar in that they derive the bulk of their revenue from hardware, though their execution and strategy are quite different. Amazon and Microsoft each derive the bulk of their revenues from other categories – e-commerce in the case of Amazon and software in the case of Microsoft, though both also have growing cloud businesses. The chart below shows the composition of their revenues by business:

Revenue by business model

All of this is a useful reminder there’s no single recipe for success in consumer technology and that each of these companies has achieved impressive metrics by ploughing its own unique furrow, rather than by following a single formula.

Microsoft’s Surface Book and its Impact on Apple and PC Vendors

I have been intrigued by various reviewers who have suggested Microsoft’s Surface Book is the best laptop on the market today. If I were one of Microsoft’s PC partners, this very thought would offend me. PC makers have bent over backwards recently to try and create slick, well designed laptops, taking their cue from Apple and trying to make them thin, sleek and light, yet highly functional. Dell’s XPS 13 and Lenovo’s new YogaPro comes to mind as good examples.

When Microsoft introduced the Surface Book in NYC earlier this month, I had to miss the event due to a schedule conflict so I had not seen it in person to judge myself. But now that it’s on shelves, I went over to the Microsoft Store and got a chance to check it out. I have to admit, the reviewers who praised it as the best laptop on the market have a point. Its design is somewhat close to a MacBook Air and, in that sense, it’s relatively equal to a 13 inch MacBook Air. But it of course differentiates from the Apple laptop significantly since it has a detachable screen that can be used as a tablet.

Perhaps a more accurate way to describe the Surface Book is it is the best “convertible” PC on the market. At the very least, it should give the traditional PC vendors a new target to go after from a design perspective and force them to try and create something even better for a cheaper price. Actually, I think that is part of Microsoft’s strategy — to push PC vendors to be more innovative. But I also believe Microsoft is in the hardware business to stay and will be a competitor to their customers from now on, too.

For Apple, I see the Surface Book putting pressure on them to possibly create their first true convertible in the future. I spent some serious time with the Surface Book and loved it in the tablet mode. It is thin, light and, with their new Pen, works really well since the version of Windows 10 on it is customized for this design. When I used it in the laptop mode, I was really surprised how well it worked as a Windows 10 laptop and loved the idea I had both a laptop and a tablet in a solid package that used a very powerful desktop class OS.

Of course, Apple does have a product in this category, although it is more like a 2-in-1. The real virtue is its tablet role and a keyboard is kind of an input addition close to Microsoft’s Surface Pro designs. Their new iPad Pro comes out in November and will play a similar role in the Mac community, albeit with iOS as its anchor instead of Mac OS X. The Surface Book is such a stellar design, I think it will become the poster child for most Windows PCs someday and be the catalyst to make convertibles the standard laptop over $500 in the future. If that happens, it could push Apple in this direction too.

At the launch of the iPad Pro, Tim Cook said the iPad does 80% of what people need to do when they compute and this new tablet/keyboard combo will be sufficient for most people’s needs, whether for business or consumer users. This is important since Apple pretty much defined the touch UI through the iPad and has continued to make touch with iOS the best touch-based OS on the market. To them, iOS seems to be the OS they will champion to business and consumers in any 2-in-1 or maybe even someday a convertible design.

Microsoft has a different view that says a desktop class OS with touch is the best way to go. The touch UI on Windows 8 and 8.1 were weak but the touch UI on windows 10 is much improved and works well with their desktop class OS. It is here where Apple and Microsoft have a deep divide.

Apple clearly wants iOS to be the heart of their broader reach into the market and make it the cornerstone of their business and consumer strategy. Mac’s will always have a place, especially with power users, but Apple seems to see power users who need a Mac as a much narrower audience. There is a larger audience that could benefit from iOS and its ecosystem of 1.5 million apps, which makes it much more versatile for most users.

This leads to two big questions for Apple in light of Microsoft’s Surface Book. First, if Microsoft and their partners are successful in making “convertibles” the standard laptop configuration over time, will Apple be forced to follow suit? How long can they stick with their laptop is a laptop and a tablet is a tablet focus if a convertible becomes something business and consumers really want?

And secondly, if they do a convertible, which OS will they use? At the moment Mac OS X is not touch based and Apple would have to put a lot of engineering dollars into it to make it competitive. It is more likely a convertible would have iOS but Surface Book and likely competitors who create similar versions could prove, in this form factor, a desktop class OS is what people really want.

At the moment, my best guess is Apple uses iOS on any device that needs a touch interface. Which means, if they do a convertible, it would be iOS based. And they would keep the Mac and OS X focused on the trackpad and very keyboard-centric. It is also too early in the convertible cycle within the Windows world to conclusively proclaim this is the future of laptops. But from what I saw in the Surface book, I believe it will have a significant impact on future PC OEM designs and perhaps, at some point, it could force Apple in a similar direction.

Breaking Down Microsoft’s New Segments

Microsoft reported its earnings for the third calendar quarter of 2015 last week. This was the first quarter since it re-structured its segments. Following my piece on company reporting structures a few months ago, I’m going to look at these new segments at Microsoft and what they tell us, both about how the company is reporting and how it wants to be perceived.

The new structure

The previous structure had a high-level, two-way split between “Commercial” (largely enterprise-related products and services) and “Devices and Consumer” (consumer and hardware businesses), with Devices and Consumer further broken down into Hardware, Licensing, and Other, and Commercial split into Licensing and Other. This was, therefore, a split largely by customer group and by business model. The new reporting structure, however, is simpler, with just three operating segments:

  • Productivity and Business Processes – Office and Dynamics businesses
  • Intelligent Cloud – server products and services, and Enterprise Services
  • More Personal Computing – Devices (phone, Surface, and accessories), Gaming (Xbox Platform), Windows, search advertising.

This new three-way split in some ways resurrects an old Microsoft that highlighted what have traditionally been its two largest businesses – Windows and Office – but in this case, it lumps in various other things which obfuscate the true performance of those two entities. Specifically, Office is grouped with the Dynamics CRM business, while Windows is with the hardware businesses – phones, Surface, and Xbox – along with search advertising. Even the cloud business unit has more than just cloud services. As a result, in each segment there’s enough of a mix of businesses it’s very hard to draw broad conclusions about the performance of any specific part of Microsoft’s business. Going back to my earlier piece about corporate reporting structures, this seems a clear attempt to shield performance of some product and service categories from view.

