‘Pokémon GO’ – How Nintendo Beat Microsoft and Sony With an End Run

‘Pokémon GO’ – How Nintendo Beat Microsoft and Sony With an End Run

Poke’Mon Go is a new sensation.  Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries.  In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat.  Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.

Poke'Mon GoSome think this is just a fad, after all it is just 2 weeks old.  Candy Crush came along and it seemed really popular.  But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?

A bit of history

Nintendo launched the Wii in 2006 and it was a sensation.  Gamers could do things not previously possible.  Unit sales exceeded 20m units/year for 2006 through 2009.  But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo.  By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%.  The Wii console was losing relevance as competitors thrived.

Sony and Microsoft both invested heavily in their competition.  Even though both were unprofitable at the business, neither was ready to concede the market.  In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft.  Nintendo was becoming a market afterthought.

Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product.  But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.

Competitor strategic errors

Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business.  Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games.  Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years.  These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.

Both companies did little to address the growing market for mobile gaming.  The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products.  Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone.  But the company was not putting investment there.  Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.

Building on trends makes all the difference

Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market.  Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft.  Fortunately for Nintendo, that did not happen.

Nintendo observed the ongoing growth in mobile gaming.  While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product.  Clearly this demonstrated there was an under-served market for mobile gaming.  The mobile trend was real, and it’s gaming needs were unmet.

Simultaneously Nintendo recognized the trend to social.  People wanted to play games with other people.  And, if possible, the game could bring people together.  Even people who don’t know each other.  Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game?  Make it both mobile, and social.  And the basics of Poke’Mon Go were born.

Then, build out the financial model.  Don’t charge to play the game.  But once people are in the game charge for in-game elements to help them be more successful.  Just as Facebook did in its wildly successful social media game Farmville.  The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements.  The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected.  So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.

The underserved market is vastly larger than the over-served market

Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market.  Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power.  Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office.  For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.

But almost everyone has a mobile phone.  And almost everyone does some form of social media.  And almost everyone enjoys a good game.  Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions.  And all they have to do is download the app.  No expensive up-front cost, not much learning, and lots of fun.  And thus in two weeks you have millions of new users.  Some are traditional gamers.  But many are people who would never be a serious gamer – they don’t want a new console or new complicated game.  People of all ages and backgrounds could become immediate customers.

David can beat Goliath if you use trends

In the Biblical story, smallish David beat the giant Goliath by using a sling.  His new technology allowed him to compete from far enough away that Goliath couldn’t reach David.  And David’s tool allowed for delivering a fatal blow without ever touching the giant.  The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.

In business trends are just as important.  Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete.  Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe.  Nintendo saw the mobile game market disintegrate as smartphones emerged.  It could have become a footnote in history.

But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social.   By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues.  This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.

A $7.6B Write-off Plus Layoffs Is Never a Good Sign Microsoft

Microsoft announced today it was going to shut down the Nokia phone unit, take a $7.6B write-off (more than the $7.2B they paid for it,) and lay off another 7,800 employees.  That makes the layoffs since CEO Nadella took the reigns almost 26,000.  Finding any good news in this announcement is a very difficult task.

MSFT_logo_rgb_C-Gray_DUnfortunately, since taking over as Microsoft’s #1 leader, Mr. Nadella has been remarkably predictable.  Like his peer CEOs who take on the new role, he has slashed and burned employment, shut down at least one big business, taken massive write-offs, and undertaken at least one wildly overpriced acquisition (Minecraft) that is supposed to be a game changer for the company.  He apparently picked up the “Turnaround CEO Playbook” after receiving the job and set out on the big tasks!

Yet he still has not put forward a strategy that should encourage investors, employees, customers or suppliers that the company will remain relevant long-term. Amidst all these big tactical actions, it is completely unclear what the strategy is to remain a viable company as customers move, quickly and in droves, to mobile devices using competitive products.

I predicted here in this blog the week Steve Ballmer announced the acquisition of Nokia in September, 2013 that it was “a $7.2B mistake.”  I was off, because in addition to all the losses and restructuring costs Microsoft endured the last 7 quarters, the write off is $7.6B.  Oops.

