About a week ago, analyst Adam Hartung, writing in Forbes, wrote in “Microsoft Still Can’t Find Its Future. Is It Too Late for the Company?” (if you want a glimpse at Hartung’s answer to his own question, the slug for the post is “sell-microsoft-now-game-over-ballmer-loses”), saying Microsoft is in serious trouble, and could be gone within 5 years.
While there have been and will continue to be many Microsoft detractors writing many “Microsoft is dead” posts over the years, this one takes a more studied approach to Microsoft’s problems. The post, along with a very enlightening two part interview about it with the author conducted by Onoura Amobi at Windows8Update.com, for the most part rises above fanboy-ism and shortsightedness to paint a bleak, but fact based look into the future of Microsoft. If you haven’t read the post or the interview, they’re well worth reading.
And before we go much further, yes Microsoft is a giant company with a huge install base, has just released a whole slew of new products, is sitting on some $66 Billion in cash, and like IBM before it, which Microsoft supposedly “killed” in the late ‘80s, could well be going strong (if not in quite the same leadership position, or as a darling of the media) for years and years to come. Hartung answers some of those “Microsoft is too big to fail” questions, and we’ll get to them, too.
In the post, and later in the interview, Hartung goes beyond the usual Apple=Good, Microsoft=Bad comparisons to lay out where Microsoft is, and why it is headed for rough times, if not extinction. At the same time, although he seems to be unaware of it, Hartung also points a way forward Microsoft, one we’ve already been following with interest.
First, let’s take a look at what Hartung says, culled from both his post and the interview that followed. In the original post, Hartung points out that a shift has already occurred away from Microsoft products and towards Apple and Android. He cites all the usual statistics, it’s a pretty clear picture. He then goes on to note that “(m)issing the market shift to mobile ahs already forever tarnished the Microsoft brand”, and lays out his bleak scenario for what comes next:
- Ballmer appears to have committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
- As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, dividends should steadily diminish.
- Expect substantial layoffs over the next 3 years. They could even reach 50-60%, or more, of employees.
- Expect closure of the long-suffering on-line division in order to conserve resources.
- The entertainment division could be spun off, sold to someone like Sony or possibly Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows, and Microsoft leadership has long shown it doesn’t know how to profitably grow this business unit.
- As more and more of the market shifts to competitive cloud infrastructure Apple, Amazon, Samsung and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical failures with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
As it stands, the original article is interesting, but Microsoft watcher Onoura Amobi took the time to seek Hartung out and speak with him for an hour about the post, Microsoft’s future, and why, according to him, the future looks so bleak. After reviewing credentials and a bit of introduction, Amobi asks Hartung about Microsoft’s recently released 4th quarter earnings, who called it “a really bad quarter”, and goes on to explain two significant problems for Microsoft: that people are not, and haven’t been since XP, compelled to upgrade their operating systems, and that Microsoft missed on a fundamental shift to tablets and mobile:
Adam: … Now those people are saying ‘I’m happy with a PC at this level and don’t want a bigger faster PC. I don’t need a bigger faster operating system. I don’t need bigger faster Office tools, I don’t really need that. I’m really happy and content with what I have…”
Adam: So now comes something new like the tablets and smartphones and people say “Oh wow I like this, it gives me more mobility, it lets me do a lot of stuff in a way that’s different and I find it to be quite a bit handier than my PC.
I like the size, the format, the build, the look, the interface, I like not having data on the device in case I lose it” – those are some of the reasons they say they like it. Then they start buying them and they starting buying them in huge quantities.
This is the classic market shift, the textbook example of a market that is shifting. The user isn’t saying “Hey my PC is crap”. They don’t’ say that. What they say is “I got a PC and I’m using the PC but I’ve noticed that this month I don’t use my PC nearly as much as I used it 6 months ago and I didn’t know that 6 months ago or a year ago I would never have walked around the halls or gone to a meeting without my laptop but now I find I never carry my laptop.
You know I only boot my laptop up every 2-3 days and now I do most of my work on this other thing”.
Then, according to Hartung, instead of realizing that the PC market “doesn’t have a lot of growth left in it”, Microsoft continued to push forward with Windows and Office, allowing their competitors to “build its very own large installed base”, and then tried (are trying) to belatedly jump back in the market. It’s not working so well:
So you now have an installed base of Android, Kindle, iOS, iPad users and that begets more buyers because people look around and most people don’t say “Oh I’m going to do a spec analysis to compare products” that’s not what they say. They say “Hey this is what most people are using” and they use it and they like it and once they use it and like it they don’t like to change.
To come along and say OK I’ve got a product that I think is better and we’ll say that product is Surface and you hand it to them and they say “Well you know it might be better but I’m very happy with what I have. I like it and how it works and I don’t like the idea of having to go use this other interface and another shape”. You say it’s better and they say “I don’t know why you say it’s better” and that’s actually how people do behave.
Instead of what Hartung calls “aggressively cannibalizing your installed base” to move into new markets, Microsoft instead concentrated on protecting its Windows and Office installed base, says Hartung:
“Oh I’ve owned the market, I have the install base. Now I have the new product and I will convert everyone to me” — universally fails. Universally fails.
That’s why Microsoft never got Zune off the ground, never got the Windows mobile phone off the ground. It was because if you look at it there’s nothing inherently bad or anything wrong with it, it’s just the company saying my energy, my time, my leadership is focused on defending my installed base.
I’ll put some energy into this I’ll put a product out there and they don’t stick with it. They don’t stay behind it. This is a very consistent management problem that we see across more companies that are caught in these market transitions. When I take a look at where Microsoft is I say “ OK what did you actually launch with Surface, what you’re trying to tell me is that you’ve got a hybrid, that you’ve solved the great conundrum of the world, that the great conundrum is ‘Do I want a tablet or do I want a PC’”?
Interestingly I haven’t heard anybody say that’s the great conundrum except Microsoft.
Hartung goes on to argue that instead of trying to shore up Windows and Office, Microsoft should have been the one moving in to new markets, instead of leaving them to others while it concentrated on a “defend our company” strategy.
In Part Two of this post, we’ll look at where Hartung thinks that Microsoft could have focused on, and why we think there might be a glimmer of hope in all of this doom and gloom. For now, go ahead and read Hartung’s post, and especially Onoura Amobi’s interview with him. We’ll be back with Part Two shortly.