Revenue breakdowns

However, we can still look at the performance of these individual segments for clues about what’s going on at Microsoft at a deeper level. As you can see from the chart below, the More Personal Computing segment accounts for almost half of Microsoft’s revenues, as it includes both one of Microsoft’s biggest products (Windows) but also a grab bag of other businesses:

Percent revenue by segment

The other two segments are considerably smaller. However, if we shift our focus to the trajectory for each segment, the picture is quite different – the chart below shows year on year revenue growth rates for these segments:

Revenue growth by segment

Here, we see the More Personal Computing segment is actually in significant revenue decline – largely because of the rapid shrinkage in the phone business acquired from Nokia some time ago. But Windows, too, is in revenue decline, while only search advertising is growing at any sort of decent rate within that revenue bucket. It is just barely a billion-dollar-a-quarter business, so it’s nowhere near enough to offset the declines elsewhere. Meanwhile, Productivity and Business Processes is also shrinking, but by far less, as the transition from legacy business models to cloud business models in the Office business takes hold, and exchange rate movements cause overseas revenues to shrink in US dollar terms. The only business segment showing healthy growth is Intelligent Cloud, which has been at around 10% year on year in constant currency terms for some time now.

A margin perspective

If we look at operating income, however, we get yet another different perspective. More Personal Computing, which we’ve already seen is Microsoft’s largest segment by far, nonetheless contributes by far the smallest portion of operating income, at around 20% in a good quarter, and closer to 10% in a bad one. Here, the underperformance of the phone business is again the culprit, dragging down the performance of the whole group (Windows has historically been a very high-margin business):

Percent operating income by segment

The segment which over-indexes the most on operating income is Productivity and Business Processes, which made up 29% of revenue but 44% of operating income in the most recent quarter. Microsoft’s other big historical business – Office – has always been very high margin and that shows here. Operating margins for these three segments are shown below:

Operating margins by segment

As you can see, More Personal Computing generates the lowest margins, while Intelligent Cloud and Productivity and Business Processes both generate operating margins closer to Microsoft’s historical levels. Again, the hardware businesses are largely to blame, with phones, Surface, and Xbox all generating lower margins than Microsoft’s software businesses always have.

Going forward, this disparity is likely to continue to get starker. Though Microsoft has talked in past quarters about the Surface business generating positive gross margins, they’ve never indicated it’s profitable on an operating income basis. The Phones business continues to bounce around at gross margin break even or worse, and the Xbox business has never been highly profitable either. All of these businesses are acting as a drag on Microsoft and, as its cloud business in particular continues to grow and become more profitable, Microsoft is going to face increasing calls to jettison its devices products.

Microsoft’s Hardware Strategy and the Impact on Their Ecosystem

In last Friday’s main column on Tech.pinions, I wrote about Microsoft getting into hardware. The important takeaway is the idea that, as the PC industry consolidates, Microsoft has fewer customers who could ship PCs with Windows on them. If that happens, it is problematic for them so they are learning about making hardware as a defensive move so they can eventually guarantee they could become a strong hardware vendor to make and sell PCs in volumes, especially for the consumer market.

However, this move is a double-edged sword for them and their partners. For most of Microsoft’s life, they have been a software company and, once they did get into hardware, it was via mice, keyboards, and accessories. Their only other move into hardware until they launched the Surface was the Xbox.

Even when they first got into hardware with the Surface it was not much of a threat to vendors since this first version used an ARM processor and had very little software that would work with on it beyond what was available with the Windows OS on these systems. However, once Microsoft launched an X86 version of the Surface, it became clear to their customers Microsoft was now a competitor as well as a software provider to the OEMs.

At the time of the x86 Windows launch of the Surface, Microsoft was basically doing a 2-in-1 prototype. Its initial goal was to get their partners to do similar models. They and Intel both believed the concept of a 2-in-1 was powerful and, since Microsoft missed the tablet boom, this was their way to differentiate and marry the tablet and laptop concept into one. Of course, they positioned this a productivity tool and hoped their PC partners would help them champion this design. While a few created some 2-in-1s, they were really not behind the idea and most OEMs opted to stay with the laptop format, adding touch screens and displays that could fold and be used as a tablet similar to Lenovo’s Yoga.

While the OEM partners were not thrilled Microsoft had created mobile hardware that could compete with them in some areas, they were relatively forgiving until Microsoft introduced the Surface Pro 3. This version was much more powerful and started to gain some traction in the enterprise. And the Surface Pro 4 is even better. To date, Microsoft has now sold between 8-10 million Surface devices and, with the Surface Book, they are now really treading on the hallowed ground of their OEM customers, taking their laptop businesses on head-to-head. To say Microsoft’s partners are not enthusiastic about this would be an understatement.

Hours after Microsoft released the Surface Book, I got calls from some of the PC OEMs who were caught off guard by the announcement. They were also perturbed at Microsoft for not showing them this in advance and perhaps rightfully upset that Microsoft is now creating a convertible or full laptop that now competes with them for premium laptops in the enterprise. The irony is not lost on them that, as Microsoft introduces a new Surface Pro 4 advertised as the tablet that could replace your laptop, they are now creating their own full blown laptop too.

I realize Microsoft has priced this at the upper end of the premium market for laptops at $1499 and is hoping their partners will get off their butts and create laptops even more innovative and sleeker than their Surface Book. However, what they actually did was piss off their partners who now feel more and more that Microsoft will become a serious competitor in hardware and steal business from them, especially in the enterprise.

With the introduction of the Surface Book, I sense a real wedge has been driven between Microsoft and their important partners who they must rely on to help keep the Microsoft Windows franchise alive and moving forward. While I don’t believe any of them will abandon Windows, I think Microsoft’s move into laptops pushes the OEMs loyalty to the limit and could make them less likely to be a Windows-only shop in the future. As I have written here a couple of times, I believe Apple is going to make iOS their main OS for consumers and enterprise and the iPad Pro is their first major hardware to be targeted aggressively at business users highlighting the huge range of iOS software available for use in just about all settings. I have also suggested that, if iOS is pushed to a broader business audience, I could see Android being used in the same way. I am aware of at least two Android ultra-thin laptops that will come to market by early 2016 and I sense the big OEMs would be more open to adding them to their product mix now that this loyalty link to Microsoft has been breached.

Microsoft and Apple’s Diverging Bets on Their Future

As I watched the live video from the Microsoft device launch event earlier in the week, I could not help but be struck by the incredible divergence of OS strategies Apple and Microsoft have as they try and push their respective platforms into the market. Microsoft has clearly put all bets on Windows and, through Continuum, it now makes it possible for all of their devices to work together better and deliver across-the-board productivity to devices and services for potential users. As we found out multiple times during the Microsoft event, the primary focus of their strategy revolves around productivity.

