Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices. This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device. Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.
Only it is probably too late to make much difference. PC sales continue falling – quickly. Q3 PC sales were down over 10% versus a year ago. Q2 saw an 11% decline vs year ago. The PC market has been steadily shrinking since 2012. In Q2 there were 68M PCs sold, and 66M iPhones. Hope springs eternal for a PC turnaround – but that would seem increasingly unrealistic.
The big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry. By 2010 when the iPad launched, the shift was in full swing. And that’s when Microsoft’s current problems really began. Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010. But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.
By January, 2013 sales results were showing the abysmal failure of Windows 8 to slow the wholesale shift into mobile devices. Ballmer had played “bet the company” on Windows 8 and the returns were not good. It was the failure of Windows 8, and the ill-fated Surface tablet which became a notorious billion dollar write-off, that set the stage for the rapid demise of PCs.
And that demise is clear in the ecosystem. Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales. But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy. And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.
And, worse, the entire OEM market is collapsing. For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%! With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.
Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs. But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth. Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.
Today Apple and Google have both built very large, profitable developer networks. Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC. Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.
Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows. But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs. Today the situation is only exacerbated.
By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft. Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh. Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.
In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S. But, largely, nobody cared. Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices. But it is so incredibly late to market that there is little interest.
Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs. And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.
AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world. But when Xerox taught people how to “one click” print on a copier, the market for presses began to die. Many people thought the installed base would keep these press companies profitable forever. And it took 30 years for those machines to eventually disappear. But by 2000 both companies went bankrupt and the market disappeared.
Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits. But, it probably doesn’t matter. When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products. And Windows 10 is not much more relevant than Blackberry.
This week an important event happened on Wall Street. The value of Amazon (~$248B) exceeded the value of Walmart (~$233B.) Given that Walmart is world’s largest retailer, it is pretty amazing that a company launched as an on-line book seller by a former banker only 21 years ago could now exceed what has long been retailing’s juggernaut.
WalMart redefined retail. Prior to Sam Walton’s dynasty retailing was an industry of department stores and independent retailers. Retailing was a lot of small operators, primarily highly regional. Most retailers specialized, and shoppers would visit several stores to obtain things they needed.
But WalMart changed that. Sam Walton had a vision of consolidating products into larger stores, and opening these larger stores in every town across America. He set out to create scale advantages in purchasing everything from goods for resale to materials for store construction. And with those advantages he offered customers lower prices, to lure them away from the small retailers they formerly visited.
And customers were lured. Today there are very few independent retailers. WalMart has ~$488B in annual revenues. That is more than 4 times the size of #2 in USA CostCo, or #1 in France (#3 in world) Carrefour, or #1 in Germany (#4 in world) Schwarz, or #1 in U.K. (#5 in world) Tesco. Walmart directly employes ~.5% of the entire USA population (about 1 in every 200 people work for Walmart.) And it is a given that nobody living in America is unaware of Walmart, and very, very few have never shopped there.
But, Walmart has stopped growing. Since 2011, its revenues have grown unevenly, and on average less than 4%/year. Worse, it’s profits have grown only 1%/year. Walmart generates ~$220,000 revenue/employee, while Costco achieves ~$595,000. Thus its need to keep wages and benefits low, and chronically hammer on suppliers for lower prices as it strives to improve margins.
And worse, the market is shifting away from WalMart’s huge, plentiful stores toward on-line shopping. And this could have devastating consequences for WalMart, due to what economists call “marginal economics.”
As a retailer, Walmart spends 75 cents out of every $1 revenue on the stuff it sells (cost of goods sold.) That leaves it a gross margin of 25 cents – or 25%. But, all those stores, distribution centers and trucks create a huge fixed cost, representing 20% of revenue. Thus, the net profit margin before taxes is a mere 5% (Walmart today makes about 5 cents on every $1 revenue.)
