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.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

48 thoughts on “Microsoft’s Re-Org and Their Future in Hardware”

  1. i think it is better for a company to look at their core values when they are pursuing new opportunities, not just trying to chase profits someone else better positioned makes in hardware sector.

    Microsoft at heart is a software company. Them putting a cloud guy Satya Nadella at the helm was a smart move, because this is where Microsoft can provide value – services. As far as the hardware business is concerned, Xbox makes a profit for them and this is pretty much it. Kinect was the last success in Microsoft hardware strategy and this is just because they had Xbox Live service. May be they need to take a page from Amazon playbook and make a “good enough” hardware for low cost or for free. Of course it will hurt Windows hardware OEMs, so something needs to be done with Windows costs to them as well.

    If Apple makes their software available for free, Microsoft can make their hardware available for free and cut Apple from the services. What Apple had proven is not that you can make money on hardware, but that a vertical integration model works from the profit prospective and benefits the end user. It does not matter where you charge – on hardware side, or on services side.

    So I think that Microsoft should build on their strengths in services and awesome development tools and develop their ecosystem without trying to clone hardware companies.

    1. What I’m insinuating is they all go hand in hand. Perhaps a way to look at this is like the way Alan Kay put it to Steve Jobs. “Those who are serious about software should make their own hardware.” With my conviction that monetizing hardware is going away as a business model for all but a few, like Apple, it means that companies who start in hardware, like Fitbit, GoPro, etc., will have no choice but to become services companies. Services is the end game and where the value will end up. So the risk is these companies build their own core services and thus lock Msft out of areas they want to play in.

      Fitbit may be viewed as a customer for MS on the cloud side, but they may also likely need to become a competitor at some time because the economics justify their need to invest and own their own services from a revenue standpoint.

      It’s possible we can update Alan Kay’s statement to also say, those who are serious about services need to make their own hardware.

      1. I agree that small hardware companies will need to look at the software services side when they develop their products. It all depends on the execution though if they can compete in services with Msft and other big fish. If these small companies execute well – they are going to carve themselves a nice niche, if not…. For example I like my Withings iPhone app better than Apple Health that it integrates with. Health is very generic in my opinion.

      2. I think the hardware vs software vs service equilibrium is in permanent flux, and I’d add consumer-relevant “transactions” and “advertising” (I don’t think they’re the same ?) to that entreprise-originated triptych.
        Of those 3 or 5, the “best” one at any time is the one with high barriers to entry/lock-in, and/or high innovation.
        All of those have clear “best-by” dates. Hardware commoditizes (until the next breakthrough). Software has network effects (until complacency Microsofts the incumbent), services rapidly require wwide horizontality and a good dose of responsibilizing verticality, transactions require quasi ubiquity, and ads, huge data massaging.
        Plus service and hardware in particular do not mean the same thing for entreprise and consumer. Consumers have a much sorter time horizon, maybe no horizon at all: my company only buys PC from the usual triad, I choose my phone regardless of brand. My company has multi-year service agreements, I switch Cloud providers occasionally (does any one know a cloud drive that’ll let me automatically synch folders, not files ? ^^)

        The main issue with “start in hardware, graduate up to services” is the Wintel effect: separate specialized players will be better over the long term than vertically-integrated ones who’ll struggle to be best, or even good enough, at each stage, and will get distracted by the need to preserve the whole edifice. Wintel vs DEC/Sun/IBM/… I find it quite telling that Fitbit, Beats, Facebook… are/were being successful with a non-integrated strategy. Now if only everyone could stop enviously eyeing their neighbours’ slice of the pie and focus on their darn job ^^

    2. The idea that companies should build on their strengths (core competencies) has been guiding corporate management for a few decades now, but I think the resurgence and huge success of Apple is forcing a rethink of that principle. I think Nadella understands that core competencies are not enough, and that is why Microsoft will continue with hardware.

      Let me explain a bit more.

      In the 1990s, pundits advised Apple to focus on its core competencies which were, depending on who you asked, either the Mac OS or the hardware. Those who thought it was the Mac OS advised Apple to license it to OEMs, which it did under Michael Spindler, with unfortunate results. Those who thought it was hardware advised Apple to make Wintel hardware. Steve Jobs ignored these ideas. In fact, as Apple stretched vertically into portable devices (iPods), telecommunications (iPhone) and semiconductors (A series CPUs), Apple focused less on its preexisting competencies, and sought new ones. This is what has been central to their success.