On the other hand, Apple is always trying to make Mac OS X better and it seems the MacBook Pro, Mac Pro and perhaps even some MacBook Airs continue to gain ground in the enterprise and are moving upstream in terms of a solution for business power users. But if you look closer at recent Apple announcements and product introductions, Apple clearly seems to be placing more and more of their bets on iOS. We already know iOS is a great consumer operating system but, with the introduction of the iPad Pro, Apple is making an important statement about taking iOS well beyond the consumer market and positioning it as the everyday device for mainstream business users. And even though Apple now stresses productivity, it really pushes the “fun” and “creative” aspect of their apps to hook more people to their ecosystem.

At Apple’s recent event, Tim Cook stated an iPad Pro could do about 80% of what a PC could but is much more versatile. Like Microsoft, they have their own cross-device software called Continuity. They take this a bit further by making it work with two different operating systems even if they are based on the same root code. The iPad Pro may be thought of as something targeted at the Surface Pro and in many ways it is. But the use of iOS in the iPad Pro and how Apple will take this more consumer-focused OS into mainstream business is really where Microsoft and Apple diverge. More importantly, Apple appears to be betting the company on iOS being its OS for consumers and business and seems well positioned to take advantage of an iOS ecosystem of 1.5 million apps to support that position.

To date, Microsoft’s revenues for Surface Pro have been about $6.7 billion, which probably translates to about 8-10 million sold since release. It will not surprise me if Apple sells as many or perhaps a bit more iPad Pros during its first 12 months on the market. And the big thing that will help them create strong demand will be the app ecosystem that comes from the App Store. Apple even hedged their bets by working with IBM to port over 100 enterprise class mobile apps for iOS, thus bulking up their overall business app offerings. Even Microsoft has given Apple a boost in their quest to make iOS more attractive to a business and productivity audience by creating a full, and by the way, great version of Microsoft Office for iOS. I am not sure Microsoft would have done this if they had realized Apple would go after their core business customers with iOS. As I have written before, I believe Apple will eventually do an ultra thin laptop powered by iOS that would go after Microsoft’s new Surface Book, although I doubt it will be detachable.

I am very impressed with the new Surface Pro 4 and their stellar new Surface Book but it looks to me like Apple and Microsoft are now going after the same business customer but with very different operating systems. At the moment, Apple probably has the edge because of the iOS app ecosystem although, to be fair, most of the productivity apps needed for use in business already exist. But make no mistake, we have a new battle royale going on. Instead of the Mac vs Windows fight of the past, it is now iOS vs Windows that is becoming the new battlefront.

iPad Pro and Surface. The Future of Notebooks

There is an unquestionable trend emerging — tablets are evolving into notebooks. This does not mean all tablet/notebook combinations will replace PCs. However, it does validate the opinion that there is a segment for these devices and our conviction is that the segment is quite large.

In my view, what Apple has done with the iPad Pro has legitimized the Surface form factor. Our data and analysis of overall PC shipments continues to highlight that 2-in-1 tablet and notebook hybrid sales have remained relatively small as a percentage of the mix of pure notebook and desktops. But it does feel like this is about to change.

Our firm has long been predicting these worlds would converge and all notebooks — at least, the vast majority of them — would converge around this form factor. There is a place for the pure notebook form factor. Think of it as a portable desktop. But the issue remains that the market for a portable desktop is very small. The market for a 2-in-1 PC is actually quite large, especially when you lump in consumer market sales, which is nearly half of the ~300 million ~ desktops, notebooks, and 2-in-1 form factors shipped today.

The iPad Pro validates the 2-in-1 form factor, albeit with a very different philosophy which I will discuss shortly. It is likely to help fuel the sales of these products in the market and is likely to help Surface in its enterprise adoption specifically because these are markets where a “Desktop OS” is still necessary. For example, one thing the Surface can do the iPad Pro can’t is run two Excel documents side by side. There is a place for a desktop OS in enterprise environments and I still believe Windows based 2-in-1 PCs fill this space.

Certainly, the iPad Pro will have its enterprise deployments. However, its opportunity there as well as its opportunity with creative professionals is simply smaller than the broader opportunity for consumers.

Tim Cook said, in a very calculated statement, “The iPad is the clearest expression of our vision of the future of personal computing.” This statement has implications and needs some unpacking.

First, we must establish the point the iPad Pro contains desktop class capabilities but runs a mobile OS, not a desktop OS. Although we can argue the specific version of iOS built for iPad is maturing to be more desktop-like with the simplicity of a mobile first experience. Second, and not to take anything away from Macs as they have their place in Apple’s lineup, this statement means Apple believes the future of computing runs on ARM not x86 (perhaps a thought nugget for those who believe Apple will bring ARM-based chips to its Mac lineup).

The Future of Personal Computing Running on ARM

This statement makes quite a bit of sense. Platforms running on ARM dominate the mobile landscape today. These platforms are Android and iOS. All the mobile first, consumer-centric developers are already writing for ARM. But when it comes to the tablet’s ability to take on notebooks (not desktops), Apple’s philosophy of leveraging the developers of the mobile ecosystem is central. I’ll make the point this way. If you were betting on developers that could carry the future of computing forward, would you bet on Windows developers or iOS developers? Hopefully, this question is easy to answer. This is where the philosophical difference between Windows 2-in-1 devices diverge from that of the iPad Pro.

Microsoft has corporate developers, this is certain.

ARM/iOS/Android has consumer developers and much more global ones at that. One market and one developer ecosystem, is significantly larger than the other. This is why it makes sense for Apple to bet on iOS developers from the viewpoint that Apple is broadening computing hardware capabilities for their developers to start thinking about the future of computing beyond pocketable screens.

It is within this vein of thinking Tim’s article about Android on “PC like” form factors makes sense. As the founder of the Remix OS said to Christopher Mims of the Wall St Journal in this excellent article on tablets:

“If two-thirds of the population of the world has not gone online yet, and if they do go online using and Android-based cellphone, then when they want to move into the productivity space, chances are they will want to use a familiar operating system.”

This was essentially what I proposed in this report on tablets. As consumers graduate to and have a desire to move up in this mobile-only world, it makes sense they stay with a mobile-first OS. Hence, our strong recommendation of late-to-PC OEMs to look at Android for the 2-in-1 form factor as a variant OS for their hardware.