Why was I so sure it would be a mistake?  Because between 2011 and 2013 Nokia had already lost half its market share.  CEO Elop, who was previously a Microsoft senior executive, had committed Nokia completely to Windows phones, and the results were already catastrophic.  Changing ownership was not going to change the trajectory of Nokia sales.

Microsoft had failed to build any sort of developer community for Windows 8 mobile.  Developers need people holding devices to buy their software.  Nokia had less than 5% share.  Why would any developer build an app for a Windows phone, when almost the entire market was iOS or Android?  In fact, it was clear that developing rev 2, 3, and 4 of an app for the major platforms was far more valuable than even bothering to port an app into Windows 8.

Nokia and Windows 8 had the worst kind of tortuous whirlpool – no users, so no developers, and without new (and actually unique) software there was nothing to attract new users.  Microsoft mobile simply wasn’t even in the game – and had no hope of winning.  It was already clear in June, 2012 that the new Windows tablet – Surface – was being launched with a distinct lack of apps to challenge incumbents Apple and Samsung.

By January, 2013 it was also clear that Microsoft was in a huge amount of trouble.  Where just a few years before there were 50 Microsoft-based machines sold for every competitive machine, by 2013 that had shifted to 2 for 1.  People were not buying new PCs, but they were buying mobile devices by the shipload – literally.  And there was no doubt that Windows 8 had missed the mobile market.  Trying too hard to be the old Windows while trying to be something new made the product something few wanted – and certainly not a game changer.

A year ago I wrote that Microsoft has to win the war for developers, or nothing else matters.  When everyone used a PC it seemed that all developers were writing applications for PCs.  But the world shifted.  PC developers still existed, but they were not able to grow sales.  The developers making all the money were the ones writing for iOS and Android.  The growth was all in mobile, and Microsoft had nothing in the game.  Meanwhile, Apple and IBM were joining forces to further displace laptops with iPads in commercial/enterprise uses.

Then we heard Windows 10 would change all of that.  And flocks of people wrote me that a hybrid machine, both PC and tablet, was the tool everyone wanted.  Only we continue to see that the market is wildly indifferent to Windows 10 and hybrids.

Imagine you write with a fountain pen – as most people did 70 years ago.  Then one day you are given a ball point pen.  This is far easier to use, and accomplishes most of what you want.  No, it won’t make the florid lines and majestic sweeps of a fountain pen, but wow it is a whole lot easier and a darn site cheaper.  So you keep the fountain pen for some uses, but mostly start using the ball point pen.

Then the fountain pen manufacturer says “hey, I have a contraption that is a ball point pen, sort of, and a fountain pen, sort of, combined.  It’s the best of all worlds.”  You would likely look at it, but say “why would I want that.  I have a fountain pen for when I need it.  And for 90% of the stuff I write the ball point pen is great.”

That’s the problem with hybrids of anything – and the hybrid tablet is  no different.  The entrenched sellers of old technology always think a hybrid is a good idea.  But once customers try the new thing, all they want are advancements to the new thing. (Just look at the interest in Tesla cars compared to the stagnant sales of hybrid autos.)

And we’re up to Surface 3 now. When I pointed out in January, 2013 that the markets were rapidly moving away from Microsoft I predicted Surface and Surface Pro would never be important products.  Reader outcry at that time from Microsoft devotees was so great that Forbes editors called me on the carpet and told me I lacked the data to make such a bold prediction.  But I stuck by my guns, we changed some language so it was less blunt, and the article ran.

Two and a half years later and we’re up to rev number Surface 3.  And still, almost nobody is using the product.  Less than 5% market share.  Right again.  It wasn’t a technology prediction, it was a market prediction.  Lacking app developers, and a unique use,  the competition was, and remains, simply too far out front.

Windows 10 is, unfortunately, a very expensive launch.  And to get people to use it Microsoft is giving it away for free.  The hope is then users will hook onto the cloud-based Office 365 and Microsoft’s Azure cloud services.  But this is still trying to milk the same old cow.  This approach relies on people being completely unwilling to give up using Windows and/or Office.  And we see every day that millions of people are finding alternatives they like just fine, thank you very much.

Gamers hated me when I recommended Microsoft should give (for free) xBox to Nintendo.  Unfortunately, I learned few gamers know much about P&Ls.  They all assumed Microsoft made a fortune in gaming.  But anyone who’s ever looked at Microsoft’s financial filings knows that the Entertainment Division, including xBox, has been a giant money-sucking hole.  If they gave it away it would save money, and possibly help leadership figure out a strategy for profitable growth.