      Of course reality is much more nuanced and you have to take into consideration the rate of innovation, how you intend to differentiate and many other things. I just wanted to say that I am generally skeptical of a blanket “core-competencies” focus, because it doesn’t consider the customer.

      I think the market conditions right now (very fast rate of innovation and the need to differentiate) suggest that expanding your competencies is the right thing to be doing for a tech company.

      1. I agree. I should have said “core values” and not “core competencies” in my last sentence. Core competencies can change, core values usually do not. What I meant is that Apple and Microsoft are run very differently.

      2. One could argue it was just a case of misdiagnosed core competencies, and that Apple’s were “easy + sexy”, and that they’ve been building on that since at least the original Mac, maybe earlier.

        1. Yes. “easy + sexy” is a pretty good one in my opinion, because it’s a description of how you want to differentiate your final product and what you want to brand to signify. On the other hand, “hardware vs. software” or “local vs. cloud” is much less so because it’s only a description of how you get there.

          So in the case of Apple, “easy & sexy” is something that hasn’t changed since the Apple II. On the other hand, their competencies in silicon, hardware assembly, industrial design, local software and cloud software has changed a lot.

  2. The Continuum thing is funny, because you’ve been able to do that with Android devices since about forever and nobody ever noticed. Samsung even have had docks for their Galaxies since the S3 I think, that make the process a breeze, but any phone with an MHL USB port can do it, or any tablet with an HDMI port and OTG USB.

    As for tackling the Mobile and/or Consumer businesses directly, via OEMs, or not at all… I’m not sure a single company can straddle Corp and Consumer on one side, Legacy and Mobile on the other, all at the same time. Yet I think it’s fairly clear that MS needs Consumer and Mobile, if only to firewall its Entreprise business ?

    1. “Yet I think it’s fairly clear that MS needs Consumer and Mobile, if only to firewall its Entreprise business ?”

      Yes, I think if MS focuses on Enterprise it is fairly easy logistically to equip every employee with a free Windows phone hoping that may be they will use it at home as well.

    2. That’s why I mentioned it has been done before, however, the target was more developed where I mention the interesting target to be under-developed world where the PC actually has interest and value/ status association as “work.” No slam dunk certainly, but look at why people are investing in these sub $10 Linux computers and they all say they are focusing on rural emerging markets. They plug these into their TV and they have a big screen computer.

      Still speculative of course, but I’m interested to see if this is a compelling point of emerging markets to have a 2-1 smartphone and PC.

      1. If I understood right,
        1- Continuum simply switches UI based on context, from touch to mouse, buttons to menus, hamburger menu to more exposed menus, single tasking to split screen/pip.
        2- is only for the new Universal apps, not for the legacy Modern, and even less for the numerous legacy Win32 apps that make the bulk of the Windows ecosystem. No x86 in phones and no x86 emulation. So very few worthwhile apps benefit from it as of today. It’s not a magic wand that makes your phone able to run AutoCAD, it’s “only” a way for your phone apps to run nicely on a big screen, with kb+ms.
        3- it does mean Universal apps are really write once run anywhere, with good ergonomics in both cases.

  3. I have to say I agree with Ben Thompson on this. Microsoft’s track record on consumer hardware has been poor. The Zune always seemed to be competing with last year’s iPod Touch, Xbox has been a sinkhole for money for years and spent most of its time jostling for 3rd place in the console market. Windows Phone was simply too little, too late and the Surface is a rehash of the two-in-one concept that has been floundering for years. Microsoft basically is a business to business company. It’s one thing to convince a small bunch of Fortune 500 CTO’s to purchase your product just to basically run MS Office and quite another to convince millions of consumers to pick your device over offerings from Apple, Sony and Android.

    It is true that there is a lot of opportunity and money to be made in hardware, but Microsoft has shown no aptitude in this area and I certainly can’t see this improving under Terry Myerson.

    I think Microsoft would be best sticking to software and going platform neutral. Their recent efforts with MS Office for iOS look very good indeed and Office for Mac 2016 impresses in a way that 2008 and 2011 surely didn’t.

    1. This is true and I agree their track record is poor. The question, however, is whether for the betterment and future security of their company, they need to develop consumer as a core competency. I’m arguing they should on the basis of being resigned to only an enterprise software and services company which would shrink the size of their company quite a bit.