The iPad Pro helps to further my conviction that Windows will remain a niche operating system in the personal computing market.

Creativity vs. Productivity

One last point. I’m continually frustrated by the commentary that states “real work” is defined by productivity. In my mind, for consumers, tools that let us create are just as important as those which help us produce. Making a home movie is more fun than creating a budget. But both sets of tools are necessary. My point is the idea of proclivity is not exclusive to Word documents and Excel spreadsheets. It also consists of making films, art, and creating things worth sharing with friends and family. This is why I’ve often been stunned Windows has never come bundled with software like the iLife suite (iMovie, iPhoto, etc.). Steve Jobs may have said it best, “iLife would do for creativity what Office did for productivity.” Consumers value the ability to create at a deeper, more emotional level. This angle is another one I’m intrigued by the upside potential of the iPad Pro, not just in vertical markets, but for the broader consumer market as well. It is up to Apple’s developers to take it there.

Waste Less Time on Apple Reports


It’s been an interesting week for those who spend their time paying attention to Apple’s third quarter earnings. The fun started last week with an analysis from Slice Intelligence that claimed a 90% drop in the sales of the Apple Watch since the launch. Never mind the fact that Slice’s data was based on nonsense, the announcement the Apple Watch was dying received vast coverage and, oddly enough, considerable belief throughout the industry.

Those whose interest was deeper then got a much more serious study by my colleague Ben Bajarin who, along with Wristly, discovered Watch sales were doing quite well, thank you. Suddenly, Apple was expected to do very well come July 21.

But when the announcement came, it was suddenly a dramatic failure. Actually, there was nothing whatever wrong with the Apple announcement. The company had never given out predictions on what to expect. The category results were reasonable: strong sales of phones, weaknesses of iPads, Macs doing OK, Watches who knows how many, and predictable difficult profitability of international exchanges.

In other words, profit. Apple announced $49.6 billion of sales and net profit of $10.7 billion, up from $37.4 billion and $7.7 billion profit in the third quarter of last year. Reasonable strong gains are expected in the next year. Another normal Apple success.

And what was the response: “Apple shares tumble after third-quarter results,” Tech blog.

“Apple iPhones sales up 35%, disappoint,” Wall Street Journal

“Apple’s iPhones sales, weak forecast investor confidence,” CNET.

Some of the coverage was downright silly. In The Washington Post’s Apple shares plummet after lower than expected iPhone sales, Hayley Tsukayama used analysis from Gene Munster of Piper Jaffray. What he had to say was pretty much down the middle, but Munster has made a fool of himself for quarters by forecasting the imminent announcement of an Apple Television. He has usefully dropped it, but it leaves him as one of the most pointless voices in the world of analysts.

Of course, there’s the odd interpretation. Time’s Kevin Kelleher argued:

Here’s the thing. The headline numbers on earnings reports often tell only part of the story, especially with a company like Apple that is so obsessively tracked by analysts, investors, fanboys and bloggers. So yes, Apple beat expectations, but it really just kind of squeaked past them, whereas it typically leaps over them with a substantial margin. In other words, beating the numbers isn’t enough. Investors expect Apple to thrash them.

And again, that didn’t happen. But all of this disappointment is centered around the iPhone. The selloff late July 21 wasn’t driven as much by Apple missing a target set by analysts. It came from a much deeper concern about Apple’s ability to keep dazzling–eight years after it introduced the iPhone–with its technology and design.

Needless to say, actual results that were a strong gain but weaker than unreasonable predictions, made the market very unhappy with Apple. Shares quickly dropped 8% before partially recovering. When all was done, the stock price ended up very close to where it was a month ago:


The fact is, Apple is doing well. Considering the amount of money it is earning is vast, growth is bound to slow over time. The company has significant improvements coming out this fall, including updated iPhones and iPads and updates to iOS and OX X El Capitan. And new products will boost sales.

If you want to watch development, you’ll do a lot better in the next couple of months where change may really make difference. That’s the release of Windows 10 and it is a lot more significant to change for Microsoft than anything at Apple.

Forum Topics: Microsoft Smartphones, iPhones in China, Slice Apple Watch Data

One of the ways I’m using our new forums is to share some shorter posts and solicit more of a discussion around certain topics. So I’ll frequently post a short post, or top of mind thought to the forum. To let everyone know there is new content there I’ll create a post like this one and link to some of the newer topics I’ve posted in the forums. Here are the recent posts with some commentary by me to get the discussion going.

How Long Will Microsoft Keep Making Smartphones?
With the recent news of layoffs and restructuring what is the future of Windows Phone and does Microsoft need it to be successful.

Latest iPhone In China Charts via Baidu
Long time readers will know I have access to data from Baidu (China’s leading search engine) that helps me track iPhones in China as a percentage of iOS devices accessing Baidu. I’ve updated these charts up through June and added some commentary around the most recent trends.

Thoughts on Slice Apple Watch Data
I shared some of my thoughts on the Slice Apple Watch sales data that is circulating the news outlets. There is already a great discussion happening on this forum thread.

If you haven’t already be sure to check out or new subscriber only forums. I firmly believe our site has the smartest readers and commenters of any site out there so I deeply appreciate your engagement and we created forums just for this community engagement. There are also a few subscriber initiated forum topics on switching from Android to iOS or Vice Versa and the Future of the Apple Watch. I encourage you to check those out as well.

Windows Phone’s Diverging Fortunes

Following a week when Microsoft executives overseeing both its devices business in general and the phone business specifically have departed, it’s worth looking at how Microsoft’s smartphone business has been performing and where it might go from here. The reality is the fortunes of Windows Phone are diverging rapidly in different regions around the world, as shown in the chart below:

Windows Phone share in Europe and US

As you can see, based on this Kantar data, Windows Phone’s share of smartphone sales has actually been steadily rising over the last two years in four of the five major European markets and, in France and Italy, is now over 10% of sales. In Italy, there have been months when Windows Phone outsold iPhones an,d in France, the two lines are also converging over time. Only Spain out of the major European markets hasn’t seen a similar trend, in part because, in a recovering economy, Spaniards are finally falling for the iPhone in a way they haven’t previously and that’s sucking some of the wind out of Windows Phone’s sails. In other smaller European markets, the share of Windows Phone is actually significantly higher than that of the iPhone, especially in Eastern Europe.

