Microsoft

Tablets, PCs and Office

The whole ‘tablets and PCs’ discussion today reminds me a great deal of similar conversations we used to have a decade ago about ‘laptop or desktop’. 

That is, someone would ask a vaguely technical friend whether they should buy a laptop or a desktop. And the answer would be “well, how much money do you have and what do you want to do with it?” Laptops were portable but had smaller screens, less power and were more expensive. Which trade-off depended on how you planned to use it. 

Over time that break point shifted: laptops got less expensive and much more powerful - today there are very few tasks that need the power a desktop can give, but the screen size point remains (though of course external screens are cheap). And so laptops grew to roughly half the PC market by volume. The desktop market didn’t go away - mostly for screen size or cost reasons (if you’re outfitting an office of 10k people, none of whom take their work out of the office, why buy laptops?)

Much the same analysis applies to tablets today - "what are you going to do with it?" Are you going to do sophisticated, complex, multi-app computing? Lots of keyboard work and detailed manipulation that a mouse is better for? Apps that are only ON a PC? Then get one (whether desktop or laptop). Mostly web, email, games, video, social networks and you’re walking around all the time? A tablet might suit you very well. You probably have a PC too - there’s very little actual substitution right now, but there is an impact on the PC replacement cycle (as well  as expanding the pie massively, especially in emerging markets, which is another conversation). 

And of course this break point will move as well, just as the laptop/desktop break point did - tablets will get faster and more sophisticated and capable of substituting more tasks. And so we should expect to see tablets taking a growing chunk out of the PC market.

(The other way to slice this is that the PC market is split very roughly half and half between consumer and corporate - corporate boxes will remain longer than consumer PCs, but there’ll be erosion in both.)

Another very important lens to look at this through, though, is Microsoft Office. Office is extremely good (tautologically) at the things it’s good at - there is no credible alternative to Excel for making large financial models and no credible alternative to Powerpoint for making 150-page pitch books, for example. Free alternatives nibble around the edges, and specialised use cases such as statistics have been carved out long ago, but the real threats come from use cases where you shouldn’t really be using Office at all. 

This ‘shouldn’t use’ comes from both above and below. Someone said to me on Twitter (I now can’t find who) that their consulting business spent half its time telling people to stop using Excel and use a database and the other half telling people to to stop using a database and use Excel. That is, Excel is used as a business information system in a huge number of companies. It’s a powerful and flexible IDE on its own terms, and this is sometimes a good use, but it often isn’t, and specialized SAAS services will probably carve out an increasing number of these use cases. When I worked at Orange there was a multi-megabyte Excel file on the network drive called, I believe, ‘sum_of_x.xls’ containing complex macros and every major operating metric for the entire company, there for anyone who needed to analyze high-level data. That should probably not, really, be in Excel today. 

The same applies to Powerpoint - it’s a very good tool for that 150 slide deck, but what if you’re making a 10-slide deck each week that consists entirely of operating metrics pulled out of a back-end system, manipulated in Excel and pasted into slides, plus commentary, that are emailed to 25 people? Shouldn’t that change from a 2 hour task to a SAAS dashboard and a 30-second task? And would it still need a mouse and keyboard?

(This point also bears on the future of email itself, but that's another topic.)

This carving out comes from below, too. One of these is the Google Docs story, about there can be much debate, but to me the interesting challenge is embodied by this screenshot - the ‘new file’ menu in Excel. 

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How many of these are actually smartphone or tablet apps providing custom lists or databases? Or Mint (another SAAS)? How many presentation templates might also be something like Storehouse?

This is, of course, all about unbundling and specialisation. Office apps (generically) are very broad and deep and general purpose. Critics tend to focus on the depth and talk about how few people need all those features, but miss the breadth - of how many things a general purpose ‘table’ app or ‘make pages’ app can be used for (including what look to technical people like misuses - the classic example being the person who pastes a screenshot into a Word document and emails that). I'd suggest that a meaningful proportion of Excel use doesn't involve formulas, for example, just lists and tables and page layout - IDE as DTP. New routes to market and new interaction models provide new ways to challenge that hegemonic interaction model, just as smartphones allow the unbundling of Facebook's interaction models - SAAS changes Office and so do app stores. 

This brings us back to the mouse and keyboard that you ‘need for real work’, as the phrase goes. Yes, you really do need them to make a financial model. And you need them to make an operating metrics summary - in Excel and Powerpoint. But is that, really, what you need to be doing to achieve the underlying business purpose? Very few people's job is literally 'make Excel files'. And what if you spend the other 90% of your time on the road meeting clients and replying to emails? Do you need a laptop, or a tablet? Do you need a tablet as well as a smartphone? Or a laptop, or phablet? Or both?

Well, what do you want do with it? it’s all just glass - the only real different is the size and the input mechanism that suits your task. 

Apple passing Microsoft

A symbolic moment, this: in Q4 2013 the number of computers* sold by Apple was larger than the number of Windows PC sold globally. If you add Windows Phone to the mix they're more or less exactly equal. 