      If they want to play any role in consumer software and services, I think they will need to play in a few hardware categories or they will be locked out of them entirely.

      1. It has been very very hard for Microsoft to revolutionize a hardware industry. I believe you need a tight control of your supply chain to do that and other things. But they can leapfrog to it. For example if they excel in Mobile Enterprise, they can move to Mobile Small business and from there to consumer. Or if they hold consumer home entertainment crown with Xbox, they may move into adjacent consumer market segments.

        Microsoft is a horizontal company, like Google. But there are too many gaps in their market coverage and they need to start tightening those.

      2. Microsoft has never had consumer in their DNA. Instead of continuing to pour effort and funds into a market where they don’t belong, the sensible decision would be to accept reality and concentrate on their successful businesses where they are making good money – and can have security.

        Microsoft has had little success in consumer. There can’t be much shrinkage where there hasn’t been much growth.

        1. I wouldn’t necessarily say that Microsoft has never had consumer in their DNA. Going back to their roots, they even made games. For example, their Flight Simulator in 1982 was quite successful for its time. Of course, one may say that this era wasn’t really consumer but simply hobbyist.

          Microsoft simply transitioned from hobbyist to business, following the adoption of computing by these segments. It makes sense for them to move on to consumer, as this segment becomes larger and larger.

          As Microsoft moved on to business, it adopted the technologies and sales organisation required to sell into this segment. As it now moves on to consumer, it will similarly acquire the skills to be successful in this market. These skills will include hardware and design.

          Of course if you look at their revenue now, it is very business focused. That’s simply because PCs were business focused. I don’t think that this necessarily means that their DNA is in business. Microsoft’s DNA is in personal computing.

          I expect Microsoft to simply follow the trends in personal computing. The trend right now is in consumer mobile so that’s where they’re going.

          1. The problem is they don’t follow the the trends in computing and their Communication efforts would score an F. The Surface is a rehash of the failed hybrid concept from 20 years ago, Windows 8 put touch on Desktop computing without anyone ever wanting it and Windows Phone had a UI that the public didn’t like. Microsoft is going nowhere in Consumer and should stay out of it.

          2. There are problems in your assertions.

            Up till 2013, most analysts including Creative Strategies were expecting tablet sales to continue their strong growth and exceed PC sales by 2015. There was good reason to believe that PCs would be disrupted by tablets and Microsoft was trying to keep ahead of the curve with Windows 8 in 2012. At that time, it was perfectly reasonable to predict that people might really prefer a touch UI instead of a mouse-based UI. Yes, Microsoft was too aggressive, in particular by removing the beloved start menu. However, you cannot blame them for not trying to follow/predict consumer market trends.

            http://techpinions.com/the-state-of-tablets-in-2013/25347

            As for the Windows Phone UI, which many reviewers actually liked. There are many reasons for why Windows phone isn’t selling well, and you cannot assert that the public didn’t like it.

            People have noted that Microsoft doesn’t get things right until version 3. Putting it the other way, Microsoft doesn’t give up until they fail at least 3 times. That is how they have succeeded in the past, and not giving in is part of their DNA. That’s how they succeeded with Windows, Xbox, Internet Explorer and others.

            Why would they give up consumer now, even if their recent efforts have gone nowhere?

          3. Tablet sales are still expected to exceed PC sales by 2016, but one has to exercise considerable mental gymnastics to conclude that a touch UI on a desktop OS was a good idea. In fact most, including Steve Jobs, thought it was a dreadful idea. The WinTel OEMs tried to push it as they saw it as a way of reversing declining PC prices. It didn’t. Also note that the architect of Windows 8 was exploring new employment opportunities only weeks after its release.

            Some reviewers thought the Windows Phone UI was interesting, but most consumers didn’t like it and Microsoft continues to lose about $40 on each handset sold. Microsoft succeeded in Windows, because IBM backed it and there was a time when people thought they should buy what they used at work. That time has passed. Xbox will never turn a profit and the DOJ might have a few opinions about Internet Explorer.

            Consumers don’t like Microsoft. They like Google and Apple, but not Microsoft.

            Consumers and Microsoft -as the Ferengi say ‘There is no profit in it’

            That is why Microsoft should get out of the Consumer Hardware business.

          4. I would simply like to reassert my points;

            1.
            Microsoft does try hard to follow trends. They have been doing that since the 1970s. Do they sometimes blunder? Of course they do.