But note, too, in the US the trend is reversed – Windows Phone’s share of sales is falling, not rising and remains stubbornly below 5%. Android and iOS make up the vast majority of the US market at this point, with 95.6% of sales in the three months ending April 2015, a pattern that has been steadily emerging over the last few years. Windows Phone capture’s the lion’s share of what’s left, but there’s frankly not much left.

What explains the differences in Windows Phone’s performance between these various markets? I think there are several factors:

  • The Nokia brand and business has remained far stronger in Europe than in North America, where it never had much of a foothold once smartphones took off. This enabled first Nokia and then Microsoft to leverage that existing brand to sell Windows Phones to people who’d previously bought Symbian devices
  • In European markets, the retail price of the phone has a much bigger impact on total spending on wireless service than it has in the US until now, which has meant cheaper phones really made a difference to the service plans customers could afford in a way the subsidy-led US hasn’t seen. This has made low-end Windows Phones, in particular, attractive in these markets
  • In some of these markets, there’s a cultural response to the dominance of iOS and Android which is leading some people to want alternatives and Windows Phone is the main option available

The reality is Windows Phone’s sales over the last two or three years at least have been dominated by the low end devices in the portfolio – the 500 and 600-series phones that retail for $200 or less for the most part. In the US, these devices are only really relevant on prepaid services, as I discussed in this previous piece. But elsewhere, prepaid is a much more significant part of the total market and low-cost devices have been very attractive to many consumers. There’s a risk here, though, that Windows Phone becomes just a low-cost brand and loses any chance it has of succeeding at the high end because the whole brand gets dragged down market (something I alluded to in this piece).

What’s so interesting to me about the timing of Stephen Elop and Jo Harlow’s departures is they come just as Microsoft is getting ready to launch Windows 10 and with it, new smartphones that take advantage of that platform. Microsoft hasn’t had a new true flagship in the Windows Phone lineup for several years and, during this hiatus, even the modest success the platform briefly enjoyed in the US has dissipated. Whereas the low-end devices are driving success elsewhere, without a flagship in the lineup that truly differentiates itself, Windows Phone’s share of the US market is destined to remain in the single digits and likely to continue to fall. At this point, Microsoft has a serious decision to make about whether it wants to continue trying to sell these devices in the US or whether it wants to shift its focus to other markets around the world. The US has become so strategically important in the smartphone market these days almost everyone feels they have to compete here, even though many of them struggle (notably the major Chinese brands). But perhaps it’s time for Microsoft to start re-prioritizing its efforts in mobile around those markets where it’s had some success and properly supporting those markets with localized services. Perhaps even launching new services there first rather than flogging what’s looking like an increasingly tired horse in the US.

No Wonder Microsoft Is Very Different

Stephen ElopIt’s hardly a surprise Microsoft has finished off the job of replacing its top managers. The company has been changing leadership considerably for the past year as a big sign of a company finally moving forward well. But it is somewhat striking that, in an industry where changing senior leadership in the biggest companies has been minimal, Microsoft has been mostly promoting the new.

The biggest news in the latest turnover is the unsurprising departure of Stephen A. Elop. Five years ago, when a very different staff worked for Steven Ballmer, Elop, the one-time CEO of Macromedia, was running Microsoft’s critical business division. He left in 2010 to become CEO of Nokia, a move that correctly predicted a Microsoft’s acquisition of the Finnish phone maker, then ended up back as a senior executive at Microsoft. But his role gradually faded away with the rest of the Nokia/Windows Phone’s position. (Another departure is Chief Strategy Officer Mark Penn, the politically oriented PR specialist who had come up with the hideous Scroogled campaign before he and his role were forgotten.)

At a time when the senior management of Apple and Google (other than the death of Steve Jobs) is mostly still in place, Microsoft under Satya Nadella has been pushing out the senior managers in the 16 months since he has taken over. Although many of the new top execs have years of experience–Nadella himself has been at Microsoft since 1992–his move up the ranks has been slow and steady. Interestingly, while he has been a critical player in the building of the cloud effort, he has never been a top Windows player, traditionally the main path.


Ballmer, Brummel, Elop, Klein, Muglia, and Sinofsky are all gone. Chief Operating Officer Brian Kevin Turner, General Counsel Bradford Smith, and research chief Craig Mundie are the only veterans still on hand. And, while they hold important jobs, they are not the people involved in the critical move of Microsoft from its traditions to a new world.

Terry MyersonThe choice of new executives is part of yet another organization of Microsoft, but one that appears to represent the direction Nadella really wants to go. Windows is hardly going away as a top unit–it remains far too important for that. But Terry Myerson takes charge of a new Windows and Devices Group, combining the key operating system with the devices functions run by Elop. It includes Lumia phones, Surface, Surface Hub, HoloLens, Band, and Xbox. Myerson, a software and engineering specialist, has been with Microsoft when Intersé, his company, was acquired in 1997, and has been a big player in phones and Windows.

Scott Guthrie leads Cloud and Enterprise, which is one of Microsoft’s leading growth areas where the company is competing with Amazon Web Services and a fleet of smaller but vigorous cloud players. The organization combines the Dynamics software group, providing the growing CRM and ERP services as part of the cloud operation. Guthrie, who joined Microsoft in 1997, has been running the increasingly successful Azure project.

Qi Lu will continue to run Application and Services Group. The little-known operation of many of Microsoft’s key products. Its functions include Office, Skype,, and Bing. One key change has been a steady movement of these services from core pieces of the Windows world to services designed to spread to a broad range of devices, including aiming at been important players for both Apple and Android.

Of course, it will take some time to see if the effects of this latest–and hopefully lasting for some time–reorganization will make a difference. After a long period of drift, Microsoft seems to finally be moving again.

Microsoft’s Re-Org and Their Future in Hardware

Microsoft announced some key, but not terribly surprising, changes to their management teams yesterday. The headline was Stephen Elop, former Nokia CEO, will be leaving Microsoft. Most public commentary has been viewing the moves in light of Microsoft’s role in the industry making their own branded hardware, namely smartphones through the acquisition of Nokia. There are some cloud and services organisation movements included in this re-org but I’m going to focus more on the hardware part of the discussion.

As a part of the new organization, Terry Myerson will now be running the Windows and Devices Group. Here is the exact statement from an internal email.