Unfortunately, Microsoft bought Minecraft, in effect “doubling down” on the bet.  But regardless of how well anyone likes the products, Microsoft is not making money.  Gaming is a bloody war where Sony and Microsoft keep battling, and keep losing billions of dollars. The odds of ever earning back the $2.5B spent on Minecraft is remote.

The greater likelihood is that as write offs continue to eat away at profits, and as markets continue evolving toward mobile products offered by competitors hurting “core” Microsoft sales, CEO Nadella will eventually have to give up on gaming and undertake another Nokia-like event.

All investors risk looking at current events to drive decision-making.  When Ballmer was sacked and Nadella given the CEO job the stock jumped on euphoria.  But the last 18 months have shown just how bad things are for Microsoft.  It is a near monopolist in a market that is shrinking.  And so far Mr. Nadella has failed to define a strategy that will make Microsoft into a company that does more than try to milk its heritage.

I said the giant retailer Sears Holdings would be a big loser the day Ed Lampert took control of the company.  But hope sprung eternal, and investors jumped on the Sears bandwagon, believing a new CEO would magically improve a worn out, locked-in company.  The stock went up for over 2 years.  But, eventually, it became clear that Sears is irrelevant and the share price increase was unjustified.  And the stock tanked.

Microsoft looks much the same.  The actions we see are attempts to defend & extend a gloried history.  But they don’t add up to a strategy to compete for the future.  HoloLens will not be a product capable of replacing Windows plus Office revenues.  If developers are attracted to it enough to start writing apps.  Cortana is cool, but it is not first.  And competitive products have so much greater usage that developer learning curve gains are wildly faster.  These products are not game changers.  They don’t solve large, unmet needs.

And employees see this.  As I wrote in my last column, it is valuable to listen to employees.  As the bloom fell off the rose, and Nadella started laying people off while freezing pay, employee support of him declined dramatically.  And employee faith in leadership is far lower than at competitors Apple and Google.

As long as Microsoft keeps playing catch up, we should expect more layoffs, cost cutting and asset sales.  And attempts at more “hail Mary” acquisitions intended to change the company.  All of which will do nothing to grow customers, provide better jobs for employees, create value for investors or greater revenue opportunities for suppliers.

 

Why Microsoft Windows 10 Really Doesn’t Matter

Yesterday Microsoft conducted a pre-launch of Windows 10, demonstrating its features in an effort to excite developers and create some buzz before consumer launch later in 2015.

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By and large, nobody cared.  Were you aware of the event? Did you try to watch the live stream, offered via the Microsoft web site?  Were you eager to read what people thought of the product?  Did you look for reviews in the Wall Street Journal, USA Today and other general news outlets?

Windows10_1

Microsoft really blew it with Windows 8 – which is the second most maligned Windows product ever, exceeded only by
Vista.  But that wasn’t hard to predict, in June, 2012.  Even then it was clear that Windows 8, and Surface tablets, were designed to defend and extend the installed Windows base, and as such the design precluded the opportunity to change the market and pull mobile users to Microsoft.

And, unfortunately, that is how Windows 10 has been developed.  At the event’s start Microsoft played a tape driving home how it interviewed dozens and dozens of loyal Windows customers, asking them what they didn’t like about 8, and what they wanted in a Windows upgrade.  That set the tone for the new product.

Microsoft didn’t seek out what would convert all those mobile users already on iOS or Android to throw away their devices and buy a Microsoft product.  Microsoft didn’t ask its defected customers what it would take to bring them back, nor did it ask the over 50% of the market using Windows 7 or older products what it would take to get them to go to Windows mobile rather than an iPad or Galaxy tablet.  Nope.  Microsoft went to its installed base and asked them what they would like.

Imagine it’s 1975 and for two decades you have successfully made and sold small offset printing presses.  Every single company of any size has one in their basement.  But customers have started buying really simple, easy to use Xerox machines.  Fewer admins are sending even fewer jobs to the print shop in the basement, as they choose to simply run off a bunch of copies on the Xerox machine.  Of course these copies are more expensive than the print shop, and the quality isn’t as good, but the users find the new Xerox machines good enough, and they are simple and convenient.