            2.
            Will Microsoft give up on a business that is going nowhere? Depending on the strategic importance of that business, they will try hard for years until they get it right. That is how they succeeded with many of their initiatives, including Windows and IE.

            3.
            Apple has clearly shown that under the current market conditions and rate of innovation, integrating hardware and software is important for creating well accepted products. Strategically, expertise in hardware will be necessary for launching their attenuated reality products, for example.

            4.
            Given that the current trend in technology is strongly towards consumers, it follows that Microsoft will continue to invest in the consumer market. This means that it will also invest in hardware. Even if it isn’t going anywhere yet, that is unlikely to deter Microsoft.

            5.
            The Xbox is arguably at least as successful as Sony, the consumer electronics company.

            So, as much as I understand your doubts, history suggests that Microsoft will not heed your advice and again, history suggests that they have a (maybe slim) chance of success. Really, we have to wait for their third or fourth iteration which, depending on how you count it, could be Windows 10.

          5. 1. I can’t see any recent trends that MS have picked up and made a success. Usually they look at a trend and come up with rather whacky interpretations of it such as the Surface, Windows Phone and Windows 8.

            2. Microsoft reminds me of the dog with the bone that sees its reflection in the water and drops his bone to get the bigger one reflected in the water. By losing focus Microsoft could find itself losing Enterprise. Right now Enterprise is locked into Windows and Office, more out of habit than intrinsic merit. That could change.

            3. Apple has succeeded with Consumers because it did things well. Microsoft did not.

            4. If someone is a good chartered accountant, it may be a wise career move to stick with that rather than try to become a fighter pilot.

            5. Nice as the Xbox is, it has never turned a profit, is not as successful as Sony nor even as successful as the PS 4.

            I do agree that Microsoft has a slim chance of success, but I certainly wouldn’t bet on that success.

          6. I am not really discussing whether Microsoft’s strategy will work this time. I’m merely pointing out that it has been their history to shift from the hobbyist market to the business market and then to the consumer market, and this strategy was what helped them to become immensely successful in the late 1990s to early 2000s. In all likelihood, under Nadella, they will continue this strategy, and instead of focusing on the market they already have, they will attempt to follow market trends as the market goes into consumer and the cloud and maybe IoT. This will inevitably require going into hardware (as they already have with the Xbox).

            Asking Microsoft to focus on the business market segment may be the better strategy, but I don’t really expect anybody to be able to give an authoritative assertion. Most pundits were wrong about Apple in the 1990s and it’s just as likely they are wrong now about Microsoft. I have zero reason to believe that today’s pundits are more informed and more intelligent than the pundits of the 1990s.

            Furthermore, just as we witnessed Apple growing on top of a business that didn’t exist in the 1990s, it is very likely that Microsoft, if they were to make a comeback, would do that upon a product that doesn’t yet exist, and even in a market that has yet to be discovered. Hence, it’s very difficult to predict what strategy is best for Microsoft. Discussing the market segments that Microsoft is strong in today is very short-sighted when you’re talking about a turnaround that may take 5-10 years.

            Instead, if I was Nadella, I would be asking what strategy best suits the culture and history of Microsoft? What strategy would energise and bring out the best in their employees? And given what I know about the history of Microsoft, that strategy will not confine them to the business segment.

            Of course, if Microsoft had brought in an external CEO who had less respect for Microsoft’s legacy and who focused more on the short-term, then things would be different.

            What I am saying is that if Nadella is taking this long-term view, and my gut feeling says that he is, then he will keep pushing into consumer and pushing into hardware. This is their legacy. Whether he succeeds short-term isn’t really an issue because he will keep pushing until he succeeds. Microsoft has been, and probably still is pretty stubborn..

            That is how I see it.

          7. I don’t think what has happened with Microsoft had a lot to do with strategy. They just happened to be in the right place at the right time in the 80s and 90s. Had Gary Kildall at Digital not been flying his plane when IBM came knocking, Microsoft might have remained very small indeed. Later they did develop a strategy based around Windows and Office, but with the Consumerisation of IT that left Microsoft in a very dark place. Who knows if Microsoft will have the ‘next big thing’? Odds are they will not, but surprises happen and Nadella is a very competent guy.

          8. I think you hit it on the nail.

            Microsoft has historically been very opportunistic. Narrowing their focus, ignoring the consumer segment, discarding hardware and focusing only on business software limits their ability to be so.

