The Windows 8 Mistake

Jan Dawson / February 20th, 2014

The CEO succession at Microsoft and the approaching Build conference have made Windows 8 a hot topic again, raising lots of questions about where the OS goes from here. While there are lots of theories, few people seem to be going back to where Windows 8 came from in the first place, which is really useful if you’re trying to figure out where it might go next.

Windows 8 was about pulling tablets towards PCs and away from smartphones

Microsoft missed the boat on the current generation of smartphones. Though it was a significant vendor in the early history of the smartphone with Windows Mobile, it misjudged the entry of the iPhone, its impact on the market, and the resulting dominance of iOS and Android. That history has been well covered and doesn’t need to be rehashed here. But the important thing is that, as Microsoft saw the re-emergence of the tablet category following the launch of the iPad, it saw that tablets were being formed in the image of smartphones, not PCs, and that was enormously bad news.

Why was this so horrifying for Microsoft? I believe they saw even then that tablets had the potential to displace PCs, but the smartphone model had several disadvantageous features from a Microsoft perspective:

  • The smartphone space was already, by 2010, coming to be dominated by two models: a tightly-integrated hardware/software package exemplified by Apple (and by then less successfully by BlackBerry) and a free, open source software licensing model embodied by Android
  • Operating system licenses on smartphones are much lower than on desktops for Microsoft, and non-existent for essentially everyone else, threatening Microsoft’s Windows revenue and margins
  • Smartphones ran entirely different apps from the applications that ran on desktops, with no cross-compatibility, eliminating the opportunity to sell existing versions of Office
  • Smartphones were based on ARM architectures rather than on Intel, making them fundamentally incompatible with all the existing Windows software.

The diagram below illustrates the situation as Microsoft must have seen it in 2010:

Windows 8 tablet strategyTablets could, at that point, theoretically go either way, and Microsoft certainly had the power to decide which way it wanted to pull tablets, whether towards the smartphone model or towards the PC model. And it clearly decided that its future depended on applying the PC model, rather than the smartphone model, to tablets. A PC model applied to tablets would allow it to continue charging high licensing fees for Windows, make Office applications easily available on the devices, and make them compatible with existing Windows applications from third parties. But it’s important to note that this was a decision driven entirely by what was perceived to be best for Microsoft, but by what would be best for the actual users of the products (The one counter-argument is that Microsoft would make Office available on tablets in more or less fully-fledged form, and this could be user-friendly as well as helpful for Microsoft’s bottom line.)

This, then, explains Windows 8, as the supposed solution to these problems. Microsoft would make the desktop, and not the mobile, version of Windows the core of the tablet experience. But by doing so, it forced on the desktop experience lots of things that made sense in the tablet world (the Metro UI, touch screens and an app store) but didn’t make sense there. Instead of taking a consumer-led approach and unifying two fundamentally similar products, smartphones and tablets, with a single OS, Microsoft tried to bridge the gap between two fundamentally dissimilar products, the desktop and tablet. And all of this was in the service of establishing the PC operating system licensing model and not the smartphone OS licensing model on tablets. 

But of course when it came to tablets, Microsoft had to make compromises to compete on price and form factor: the choice of ARM rather than Intel for Windows RT, and the resulting limitations of RT devices, ironically made them a lot more like smartphones, while eliminating almost all the consumer benefits of creating tablets in the image of the desktop. As a result, whereas the other two major platforms have one big dividing line from an applications point of view – between smartphone/tablet on the one hand and PC on the other, Windows has two – between smartphone and tablet, and between tablet and PC.

Where do we go from here?

If Microsoft’s ambition was to pull tablets in the direction of PCs, it clearly failed. The iPad and now a range of Android devices have enthroned the two dominant smartphone operating systems as the OSs of choice for tablets too, and there is nothing Microsoft can do to stop this at this point. Its own tablets have sold poorly, and its OEMs’ tablets haven’t sold that well either. Part of the challenge is that Windows tablets are competing on an uneven playing field from a cost perspective – wrapping in a licensing fee for a full operating system significantly increases the price for Windows tablets over the price of iOS and Android devices which don’t have to cover licensing costs.

