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4 Reasons Microsoft is Coming Back in a Big Way

2012 March 7
by Greg Satell

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.

– Greg

12 Responses
  1. Robert Neuschul permalink
    March 9, 2012

    From one [limited] perspective I would suggest that the headline is misleading: MS never really went away; it just looked that way.

    The financial markets and the consumer marketplace have been hugely distracted by the smoke mirrors and glam which Apple have delivered over the last few years and have also been distracted by some highly misleading market [*] indicators.

    MS have spent the last 5-6 years doing a fairly major repositioning of their approaches to market *and* to the fundamentals of their technology: they have known for almost a decade that they need to move away from the established repetitive buy/upgrade cycle to a software rental mode – there are very sound technical and business reasons for this – reasons which make as much sense to customers as to MS, *and* they have known for even longer that their decision in the late 90s to ditch multi-platform hardware support in the OS was a *bad* move.
    Software rental in the cloud is now a strong reality – and MS’s Azure cloud platform is far ahead of Apple and roughly on a par with Google and Amazon; this sector and the Office BPOS/365 services [and the free Office/Skydrive] and the various new cloud based “office in a box” outsourcings are delivering the most rapid growth area in MS revenues. It’s a sector of their revenues which will eventually overtake the MS Office sales – probably by around 2014. Meanwhile hardware neutrality is once again well established with W8 – which runs seamlessly on all x86 compatable platforms and on the ARM chipsets which dominate the smartphone market, allowing application and service portability from smartphone to internet cafe to virtual desktop to office workstation to home PC, delivering the foundations of real context sensitivity.

    More importantly, it means that when new hardware platforms such as quantum chipsets arrive at some point in the next few years, MS will be in a position to exploit them easily and almost transparently: Apple and Google/Android, on the other hand, still need to do some major work under the hood if they want to build in similar transparent capability to deploy OSs and apps or services on other hardware platforms.

    In the arena of the Xbox and its haptic interfaces one of the less obvious things is the support given by MS to the “jailbreak” code. XBMC is a derivative of the Xbox OS, hacked to run on almost any hardware platform, including smartphones. The work from this project has been feeding back into MS research and into MS product for the last 5 years or more.
    And as far as that goes, unlike Apple and to some extent Google/Android, MS is far more heavily engaged in fundamental research – only companies such as IBM and Fujitsu and Xerox are still heavily engaged in or funding such work to the same extent and with such great effect. MS play the long game in a way that few others appear to do. The market meanwhile has allowed itself to be entirely seduced by Google’s mantra “Fail fast, fail often!” and overlooked the fact that one also needs longer term strategies to go with those short-term tactics.

    Reposted from LinkedIn @ Greg’s request.

    * addendum: stock market valuations are tricky beasts. There’s frequently too much concentration in the stock markets on managing expectations through dividends payments to shareholders and other “tricks” and not enough focus on creating long term customer value. What the markets think of MS or Apple are often unrelated to any “true” valuations of their businesses. In that area at least, Apple have done slightly better than MS in recent years.
    Meanwhile Google will need to settle in for the long haul with Android and Google Apps etc; how they manage that process over the next 2-3 years will be interesting to watch.

    We live in interesting times 🙂

    Robert

    Greg Reply:

    Thanks Robert.

    One question: Can you explain “quantum chipsets?” By quantum, do you mean qubits rather than bits or something else?

    Greg

    Robert Neuschul Reply:

    Greg

    For now, qubits is close enough. Anything else would take a dissertation 🙂

    There are lots of people working on practical chipsets; IBM, Cambridge University [UK] and the Australian Federal Quantum Computing Lab amongst a few others, although Fujitsu and one of the Stanford Labs are doing some interesting parallel work on quantum switching which also has application in building ‘arrays’ of quantum computers as well as being useful in re-optimising existing global fibre infrastructures.

    Thanks to various discoveries in the last year or so we now know that both Moore’s Law and Ohm’s Law still apply at the Quantum level, so we can probably expect to see ‘real’ usable chipsets appearing relatively soon.

    Combine these ‘chips’ with various memristor type devices to replace both ram and “drive” storage and potentially we have the capability to make really really small very low power RISC type devices which could deliver huge computational power and large and smart storage capacities.