          9. The thing is you have to have some skills relevant to the consumer segment and so far Microsoft has not displayed these. The current team may not have the attributes needed for this task.

          10. Apple acquiring the skills for semiconductor design was not a transition but merely an extension. They did not have to change anything about their current business to obtain it. It was simply an addition to their business, which had synergistic consequences.

            Obtaining a new skill does not mean that you have to make a transition, which at least in my definition would mean making widespread changes throughout the company.

            Likewise, improving on their consumer skills would not necessarily force Microsoft to make widespread changes to their business. Of course, becoming as good as Apple would be very difficult. That would require a deep level change in the company. However, very few consumer goods companies are as good as Apple. In general, if you are as good as Samsung, GE, Toyota, Walmart, Nintendo, then you’re a damn good consumer-oriented company. Given how far Microsoft came with Xbox, I don’t the outlook for them is particularly gloomy at all.

            And really, I think you’re all confused with consumer vs. business. What Microsoft missed out on was the touch UI smartphone revolution and not consumer. Prior to the iPhone, consumer tech (at least Internet consumption) was dominated by Wintel PCs. By that measure, Microsoft was actually very strong in consumer. This might have only been a result of being strong in business, but it was strong nonetheless. After the iPhone and Android copying it, consumer tech shifted towards the touch UI smartphone, which Microsoft was weak in. This was why Microsoft lost its position in consumer tech. Essentially, Microsoft lost in the consumer market, not because it didn’t understand consumer, but because it didn’t have a competitive touch UI smartphone. And the reason why it didn’t have a good touch UI smartphone is not because it didn’t get consumer. It’s because it was too slow to bring out a product that could match the iPhone. On the other hand, Android did not win in the consumer market because Google had a good understanding of consumer preferences. It won because Google was very quick at providing an alternative touch UI smartphone (that aped the iPhone) that any OEM could licence and any carrier could put on their networks. I don’t think Google is any better at consumer than Microsoft, and their history of failed consumer product launches/announcements (Google TV, Chromebooks, Google Glass, etc.) is just as bad as Microsoft’s, or maybe even worse.

            The problem is not that Microsoft doesn’t get consumer. It’s that it was slow to touch UI smartphones. This has created the illusion that Microsoft is bad in consumer markets. Also, Microsoft does not have to become as good as Apple in consumer markets since very few are. All it has to do is to be as good as Samsung, etc., which it arguable already is.

          11. I think you are confusing the days when Microsoft had an effective monopoly on PCs with them being any good at Consumer electronics. It’s like thinking a prison cook is a great chef because all the inmates eat his cooking. Wrong conclusion. Consumers may like Google and Apple, but most of the time they only tolerate Microsoft and that is only until something goes wrong and then they get irritated.

            Doing Consumer isn’t easy nor is making transitions. Both Nokia and Blackberry dominated Smartphones, but were unable to compete with the iPhone. Except in its home regional market, Windows Mobile was’t much of a contender. Palm, Google, Nokia and Blackberry all tried to come out with a touch UI phone to rival the iPhone, but only Google made a success out of it and of all its OEMs only Samsung seems to be making a profit. Indeed, many of the other OEMs look like they are teetering on the brink of disaster.

            Consumer Electronics is a hard business.

            I am not sure that you could call Chromebooks a failure nor Xbox a success. Chromebook’s seem to be chugging along okay while the Xbox (which is very nice) probably will never turn a penny in profit.

          12. I am very curious as to which companies you think are good at consumer electronics. Since you are saying that Microsoft was never good at it, you are effectively rejecting success in that market (measured by either market share or profit share) as a measure. Therefore, I imagine that you have a different metric.

            You seem to think that Google and Samsung are consumer-oriented companies. How do you know that Android for example is being loved and not simply being tolerated, just because it is significantly cheaper? Do you see Samsung’s design, marketing and understanding of consumer needs to be clearly superior to Microsoft’s? What allows you to categorise these two companies into consumer-oriented, when you have rejected market success as a metric?

            What about Nokia? In terms of design and the people who bought their products, was Nokia not clearly a consumer-oriented company? Was Google better than Nokia in terms of consumer focus? Did they have better design? Did Samsung have a better understanding of the consumer market than Nokia, or did Nokia suddenly lose it?

