Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (47 page)

In general, the move to ARM will mitigate the trend to smaller mobile devices profoundly and give PC manufacturers opportunities to develop a variety of spiffy tablets. To make this even more attractive MS will include her Office productivity suite with the ARM version of Windows.
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Storage for documents and spreadsheets will be provided in the cloud. A very gutsy move reminding me again of the Windows 95 playbook when IE got integrated into Windows. The difference this time: MS does not start with a mediocre product. Google’s similar applications being already free to use in the cloud for sure inspired this move and should warrant no court challenge. Less need for constant connectivity for 8-powered tablets when running MS-Office applications means a further leg up over Google’s solution. Short term this move might sacrifice some revenue, which I expect to be made up through service, storage or subscription fees.

Using both her crown jewels and selling them cheaply to get a late foothold in the mobile segments proves how serious MS is to recover lost ground and most importantly lead again. What we tried at the end of the ‘90s, offering Office through subscription, will be revived as well. The market might have matured enough to make this successful this time. Calling it
modern
Office and having it bundled with cloud storage four times larger than what competitors are offering and allowing for installation across multiple devices might just be the ticket.

Another trump card I expect MS to play is addressing end-user privacy rights issues. The contentious concerns surrounding Google and Facebook in this regard are serious enough to give her an opening. As a policy, I expect her to let end-users choose how messages and their content are being tracked and linked to advertising and how the “fair use” rule will get applied in respect to copyright issues. This is not strictly an OS issue. A proactive move by MS signaling a retreat from practices her main competitors are employing will create a lot of good will, if not admiration. I am sure the Facebook generation—sometimes accused of “digital narcissism”—will eventually demand this. Sympathy shall follow!

Two recent announcements point to this. Hotmail being worked over—finally! Advertising being suppressed in end-user to end-user e-mails in the improved Hotmail is a promising first step in the right direction. Internet Explorer 10 having a default setting that will disallow anybody to spy on user preference is yet another. Building a privacy engine into Windows that ISVs will have to adhere to should follow and could police and eventually foreclose privacy abuse once and for all. A faster adaption rate for such a version should easily mitigate potential losses of advertising revenue for MS for sure—but not necessarily for any of her competitors. A scenario well suited to cut deeply into Google’s profit if not mitigated by Google paying ISVs to bypass such an engine. Always possible because it is just software! Will such integration get the courts busy again?

Understanding that nearly 50 million e-book readers will probably be sold in 2015 alone, MS’s move to obtain a stake in Barnes & Noble’s NOOK
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business—even as she overpaid for it—needs to be understood an assault on Amazon. This move represents MS’s second entry into e-book reader category. A sad issue to highlight for me knowing that back in ’98 MS made a dedicated effort to invent this product category. But the developers involved in this effort were told to shut down because their solution was not Windows centric enough. True on its face value, but impossible to realize at that point in time with then available technology. You do not need Windows to read a book—MS-DOS would have sufficed and could have easily been replaced with more advanced technology later.

Naturally any media tablet can eventually access book publisher’s libraries and download titles. Yet the more dedicated e-book readers pioneered by Amazon and perfected in her Kindle Fire versions should continue to be cheaper to obtain because of their limited feature sets, and if not Amazon has the financial muscle to subsidize them and/or attract buyers by bundling other enticing goodies with them. Together with Barnes & Noble’s size and reach, MS bringing Windows 8 to NOOK has nevertheless the potential to reduce Amazon’s share and get rid of another Android infested device. MS has deep pockets and Steve loves to get a foothold in consumer segments and win against open-source-based devices. Be prepared for a fierce battle to progress and expect Amazon’s Kindle sales to be hurt.