This is a pretty good illustration of the scale of mobile: Apple limits itself only to the high end of the mobile market but still sells more units than the whole PC industry. 

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(*Macs, iPhones, iPod Touches and iPads) 

For even great clarity, this shows just Windows PCs and iOS devices - Microsoft's old business and Apple's new one. Obviously, Apple's business is more seasonal and the iOS number will probably be lower next quarter - hence my opening line: a symbolic moment. 

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The comments to this post were passionate but not all that productive. It's a pretty simply point: mobile is the next computing platform and it's a lot bigger than PCs in unit sales, so even the smaller player can overtake the total PC business. It really didn't occur to me that anyone would disagree with this. I've closed comments. 

Windows Mobile - one more push?

It seems pretty clear from Microsoft's messaging (including the carefully placed ‘off the record briefings’) that it thinks Windows Phone will work if it’s given more time, more effort and more execution. 

Merge the Nokia sales and marketing teams. Add enterprise features. Pay more developers to port their apps. Make better tools. Keep pushing, and pushing, and pushing, and eventually things will lift off the ground. The shift to mobile is clearly an existential threat to large parts of Microsoft’s business, but unlike, say, Blackberry sales, the Windows/Enterprise nexus isn’t going to collapse any time soon, so Microsoft has time to get things right. Just throttle up and head down the runway - you’ll get up off the ground eventually. 

This strategy reminds me of the video below. It works best with the sound turned up.

Given that Windows Phone 8 is effectively the second version since the post-iPhone reboot, you could even invoke the old rule of thumb that Microsoft takes three attempts before it wins. So just keep pushing and you’ll do… OK. The Nokia takeover document proposes a 15% smartphone market share target, which is respectable, though hardly victory and a long way from classic Ballmerian bombast. 

The problem with this narrative, though, is that the problems with Windows Phone will not be fixed by product quality, execution, perseverance or capital. Nor can Microsoft count on the market leaders screwing up, which often helped out in the past. Rather, Microsoft is now on the wrong side of precisely the same dynamic that came close to killing Apple 20 years ago: developers are not choosing it. 

By the end of the year there will be perhaps 1.1bn Android phones in use, and around 300m iPhones. And perhaps 50m Windows Phones. That’s a very quick decision for most developers, and that trajectory is not changing. Can Microsoft brute-force its way through this? Perhaps. But it seems unlikely. 

This prompts the question of what else Microsoft might do. In any discussion of fundamental strategy it's helpful to recall an observation by Santayana: 'Fanaticism consists of redoubling your efforts when you have forgotten your aim.’ What is Microsoft’s aim? Is it to sell lots of Windows Phones? Is it to extend the generation-old strategy of ‘Windows Everywhere’ to mobile? Or is it to be a vital, important and relevant platform and applications company?

Arguably, Windows Phone is just a tactic, and a failing one at that. Microsoft, like Nokia in 2010, should move from denial to acceptance and work out what comes next. 

Marc Andreessen famously declared that the web would reduce Windows to “a poorly debugged set of device drivers" (a good example of climbing out of the Trojan Horse before you’re inside the city). But how far down the device stack does Microsoft really need to go? 60% of revenue, after all, comes from enterprise and business services. Does Microsoft need to make the device drivers on a phone? The networking stack? The power management stack? It might like to, but does it need to? 

It seems to me that a new Microsoft CEO must at least consider turning Android into a stack of poorly debugged device drivers. After all, Google has stolen Microsoft's natural place in mobile: it is Android that fills the role taken by Windows in the PC world. There is no free slot in the 'poorly debugged device driver' game. But there is a very big one in providing a stable, secure ecosystem, in providing a managed environment for enterprise, in corporate messaging, and in putting corporate documents onto mobile, on whatever platform. And even, perhaps, in providing a polished, safe consumer Android experience. Right now Microsoft is leaving all of that vacant. This screenshot, from a friend at a very big fund management company, is pretty damning. He's organised all his apps by ecosystem - compare Google and Good with Microsoft. Microsoft should not have allowed this to happen. 

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What if Microsoft were to do what Amazon has done to Android? Make a suite of services for mobile, ranging from sandboxed apps for iOS to a complete ROM for Android, and everything in between. Buy Cyanogen and Good. Make its own launcher, UI and app store? Above all, put Office and Exchange on the iPad.  

Once you start down this route the possibilities iterate almost indefinitely. But they all start from Microsoft being on a platform that people will buy and developers code for. Once it arrives there, all the rest of Microsoft's still-remaining strengths might be brought to bear. But if it sticks with wanting to own the kernel then it may end up like the peasant in Molière who dug a ditch around his house and called himself Monsieur de l'Isle. 

 

Further reading:

The irrelevance of Microsoft 

Is Google fighting a platform war? 

Microsoft and Nokia

It’s been very clear that for some time that Windows Phone was not working. It isn’t failing, exactly - sales are drifting slowly upwards and it’s ahead of Blackberry in some markets (as though that was an achievement), but it sold 20-25m units in the last 12 months where Android sold 430m or so (and perhaps another 150m in China) and the iPhone 143m. It’s irrelevant in the scope of the industry, and for Microsoft that counts as failure. For Nokia, meanwhile, simple finance was an issue: Microsoft’s announcement says that operating break-even is 50m units, a long way off at current growth rates. So, something had to change.