            Your discussion lacks any kind of metric to determine which companies have consumer-oriented skills and which do not. If you used any metric at all, you would clearly see that it has little correlation with success in the consumer market.

            As an exercise, try to classify Apple, Microsoft, Google, Samsung, Nokia, Sony and any others by their skill in consumer. Then plot their successes and failures since about 20-years or as far back as you can go. Do you see “skill in consumer” as having any real predictive value of their success in consumer electronics or tech? Or is it just about tech?

          13. Do I have a different metric? Yes, and it is a sensible one. Customer satisfaction. When a company like Microsoft has an effective monopoly in PCs, it really isn’t good to look at marketshare, because in reality the customer has little or no choice. Let’s take a look at owner satisfaction. Regularly the Consumers’ Association in the UK asks members whether they are satisfied with their computers and whether they would recommend them to others. Apple has a 93% satisfaction rate for Desktops and a 94% satisfaction rate for Laptops. iPads have 99% satisfaction rate and people love them. Most Windows OEMs struggle to meet 50%. Lenovo is the best and they are still more than 20 points behind Apple. We all know that Windows 8, the Zune, the Surface and Windows Phone have not been a hit with Consumers. The Xbox stands out as being a product that has a loyal following although it will probably never turn a profit. But note that Microsoft played down its connection with Xbox for a very long time.

            Hundreds of millions of people use Windows and Office at work each day, but they don’t love it, just as they don’t love their uniforms or dress code. They just use Windows and Office and when it goes wrong with BSOD or mere recently the Frowny Face of Death or something else and they have to phone IT to sort it, they just get annoyed.

            Nokia and Blackberry were very popular with consumers in many countries, but they couldn’t make the transition well and quickly enough to the reality of the iPhone and Android which put a computer in your pocket.

            People really do seem to have affection for their Android and iPhones and people in large numbers. They don’t have a similar affection for anything called Windows. That reminds them of work and problems and who wants to be reminded of that?

          14. Do you have customer satisfaction numbers for the other companies and products. Just comparing Apple and Windows PCs is only one data point and is hardly enough to make the general statement that “consumer relevant skills” are key.

          15. Here’s one example. Breville, a company I call the Apple of small home appliances, entered the microwave market in Australia. They paid attention to design and ease of use and now they top the category in Australia in customer satisfaction beating out incumbents including LG, Panasonic, Samsung, Sharp, Whirlpool. The result is Breville is the fastest growing brand in the microwave category and they have gained significant share.

            Of course when you sell to consumers (the end user is also the buyer) there are all sorts of variables, which is why there’s always a place for low priced products that are ‘good enough’. But there’s also always a place for quality products. And they share the overall quality of being a thing the consumer wants to buy.

            To succeed in a consumer market you have to make something the consumer wants to buy. It’s really that simple. And that is very different from making something consumers feel they have to buy (Windows, Office).

            Microsoft has yet to demonstrate that they can make much that consumers want to buy. Xbox has done okay, but it isn’t profitable yet from what I understand. To be sustainable you have to make something consumers want to buy, and you also have to make a profit.

          16. At this point, I think it’s prudent to understand what the original discussion was about. It was about whether Microsoft should keep out of the areas where it has had a poor track record as of late, which are consumer and hardware. The question that I brought up was that whether we can simply conclude that Microsoft does not have what it takes to be successful in consumer (consumer relevant skills), and that they could not acquire them. My argument is this is not the case, and that a company can succeed in the consumer market without having the special attributes relevant to the market, and that any relevant skills can be acquired anyway.

            Now assuming that Breville is the Apple of small home appliances, what should Microsoft aim for in that market? I would say that Microsoft’s vision aligns not necessarily with Breville, but with LG, Panasonic, Samsung, Sharp and Whirlpool. Their vision under Bill Gates was a computer on every desk and every home. Certainly they would aim for the adoption in both the high- and low-end, and not focus on the premium, quality segment.

            Now, when talking about the future of Microsoft in consumer tech, especially in mobile, wouldn’t they be perfectly happy to be LG, Panasonic, Samsung, Sharp and Whirlpool. Just because they cannot be the same as Apple, it doesn’t mean that they are doomed to failure. I regard LG, Panasonic, Samsung, Sharp and Whirlpool as successful consumer companies. Would not Microsoft be happy if Windows Phone could have a market share similar to LG in the home appliance market?

