Microsoft's move to devices and services was one of the top stories of the past year, and there are many ways to view this strategy sea change.
While we tend to focus on the services side of the equation when it comes to Microsoft, because the transition from traditional software to services is so obvious and relatively straightforward, we shouldn't ignore what's happening on the devices side.
Here, too, we see a transition, but it's going to be messier and more confusing.
And it's happening right now.
The Shifting Market for PCs
Few reading this need to be told that smart phones long ago started outselling traditional PCs, and that tablets are poised to do so as soon as this time next year. But this transition has rocked the industry in ways that are only now beginning to be understood.
From the Microsoft perspective, its previous safe perch atop the PC market is crumbling as you read this. Where the firm long enjoyed roughly 90 percent market share in the market for personal computing devices, it now owns closer to 20 percent, because that market includes smart phones and tablets, and not just traditional PCs. (You can check out my math in Post-PC: When Will Then Be Now? if you're curious how this works.)
Android Leads the Way
Like the "Internet tidal wave" before it, the proliferation of mobile computing devices happened without Microsoft's leadership, so the company once again has been forced to adapt to this change rather than drive it.
The prime beneficiaries, so far—and to be fair, this is everchanging—are Samsung and Apple, though of course Google needs a mention here since they create the free Android OS that runs most of the mobile devices made today. In fact, Android market share stands to be three times the size of that of either Windows or Apple iOS by 2017.
The reasons for Android's successes here are roughly analogous to what drove Windows to fame and fortune decades ago. It's a low-cost (in this case, free) alternative offered by numerous third-party hardware makers who are battling each other and high-priced incumbents who either license their own solution (Microsoft) or selling directly to users (Apple).
From a pricing perspective, it's a race to the bottom, and since Android is essentially free to device makers, it's a more economical solution than any Windows version.
Chromebooks Chip Away from the Bottom
Google also makes a free web browser-based OS called Chrome OS, which it too gives away for free. This OS is used mostly on laptop-like devices called Chromebooks that can be sold at very low prices, in the $250 range typically.
Chromebooks have already seen some initial sales successes, and with most of Microsoft's PC maker partners seemingly signing on to make these netbook-class wonders each month, it's perhaps not surprising that Microsoft has recently turned its "Scroogled" ad campaign sights on the devices in recent days.
Chromebooks are insidious because they look like laptops, and they signal to the uninformed that they can have a productivity machine for cheap.
More to the point, Chromebooks could continue the price dissolution of the PC market that started with netbooks. Even if they aren't directly successful, they could still have a devastating impact on the traditional PC, which is Microsoft's last stronghold in this new personal computing market.
The Evolving PC Market
So that's the situation that Microsoft finds itself in as we head to the end of 2013. A market that was previously comprised of just desktop and laptop computers now includes a startling range of devices in a variety of sizes and form factors, and it's only going to get more confusing as we move forward.
In the smart phone market, Android continues racing ahead, and now controls over 80 percent of sales thanks to the sheer variety of device types offered by hardware partners. Apple's iPhone continues falling, from a market share perspective—though it's growing sales as the overall market grows—and Windows Phone is bringing up the rear with just 4 percent of all smart phone sales.
On the tablet front, Android is edging towards dominance with roughly 65 percent of the market. Here, too, Apple is falling behind because of its high prices and lack of product range. Microsoft makes a negligible dent in this market, and should control just 3.5 percent of this market in 2013.
PCs are getting attacked by Chromebook on the low-end, by Mac on the high-end, and by tablets all around. This market is contracting, is much smaller than the smart phone market, and could be smaller than the tablet market soon.
So it's no surprise that Microsoft is mixing things up. Again.
Microsoft's Response to Device Convergence
Windows 8 was Microsoft's first, pained push into this new world, and there's little reason to reiterate the many problems this dual-use design product caused with both customers and partners. But Windows 8 was a response to the surge in tablets, where, in Microsoft's view, Windows could simply become a platform for these hot, new devices. The problem is that the market is continuing to change.