Terry Myerson will lead a new team, Windows and Devices Group (WDG), enabling our vision of a more personal computing experience powered by the Windows ecosystem. We will combine the engineering efforts of our current Operating Systems Group and Microsoft Devices Group (MDG) led by Stephen Elop. This new team brings together all the engineering capability required to drive breakthrough innovations that will propel the Windows ecosystem forward. WDG will drive Windows as a service across devices of all types and build all of our Microsoft devices including Surface, HoloLens, Lumia, Surface Hub, Band and Xbox. This enables us to create new categories while generating enthusiasm and demand for Windows broadly.

One of the most debated topics in my analyst circles is Microsoft’s efforts in hardware, particularly around Surface and smartphones. Many believe Microsoft should not be in hardware and both their Surface and Windows Phone efforts are counter-productive to their partner software licensing model. This argument is stronger with Surface than it is with Windows Phone since Nokia was the only major vendor committed to shipping them. Microsoft owning Nokia, in reality, was not a competitive move against other hardware partners since there were no other truly committed OEMs to Windows Phone. This is also why Microsoft felt they needed to buy Nokia. We now know Nokia was on the brink of shipping Android, which would have likely led them down a path to abandoning Windows Phone entirely. Microsoft, at the time, felt strongly about Windows Phone remaining in the marketplace and couldn’t risk their only true smartphone partner to drop them and move to Android.

Should Microsoft still be making Windows-based smartphones? One can argue their global smartphone market share is not only growing extremely slowly but is also quite small.

Screen Shot 2015-06-18 at 10.03.53 AM

Ben Thompson, in his daily subscriber($) email, wrote he believes this is the beginning of the end of Microsoft’s efforts in hardware. I’m not ready to go that far yet for a number of reasons.

There is still a lot of opportunity in hardware. Perhaps we can argue those opportunities are not in areas Microsoft is in yet, but this is where the last line of the quote I pulled from Nadella’s email comes into play. “This enables us to create new categories.” I think Microsoft still sees hardware opportunities on the horizon in both current hardware businesses and future ones.

You can make money in hardware. FitBit demonstrates a great example of monetizing hardware. FitBit currently makes quite a bit of money in hardware and in a space where Microsoft is looking to gain share with their own health and fitness band. FitBit’s margins are roughly 50% today and with their IPO going live today there has been solid commentary on their profitability. In regards to FitBit, I would be skeptical they can keep their hardware profits/margins going as history teaches us how, in many categories, hardware becomes commoditized. The bear narrative for FitBit is actually the bull narrative for Microsoft. Should Microsoft be able to grow their health band hardware business, they will be able to make money on hardware but, more importantly, they can tie that hardware business to their services. There is money in hardware, but I’ve frequently argued the best-positioned companies to succeed in hardware are services companies who don’t rely solely on the hardware margins to survive. I believe this will also work in favor of Microsoft even though it may not be immediately apparent.

Filling Existing Holes. If I was Microsoft, I’d be taking a hard look at the consumer PC market and asking myself how much longer my OEM partners will stay serious about consumer desktops, notebooks, and tablets. When you look at how Lenovo, Dell, and HP are positioning themselves, it is clear more of their resources and focus is consumed by the commercial segments of the industry rather than the consumer segments. While the Surface project started as a way to kickstart innovation in PCs and used as a showcase, it could likely become Microsoft’s best chance to serve the global consumer PC segment.

Similarly, I’m intrigued by a new feature called Continuum which will let owners of Windows Phones plug their phone into a monitor, keyboard, and mouse and use the device as a desktop computer. The idea your smartphone is your primary CPU and drives the intelligence of other displays is not a new one. Motorola tried this with their Atrix design. This idea struggled in developed markets, but I’m interested in this idea for emerging markets. Say someone in India buys a Windows Phone for $200 and that phone can also be docked with a big screen, keyboard, and mouse and function as their desktop as well. It becomes a 2-1 where it’s both a smartphone and a desktop PC. I’m intrigued to see how this plays out in emerging markets since we have data to suggest interest in PCs is high in these markets but price keeps them out of reach for rural India, Africa, China, and SE Asia. Viewing Microsoft through a software and services lens, this strategy is a way to bring software and services to brand new customers and empower them in the way Satya Nadella desires.

The point of the hardware is if Microsoft doesn’t do these things and fill these holes, who will? Others have conflicting interests since the business model is shifting from hardware to services. Other companies will want to get in on the services side and could cut Microsoft out. In this regard, both Microsoft and Google are in tricky positions when it comes to the next billion if that is indeed a segment they want to capture growth from.

While it may not be the popular position, I’m a bit more positive on Microsoft’s hardware initiatives. Even if some of them fail, I believe there will be new hardware categories which will need deep services integration that Microsoft can play in. Hopefully, what Microsoft is getting better at is identifying these areas early so they can participate before it is too late.

Why Context is the Next Battleground for Apple, Google and Microsoft

At this year’s Google I/O Conference, the company announced Now On Tap, the next-gen version of its Google Now digital assistant, which can contextually improve how you experience apps using an updated machine learning algorithm and something they call “deep linking.” The idea behind this is, if you get a text saying to meet at a certain place, Now On Tap is smart enough to put it on your calendar, give you a map of the place you are going to and, if it is a restaurant, it could even serve up the menu for you to review. It might even show the best parking areas nearby as well as stores that might be of interest to you based on your Google profile preferences.

Last week, Apple announced a new version of Spotlight and Siri at WWDC in which you can type or ask questions of Siri and it is supposed to give you an answer based on a better contextual search engine. And, in May, Microsoft used their developer conference to launch an updated version of Cortana that, at its root, is also an AI-based personal assistant that will take a question and put it into context in order to give the user more precise answers to their questions.

I believe the consumerization of AI is set to be the next major battleground to drive differentiation, especially into the mobile space since hands-free communication is often critical to accessing information in real time and making our mobile devices even more useful. This is why Google Now, Siri and Cortana personal voice assistants are important front ends to their contextual AI offerings.

In an excellent piece in Fast Company titled “Apple finally learns that AI is the new UI”, author John Brownlee asks the question of whether UI or AI will win the war in this new battleground. In it he says:

“The thing is, Google knew something we didn’t. It knew that Apple’s taste was a temporary advantage. It knew that designing a host of functional, universally integrated services was harder than designing pixels. And in the protracted thermonuclear war between Apple and Google, which first started when the search giant launched Android in 2008, Google knew that ultimately, it would be AI, not UI, that would win the war.”

While I agree AI is the new battleground, I would argue UI still is critical to the success of a mobile OS and user experience. After talking to Apple officials at WWDC, I am convinced they have a deeper level of research going on in AI than Mr. Brownlee gives them credit for. I also believe Microsoft has put serious investment in this level of machine learning and AI and it is being applied to Cortana and Windows 10.