What are you to do if you make printing presses?  You probably need to find out how you can get into a new product that actually appeals to the users who no longer use the print shop.  But, instead, those companies went to the print shop operators and asked them what they wanted in a new, small print machine.  And then the companies upgraded their presses and other traditional printing products based upon what that installed base recommended.  And it wasn’t long before their share of printing eroded to a niche of high-volume, and often color, jobs.  And the commercial print market went to Xerox.

That’s what Microsoft did with Windows 10.  It asked its installed base what it wanted in an operating system.  When the problem isn’t the installed base, its the substitute product that is killing the company.  Microsoft didn’t need input from its installed base of loyal users, it needed input from people who have quit using HP laptops in favor of iPads.

There are a lot of great new features in Windows 10.  But it really doesn’t matter.

The well spoken presenters from Microsoft laid out how Windows 10 would be great for anyone who wants to go to an entirely committed Windows environment.  To achieve Microsoft’s vision of the future every one of us will throw away our iOS and Android products and go to Windows on every single device.  Really.  There wasn’t one demonstration of how Windows would integrate with anything other than Windows.  And there appeared on intention of making the future an interoperable environment.  Microsoft’s view was we would use Windows on EVERYTHING.

Microsoft’s insular view is that all of us have been craving a way to put Windows on all our devices.  We’ve been sitting around using our laptops (or desktops) and saying “I can’t wait for Microsoft to come out with a solution so I can throw away my iPhone and iPad.  I can’t wait to tell everyone in my organization that now, finally, we have an operating system that IT likes so much that we want everyone in the company to get  rid of all other technologies and use Windows on their tablets and phones – because then they can integrate with the laptops (that most of us don’t use hardly at all any longer.)”

Microsoft even went out of its way to demonstrate how well Win10 works on 2-in-1 devices, which are supposed to be both a tablet and a laptop.  But, these “hybrid” devices really don’t make any sense.  Why would you want something that is both a laptop and a tablet?  Who wants a hybrid car when you can have a Tesla?  Who wants a vehicle that is both a pick-up and a car (once called the El Camino?) Microsoft thinks these are good devices, because Microsoft can’t accept that most of us already quit using our laptop and are happy enough with a tablet (or smartphone) alone!

Microsoft presenters repeatedly reminded us that Windows is evolving.  Which completely ignores the fact that the market has been disrupted.  It has moved from laptops to mobile devices.  Yes, Windows has a huge installed base on machines that we use less and less.  But Windows 10 pretends that there does not exist today an equally huge, and far more relevant, installed base of mobile devices that already has millions of apps people use every single day over and over.  Microsoft pretended as if there is no world other than Windows, and that a more robuts Windows is something people can’t wait to use!  We all can’t wait to go back to a exclusive Microsoft world, using Windows, Office, the new Spartan browser – and creating documents, spreadsheets and even presentations using Office, with those hundreds of complex features (anyone know how to make a pivot table?) on our phones!

Just like those printing press manufacturers were sure people really wanted documents printed on presses, and couldn’t wait to unplug those Xerox machines and return to the old way of doing things.  They just needed presses to have more features, more capabilities, more speed!

The best thing in Windows 10 is Cortana, which is a really cool, intelligent digital assistant.  But, rather than making Cortana a tool developers can buy to integrate into their iOS or Android app the only way a developer can use Cortana is if they go into this exclusive Windows-only world.  That’s a significant request.

Microsoft made this mistake before.  Kinect was a great tool.  But the only way to use it, initially, was on an xBox – and still is limited to Windows.  Despite its many superb features, Kinect didn’t develop anywhere near its potential.  Cortana now suffers from the same problem.  Rather than offering the tool so it can find its best use and markets, Microsoft requires developers and consumers buy into the Windows-exclusive world if you want to use Cortana.

Microsoft hasn’t yet figured out that it lost relevance years ago when it missed the move to mobile, and then launched Windows 8 and Surface to markets that didn’t really want those products.  Now the market has gone mobile, and the leader isn’t Microsoft.  Microsoft has to find a way to be relevant to the millions of people using alternative products, and the Windows 10 vision, which excludes all those competing devices, simply isn’t it.