There’s lots of detail in the transaction structure to pick over. Why is Nokia licensing the brand instead of selling it when it has no consumer-facing business? Why isn’t Microsoft buying Here, the location platform? Why are the patents licensed instead of sold? Why did Microsoft take on the featurephone business?

I have thoughts on some of these, but they’re not really important. What matters is what happens next.

My initial reaction, like many, was that this changes nothing. Windows Phone is failing because of a classic vicious circle: consumers will not buy it because it has very few apps, and developers will not target it because very few consumers own one. There may be 20-30m Windows Phones in use, but there are 250m iPhones and over 900m Android phones out there. As a developer, any investment you make in Windows Phone is investment you’re not making in iOS or Android, and that opportunity cost delta is huge. There are other issues (distribution and sales commissions most obviously) but those are secondary: the ecosystem itself is sub-scale and that is self-perpetuating.

So, the acquisition solves Nokia’s problem (running out of cash) and hence is a tactical move by Microsoft: it prevents the only significant Windows Phone OEM from exiting the market. It is possible that Nokia threatened to switch to Android otherwise (the relevant contracts are getting close to renewal), rather as Motorola threatened to sue other Android OEMs before Google bought it.

But ownership by Microsoft will not of itself change the sales of Windows Phones. If anything, it will decrease them, since it prompts other OEMs to give up on it entirely. It will not make more developers make Windows Phone apps or more consumers buy the devices. And it does little or nothing for Windows on tablets. Something else needs to change.

However.

Microsoft IS going through a fundamental strategic change. Steve Ballmer is leaving - possibly pushed out. It is moving from a business line to a functional structure, and reorganising to become a devices and services company. The (misfired) Surface was one step towards devices, but owning a handset manufacturer is a much bigger one.

Suppose, for the sake of argument, that Microsoft does make a significant change in strategy - something that would give it a much better chance to become relevant in mobile. Owning Nokia - both the featurephone and smartphone parts - might well be part of that.

That is, is this a doubling down on the existing, failing strategy, or a foundation for a new one?

Steve Ballmer's failure

There's an old saying in British politics that all political careers end in failure. That applies, I think, to Steve Ballmer. In some ways he did a superb job in the last 30-odd years. But he leaves with Microsoft irrelevant in the new paradigm of the tech industry, mobile.  

(I wrote a post looking in more detail at Microsoft's irrelevance here.) 

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The irrelevance of Microsoft

Quarterly numbers are all well and good, but sometimes it takes a really long-term chart to see what's going on. This one shows unit sales and average selling prices of PCs (including Macs, not that it matters) since 1995, the year Microsoft sealed its victory with Windows 95.   

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This is really a classic illustration of the demand curve; falling prices and rapid growth in unit volumes, mainly driven by the growth of the PC internet. And, of course, the dip downwards in the last few quarters. The contrast with the exploding sales of the new wave of mobile UNIX devices is pretty obvious. 

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The practical effect of this is that Microsoft's share of connected devices sales (in effect, PCs plus iOS and Android) has collapsed from over 90% in 2009 to under a quarter today. 

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Just as overnight success can take a lifetime, so overnight collapse can also take a long time. There are founders creating companies today who weren't born when people were still actually scared of big bad 'Micro$oft'. It stopped setting the agenda 18 years ago. Windows 95 was the moment of victory, but was also the peak: it came just at the moment that the Internet started taking off, and Microsoft was never a relevant force on the internet despite investing tens of billions of dollars.

But you needed a PC to use the internet, and for almost everyone that PC ran Windows, so Microsoft's failure to create successful online services didn't seem to matter. Microsoft survived and thrived in the PC internet era, despite appearing to be irrelevant, by milking its victory in the previous phase of the technology industry. PC sales were 59m units in 1995 and rose to over 350m in 2012. Of course, that's now coming to an end. 

Though it looks like we've passed the tipping point, this process isn't going to be over quickly. PC sales aren't going to zero this year. But the replacement cycle, already at 5 years, will lengthen further and further, more and more apps will move to mobile or the cloud, and for many people the PC will end up like the printer or fax - vestigial reminders of an older way of doing things. Microsoft may yet manage to turn Windows tablets and phones into products with meaningful market share, but it will never be dominant again. 

Note

A few commentators seem to think I'm ignoring (or just don't know about) Microsoft's enterprise and games businesses. That isn't the point. Those are perfectly good businesses, but they don't set the agenda. They don't drive the future of the consumer technology world. No-one's afraid of them.  

Apple closing on Microsoft

In Q4, Apple sold 75m iOS devices and 4.1m Macs. Most estimates of total PC (including Mac) sales in the same period were around 90m. 

In other words, Apple is now (in peak quarters) selling as many computing devices as Windows. This trend is not going to change. 

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Almost as interesting as this milestone is how, well, boring and predictable it feels. That war was over a long time ago.