So what’s this new Microsoft strategy
you’ve been hearing about?
According to CEO Satya Nadella, the
company is three things : Office 365,
Windows and Azure. “That’s it,” the
executive recently quipped. Given
that narrow focus, how do the
company’s massive and recent bets
on hardware fit into the picture?
Microsoft has poured billions in its
Windows Phone project, even before
you take into account its purchase of
Nokia’s hardware assets. And Surface
has been a damn expensive project ,
though one that has been showing
some stronger signs of life in the
most recent quarter.
We recently sparred over whether
Microsoft’s hardware strategy makes
a wit of sense. Should the company
get out of the hardware game and
go all in on services or does its
hardware play make sense —
especially since it’s put so much
money into it?
Ron Miller is up first:
If Microsoft Wants To Be A Services
Company It Needs Total Focus
Microsoft has been making moves
lately that suggest it wants to be a
service company, but if that’s the
case, it’s going to take total focus.
For example, last week, Microsoft
surprised some people when it
announced a deal with Dropbox
to embed Dropbox storage inside of
Office and allow Dropbox users to
edit documents from Dropbox.
Microsoft has services that do this,
and the old Microsoft would have
protected that internal business over
any other business opportunities.
But this isn’t the old Microsoft. It’s
the new service-focused Microsoft
and it intends to go where the users
are, regardless of what impact that
has on its own products.
In another example, this spring
Microsoft announced a deal with
Salesforce.com
around its CRM tool. Once again,
Microsoft has a CRM service in
Microsoft Dynamics, but it ignored
its own products, because it wanted
to put the platform over the product
(or the many over the one as Spock
might say).
If you’re beginning to sense a
pattern here, you’re absolutely
correct. As my colleague Alex
pointed out in a series of posts
recently, Microsoft is trying to get
leaner and more focused, so it’s
putting its eggs in one of three
baskets
: Windows, Office 365 and Azure — a
core OS, a software service platform,
and an infrastructure platform,
respectively. That’s it.
It’s actually a brilliant plan if they
stick to it, but they seemingly can’t
let go of some things that are
getting in the way of succeeding.
If those three pieces are truly the
core of this new Microsoft, they need
to get out of the hardware business
because it doesn’t really fit any of
those buckets, does it? When you
look back at Microsoft’s hey day, it
was successful (all antitrust business
aside) because it concentrated on
what it did well.
It was a Windows/Office business
with some nice enterprise pieces
such as Windows Server, Exchange
Server, Active Directory and so forth.
What you didn’t see was Microsoft-
branded PCs and servers. Microsoft
created a core set of products and
let everyone build stuff on top of
that and it was tremendously
successful. They fed the hardware
and software ecosystem and didn’t
try to compete in any direct way with
their OEM channel.
(And yes I know they made
keyboards and mice, but that was a
small part of the business.)
Today, Microsoft is trying desperately
to sell phones and tablets. It has no
business doing that if it truly wants
to stick to that core mission. Sure,
the numbers have gone up
nominally last quarter and every
Microsoft fan let out a loud cheer
and let everyone know it, but
ultimately when you look at the
numbers, Microsoft isn’t even on the
radar of companies like IDC who
track tablet sales and they barely
register on the phone side.
What’s the point of wasting time
and resources producing these
devices if they aren’t central to the
services mission, and they aren’t
central to that mission. You could
argue of course that Microsoft needs
these devices for its mobile strategy
to work, but what it needs is to get
more hardware companies interested
in the platform and the services that
run on it.
And as for Xbox, yes it’s much more
successful in its market, but it has
absolutely nothing to do with the
core mission. Sorry. I don’t see a
place for it in the new Microsoft and
if Microsoft were smart, they would
spin it off or sell it.
As R Ray Wang from Constellation
Research told me last spring after
the Microsoft-SFDC announcement,
for Microsoft everything now comes
down to the platform. “If you view
Microsoft as a platform company,
they will make decisions [from now
on] in the interest of the platform,”
Wang told me at the time.
And if that’s true, Microsoft needs to
get out of the hardware business,
and soon.