There was lots of neat geeky stuff shown.  Surface tablets using Windows 10 with an xBox app can now do real gaming, which looks pretty cool and helps move Microsoft forward in mobile gaming.  That may be a product that sets Sony’s Playstation and Nintendo’s Wii on their heels.  But that’s gaming, and historically not where Microsoft makes any money (nor for that matter does Sony or Nintendo.)

There is a new interactive whiteboard that integrates Skype and Windows tablets for digital enhancement of brainstorming meetings.  But it is unclear how a company uses it when most employees already have iPhones or Samsung S5s or Notes.  And for the totally geeky there was a demo of a holographic headset.  But when it comes to disruptive products like this success requires finding really interesting applications that otherwise cannot be completed, and then the initial customers who have a really desperate need for that application who will become devoted users.

Launching such disruptive products has long been the bane of Microsoft’s existence.  Microsoft thinks in mass market terms, and selling to its base.  Not developing breakthrough applications and finding niche markets to launch new uses.  Nor has Microsoft created a developer community aligned with that kind of work.  They have long been taught to simply continue to do things that defend and extend the traditional base of product uses and customers.

The really big miss for this meeting was understanding developer needs.  Today developers have an enormous base of iOS and Android users to whom they can sell their products.  Windows has less than 3% share in mobile devices.  What developer would commit their resources to developing products for Windows 10, which has an installed base only in laptops and desktops?  In other words, yesterday’s technology base?  Especially when to obtain the biggest benefits of Windows 10 that developer has to find end use customers (companies or consumers) willing to commit 100% to Windows everywhere – even including their televisions, thermostats and other devices in our ever smarter buildings?

Windows 10 has a lot of cool features.  But Microsoft made a big miss by listening to the wrong people.  By assuming its installed base couldn’t wait for a Microsoft-exclusive solution, and by behaving as if the installed base of mobile devices either didn’t exist or didn’t matter, the company showed its hubris (once again.)  If all it took to succeed were great products, the market would never have shifted from Macintosh computers to Windows machines in the 1990s.  Microsoft simply doesn’t realize that it lacks the relevance to pull of its grand vision, and as such Windows 10 has almost no chance of stopping the Apple/Google/Samsung juggernaut.

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Microsoft Should Give XBox Biz to Nintendo

Microsoft Should Give XBox Biz to Nintendo

Microsoft has a new CEO. And a new Chairman.  The new CEO says the company needs to focus on core markets.  And analysts are making the same cry.

Amidst this organizational change, xBox continues its long history of losing money – as much as $2B/year.  And early 2014 results show that xBox One is selling at only half the rate of Sony’s Playstation 4, with cumulative xBox One sales at under 70% of PS4, leading Motley Fool to call xBox One a “total failure.”

While calling xBox One a failure may be premature, Microsoft investors have plenty to worry about.

Firstly, the console game business has not been a profitable market for anyone for quite a while.

The old leader, Nintendo, watched sales crash in 2013, first quarter 2014 estimates reduced by 67% and the CEO now projecting the company will be unproftable for the year.  Nintendo stock declined by 2/3 between 2010 and 2012, then after some recovery in 2013 lost 17% on the January day of its disappointing sales expectation.  Not a great market indicator.

The new sales leader is Sony, but that should give no one reason to cheer.  Sony lost money for 4 straight years (2008-2012), and was barely able to squeek out a 2013 profit only because it took a massive $4.6B 2012 loss which cleared the way to show something slightly better than break-even.  Now S&P has downgraded Sony’s debt to near junk status.  While PS4 sales are better than xBox One, in the fast shifting world of gaming this is no lock on future sales as game developers constantly jockey dollars between platforms.

Whether Sony will make money on PS4 in 2014 is far from proven.  Especially since it sells for $100/unit (20%) less than xBox One – which compresses margins.  What investors (and customers) can expect is an ongoing price war between Nintendo, Sony and Microsoft to attract sales.  A competition which historically has left all competitors with losses – even when they win the market share war.

And on top of all of this is the threat that console market growth may stagnate as gamers migrate toward games on mobile devices.  How this will affect sales is unknown.  But given what happened to PC sales it’s not hard to imagine the market for consoles to become smaller each year, dominated by dedicated game players, while the majority of casual game players move to their convenient always-on device.