But that’s far from the only reason why Windows 8 has been a relative failure. The bad decisions described above, which flowed from a desire to bolster Microsoft’s two cash cows rather than to do what was best for users, have left it with an operating system (or two) which meets almost no-one’s needs well, and sales have reflected that. So, where should Microsoft go from here? The following should serve as a good to-do list for starters:

  • Merge Windows Phone and Windows RT, mirroring the existing iOS and Android structures, and rename Windows RT as Windows Tablet.
  • Make both flavors  of the merged mobile OS free for users and OEMs, eliminating licensing fees
  • Do much more to promote consumer services, notably Microsoft’s own Music, Video and Gaming stores and offerings, across its consumer devices (smartphones, tablets and Xbox)
  • Continue with Windows 8 as a separate operating system, making Metro an optional overlay UI for touch-screens, but allowing users to choose the old-fashioned desktop UI as their primary or only UI if they so choose.

I’ll address each of these below in more detail.

Windows RT has largely been a flop, precisely because of those compromises and the confusion created in consumers’ minds about what it is and how it relates to the full version of Windows 8. It shares much more with Windows Phone than it does with Windows 8 in its limitations and in its architecture, and as such the answer is to rebrand Windows RT as Windows Tablet and merge it with Windows Phone, while leaving Windows 8 as a separate entity that works primarily on desktops, laptops and a few convertibles including things that look a lot like tablets but behave more like laptops in their functionality. This would be a recognition that Apple and Google were right all along, and thus a painful one. But it would also open the door to a couple of other strategies Microsoft could pursue.

Next, it should stop charging for licenses for Windows Phone and Windows Tablet.  By my own calculations, Microsoft likely makes under $1 billion from Windows Phone licensing annually, the vast majority of which comes from Nokia anyway. By ending license fees for Windows Phone, Microsoft would remove one of the competitive disadvantages every Windows Phone vendor labors under, allowing them (including Nokia) to either reduce prices or increase margins on their device sales. This doesn’t solve the other fundamental problems with Windows Phone, but it should at least accelerate growth. Microsoft ought to capture far more than $1 billion annually from growth in the hardware market.

Making Windows Tablet free would solve some of the same problems for Microsoft and its OEMs in the tablet space as it would in the smartphone space. It would reduce the cost of making the more consumer-centric Windows tablets, allowing them to be more price-competitive, potentially stimulating demand for the Surface among other tablets, which would also benefit Microsoft on the hardware side. Microsoft could then sell Office RT as an add-on for these devices (or continue to bundle it for free as a unique selling point), but should recognize that the primary reason most people buy tablets is not to do work on them.

The corollary here is that Microsoft needs to do a much better job selling its consumer services, the other half of its Devices and Services strategy. Microsoft now has competitive Music and Video stores, which are available across Xbox, Windows 8 and Windows Phone, but which it does very little to promote. These devices can absolutely be viable entertainment devices, whether by using Microsoft’s own services or the Netflix, Hulu and other entertainment apps available on them. But Microsoft says very little about these in its marketing of any of its devices, whether Windows Phone, tablets or PCs. Apple has built up an installed base of 500 million iOS devices by most estimates, and the associated content and application stores now generate almost $10 billion in net revenue for Apple annually. Microsoft’s massive base of Windows PCs combined with a stronger base of Windows-based smartphones and tablets could come to rival the size of this services and content business quickly, on top of the existing $7-8 billion annual revenue from the Xbox platform. Together, this revenue stream could easily outweigh the lost revenues from Windows RT licensing, which must be minimal today.

The desktop/laptop version of Windows 8 should continue more or less as it is. There’s nothing fundamentally wrong with it, especially in its desktop UI version, but Microsoft has caused itself huge heartache by imposing a user interface designed for touch screens on tens of millions of non-touch devices. The Metro interface is fine on smartphones and tablets, but both unfamiliar and poorly suited to a traditional trackpad/mouse and keyboard device. As such, it should make the Metro UI an optional overlay for those users who see value in it (probably mostly touchscreen users) and allow other users to banish it entirely and revert to the desktop interface. Another lesson Microsoft can learn from Apple is that, although it has driven significant convergence between the desktop and touch versions of its operating systems, it’s all been in the systems and infrastructure rather than in the UI, and there are good reasons for that.