Next up, Alex Wilhelm:
You Don’t Back Half A Horse
Ron is correct to state that Microsoft
is a services company now, or at
least a company that has charted a
path in that direction. I don’t
completely disagree with his analysis
from my own perspective, but I do
think that there is a bit of a
dissonant nuance at play when you
take into account Microsoft’s broader
strategy, as best as I can understand
it.
Broadly, I think that hardware can
be viewed in a support role to the
company’s primary efforts, and that
the company is pretty well pot
committed, to a certain extent. Also,
the company is finally seeing cracks
of sunlight in formerly dim financial
results.
First up, the three core points of
Microsoft appear to be set: Office
365, Azure and Windows. Microsoft
CEO Satya Nadella recently stated
that he views Windows 10 as a
service, so that makes the company’s
three core efforts each land
decidedly in the services column.
Hardware fits into this in three ways:
Without its Windows Phone
business, there is no Windows
Phone-as-a-platform. If it abandons
Surface, it would leave behind a
nearly profitable business that does
a fine job showcasing Windows, and
provides a template for its OEM
partners to build better hardware;
and if it did drop hardware
altogether, it would greatly
deprecate its gaming efforts.
Why would it matter if there is no
Windows Phone, given the hardware
line’s limited sales, when compared
to iOS and Android? It appears that
Microsoft is betting that when
Windows 10 comes to fruition, and
Windows Phone becomes a full
member of the Windows family, it
wants to make a developer
proposition that extends from the
smallest screens to the largest —
build once deploy everywhere I’d
think works better when your
“everywhere” is largest.
A short aside to gaming here is
useful: Gaming is the largest and
most popular category of apps on
Windows Phone. If Microsoft walked
out of the hardware game, there
would essentially be no Windows
Phone handsets in the market, and
thus there would be no Windows
Phone unit volume, and thus sales
and downloads of games would
begin an inexorable decline. So, if
Microsoft leaves hardware, attention
from gaming developers that it
wants very much for Windows 10
would be cut. That would be tough.
Moving forward, regarding Surface, I
agree that if the business had failed
to produce a better-selling device in
the Surface Pro 3, the project would
have been a decent candidate for
cancellation, simply because it had
minor revenues — when compared to
the larger Microsoft top-line
segments — and therefore less
importance. Also keep in mind that
Surface, in terms of unit volume, is a
slim slice of total PC volume, making
it not mission critical for the PC
market in terms of short-term
survivability. However, the Surface
Pro 3 has done two things: Grown
Surface revenue greatly while moving
closer to GAAP profitability, and has
provided a reference design for how
to build touch-PCs that are useful in
the Windows 8+ context.
Given that, why cut it loose? The
company expects sequential quarter
unit volume growth it said in its
earnings, so we could see even
higher revenue in the current
quarter. Why cut a nearly profitable
business that could do more than $3
billion a year in top line?
Regarding Xbox, the chance that
Microsoft does away with it is nil to
begin with, but it is worth noting
why: It has massive buy-in among
younger users that might not
otherwise have lots of experience
with Microsoft products, which could
help the company gain mindshare
among the people down the road
that are likely to buy computers.
And again, the gaming bit: If
Microsoft dropped its Xbox business,
it would greatly harm its
relationship with gaming companies,
firms that will be able to quickly and
easily deploy their titles across the
unified Windows 10 platform, where
the company would love to see
popular Xbox titles land to help
support the unified Windows Store.
Surface almost makes money, Phone
will lose money for only another
fiscal year or so, and Xbox is a hit
for the company. And, given that
each supports the key coming
Windows 10 platform, and leans on
the company’s Azure computing
service — making them useful
customers, if in-house — I don’t
think that they are on the chopping
block.
If gobs of money are hemorrhaged,
expect cuts. But for now, Microsoft
has spent something in the
neighborhood of $10 billion — using
back of the envelope math — on
buying Phone, Phone losses and
Surface losses, not to mention
Surface development costs pre-
launch. You just don’t throw that
away.
Don’t aQuantive things that might
work, bro.
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