Microsoft in 2015

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

Windows 10 – symbolic of all the challenges facing Microsoft

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

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

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

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

Office – the transformation continues

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

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

Lumia – playing both sides of Windows Phone

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

Surface – make or break in 2015

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

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

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

Consumer services – focus on free stuff sends a mixed message

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

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

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

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

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

2015 – from vision to execution

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

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

16 thoughts on “Microsoft in 2015”

  1. Some thoughts…
    a) I highly doubt Windows 10 will go to a subscription model. It gives incentive to leave at each renewal period. You may say, ‘to go where?’, that remains to be seen. Unlike Office Suites a computer is a brick without an OS, who wants to lease their already purchased computer? Regardless, Windows will have downward price pressure. This is just. It’s called ‘paying the piper’.

    b) I think the Surface program has already been successful in getting their OEM’s to innovate. This has been their stated intent from the beginning. It’s quite possible it will be spun off at an appropriate time.

    c) Having an overlapping codebase for phones, tablets, and PC’s has benefits for developers, especially enterprise developers. Having the freedom to sell your wares as you see fit is another incentive.

    1. “I highly doubt Windows 10 will go to a subscription model. It gives incentive to leave at each renewal period” – klahanas

      If Microsoft moves to an annual release of Windows, it will be much easier to keep subscribers than to try to re-sell the program to existing users year after year after year.

      1. Maybe. I don’t have a crystal ball, and I don’t gamble. But if you look at the pushback of discontinuing support for XP, I would think that some scheme would have to be developed to accommodate owning your own copy rather than renting your copy.

        Even with the current Office365 licensing scheme, which I admittedly favor, I still run versions of Office 2010 on some of my older machines. There are also standalone copies of Office 2013 available for sale.

        But, like I said, without an OS a computer is a paperweight. Barring any other option, I wouldn’t take kindly to having to re-lease my purchased machine on Microsoft’s say so. It could come to pass where I won’t have a choice, but I’m sure DOJ will be watching, and I keep brushed up on Linux at all times.

    2. “I think the Surface program has already been successful in getting their OEM’s to innovate.” – klahanas

      I’m sorry, but this is rationalizing gone mad. You don’t incentivize your partners by directly competing with them. Look around at any other industry, or any other field, in any period of time and show me even one example where competing with one’s licenses worked.

      1. Worked for whom? The licensor, the licensee, the customer?

        I would say the Intel x86 license worked for Intel and AMD and the customer for a while. AMD falling behind is not Intel’s fault any more.

        It could be argued that the Webkit license is working for everyone to varying degrees.

        Android??? Working pretty good for Google and (some of) it’s OEM’s. They wouldn’t be competitive without it.

        If we get into cross-licensing, then everyone in every industry does it. I don’t think it’s possible to even launch a cell phone without cross-licensing. Biotech, chemicals, medical devices, aerospace, and on all cross-license successfully.
        Hardly “rationalizing gone mad”.

        Edit: If I may add, in hardware, MS is the puny player. Not the 800 lb. gorilla.

        1. Couldn’t help but notice than none of your examples reflect the relationship MS has with its partners. Even Google/Android and its OEMs are a big stretch, as the financial terms have never been remotely similar to MS’s contracts (and Android is always pimped as “open source”)..

          1. Because that’s not what was asked. What was asked was “any industry, or any field”. And open source is a category in and of itself, but so is Webkit.

          2. The real challenge was to provide an example of directly ” competing with one’s licenses(sic).”

            Webkit is open source. Android is open source. Irrelevant examples.

            The Intel / AMD technology license relationship is so dissimilar to the relationship Microsoft has with its OEM licensees that it fails to satisfy the challenge.

            For starters: A) Intel only needs AMD to avoid monopoly status (and Intel has been successfully prosecuted in that regard — despite the license). B) Intel’s x86 technology licenses are a trivial portion of their revenue and would not be missed.

            Seriously. I can’t see a single concrete similarity to the dynamic of the Microsoft / partner OEM relationship in the examples you cited.

            So there.

            P.S. Happy Holidays at you, klahanas. Hope all is well.

          3. Wishing you the Happiest of Holiday’s as well.
            Frankly, discounting open source is moving the goalposts. Of course Apple and Google are competing with other things that they have open sourced.
            But to tell you the truth…I’m neither qualified, nor interested in these business machinations other than how it impacts the consumer. I’ll leave those matters to those better qualified and better interested. I chime in on scenarios that, in my limited knowledge, may impact me. Matters of ownership, freedom, and anything remotely analogous to citizen’s rights DO matter to me, and I’m much more vocal there.

          4. @FalKirk:disqus @disqus_3U8roRlOeJ:disqus

            Many thanks to informed for getting me to think about this further. You too, you ex-barrister! 😉

            Isn’t the FRAND patent setting a situation where patent holders license to competitors and oem’s? (Not being insistent, just curious as to your thoughts).

  2. Microsoft has never been and likely never will be a consumer company. They need to forget the consumer business and concentrate on activities like Azure. They should abandon the ancient brand Windows for their flagship OS and create a product that works well for its market.

    But Microsoft probably isn’t intelligent enough to go down this road.

  3. I think MS is trying to serve 3 masters: Entreprise, Consumer, and Management -not even The Boss like Steve Jobs was, but the amorphous procedural and indecisive blob that is Management). Across markets and segments, they need to focus on making good product for the intended user -not Management-, and realize Enterprise and Consumer are very different.
    Or, if they try ti straddle boundaries, like with Metro, they need to stop doing a half-assed job of it.

  4. First, great article, Jan. I’m really enjoying the series.

    Second, and as more of an aside, while reading your article, I was struck by how confusing Microsoft’s lineup is. Their product line is all over the board. To be fair, I think that the products themselves work together but the naming conventions are a muddled mess.

    1. Thanks John. Microsoft is an enormously complex company with a bewildering set of products and services, each with their own set of arcane and Byzantine options and license agreements. It’s the anti-Apple in this sense, and this enormous and diverse base is both their biggest asset and their biggest liability. It makes it so hard to do anything truly new and different when you have so many constituencies to keep happy.

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