As an analyst I have covered Microsoft close up and personal since 1981. When I first went to visit Microsoft in 1982 they were in their red brick buildings in Bellevue, WA and had less than 100 employees if my memory serves me right. I remember being able to walk down the halls and see Gates, Microsoft co-founder Paul Allen and other top executives in their offices as I was shown the operations. If it weren’t for Microsoft, I don’t think we would have had the kind of PC business that exists today and its overall role in driving our industry has been enormous. Over the years, I have watched them grow to become one of the most important and profitable businesses in the world. I have seen Gates become a billionaire 55 times over and see friends I got to know in the early days become billionaires or multimillionaires as they steered Microsoft to software dominancy.
However, as they grew and diversified their business, they have had many challenges over the years. In this day and age when computing is going mobile and their past cash cow of Windows and Office suite software is under attack, it became clear to many that the company should to change its leadership from the top down. More importantly they needed to re-architect themselves for a world of computing that is much different than the one they have known over the past 30+ years. 2014 will become the pivotal year for Microsoft and how the new CEO guides them will determine their success and relevance in the future.
The choice of Satya Nadella as the new CEO of Microsoft is very important to redesigning this pioneering software company. I believe it underscores that Microsoft’s board understands the core of their future lies in business and enterprise. They looked for a leader who could keep them moving forward in this growing segment of their business and Nadella was their choice. In fact, servers, Cloud and IT software represent an area that Microsoft already has a powerful position in. They must innovate within this segment if they are to stay relevant. On the other hand, the PC business is now in stability mode and will never again be a growth market for them or anyone in the PC industry again.
Demand for PCs declined by 10% last year and although we do see some increased demands for PCs in the next 1-2 years due to IT refresh rates starting this year, the fact remains that demand for PCs will stay steady at about 280-300 million a year going forward and most likely will continue to decline in importance over the next 5 years. In fact, even with refresh rates in play over the next two years we believe that overall demand for PCs will still be down by 2-4% over last year’s unit shipments. Also, most IT refresh OS demands will be Windows 7 related, while Windows 8.1 will continue to be slow to garner any serious market share within the enterprise as well as consumer PC markets. Although we know very little about Windows 9, if it pushes a touch based UI to IT and Enterprise accounts, it too will get a poor reception as touched based systems are really not suited for the precision like functions you need with spreadsheets, databases and even word processing where a keyboard and mouse are a key part of the user interface. Also touch screens just add to the cost of the PC or laptop and that serves as a deterrent for upgrading to Windows 8.1 or even a touch based Windows 9.
Where Microsoft is really challenged is in mobile where the growth of smartphones and tablets continues to be strong. Competition by Apple’s iOS and Google’s Android, which together dominate 95% of this mobile market, makes it hard for Microsoft/Nokia to gain the kind of software and channel support they need to grow real strong demand for their mobile offerings. Although smartphones and tablets do cross over to business via BYOD, the role of mobile devices and especially its growth will be driven by consumers and Microsoft’s position in mobile for consumers is falling farther behind their competitors today.
With this in mind, here is my blueprint of how I believe Microsoft should deal with these challenges over the next two years.
Within 18 months I believe the company needs to be broken out into three distinct divisions or possibly separate companies. One division should be focused on IT, Enterprise and Business, Cloud Software, business focused OS and services. The second division or company should be focused primarily on mobile, which includes smartphones and consumer tablets. The third company should be focused on entertainment and games and includes the Xbox, smart TV and the living room.
As for the IT company, this group would have the charter of moving all of Microsoft’s software to the cloud, stabilizing their Windows OS PC business, innovating within server software and establish a set of software as a service solutions primarily for enterprise and SMB. I could see them even acquiring a dedicated services organization to enhance their current software services and consulting practice. This group would be responsible for evolving their Windows OS for enterprise, consumers and education but with full knowledge that the PC as an OS vehicle will never be a growth market again. This group would also oversee the Surface Pro business although if they were smart they would get out of the PC hardware business altogether and let their remaining PC customers handle that part of the business. Bing should also be run out of this group since it is cloud service.
The mobile division or company would be solely responsible for smartphones and consumer tablets. However, this group would have to understand that the Windows PC OS does not serve their mobile agenda going forward. Like Google with Chrome/Android and Apple with iOS, which have distinct operating systems for PC and Mobile, this group should scale Windows Mobile OS up for use on tablets and optimize this OS for various size tablet screens instead of trying to push a PC OS down for use on smaller mobile screens. However, even if they do this they need to fix a huge problem Windows has when it comes to software apps. Windows Mobile OS and Windows 8.1 will never have the long tail software apps that IOS and Android have today and in the future. This puts them at a huge competitive disadvantage. I believe that this group has to bite the bullet and find a way to bring Android apps into Windows mobile, thus giving them a fighting chance to compete with Apple and Google and their partners.
There are various ways to do this although Bluestacks Android on Windows solution is the best of breed that I have tested to date. Of course, the Nokia acquisition would be critical to this division and their hardware which could run Windows mobile as well as Android on smartphones and tablets could help this division gain serious ground against Apple and Google and their Android partners. This group could also become involved in wearable devices and any other mobile based hardware and software that shows market promise.
The Entertainment division or company would be highly consumer focused and take aim squarely at the living room. The new Xbox ONE already serves as a set top for OTT streaming services like Hulu or Netflix as well as delivering games, but they could and should expand its role as a set top box in the living room and tie it closer to their various consumer online services such as Bing and future consumer cloud apps. They could really kick this into high gear if they bought Roku and integrated it not only into Xbox one but push to get the Roku box and technology into actual TV sets like Roku is doing today and make an even broader play to get Microsoft software, apps and services into the home. This group could also oversee future work on the connected home and other IOE consumer related hardware, software and services.
I suppose this is a rather simplistic view of how I think Microsoft should proceed in insuring their future, but to try and do all of this under a single Microsoft umbrella I just don’t think will work. By creating three distinct divisions or setting them up as separate companies each would have a clear set of goals, charters and roles with a tighter focus, thus giving them more of a fighting chance to compete especially against Apple, Google and Samsung that today are dominating the world of consumer technology and have strong desires and goals to become powerful players in IT and enterprise over time. I have no idea if this new CEO will go down this path but I do believe that if they don’t do something drastic along these lines, Microsoft’s overall business will continue to decline and their relevance in the future will be seriously in doubt.