To sum up, if Microsoft is to become a Devices and Services company on the consumer side and not just on the enterprise side, it needs to do what it can to stimulate the virtuous circle that exists between the two: compelling services drive device purchasing, and device purchasing drives usage of services, which in turn creates greater loyalty around the ecosystem. Today, Microsoft is so obsessed with driving Windows and Office revenues that it often takes steps which are either irrelevant to, or at worst, counter-productive to maximizing device sales and installed base and the usage of services. Taking the steps outlined above would stimulate device sales by lowering costs, incentivize OEMs who are on the fence about making Windows smartphones and tablets to give it another go, and at the same time foster Microsoft’s own burgeoning hardware business. On top of it all, it would finally give Microsoft a shot at building loyalty around truly consumer-centric services such as content consumption rather than insisting that Office and Windows are the only things around which it wants to build loyalty in the consumer market.

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw, a technology research and consulting firm focused on the confluence of consumer devices, software, services and connectivity. During his thirteen 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.
  • Windows Tablet sucks as a name.
    Windows has too much baggage.
    Microsoft needs to abandon the Windows name for its phone/tablets.

    • qka

      Call the merged RT & WinPhone “Windows Touch”. Or to avoid the “Windows” baggage, “Microsoft Touch”. That also continues the Microsoft tradition of naming their software with real world words.

  • JoeBest

    Very informative assement on what should be some of Microsoft’s potential “todo” list on solving the company”s current situation.

    I agree that Microsoft should merge Windows RT and Windows Phone and rename the initiative. I don’t think that your suggested renaming of the product to Windows Tablet is practical (even though its much better than Windows RT); if such a merge were to occur they should brand it under one name (maybe Windows Mobile).

    If Microsoft wants to play it on the safe side, they could make 2 versions of tablets: one compatible with ARM (Windows Phone ecosystem), the other compatible with x86 (Windows ecosystem), and let the market decide which is best for them.

    I don’t think that making Windows Phone/RT’s license price free should be on this “todo” list; OEMs are willing to pay if the product sells, after all, paying license fees to Microsoft for using Android hasn’t stop OEMs from building Android devices. Instead, I would add to your list that Microsoft should sell Office (native apps) on iOS and Android.

  • Bruce_Mc

    Making a Microsoft Phone and Tablet OS free might make it cheaper than Android, which has licensing fees to be paid, some of which go to Microsoft. I think that would help Microsoft compete with Android.

  • mscritic

    You’re talking about a company that has been mired in deep confusion for 2 years. The recent leadership reshuffling has changed nothing, and Bill Gates, Steve Ballmer and Windows need to depart permanently. Radical? Unlikely to happen? Definitely, but otherwise Microsoft is likely to continue their downward spiral.

  • zp

    Interesting analysis. I can’t wait to see how the changed Microsoft leadership addresses these issues.

  • Recision

    While you have outlined a reasonably credible strategy, there are three significant problems with it.

    1.) Effectively executing that strategy with focus and commitment.
    2.) Doing so in a timely manner.
    3.) Actually choosing to commit to that strategic direction.

    Frankly I can’t see Microsoft achieving any of those; let alone doing all three simultaneously.

  • Microsoft has made many strategic mistakes while competitors have evolved rapidly. All these errors are reflected in products that fail strategically, are late or can not compete.

    The worst outcome of this is how the brand has been devalued. Users lost interest and remain very skeptical when buying Microsoft products. A few days ago I saw how a group of people made ​​fun of a guy that had Windows Phone. Branding matters.

    Microsoft today is like a dolphin who lost her shoal and remains confused. He had his chance and failed.

  • Clyde Seymour

    Good stuff

  • Jbcay26

    you missed the biggest issue with the Metro interface on desktops. Its not the touch screen, its the fact that it no longer “does” windows. A single app (or two) on a large desktop or even notebook screen makes no sense, especially for a system called “Windows” since it banished DOS which was the original single-app GUI.

  • ncgmac

    Actually Microsoft announced earlier this year they would be combining Windows Phone 8 and RT. Or at least pulling them closer together. As for free though, we’ll see. You are correct in the article that this is the path they need to follow for mobile, especially since they are a distant third in the market. The question is, can they get over themselves and find the same fight and strategy that pushed IBM out of the OS market.

  • Hole Of Peace for Everybody

    The problem with 8 is: isnt finished is a working system. not all the system is NewUI.