But, as sales go from brick-and-mortar to on-line, this threatens that revenue base. At Sears, for example, revenues per store have been declining for over 4 years. Suppose that starts to happen at Walmart; a slow decline in revenues. If revenues drop by 10% then every $100 of revenue shrinks to $90. And the gross margin (25%) declines to $22.50. But those pesky store costs remain stubbornly fixed at $20. Now profits to $2.50 – a 50% decline from what they were before.
A relatively small decline in revenue (10%) has a 5x impact on the bottom line (50% decline.) The “marginal revenue”, is that last 10%. What the company achieves “on the margin.” It has enormous impact on profits. And now you know why retailers are open 7 days a week, and 18 to 24 hours per day. They all desperately want those last few “marginal revenues” because they are what makes – or breaks – their profitability.
All those scale advantages Sam Walton created go into reverse if revenues decline. Now the big centralized purchasing, the huge distribution centers, and all those big stores suddenly become a cost Walmart cannot avoid. Without growing revenues, Walmart, like has happened at Sears, could go into a terrible profit tailspin.
And that is what Amazon is trying to do. Amazon is changing the way Americans shop. From stores to on-line. And the key to understanding why this is deadly to Walmart and other big traditional retailers is understanding that all Amazon (and its brethren on line) need to do is chip away at a few percentage points of the market. They don’t have to obtain half of retail. By stealing just 5-10% they put many retailers, they ones who are weak, right out of business. Like Radio Shack and Circuit City. And they suck the profits out of others like Sears and Best Buy. And they pose a serious threat to WalMart.
And Amazon is succeeding. It has grown at almost 30%/year since 2010. That growth has not been due to market growth, it has been created by stealing sales from traditional retailers. And Amazon achieves $621,000 revenue per employee, while having a far less fixed cost footprint.
What the marketplace looks for is that point at which the shift to on-line is dramatic enough, when on-line retailers have enough share, that suddenly the fixed cost heavy traditional retail business model is no longer supportable. When brick-and-mortar retailers lose just enough share that their profits start the big slide backward toward losses. Simultaneously, the profits of on-line retailers will start to gain significant upward momentum.
And this week, the marketplace started saying that time could be quite near. Amazon had a small profit, surprising many analysts. It’s revenues are now almost as big as Costco, Tesco – and bigger than Target and Home Depot. If it’s pace of growth continues, then the value which was once captured in Walmart stock will shift, along with the marketplace, to Amazon.
In May, 2010 Apple’s value eclipsed Microsoft. Five years later, Apple is now worth double Microsoft – even though its earnings multiple (stock Price/Earnings) is only half (AAPL P/E = 14.4, MSFT = 31.) And Apple’s revenues are double Microsoft’s. And Apple’s revenues/employee are $2.4million, 3 times Microsoft’s $731k.
While Microsoft has about doubled in value since the valuation pinnacle transferred to Apple, investors would have done better holding Apple stock as it has more than tripled. And, again, if the multiple equalizes between the companies (Apple’s goes up, or Microsoft’s goes down,) Apple investors will be 6 times better off than Microsoft’s.
Market shifts are a bit like earthquakes. Lots of pressure builds up over a long time. There are small tremors, but for the most part nobody notices much change. The land may actually have risen or fallen a few feet, but it is not noticeable due to small changes over a long time. But then, things pop. And the world quickly changes.
This week investors started telling us that the time for big change could be happening very soon in retail. And if it does, Walmart’s size will be more of a disadvantage than benefit.
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.
Unfortunately, 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.
Few businesses fail in a fiery, quick downfall. Most linger along for years, not really mattering to anyone – including customers, suppliers or even investors. They exist, but they aren’t relevant.
When a company is relevant customers are eager for new product releases, and excited to talk to salespeople. Media want to report on the company, its products and its leaders. Investors want to hear about what the company will do next to drive revenues and increase profits.
But when a company loses relevancy, that all disappears. Customers quit paying attention to new products, and salespeople are not given the time of day. The company begs for coverage of its press releases, but few media outlets pay attention because writing about that company produces few readers, or advertisers. Investors lose hope for big gains, and start looking for ways to sell the stock or debt without taking too big a loss, or further depressing valuations.