On a personal level, this can’t come fast enough. Like many readers, my days have become packed with meetings, research, and writing and I admit I often miss the little things that are an important part of my daily lifestyle. For example, I often head to an offsite meeting thinking I know where I am going only to get half way there and realize I did not have the proper directions or even the right location. Too many times, I have had to pull over, check my email, go to Google Maps and find the exact way to go. Or I may leave the office and head to Office Depot only to get there and forget why I went in the first place.

Now, you may just think I am unorganized and, while that may be true in some cases, the reality is I have information overload that deeply impacts my overall efficiency. And I have to admit my memory banks are overloaded too. An AI-based personal assistant that anticipates things that impact my lifestyle is something I would pay for and, I suspect, many people are in similar shoes. In fact for many of this, it would be our killer app.

Although smartphone vendors can still differentiate around OS, design and UI, I agree with Mr. Brownlee that contextual AI-based services will be where the next major investment needs to be by these big players. Within the next two years, I believe users are going to demand more proactive contextual services that add greater value to our mobile and overall PC experiences and help us better manage our digital lifestyles. If done right, it would be a game changer for all of us who use this technology and, in my case, make my life much easier too. This is one of the promises of technology people have been wanting for some time and AI for mobile is getting better each year. I just hope Apple, Google and Microsoft double up on this research and make it a reality soon.

Rethinking the Conference Room

Picture this.

You walk into a conference room, and everyone watches as someone (hopefully not you) suffers through the process of fumbling and futzing with cables, dongles and A/V switchers for 5 or more minutes trying to get an image on the screen.

It doesn’t matter what kind or size of company you work for, we’ve all been there. In fact, trying to calculate the amount of wasted productivity for all workers across all industries around the world for just this one scenario would likely lead to a frighteningly high number.

Clearly, this a problem in need of a solution and thankfully, there are several new options coming to market over the next few months. What’s interesting is these new products aren’t being driven by the typical projector, display and other A/V companies, but by Intel and Microsoft.

At Computex this week, Intel unveiled a technology solution for conference rooms they call Intel Unite. Essentially, Unite consists of some Intel-created software that runs on a small form factor, Windows-based, Core vPro processor-powered PC typically hardwired to a room’s projector or large display screen. Individual employees or guests who come into the room are prompted to install a lightweight application by the integrated hotspot functionality of a Unite-enabled PC and, in less than a minute, get automatically connected to the room’s display.

The idea is it’s fast, simple, and just works, with an emphasis on the “just works” part. To that end, the presenter can be using a Windows 7 or 8-based PC or even a Mac, and it’s expected to support Android and iOS in later releases. Unite can also be part of an overall “smart” conference room solution that can integrate remote employees (the app will stream the displayed content to them) and even tap into OIC-enabled lighting and temperature solutions. With the integrated hotspot capability, companies can also use it to enable guest internet access in their conference rooms.

In addition, the software supports the ability to temporarily annotate certain elements on the screen (the annotation marks fade after a few seconds) and to automatically send the presentation to all meeting participants at its conclusion. There’s also support for third party plug-ins and the ability to do split screen and leverage existing collaboration software tools. All in all, it looks like a very thoughtful solution to a very annoying, real world problem.[pullquote]All in all, Intel’s Unite looks like a very thoughtful solution to a very annoying, real world problem.”[/pullquote]

At the other end of the spectrum, Microsoft is getting ready to release their Surface Hub device, which the company first showed at the Windows 10 debut event back in January. Surface Hub is a Windows 10-based PC housed in a touchscreen 55” 1080P or 84” 4K display that sits on a mobile stand. Think of it as a super high-tech AV cart.

The Surface Hub is designed for collaborative computing-style work, where multiple people can be marking up the screen (it supports up to 3 simultaneous pen inputs) or multiple people in a meeting room can wirelessly project to it via Miracast (it also offers regular wired connections). The device includes two 1080p cameras mounted on each side of the screen titled inwards to enable high quality videoconferencing and remote meetings as well. In addition, Microsoft will be integrating some specialized applications into Surface Hub specifically designed for collaboration. Final details, including pricing, on Surface Hub are still forthcoming, but it too looks to be a great way to help rethink conference rooms.

Some might argue these Intel and Microsoft solutions are competitors, but I think we’ll end up seeing them used in different rooms in different ways. It wouldn’t surprise me to see companies deploy a few Surface Hubs in some of their conference rooms and Intel Unite-based solutions in others. Either way, they will both be a great step forward over what most of us have to endure today.

The Amazing HoloLens Leap

As a grizzled tech industry veteran, it takes a lot to really make me feel like something is dramatically new and different. In other words, I’ve seen lots and lots of evolutions, but not really that many revolutions.

Yesterday, I experienced a revolution: the Microsoft HoloLens is unlike anything you’ve ever used.

For now unfortunately, you’re going to have to take my word for it, because, more than any tech product I’ve seen or tried in quite awhile, you really have to experience the HoloLens first hand to appreciate it.

Luckily for me, I’ve actually been able to try the HoloLens twice—at the product’s initial unveiling in late January and at Microsoft’s Build conference in San Francisco yesterday. During that three month gap, the company has made enormous progress. The first demo consisted of a development system made up of multiple parts: a big box holding the computing elements that went on a cord around the neck, a long cord tethered to a large workstation-looking PC, and the goggle-like head-mounted display. Yesterday’s demo on the other hand consisted of nothing but the untethered, slick-looking head-mounted unit that’s supposed to be representative of what the final shipping product will look like.

Just to see that transition was impressive. Even though Microsoft showed one final looking unit at the launch event in January, I still had serious doubts about how long it would take to get them to reduce what I wore in January to the portable, battery-powered device I wore yesterday.

More importantly, the product’s capabilities and overall functions continues to impress. Whenever you try out something that’s very new, there’s always a tendency to overemphasize how great or different it is. As a result, I was very curious to see how I would feel about using the HoloLens for the second time. I have to say, if anything, I walked away more impressed.