Due to its limited product range, Nintendo is in a “fight to the death” to win in gaming. Sony is now selling its PC business, and lacks strong offerings in most consumer products markets (like TVs) while facing extremely tough competition from Samsung and LG.  Sony, likewise, cannot afford to abandon the Playstation business, and will be forced to engage in this profit killing battle to attract developers and end-use customers.

When businesses fall into profit-killing price wars the big winner is the one who figures out how to exit first.  Back in the 1970s when IBM created domination in mainframes the CEO of GE realized it was a profit bloodbath to fight for sales against IBM, Sperry Rand and RCA.  Thinking fast he made a deal to sell the GE mainframe business to RCA so the latter could strengthen its campaign as an IBM alternative, and in one step he stopped investing in a money-loser while strenghtening the balance sheet in alternative markets like locomotives and jet engines – which went on to high profits.

With calls to focus, Microsoft is now abandoning XP.  It is working to force customers to upgrade to either Windows 7 or Windows 8.  As PC sales continue declining, Microsoft faces an epic battle to shore up its position in cloud services and maintain its enterprise customers against competitors like Amazon.

After a decade in gaming, where it has never made money, now is the time for Microsoft to recognize it does not know how to profit from its technology – regardless how good.  Microsoft could cleve off Kinect for use in its cloud services, and give its installed xBox base (and developer community) to Nintendo where the company could focus on lower cost machines and maintain its fight with Sony.

Analysts that love focus would cheer.  They would cheer the benefit to Nintendo, and the additional “focus” to Microsoft.  Microsoft would stop investing in the unprofitable game console market, and use resources in markets more likely to generate high returns.  And, with some sharp investment bankers, Microsoft could also probably keep a piece of the business (in Nintendo stock) that it could sell at a future date if the “suicide” console business ever turns into something profitable.

Sometimes smart leadership is knowing when to “cut and run.”

Links:

2012 recognition that Sony was flailing without a profitable strategy

January, 2013 forecast that microsoft would abandon gaming

 

Ballmer Resigning – Next?

Steve Ballmer announced he would be retiring as CEO of Microsoft within the next 12 months.  This extended timing, rather than immediately, shows clear the Board is ready for him to go but there is nobody ready to replace him. 

The big question is, who would want Ballmer's job?   It will be very tough to make Microsoft an industry leader again.  What would his replacement propose to do?  The fuse for a turnaround is short, and the options faint.

Microsoft has been on a downhill trajectory for at least 4 years.  Although the company has introduced innovations in gaming (xBox and Kinect) as well as on-line (games and Bing), those divisions perpetually lose money.  Stiff competitors Sony, Nintendo and Google have made these forays intellectually  interesting, but of no value for investors or customers.  The end-game for Microsoft has remained Windows – and as PC sales decline that's very bad news.

Microsoft viability has been firmly tied to Windows and Office sales.  Historically these have been unassailable products, creating over 100% of the profits at Microsoft (covering losses in other divisions.) But, these products have lost growth, and relevancy. Windows 8 and Office 365 are product nobody really cares about, while they keep looking for updates from Apple, Google, Amazon and Samsung.

The market started going mobile 10 years ago.  As Apple and Google promoted increased mobility, Microsoft tried to defend & extend its PC stronghold.  It was a classic business inflection point in the making.  Everyone knew at some point mobile devices would be more important than PCs.  But most industry insiders (including Microsoft) kept thinking it would be later rather than sooner. 

They were wrong.  The shift came a lot faster than expected.  Like in sailboat racing, suddenly the wind was taken out of Microsoft's sails as competitors shot to the lead in customer interest.  While people were excited for new smartphones and tablets, Microsoft tried to re-engineer its historical product as an extension into the new market.

Windows 8 tablets and Surface tablets were ill-fated from the beginning.  They did not appeal to the huge installed base of Windows customers, because changes like touch screens and tiles simply were too expensive and too behaviorally different.  And they offered no advantage for people to switch that had already started buying iOS and Android products.  Not to mention an app availability about 10% of the market leaders.  Simply put, investing in Windows 8 and its own tablet was like adding bricks to a downhill runaway truck (end-of-life for PCs) – it sped up the time to an inevitable crash. 

