Last week, Microsoft formally announced what we’ve suspected for months, which is that the company is switching its emphasis from traditionally delivered software to services for devices. That is, the one-time software giant now thinks of itself as a devices and services company.
Phooey, you say?
I, too, have some fears about this announcement, which came in the form of a public letter from Microsoft CEO Steve Ballmer to shareholders, customers, partners, and employees. But my issue has little to do with the move to devices and services, which I’ve championed as the future of this industry in general, and a future for Microsoft that I honestly never expected the firm to embrace so quickly. (2012 has seen an amazing and pervasive strategy shift at Microsoft that this letter simply formalized.)
No, I’m worried that Microsoft’s few successes so far in these new markets for devices and services – such as the excitement around Surface -- are triggering a serious bout of reality distortion. And if this continues, Microsoft might end up jettisoning the one important differentiator that it has against monoculture competitors such as Apple and Google: the diversity of its ecosystem. And should Microsoft decide to go it alone across the board, and stop partnering with the companies that provide that diversity, all we’ll be left with is a third-rate copy of Apple.
Microsoft: We don’t need another Apple.
Apple is successful because of its impossible-to-duplicate insistence on doing everything by itself. It partners only when it absolutely has to, and these partnerships are largely temporary conditions that end quickly, either by Apple buying that company (if the company is lucky) or simply duplicating the functionality Apple wanted to begin with.
For Apple’s customers, this behavior results in products and services that customers feel are superior, because Apple supposedly only focuses on a few things and does them really well. I don’t actually agree that’s always the case -- witness Mobile Me and Apple Maps as obvious examples -- but whatever. Apple’s customers are routinely the most satisfied and compliant of any technology firm’s users. And whether it’s justified or not, they are, above all, faithful.
Microsoft is not Apple. Microsoft competes in a stunningly diverse range of markets. But looked at from a very high level, it’s easy enough to separate those markets into just two groups -- businesses and consumers -- and Apple focuses only on consumers. Marketing and selling to consumers is quite a bit different than doing so with businesses, and I think most people would agree that, to date at least, Apple has dominated in the consumer market while Microsoft has seen its best successes with businesses.
In fact, Microsoft’s biggest success occurred when individuals started buying PCs for the home, because what these users wanted was what they had at work: the same PCs, the same software, and the same capabilities. When those needs changed -- to devices, connected services, and mobility -- Microsoft was suddenly left out in the cold. And what the company is trying to do now is adapt to this new reality, instead of making a new reality adapt to it, as it did in the past with products such as the Tablet PC.
I don’t begrudge Microsoft that, as noted. But where Apple offers monoculture -- and, until Steve Jobs passed, the somewhat bogus notion that a single mastermind was at work behind the scenes ensuring a high quality level and integration across all offerings -- Microsoft has been about diversity. And that diversity comes into the Microsoft ecosystem by its many, many partners.
Case in point: Microsoft’s PC maker partners. They are in some ways the worst thing that ever happened to Windows -- crapware is the reason that your Windows 7 PC often takes a minute to boot up and then runs far more slowly than it should day-to-day -- but they are also the best thing that ever happened to Windows. The sheer variety of PC types that we’ve been offered as customers over the years is something Apple can’t duplicate, not to mention the many, many ways that those PCs can be configured, by the user, at the time of purchase. Apple sells consistency. The PC world sells choice. It can get messy and confusing. But it’s hard to argue against diversity, whether you’re talking about real, biological ecosystems or digital ecosystems.
For now, Microsoft is talking the talk. In his letter, Mr. Ballmer noted that there is no way that a single company (i.e., Microsoft) could address the needs of 1.3 billion PC users. But he also hints that things could change. That if its Surface devices take off, well, those partners might not be required anymore. There are even hints in a related proxy filing that Microsoft is considering building its own Windows Phone handsets.
It’s reality-check time. Microsoft has never successfully sold any important hardware device of its own, not once, not ever. And yes, I’m including the Xbox 360 in that equation. To date, Microsoft has sold about 68 million Xbox 360 consoles since its release in 2005. And although that might sound like a lot, I’d just remind everyone that in the most recent quarter -- which analysts have described as the worst quarter for PC sales growth since 2001 -- hardware makers overall sold 87.6 million PCs. So, one quarter of PC sales is more units than Xbox 360 sales across its entire 7-year lifespan. And the total size of the PC ecosystem, 1.3 billion PCs in active use, is anywhere from 20 to 40 times the size of the Xbox 360 active user base.
When you combine this unfortunate truth with Microsoft’s lackluster online services division and its inability to sell more than a handful of Windows Phones to a market for smartphones that is, if anything, bigger than the PC market, a clear picture emerges. Sure, Microsoft can recast itself as a devices and services company, but the result is a very different -- and much smaller -- company than the one we see today. Obviously, that’s not Microsoft’s game plan. So something has to change. And that will involve selling a lot more devices and services. Obviously.
The key to doing this is to coerce customers to make the same transitions that Microsoft is making, away from traditional software that’s purchased occasionally and to devices that are purchased more frequently and to online services that include regular subscription payments. It’s not a bad plan, and you can see the seeds of this in Windows 8, Office 2013, and other new Microsoft products. But for this to work, Microsoft still needs its partners, still needs the diversity that makes this ecosystem not only make sense for users but also makes it the superior alternative.
If Microsoft gives up on the diversity that made the company great, all is lost. Microsoft does not have the cachet or the internal capacity to serve its more diverse market in ways that Apple, with its less diverse and more compliant user base, can. Any moves to push PC or handset makers out of the equation should be viewed as an implicit admission of defeat.
To be fair, that’s not happening yet. But when I read -- and re-read – Ballmer’s letter, I do see the makings of a potential strategy disaster, one that has nothing to do with a focus on devices or services. And that, to me, is a much bigger concern than Microsoft’s logical and surprisingly fast change to match the direction the industry would otherwise go without it. Let’s just hope Microsoft does the right thing.