As I have explained throughout the book, to gain a coveted top spot in the IT industry a company needs to be recognized as the coolest and most groundbreaking innovator. In today’s landscape this means you have to know how to excite and energize the Facebook and Twitter generation. If you succeed, the progressive media will hail you and promote your product through plenty of PR—for free. MS urgently needs to relearn this and do it pronto. She once owned the tennis shoe/sneaker and jeans generation. Will a solidly executed engineering strategy for Windows 8 be enough to earn accolades from this audience? Market challenges have changed tremendously since Windows 95 was launched. The appearances of Google’s, Facebook’s, Twitter’s and Apple’s products have profoundly influenced user experiences and expectations. Today’s excitement is created by hip-hop minded entrepreneurs who appeal to a wide audience projecting revolutionary sentiments of change and progress. Their groovy—or should I say Ray Ozzie—like messages fascinate and reverberate in particular with the mobile information addicted younger generation.

MS’s image over the last decade seemed stuck with buttoned up business suits or ex-nerds who have become less popular as they moved through the ranks and obtained middle manager status. When announcing Windows 95, we brought Jay Leno up on stage and the PC played “Start me up”—the famous Mick Jaeger song every time I booted it. Gimmicks? The launching of 8 will need to create a special atmosphere demonstrating a brighter future, one the young generation can believe in, trust and talk about as being utmost cool (or as MS would say,
modern
). For this an image remake of MS needs to occur. MS needs to think Facebook generation, not business community, and leave the booming voice and piercing blue eyes cliché behind. Creating a new social forum for the current generation expressing outmost exhilaration is in my mind the ticket to make inroads and cause a wave of excitement!

While the former paragraph may sound too tactical for some, let’s return to the more strategic issues. Developers now engaged with Apple and Google need to be converted and ensured that resulting opportunities and profits will be theirs to keep without MS turning from friend to foe rather earlier than later. There is too much fear in the development community today that MS might not keep her promises. Her current CEO might have a trust deficit in this community, and if so he will need to fix this or leave. Without loyal partners MS is nothing!

To underline my point, Windows 8 has already caused a stir with ISVs. Making it difficult for competitors to port their browsers into the new ARM/METRO environment is not the way to succeed. Returning to the secrecy of the 90s or pursue a walled-garden approach in regard to content as some already claim might awaken the Feds again. Users want choice, and ISVs need a maximum of design freedom for modern Windows to succeed.

My old OEM customers are venting about MS developing its own proprietary tablet following Apple’s lead. This has happened before and was code named “Courier” early in this century and shut down to avoid hurting OEM partners. No doubt most dropped the tablet ball by not seriously supporting and promoting earlier MS efforts and as such pursuing a proprietary route now is understandable. What is troubling is the secrecy it has been shrouded in. During my time this would never had happened—I would have made sure of it. I am aware that several OEMs have already made substantial investments to develop their own tablets. They feel like being punched in the face. Further perturbing is that MS’s plans to offer a proprietary notebook. It will compete head on with partner offerings and endanger current OEM relationships. If both actions backfire, I envision chances for Linux and Google’s Chrome OS to make inroads with OEMs and take significant market share away from Windows.

I further believe the P&L
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math does not work for either device. Not considering any losses to Linux and Google as discussed before, the new tablet and notebook should increase revenues but I remain very skeptical about the profit picture. MS does not own a factory and has a track record of having trouble with sourcing hardware components and producing devices as cheaply as her competitors. Hardware margins are super thin. To obtain any, the accompanying software will have to be nearly given away. If competitors respond with launching loss leaders, this picture will get even uglier and compare most unfavorably to MS’s traditional royalty model. The situation will worsen if as a result OEM market share for Windows will get lost through defection. Revenue deterioration will for sure follow and red ink will almost certainly be spilled. I do not know who did the math on this project. The slim revenue gain with not much hope for real profits combined with losing partner’s trust and loyalties seems not worth that risk.

A much smarter move was and still is available. Understanding the frustration of Apple winning the tablet and notebook category and OEMs’ failure to produce them at all or not making the most attractive design choices, MS should have nevertheless shared her intent to explore both segments early on. In parallel she should have spun off the people eager to design either device, given them some seed money may be combined with a loan and management would have basically created another OEM competing with her current customers. An arm’s length relationship would have been easy to impose and execute. Doing so enables MS to either limit her financial exposure in case of failure or to increase her chance for a nice profit when selling her stake in the future. Should I say back to the drawing board there is no need to play with fire?