And spending money on poorly thought out investments like the Barnes & Noble Nook merely demonstrated Microsoft had money to burn, rather than a strategy for competing.  Skype cost some $8B, but how has that helped Microsoft become more competive?  It's not just an overspending on internal projects that failed to achieve any market success, but a series of wasted investments in bad acquisitions that showed Microsoft had no idea how it was going to regain industry leadership in a changing marketplace going more mobile and into the cloud every month.

Now the situation is pretty dire, and now is the time for Microsoft to give up on its defend and extend strategy for Windows/Office.  Customers are openly uninterested in new laptops running Windows 8.  And Win 8.1 will not change this lackadaisical attitude.  Nobody is interested in Windows 8 phones, or tablets.  This has left companies in the Microsoft ecosystem like HP, Dell and Nokia gasping for air as sales tumble, profits evaporate and customers flock to new solutions from Apple and Samsung.  Instead of seeking out an update to Office for a new PC, people are using much lighter (and cheaper) cloud services from Amazon and office solutions like Google docs.  And most of those old add-on product sales, like printers and servers, are disappearing into the cloud and mobile displays.

So now, after being forced to write off Surface and report a  horrible quarter, the Board has pushed Ballmer out the door.  Pretty remarkable.  But, incredibly late.  Just like the leaders at RIM stayed too long, leaving the company with no future options as Blackberry sales plummeted, Ballmer is taking leave as sales, profits and cash flow are taking a turn for the worst.  And only months after a reorganization that simply made the whole situation a lot more confusing for not only investors, but internal managers and employees.

Microsoft has a big cash hoard, but how long will that last?  As its distribution system falters, and sales drop, the costs will rapidly catch up with cash flow.  Big layoffs are a certainty; think half the workforce in 2 years. Equally certain are sales of divisions (who can buy xBox market share and turn it competitively profitable?) or shut-downs (how long will Bing stay alive when it is utterly unnecessary and expensive to maintain?) 

But, there is a better option.  Without the cash from
Windows/Office, you can't keep much of the rest of Microsoft walking. So
now is the time to cut investments in Windows/Office and put money into the
best things Microsoft has going – primarily Kinect and cloud services.  A radical restructuring of its spending and investments.

Kinect is an incredible product.  It has found multiple applications Microsoft fails to capitalize upon.  Kinect has the possibility of becoming the centerpiece for managing how we connect to data, how we store data, how we find data.  It can bring together our smartphone, tablet and historical laptop worlds – and possibly even connect this to traditional TV and radio.  It can be the centerpiece for two-way communications (think telephone or skype via all your devices.)  Coupled with the right hardware, it can leapfrog iTV (which we still are waiting to see) and Cisco simultaneously. 

In cloud services it will take a lot to compete with leaders Amazon, IBM, Apple and Google.  They have made big investments, and are far in front.  But, this is the bread-and-butter market for Microsoft.  Millions of small businesses that want easy to use BYOD (bring your own device) environment, and easy access to data, documents and functionality for IT, like guaranteed data back-up and uptime, and user functionality like all those apps.  These customers have relied on Microsoft for these kind of services for years, and would enjoy a services provider with an off-the-shelf product they can implement easily and cheaply that supports all their needs.  Expensive to develop, but a growing market where Microsoft has a chance to leapfrog competitors.

As for Bing, give it to Yahoo – if Marissa Mayer will take it.  Stop the bloodletting and get out of a market where Microsoft has never succeeded.  Bing is core to Yahoo's business.  If you can trade for some Yahoo stock, go for it.  Let Yahoo figure out how to sell content and ads, while Microsoft refocuses on the new platform for 2017; from the user to the infrastructure services.

Strong leaders have their benefits.  But, when they don't understand market shifts, and spend far too long trying to defend & extend past markets, they can put their organizations in terrible jeopardy of total failure.  Ballmer leaves no with clear replacement, nor with any vision in place for leapfrogging competitors and revitalizing Microsoft. 

So it is imperative the new leader provide this kind of new thinking.  There are trends developing that create future scenarios where Microsoft can once again be a market leader.  And it will be the role of the new CEO to identify that vision and point Microsoft's investments in the right direction to regain viability by changing the game on the current winners.