            The thing is that the consumer market is not only the premium segment. There are also the mid-range and the low-end segments.In these segments, consumer skills are less important. What is important is the ability to produce less expensive products, widespread distribution and marketing tactics like bundling. If done well, you can still make profits.

            It is completely wrong to assume that Microsoft will fail in consumer markets because it is no Apple or it is no Breville. It is wrong to say that they should keep out because there is no hope for them to become like these companies. There are many other ways to be successful in consumer markets.

          17. I mostly agree with you. I’ve said before that consumer markets have many needs to be filled. One of those is exactly what you mentioned, lower priced products that are good enough. That’s a big opportunity, and it does require less skill as a maker. But there is a threshold, your product does have to be good enough, and some of what Microsoft has made, I would say, hasn’t passed that threshold.

            I also mentioned services, Microsoft might be better off pursuing some kind of services platform for consumers.

            Back to making things, a mid-market strategy might work well for Microsoft, but they’ll have to get better at making things. Culturally it’s going to be difficult because I think Microsoft views themselves as ‘top dog’. Microsoft was certainly dominant, but they made mostly mediocre junk. I think Microsoft, culturally as an entity, believes they were making great stuff, top notch, A1, and so on.

            Maybe the first thing Microsoft needs to do is figure out who they are.

          18. Looking at Android for example, the reason that it managed to succeed is not because it was any good. Until 4.0, it significantly lagged behind iOS in terms of stability, design, smoothness, ecosystem. Despite this, it was popular because the other operating systems were slow to come out; Windows phone, WebOS, etc. Therefore, I conclude that speed is more important than having a good product, at least in the early stages of the market. I’m not saying that you can jump ahead of Apple by speed alone, but at least it allows you to be the top follower.

            The reason I think Microsoft should stay in consumer and should stay in hardware is not because they have a chance at becoming a major, quality smartphone vendor. That is a lost cause, even with great software or hardware. It’s because having expertise in these areas will enable them to quickly catch the next wave. It’s a matter of speed. When Apple introduces a new category product, they always leave untouched a certain market segment that followers can exploit. Android was very quick and that’s why they snatched up this segment. Windows on the PC was slow to copy the Mac, but since there were no competitors, it managed to dominate this segment as well.

            What’s important for Microsoft is to be quick to ride the next wave. One has to analyse their strategy with the understanding that in 5 years time, some big disruptive product is likely to come (and if current trends are any indication, it’s likely to be first popularised by Apple).

          19. You’re right about Apple leaving much of the market untouched. Apple is very focused on segments, not the total market. Many analysts (and people generally) don’t seem to understand this. There’s an opportunity for good enough products at lower prices, serving the lower end segments of the market, and even the mid market segments. Apple needs this void to be filled by someone else. Apple can’t possibly serve the entire market, and they don’t want to.

          20. I would say yes. Apple knows how to make things. Apple is a ‘maker’. As you say in another comment, semiconductor design was an extension for Apple, I would add it was simply making something new (which Apple does plenty of). The question is whether Microsoft is a maker. Very few companies are.

          21. If, by a ‘maker’, you mean that a company that doesn’t merely invent, but actually brings a new category product to the market and popularise it, then yes, very few companies other than Apple are good at it. Even most of the companies that are successful in the consumer market have not done what Apple has done (popularising a new category product).

            Microsoft historically has been quick to react to new category products that are just emerging. The speed and thoroughness of how they responded to the Netscape threat and the Internet as a whole is legendary. Likewise, they responded viciously to the Linux netbook threat. They didn’t succeed because they were a ‘maker’. In fact, one could argue that when they tried to be a ‘maker’ when they tried to popularise the tablet PC, they not only failed but they even jeopardised their future response to the iPad.

            Google has also succeeded mainly by a) improving on a product that had already proved to be popular (Search) or b) commoditising and making free a product that was already popular and was earning money (Google Docs, Gmail, Android, etc.).

            Companies don’t have to be a ‘maker’ to be financially successful. In fact, trying to be one can negatively impact the future agility of that company. If the new emerging technology competes with one that you have been developing (without market success) for years, then you will be hesitant to put your weight behind the new one. That is the peril of developing a technology for too long. If for example, a new technology for continuous monitoring for blood glucose emerges, Google might hesitate to invest in that because of the contact lenses in Google X.

          22. “Companies don’t have to be a ‘maker’ to be financially successful.”