Part of that may be because the company has come up with several more impressive demos. In particular, the demonstration of an architectural program, where you can manipulate elements of a building design and see it in the context of an architectural model, really gave me a sense of how innovative the HoloLens can be. To be fair, it also gave me the sense HoloLens will initially probably have more focused applications and may not be for everyone. Still, being able to adjust the roof of a 3D model by moving the mouse from a PC screen over to the “hologram” of the rendered building and then adjust it, all the while being able to see the physical model of the existing buildings in the area surrounding the one you were designing, was really impressive.[pullquote]It’s a rare, but incredibly cool feeling when science fiction comes to life right in front of your eyes, and with the HoloLens, that’s exactly what Microsoft has managed to achieve. “[/pullquote]

For me, this demo also served as a great example of why augmented reality products, such as the HoloLens, are likely to be much more successful than virtual reality products, which completely take over your field of vision with a computer display. Being able to see the real world helps avoid the seasick-like feelings many people (including me) feel when trying on virtual reality headsets like the Oculus VR. Augmented reality also provides the ability to perform productive tasks, as opposed to just experiencing a computer-generated world through VR. Certainly for gaming and entertainment applications, there are a few compelling VR applications but, even so, I expect the options with augmented reality will prove to be more attractive to a larger audience.

To that end, the software support for HoloLens has also made important advancements. The ability to do things like pin a video player or Skype window onto a wall in a room around you starts to hint at some of the many interesting possibilities Microsoft could enable with HoloLens.

There are still a number of very important questions to answer with regard to HoloLens—not the least of which are price, availability, battery life, and software compatibility. Yet, I think the experience is so compelling that even limitations or concerns in these areas won’t limit the device’s appeal.

It’s a rare, but incredibly cool feeling when science fiction comes to life right in front of your eyes, and with HoloLens, that’s exactly what Microsoft has managed to achieve. Well done.

Windows Phone and Prepaid in the US

Alternative title: Cricket is saving Windows Phone in the US

I’ve written quite a bit about Windows Phone previously, but I have a slightly different angle this time around — the impact prepaid is having on Windows Phone in the US and, in particular, the impact AT&T subsidiary Cricket is having on Windows Phone sales in the US.

I’m going to draw on a couple of different sources here:

  • Comscore’s regular monthly updates on smartphone installed base market share in the US. I’m using these primarily to measure the size of the installed base for Windows Phone in the US. The latest data as I write is for February 2015.
  • AdDuplex’s data on the Windows Phone installed base, based on its ad analytics software. Its latest numbers are for March 2015. I’ve used these numbers before for other purposes and Nokia in the past has occasionally pointed at them as well, which leads me to believe they’re generally pretty accurate.

Windows Phone in the US is growing

The headline from the recent Comscore data as it relates to Windows Phone is that the platform is growing, at least a little bit. The chart below shows the percentage market share number Comscore reports, as well as the installed base of devices this implies, based on Comscore’s overall smartphone market sizing:

Screenshot 2015-04-26 08.50.21

What you can see is that market share is somewhat static, perhaps rising a tiny bit over time. But because the overall smartphone market is growing, the installed base this represents is also growing over time, from around 5.5 million a year ago to 6.6 million in January 2015 (the slight dip recorded in February likely isn’t meaningful). Given that Windows Phone is in a bit of a lull at the moment, since there hasn’t been a new flagship in quite some time (and isn’t likely to be another until Windows 10 launches later this year), where is this growth coming from?

As elsewhere, the low end is driving growth

The answer is pretty simple: as in other markets, from a device perspective, the growth is all coming from the low end. Here, we switch to the AdDuplex data on the Windows Phone installed base. AdDuplex only reports the top 10 devices in every market, so we don’t have a complete picture of the base, but we do know what’s selling best:

AdDuplex Windows Phone US by device

As you can see, what drove growth through the second half of 2013 and much of 2014 was the Lumia 521 and, to a lesser extent, the Lumia 520. Over the last six months or so, it’s the Lumia 635 that’s driving growth, with the Lumia 630 doing fairly well, too. The 500 and 600 ranges have been the lowest priced devices in the Lumia range, but they’re vastly outselling anything else right now both in the US and elsewhere.

The role of prepaid, and especially Cricket

So far, so predictable. But what’s particularly interesting in the US is the role of prepaid and especially the role of a single provider, Cricket. One of the nice things about the AdDuplex data set is the company breaks out wireless providers in the base, and one company that’s appeared to come out of nowhere over the last nine months is Cricket.

The history here is a little complicated, because today’s Cricket is actually the combination of two separate businesses: Leap Wireless, a CDMA-based prepaid operator which AT&T acquired, and Aio Wireless, a prepaid subsidiary which AT&T merged with Leap when the acquisition closed. Aio had a couple of Windows Phone devices before the transition, and the new Cricket launched its first Windows Phone handset, the Lumia 1320 phablet, in June 2014, followed in July by the Lumia 630, with the 530 and 635 landing later in the year. But, during that time, Cricket has gone from zero to over 20% of the base. The chart below shows that meteoric rise over a period of roughly nine months:

AdDuplex Cricket data

What gets really interesting is if you translate that share into a number in the installed base, based on the Comscore numbers. It’s a bit of a tricky calculation, because AdDuplex technically only breaks out Windows 8 devices by operator and there’s likely some number of Windows Phone 7 devices in the US base still, albeit a small one. But based on the combination of AdDuplex and Comscore data, it’s likely Cricket has between 1 and 1.5 million Windows Phone devices in its base, which is a fairly significant chunk of Cricket’s overall base, perhaps as much as 25%. Secondly, remember the overall Windows Phone growth numbers we looked at earlier? There was net growth of about 1 million Windows Phone handsets in the base during that same nine month period or, in other words, the difference between those that left the platform and joined it was 1 million. Given Cricket likely added around 1 million during that period, it’s possible it accounted for the vast majority of that net growth.

Windows Phone is disproportionately prepaid

Cricket isn’t the only prepaid brand where Windows Phone is big, though. It’s hard to get a full postpaid/prepaid breakdown from the AdDuplex numbers because, for the major carrier brands, the two aren’t separated. But even if we just focus on MetroPCS, Cricket and a phone only available on AT&T’s GoPhone prepaid service, these three add up to around 40% of the total base in the US. Add in a few percentage points for other prepaid sales on the major carriers and we could be getting close to half the Windows Phone base on prepaid, compared with about 25% of the total US phone base on prepaid. In this sense, Windows Phone is the anti-iPhone, with the iPhone well underrepresented in the prepaid market, just as Windows Phone is well over-represented.

The big question for me around Windows Phone remains whether this disproportionate emphasis on low end and prepaid phones will end at some point. The launch of Windows 10 in the coming months provides the best near term opportunity for Microsoft to re-engage with the premium end of the market, so these numbers will be well worth watching over the next year or so.