Microsoft Beyond Windows
Microsoft is going through an evolution. Microsoft has always been a “platform” company and for decades that platform was Windows. Microsoft is in the post-Windows era but they are still poised to be a platform company. The only difference is that the platform resides in the cloud rather than on billions of PCs.
Windows runs on about 1.5 billion PCs. Not every single one of those PCs is owned by a single individual. Many are in offices and never leave. Many are in screens at retail, powering point of service terminals or visual displays. Some sit in internet cafes all over the world and, of course, many are in people’s homes. The challenge staring Microsoft in the face is the 1.5 billion copies of Windows being used is not increasing and is, in fact, decreasing. To put it bluntly, Windows, as Microsoft planned it, has gone as far as it can go. That is because the primary computing form factor Windows runs on has gone as far as it can go. Desktops and notebooks are not growing in sales and not attracting first time buyers in any meaningful numbers. Computers in the shape of a pocketable device are where the growth is and Microsoft has little play for a platform on those screens. This is why the cloud platform matters. Microsoft may not be able to acquire new users for its Windows platform but it can potentially touch several billions more than Windows ever could as a cloud platform player.
The Line Ends at Services
Study the technology industry long enough and you start to recognize patterns. One pattern that is consistent, and I believe remains consistent in modular ecosystems ((A modular ecosystem is one where many critical parts of the stack are owned by many individual players. This differs from an integrated ecosystem where a single player controls the key parts of the stack and thus defines the ecosystem unilaterally.)) like Micosoft’s, is how the value chain always ends at services. In the early stages of a segment, the value starts in hardware, then quickly moves to software (once the hardware is good enough), and, finally, all the opportunity shifts to services. This is why, at the end of the day, services companies are the best positioned for the future in modular ecosystems (which generally encompass the largest user bases).
We have quickly moved out of the hardware value cycle, which is why we are seeing ASPs of things like PCs and smarpthones rapidly decline. Software is also mostly commodity and all the upside is quickly moving to services. Understanding this is essential. Because, at a fundamental level, services are not easy and not everyone can do them well. So there is an opportunity for a cloud platform player to emerge as a service enabler for a broader ecosystem. This is where I believe Microsoft fits in and where their greatest upside lies. By being a cloud platform company, Microsoft can create products and services that transcend local platforms like Windows, OS X, Chrome, Android, Windows Phone, Blackberry, Firefox OS, Tizen, and any other local platforms that may show up.
A great first example of this is the Microsoft Band — a purpose-built fitness tracker specifically designed for the health enthusiast market. The hardware itself contains 10 sensors, all specifically integrated into the bigger story of Microsoft’s health platform. The Microsoft Band is simply a front end to the data. It is hardware and, more importantly, sensors as a service. Microsoft is building a health platform that gets smarter and better the more data it has about you and others. Jawbone, Fitbit, and many others could benefit from this service and simply provide the hardware and software front ends to a bigger data story. They are examples of companies who need to be investing in services and Microsoft could be a great partner in this.
The Health example is one of many where Microsoft can invest in cloud platform services and help other companies with their necessary services strategy.
It is my firm conviction that, for many hardware companies, their future success and revenue depends, not on monetizing the hardware, but in monetizing the services. In similar ways the early PC companies went to Microsoft to license Windows in order to deliver hardware value, the next generation of hardware companies can go to Microsoft to license their cloud platform to enable the next generation of hardware and services. Few companies are as well positioned to capitalize on this shift from hardware to services as Microsoft. They still have a long road ahead of them and they need to build trust with these next generation companies that they are a true partner and not a competitor. Nonetheless, I like where Microsoft is sitting with a focus that resides in the clouds.