The departure of Microsoft’s top Xbox guy, Don Mattrick, for Zynga has raised again the profile of Microsoft’s still-secret-in-detail restructuring. Ballmer announced that the company would be working to be more focused on services and devices and less on software. Clearly there are going to be a lot of changes, but rather than speculating on the changes or on whether Mattrick departed because he thought he might be asked to leave later, let’s look at the fundamentals. Does Microsoft have a shot at their goal of becoming a device/services company, and why would they want to do that anyway?
On the surface, the last question is easily answered. PC software is what Microsoft does most, and PC software is sinking as PCs sink. Windows and Office sales are both tied strongly to new PC sales, which are being lambasted by tablet sales. So it makes sense to jump out of software and into services and devices, right? Not that simple.
Devices aren’t replacements for software, they’re carriers for software. Apple’s iPhone and iPad are at least as much software as hardware, and Android’s success as a software platform is linked to Samsung’s success as a hardware provider. The more something looks like a gadget, the less users are willing to think about hardware and software as separate elements. Apple knew that and created the first platform ecosystem. But it wasn’t a slam dunk. Had Microsoft responded to Apple aggressively, before both Apple and Google had a chance to establish commanding leads, the Microsoft model of “Wintel” would likely have been just as effective in phones and tablets as it was for PCs, and the current restructuring buzz would have never happened.
Now, with Apple and Google established, and in particular with Google already owning the “software-partners-with-hardware” model of an ecosystem, Microsoft has little choice but to create their own total platform. They can’t compete with the incumbents through partnerships because they’ll never get the big hardware players to bet convincingly on Microsoft at this point. No choice, in short, more than good choice.
How about “services”? It seems to me that every company that’s been slipping in its core business, whether hardware or software, discovers the “services opportunity”. The problem is that if you’re creating a platform ecosystem of consumer devices, it’s hard to see how services are going to come out of the process. Does Microsoft think they’re going to be selling professional services to Windows RT users? If Microsoft wants to be a professional services player they need to be that in the cloud computing evolution in general, and that’s going to be a challenge given their insipid positioning of Azure and the cloud overall. The cloud as it is today is a cost-based substitution, which means that it loses money for Microsoft by reducing sales of premises software licenses while increasing the sale of hosting. So even if there’s professional services opportunity, Microsoft has to first pay for the cloud losses with the professional services gains, then get some net benefit.
The solution to all of this, if there is one, is to create a “device cloud”, the kind of symbiosis between devices and cloud-hosted services elements that I’ve been touting for operators to create. Microsoft cannot win the game that it’s already lost, the head-to-head war with Apple or Google. It could win the “supercloud-device” war because both Apple and Google would face the problem of kissing off their current incumbency to address future gains. That’s the problem that got Microsoft behind in phones and tablets to begin with, so why not force the problem down the other guy’s throat?
I think Microsoft could create this device/supercloud model easily at a technical level, probably easier than it could create a completely new structure that’s aimed at becoming a device success and also a services success. As somebody in finance said, culture will always trump strategy. Microsoft’s culture is too far from what Ballmer wants, particularly when there are better choices that are closer to Microsoft’s traditional model. Could it be harder for Microsoft to see something that’s at its own feet than something on the distant mountain-top? Or could it be that Microsoft has become such a bureaucracy that it can’t lead anymore, so it has to follow its competitors and accept perpetual marginalization?
Huawei is also a part of the equation. Because the US Congress doesn’t trust them, they’re barred from being a big player in the US carrier space and also from enterprise equipment sales to government agencies. That means that they’ll have to play in the US through consumer devices—like phones and tablets. They picked up their own new executive, from Nokia, in a possible move to buttress this play. If Huawei is really going to get into the device space, then for Microsoft to make a move now would be potentially suicidal. The cloud is Huawei’s only weak spot, mister Ballmer. Go for that, or face what might be a fatal level of risk.