4 Reasons Microsoft is Coming Back in a Big Way
Go ahead. Call Steve Ballmer a buffoon. Many people do. When he jumps up and down and waves his arms he can look a little bit like a monkey and under his reign as CEO, Microsoft has gone from being feared by rivals and loved by investors to being pitied by both.
It’s no wonder that Microsoft has gotten a bad reputation. Windows run PC’s are clunky and buggy compared to Apple’s sleek interoperable ecosystem. Zune was a joke and Apple’s iPhone phone business alone is now bigger than all of Microsoft.
Yet look a little closer and a different story emerges. Microsoft is quietly coming back. In ways large and small, they are gaining ground and may be ready to return to dominance. I realize that’s not a popular view, but after analyzing their business it’s become clear that they have important advantages that will help them prosper in coming years.
1. Scale & Diversification
While Balmer certainly isn’t the visionary like Bill Gates and Microsoft under his tenure has been consistently behind the curve, he has built a stronger operational company. While many assume that Microsoft’s fortunes rise and fall with Windows, even a cursory look at their financial results for the last quarter makes it clear that isn’t the case any more.
Windows, in fact, is only the third largest division by revenues. The largest by far is the business division. As astounding as Apple’s success has been, it hasn’t put a dent in the Microsoft Office monopoly. Ballmer and company still profit on every Macbook running Word, Excel and PowerPoint.
There’s some other strong business in there as well. The Servers & Tools division is relatively new and becoming one of Oracle’s biggest competitors for data center solutions. Bing is gaining ground against Google and the Entertainment & Devices business is growing like mad. Xbox live has over 60 million members.
Moreover, Microsoft is a smart investor with an impressive portfolio. They put $150 million into Apple after Steve Jobs returned and $260 million into Facebook back in 2007 along with dozens of other minority stakes picked up over the years.
That, combined with three out of five divisions growing at double digit rates, a cash hoard of $50 billion and operating margins of almost 40%, should dispel any doubts that Microsoft has a bright future.
2. Windows 8
The most serious chink in Microsoft armor is, of course, the Windows franchise which led them to dominance in the first place. Once a true monopoly, which ran 95% of the world’s computers, it has fallen to less than a 50% share of connected devices and is almost non-existent on smartphones and tablets. As the table above shows, revenues are actually falling.
Yet even here, there’s good cause for optimism. As I explained in a post a month ago, Windows 8 is likely to put Microsoft back on top. It’s a true mobile first platform, will allow users to incorporate voice and gesture commands and has been receiving rave reviews, a rarity for Microsoft launches.
Will it be better than Apple’s iOS operating system that runs the iPhone and iPad? I doubt it, but it doesn’t have to unseat Apple to be a major success. It only has to beat Google’s Android. With Microsoft’s strength in partnering with manufacturers (a competency that they have been building for decades) it’s a fair bet that’s a battle they can win.
As impressive as Apple has been over the last decade, it’s important to remember that they are, in the final analysis, a single company. Windows 8 will have the rest of the world’s manufacturers on board, creating devices for every purse and purpose.
3. The Final Screen
For the past few years, innovation has been focused on mobile and social. Microsoft’s efforts to date have fallen far short. While Apple was wowing the world with the iPod, iPhone and iPad, Microsoft came out with the Zune and Windows phones. The “Death Star” looked like it was in a death spiral.
For the next few years though, the Internet will be coming home. Apple and Google are racing each other to build the interface for connected TV’s. Microsoft, however, is already there. The Xbox is evolving into the set-top box of the future.
As I mentioned above, they already have built substantial installed user base, Kinect provides an impressive voice and gesture interface and everything will eventually be Windows 8 compatible. They have released a Software Developers Kit so that outside developers can help drive innovation and even HBO just signed on to provide access to their entire library.
Somehow, while nobody was paying attention, Microsoft has built out an impressive ecosystem that will enable them to lead the next era of computing.
4. A New Modular Marketplace
Microsoft’s resurgence heralds a new paradigm or, to be more precise, a return to an old one.
Apple’s rise from the ashes over the last decade has been astounding. They have single-handedly remade the computing world in their own image. Their integrated architecture has allowed them to innovate seamlessly; creating a unique environment that has left everyone else dumbfounded.
That era, however, is coming to an end. As technology matures, modular architectures tend to win out over integrated ones. A single company, no matter how impressive, can’t stand alone forever. As I pointed out in an earlier post contrasting Bill Gates and Steve Jobs, that is Apple’s Achilles’ heal and it is one that Jobs recognized and lamented.
It is also Microsoft’s great strength. They have prospered through partnerships and have been able to leverage those alliances to dominate the marketplace like no other company before or since. I’m not saying that Microsoft is sure to regain that kind of past glory, but they are through with being the industry’s whipping boy.
In Good Strategy Bad Strategy, Richard Rumelt writes that good strategy “brings relative strength to bear against relative weakness” and that seems to be exactly what Microsoft is doing. For my part, I wouldn’t bet against them.