Having a stake in such company would raise few eyebrows and probably just stirred up other OEMs’ desire to finally get tablet and notebook designs right. There is no doubt that MS did exactly that
—hats off. The device which sticks out the most is her proposed media tablet. Adding an innovative wireless keyboard makes it a hybrid located between today’s notebooks and tablets. When combined the slick design promises to totally obsolete notebooks in a few years when solid state drives
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will become cheap and small enough to replace traditional hard drive storage units. Its glossy plastics and sexy eye appeal beat Apple’s, and if the flat keyboard finds acceptance, MS’s design may be a real hit. Let’s see how Apple will respond!

Despite getting the tablet design right first time I have yet to spot a Steve Jobs like product fanatic in today’s MS. I hope Steve Sinofsky, president of MS’s Windows division, will step up to play this role. Like others I always wait for a service pack to be released before trusting a new OS version. He will need to correct this notion with product excellence right out of the chute to gain vital momentum. This is in particular important for changing MS’s fortune in the media tablet market where Apple, Google and Amazon are seen as leaders.

The cooperation with Nokia on the Windows 7 smart phones is off to a good start. A jointly developed Windows 8 phone promises to build on this early success. Yet only a few contenders, in particular weak ones, are neither enough for an early splash nor for enduring success. With Apple having a nearly insurmountable image and perceived quality lead and Google’s Android systems outselling Apple’s two to one, time to market is more than ever of the essence. Only a broad-stroke attack with a multitude of eager and healthy partners promises to regain the lead. The company needs to go back to the future and cut super attractive flat-fee deals to gain market share and combine it with going totally for broke by massively paying for partner advertising to propel this new breed of phones on a steep trajectory to success. Especially after Google bought Motorola’s phone business! MS acquiring a similar supplier would not be an effective counter move either. Neither MS nor Google have enough expertise to be a successful low margin component or device manufacturer.

Other way more effective weapons exist to stimulate market share for Windows 8–powered mobile devices. The integration of slick video communication means—using Skype features restricted to Windows—seems to be one promising idea. The reduction of communication costs is another. Amazon is showing the way here by offering limited free cloud storage and an annual $50 data plan—less than half of what the large carriers charge today—for the just announced new Kindle e-reader. Deep-pocket MS needs to respond and beat this!

Finishing the device discussion, let me comment on Apple’s rumored plan to market her own TV sets and Google having similar intentions with her so-called Fiber TV services. Obviously both companies are working on integrating the Internet, mobile devices and PC experiences into a revolutionary TV realm comparable and way beyond to what Apple currently offers with Airplay. A slick and advanced proprietary Apple or Google inspired TV set will find plenty of buyers—even for an initially high price. Google’s closest partners Samsung and LG will make sure of that.

The difference, Apple’s move in particular will create more enemies in the industry and I predict any ingenuity advantage shall be short-lived. The TV industry, already plagued with super low margins, will fight tooth and nails to stop this provenly dangerous competitor right away. First, patent challenges like the ones Apple and Samsung are experiencing with smartphones and media tablets can be expected. Second, Apple has no distribution depth beyond her own stores, a handicap her competitors will explore to their advantage.

Third, over the last two to three years efforts to connect TV sets to the Internet have been quite successful and constantly improved. Whatever novel idea Apple comes up with will therefore cause a storm of imitations in a very short time span. A lot of traditional TV manufacturers are PC, phone and tablet producers. They are more than capable of finding ways to hook up their devices to TV screens. Let’s not forget the TV market is profoundly different from the phone or tablet market. The average replacement time is seven years and not the two to three years Apple is used to with her current product offerings. The giant Sony has lost money in this market for years, and companies like Panasonic and Sharp are struggling equally. Why should Apple be the exception? The best way to make profit here might be to dominate the movie download industry or sell annual software updates, which take advantages of hidden hardware options. The latter has never been tried before, and MS—the software DNA driven company—might be much better positioned to take advantage of such an opportunity when she enters this field in particular if she is willing to share some revenues with her TV manufacturers.