  • JoeS54

    I like Windows 8. Especially in the context of the Surface Pro 2 that I own, which is an excellent device both in terms of hardware and software, and the integration of the two. I’ve seen a lot of media trashing of Windows 8, and a fair amount of internet comment section complaints, but not a lot of actual data proving that people universally despise it, or that it can be unequivocally be characterized as a “failure”.

    The data that does exist is that Windows 8 has sold 200 million copies. That’s more than twice the number of iPads and iPhones combined sold by Apple in all of 2013. And yet Apple is the constant recipient of glowing praise, while Windows 8 is supposedly a catastrophic failure.

    • qka

      How many Wind8 sales were then downgraded to Win7? The same happened with Vista; many licenses sold, only to be downgraded to XP.

      • JoeS54

        Good question – you tell me. Aside from anecdotes, there is no such data.

    • capnbob67

      Do you have any clue how many iPad and iPhones Apple sold in 2013? It is well over 200M (About 70M and 160M). If you were looking for iPads and Macs, then you might be closer. Not to mention that iOS7 has rolled out to over 400M+ devices in a matter of a few months.
      The 200M is a terrible number, way behind Win7 at the same stage, and that’s before you consider that this is license sales to OEMs that doesn’t necessarily translate to actual device sales and OS in user hands (unlike Apple sales numbers). PC sales are declining significantly and steadily and Win8 is both a cause and a victim of this trend.

      • JoeS54

        Those aren’t the numbers I’ve seen for Apple sales, but even so – when you consider that Windows is only one part of Microsoft’s business, while iPhones and iPads are nearly Apple’s entire business, the characterization of Windows 8 as a “mistake” fails.

        Then again, I never got why people trashed Vista and loved Windows 7, when to me they were almost identical. Most people have an engrained view that Microsoft is for work and Apple is for play, so Microsoft faces an entirely different level of demands and expectations.

        • capnbob67

          Facts is facts. What is your point about iphone/ipad as being most of Apple’s business? It is (70%) but the iPhone business is alone is larger than all of MS in revenue and profit. Does that change anything? Windows/Office is most of MS business.

          I am not saying Win8 is a mistake per se but I am saying it has significantly underperformed MS and the market’s expectations probably for a combination of all the reasons trotted out ad nauseum – too different, highly compromised, unnecessary for most users, worthless for enterprise, etc.
          People disliked Vista because it messed up old systems (too slow for old hardware), didn’t have adequate driver support and wasn’t tested with corporate apps before it was replaced so was no use to Enterprise customers.
          2007 called and wanted it’s MS for work, Apple for play meme back. MS has lost any relevance in Enterprise mobile and BYOD is even allowing Macs onto corporate networks. In the meantime, MS has thrown billions at “play” and has the minor (<10M units per year) and unprofitable Xbox franchise to show for it.
          MS is far from dead but pretending it has strength is key growth areas is just sticking your head in the sand.

  • jfutral

    Well, they just cut fees by 70% for low end devices. I doubt that may be enough, but maybe that coincides with fees paid to MS for Android. But I am still not clear on the status for RT is these days. I agree that free, for mobile devices, makes the most sense, especially if they are tied to MS services like certain Android licenses are tied to Google services. And lets face it, it is likely that anyone who only wants a low end device is not looking to need/buy Office, so not having that as a functional part of RT should not be that big a deal, except maybe through Office 365 or whatever the online version is.

    Honestly, I couldn’t explain to anyone what the status and parts are for any of their software offerings. That is something that needs to be addressed the way Jobs stripped down Apple’s products when he came back. That should be the new CEO’s first job—clarity and focus.

    Joe

  • Barack Holder

    I actually think MS is ahead of the curve here. Win8 isn’t perfect but I think the next couple of versions will be better, just as tablets are getting enough juice under the hood to run a full OS at a reasonable price. They already allow boot to desktop in Win8.1, so the 9-5ers can calm down. The desktop and Metro will have better interplay between them in future versions. Us road warriors with Surface Pro’s already understand where MS is headed, and it’s a good place.

    • qka

      “Just wait until the next version!”

      The perennial Microsoft mantra.

      • Barack Holder

        sure, but my point was that the current version is very good and gets a bad rap. That said, I think this article makes good points about business strategy and mistakes.

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