In short, when a company loses relevancy it is on the downward slope to failure. It may take a long time, but lacking market relevancy the company has practically no hope of increasing revenues or profits, or of creating many new and exciting jobs, or of being a great customer for suppliers. Losing relevancy means the company is headed out of business, it’s just a matter of time. Think Howard Johnson’s, ToysRUs, Sears, Radio Shack, Palm, Hostess, Samsonite, Pierre Cardin, Woolworth’s, International Harvester, Zenith, Sony, Rand McNally, Encyclopedia Britannica, DEC — you get the point.
Many people may not be aware that Microsoft made an exclusive deal with the NFL to provide Surface tablets for coaches and players to use during games, replacing photographs, paper and clipboards for reviewing on-field activities and developing plays. The goal was to up the prestige of Surface, improve its “cool” factor, while showing capabilities that might encourage more developers to write apps for the product and more businesses to buy it.
But things could not have gone worse during the NFL’s launch. Because over and again, announcers kept calling the Surface tablets iPads. Announcers saw the tablet format and simply assumed these were iPads. Or, worse, they did not realize there was any tablet other than the iPad. As more and more announcers made this blunder it became increasingly clear that Apple not only invented the modern tablet marketplace, but that it’s brand completely dominates the mindset of users and potential buyers. iPad has become synonymous with tablet for most people.
In a powerful way, this demonstrates the lack of relevancy Microsoft now has in the personal technology marketplace. Fewer and fewer people are buying PCs as they rely increasingly on mobile devices. Practically nobody cares any more about new releases of Windows or Office. In fact, the American Customer Satisfaction Index reported people think Apple is now considered the best PC maker (the Macintosh.) HP was near the bottom of the list, with Dell, Acer and Toshiba not faring much better.
And in mobile devices, Apple is clearly the king. In its first weekend of sales the new iPhone 6 and 6Plus sold 10million units, blasting past any previous iPhone model launch – and that was without any sales in China and several other markets. The iPhone 4 was considered a smashing success, but iPhone 4 sales of 1.7million units was only 17% of the newest iPhone – and the 9million iPhone 5 sales included China and the lower-priced 5C. In fact, more units could have been sold but Apple ran out of supply, forcing customers to wait. People clearly still want Apple mobile devices, as sales of each successive version brings in more customers and higher sales.
There are many people who cannot imagine a world without Microsoft. And the vast majority of people would think that predicting Microsoft’s demise is considerably premature given its size and cash hoard. But, that looks backward at what Microsoft was, and the assets it previously created, rather than looking forward.
Just how fast can lost relevancy impact a company? Look no further than Blackberry (formerly Research in Motion.) Blackberry was once totally dominant in smartphones. But in the second quarter of last year Apple sold 32.5million units, while Blackberry sold only 1.5million (which was still more than Microsoft sold.)
The complete lack of relevancy was exposed last week when Blackberry launched its new Passport phone alongside Apple’s iPhone 6 actions. While the press was full of articles about the new iPhone, were you even aware of Blackberry’s most recent effort? Did you recall seeing press coverage? Did you read any product reviews? And while Apple was selling record numbers, Blackberry analysts were wondering if the Passport could find a niche with “nostalgic customers” that would sell enough units to keep the company’s hardware unit alive. Reviewers now compare Passport to the market standard, which is the iPhone – and still complain that its use of apps is “confusing.” In a world where most people use their own smartphone, the only reason most people could think of to use a Passport was if their employer told them they were forced to.
Like with Radio Shack, most people have to be reminded that Blackberry still exists. In just a few years Blackberry’s loss of relevancy has made the company and its products a backwater. Now it is quite clear that Microsoft is entering a similar situation. Windows 8 was a weak launch and did nothing to slow the shift to mobile. Microsoft missed the mobile market, and its mobile products are achieving no traction. Even where it has an exclusive use, such as this NFL application, people don’t recognize its products and assume they are the products of the market leader. Microsoft really has become irrelevant in its historical “core” personal technology market – and that should scare its employees and investors a lot.
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.