So where many disputed whether tablets and PCs were even comparable device types, now there are divisions within the tablet camp. And devices like the original iPad, which are now thought of as "full-sized tablets" are being outsold, overwhelmingly, by so-called mini-tablets with smaller screens.
So do these mini-tablets compete with full-sized tablets any more directly than do full-sized tablets with PCs? It doesn't matter: They're all personal computing devices, and the sale of one type could take away the sale of another.
To address this explosion in mini-tablets, Microsoft had to specially adapt Windows, and those changes came as part of Windows 8.1. This release supports portrait mode, as many mini-tablets will be used like e-readers.
For smart phones, conversely, the growth part of the market is in so-called phablets, those phones with screens larger than 5". (Most phablets have 5.5" to 6" screens currently.) Here, Microsoft has also responded by adding support to Windows Phone 8 for 5" to 6" screens running at 1920 x 1080 (1080p), meeting the Android threat. (Apple, thus far, has ignored the phablet craze, for some reason.)
At some point, phablets and mini-tablets are going to meet in the middle. A device like the Nokia Lumia 1520, which sports an enormous 6" screen, is clearly too big to be used as a phone by many, and it's pretty close in size to 7" devices like the Google Nexus 7. But it's a phablet—that is, a large smart phone—and not a tablet.
So Microsoft is adapting Windows yet again. We don't know the full details, but as I noted in A New Hint About Microsoft's One Windows Vision, Microsoft executive vice president Julie Larson-Green told a recent tech conference that three versions of Windows—Windows RT, Windows Phone and "full" Windows—were too much. "We're not going to have three," she said.
My expectation is that the ARM-based versions of Windows—RT and Phone—are basically merging into a single product.
This makes plenty of sense for plenty of reasons, but for the purposes of this discussion, the types of devices on which Windows runs seems to be growing pretty rapidly these days. Instead of addressing changing market needs belatedly, as it did with mini-tablet support in Windows 8.1 and Windows Phone's support for phablets, Microsoft can simply build functionality onto a single core Windows release and adapt more quickly.
What also needs to happen—and there are rumors that new Microsoft OS chief Terry Myerson has floated this possibility with hardware partners—is for Windows licensing fees to come down.
Microsoft can't command the high prices that Apple does, so a high-margin luxury market play doesn't make any sense for the firm. But it's getting killed in the volume part of the market by Android. Clearly, prices need to come down.
One possibility is that the OS could be free on phone and phone-like devices, and only a minimal cost on tablets. But that's just speculation at this point.
Everything is Changing
While users seem to be embracing using multiple devices, it's hard not to imagine some strange scenarios that will begin unfolding in the coming years.
While many will continue to carry separate smart phones, tablets, and PCs, many more will seek to consolidate and lighten the load. For example, if a phablet-class device were powerful enough to be used as a PC, why not carry that device with you at all times and connect it to a docking station at work or even a full-sized keyboard while on the go?
This move to mobile devices also puts further pressure on the Windows desktop, which will most likely be relegated to x86-class hardware only, or what we might now think of as traditional PCs.
And with virtual desktop infrastructure (VDI) coming to the cloud, this move from the Windows desktop might actually be accelerating: Many users can simply access their aging desktop applications through remote virtual instances. (Check out Amazon takes Virtual Desktop to the Cloud for more information about this kind of solution, which isn't isolated to Amazon.)
As we come to the waning days of 2013, Microsoft and its partners offer a wealth of options at various price points and in various form factors. We have Windows Phone handsets of all sizes, primarily from Nokia, which will become part of Microsoft early next year. And we have Windows-based mini-tablets, tablets, hybrid and transforming PCs, touch-based Ultrabooks, laptops, desktops, all-in-ones and more. Even the Xbox One, which utilizes versions of Hyper-V and Windows 8 at its core, is ostensibly a Windows-based PC for the living room.
But moving forward, wearable and even human-embeddable technology will go mainstream, and I have no doubt that Microsoft will adapt Windows for health-monitoring bracelets, digital glasses, smart watches, and whatever other Jetsons wizardry you can imagine. Making the platform more easily adaptable to new usage scenarios will only allow this to happen more seamlessly and quickly.