            Agreed. But if you want to sell devices to consumers, you better be a maker if you want to do well. And the more integrated you are, the better.

            Of course consumers need services as well, so perhaps that is a better opportunity for Microsoft. Still, there is a chance Microsoft could become a maker. Right now I would bet against it, but I can’t rule it out. Microsoft also has a huge identity problem among consumers. I’m sure there are people who love Microsoft/Windows, but MS did a lot of damage to their brand by selling mediocre crap for many years. They may just need to ditch the Windows name, that’s where the damage was done.

          23. Analysts are just extrapolating stuff they have no clue about, mostly aimed at pleasing their paymasters. Whatever they say is of no consequence. I remember seeing predictions that Nokia would hang on to a majority share way into the Android/iOS era.

            As for mixing Touch and Pointer being a bad idea, I see no proof of it anywhere. Both Android and Windows do it competently, offering arguably better Touch interfaces than iOS, plus a Pointer one where iOS offers none. I’m using both to try and figure out what the issues are because there are obviously issues. None are specifically related to the dual mode of pointing:
            1- Discoverability is low as on all mobile OSes including iOS (no scroll bars, random gestures and taps that do stuff…). Mobile users are somewhat accepting of these issues; Windows users reacted especially badly because they’re used to being treated better, and they knew how to do what they wanted to do, before MS went and confused it up.
            2- Metro as an OS is so full of holes and inconsistencies it’s not even half-backed. On the Home Screen, there sometimes is a “Customize” button. Only it’s not a button to click, it’s an indicator you’re in Customize mode and can change the home screen (but not too much, icons/LiveTiles will rearrange themselves and not end up where you put them). Things go downhill from there (not only are there no scroll bars, scrolling is in a random direction in each app, shutdown is no longer in the Start menu, which could be conceived as good if it weren’t in the… Configure… menu now. Etc…)
            3- Metro as an ecosystem is a one-legged joke. A *lot* of MS system apps and tools aren’t Metro-ized at all, a lot that are just suck (ask anyone about Metro Skype… doesn’t ring reliably, can only use your main PC login credentials…), and 3rd party apps are mostly scams, sometimes honest but bad, rarely worth using (using Android in a VM on my PC works better for me than using Metro apps…)

            All those issues are fully independent of the OS being Touch+Pointer.

          24. I totally agree, and looking at some of the new features in iOS 9 like making the keyboard into a touchpad, it would seem that Apple (gasp!) agrees with you too.

            The failure of Windows 8 could be because of Touch + Pointer, but it could also be a simple logical fallacy of association (guilt by association). I agree that there is little proof that Windows 8 failed because of Touch + Pointer. As you say, the culprit is just as likely to be simple bad execution.

            Maybe asking for a strict logical analysis is too much in this era of heuristic machine learning. I do wish though that human beings would try to be more intelligent that computers, and question simple inferences based on correlation.

            A similar fallacy of association is that you have to give up your personal information in order for a predictive assistant (like Google Now) to work. Just because Google sucks up all your privacy, it doesn’t mean that this is a requirement. Certainly Phil Schiller doesn’t seem to think so (in his interview with Gruber).

          25. I think a bigger logical fallacy is that words = deeds, especially that PR = deeds. Apple are playing the “privacy” card over and over, yet I haven’t seen any objective evaluation of Apple vs Google on that front neither in theory (Apple do sell trackers to retailers, have silently turned tracking on at OS updates, have Unique IDs…) nor in practice (privacy in theory with one hack a month doesn’t count ? The latest on Apple’s side seems to let any app steal all other apps credentials ?).
            I’m amazed everyone is taking what is in essence advertising at face value.

          26. Sounds like a nice idea for Jan Dawson (who has written many good articles that clear up these kind of issues). I personally don’t know the fine details well enough.

  4. Unrelated question (maybe you should have a Q&A column ?): I noticed in one of Ben Evans slides that he assumes smartphone renewal cycles have been, are, and will stay at 2 years. Is that true ? Around me, the 2-yrs cycle has all but disappeared, some people switch constantly, most keep their device until it dies ?

  5. could you extrapolate on the history thing? ie hardware becomes commoditized therefore margins shrink? Seems a little flippant to fitbit i think no? Ie, seems the more relevant data point is the potential growth and scale ability of new markets? ie fitbit would be happy with 30-40% market share if they move exponentially more volume.

Leave a Reply

Your email address will not be published. Required fields are marked *