    Robert

    Greg Reply:

    Thanks for the clarification Robert.

    btw. While I have you here, I was wondering what your thoughts would be on something I posted a while ago about the digital world in 2020: http://www.digitaltonto.com/2011/the-digital-world-in-2020/

    Greg

  2. March 15, 2012

    Microsoft have held the IT industry back for years. I have been involved in IT for nearly 40 years now and they have stagnated the PC world! Apple and Google are innovators .. they are driving change like touch screens, apps that are intuitive, computers that people actually enjoy using. If it was left to MS, we would still be using a mouse, keyboard, point & click etc for ever. There is no practical difference between windows 20 years ago and windows now. No voice, I still need to type to tell it exactly what I want it to do. Should it not know when I boot up what where the last apps I had running, which documents I was working on, let me even click a button for it to change profiles – like a car does when you or your wife get in ..
    If MS was a car, it would still be only available in Black!!!! Sorry, but (along with a few other heavyweights like SAP) this is true;-(

    Greg Reply:

    Thanks for sharing Terry. We’ll see what happens.

    Greg

  3. March 15, 2012

    MS doesn’t turn me on to want to work. Apple makes me smile. At $600+ that smile is big!

    Greg Reply:

    Point taken. Well argued:-)

    – Greg

  4. March 16, 2012

    I think a 5th would be Privacy/Trust. Ask yourself who would you trust most with your privacy among Google, Apple, Facebook, Amazon, Microsoft. The answer might surprise you.

    Greg Reply:

    Interesting point. I guess trust is in the eye of the beholder.

    Have a nice weekend.

    Greg

    Robert Neuschul Reply:

    Alan

    Who /would/ you trust most? Or who /should/ you trust most?

    They’re not the same thing 🙂

    However I do entirely agree that trust is one of the most significant issues of the next decade: currently it’s an iceberg issue – most people are still pretty unaware that it IS an issue, and most are also unaware of the associated issues that go with corectly handling role and identity. So better than 90% of the trust issues are still concealed beneath the surface.

    To quote [indirectly] from the intro to Bruce Schneier’s latest book “Liars & Outliers”

    “It’s all about trust, really. Not the intimate trust we have in our
    close friends and relatives, but the more impersonal trust we have in
    the various people and systems we interact with in society. I trust
    airline pilots, hotel clerks, ATMs, restaurant kitchens, and the company
    that built the computer I’m writing this short essay on. I trust that
    they have acted and will act in the ways I expect them to. This type of
    trust is more a matter of consistency or predictability than of intimacy.

    Of course, all of these systems contain parasites. Most people are
    naturally trustworthy, but some are not. There are hotel clerks who will
    steal your credit card information. There are ATMs that have been hacked
    by criminals. Some restaurant kitchens serve tainted food. There was
    even an airline pilot who deliberately crashed his Boeing 767 into the
    Atlantic Ocean in 1999.

    My central metaphor is the Prisoner’s Dilemma, which nicely exposes the
    tension between group interest and self-interest. And the dilemma even
    gives us a terminology to use: cooperators act in the group interest,
    and defectors act in their own selfish interest, to the detriment of the
    group. Too many defectors, and everyone suffers — often catastrophically.”

    Until we have suitable architectures for managing identity and roles and the trusts that go with them we’re all potentially vulnerable to exploitation or attack in a variety of different ways: which is why we all need to be careful about the data we expose about ourselves in all sorts of places. – including what data [and how] we store on our personal devices – phones, pads, laptops and desktops etc.

    In an earlier reply Terry suggests that Apple is more innovative and their products make him smile and happy to work; I won’t disagree with that, [though I do take issue with him on other aspects of his reply] but those smile and innovation factors are only a small part of the social political economic and environmental context of technology usages.

    The reality, in the context of wider systems theory is that the underlying architecture of Apple products makes them inherently more vulnerable to single-point-of-failure subversion of trusts than any product from Microsoft or Google: up until today they have essentially relied on security through obscurity and their hard control of what can or cannot run on some of their platforms – and too they were not a large enough market segment to be economically worth attacking and there was little challenge for the script-kiddies to do so. Meanwhile their fan base [sorry, customers] have always impersonally “trusted” that Apple were looking after their customers and delivering secure product. However there’s little technical basis for that assumption on the customer’s part.
    It will only take one determine and successful exploit on iOS/OSX etc and/or an attack on the iTunes platform for a lot of people’s faith to be shaken.

    Greg Reply:

    Thx Robert. Sometimes I think I should write blogs just to get your comments.

    On the issue of trust, I recently wrote a post about privacy. The problem goes much deeper than most people would ever imagine: http://www.digitaltonto.com/2012/the-scary-truth-about-privacy/

    Greg

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