Decoding the new economy

Microsoft’s continued evolution

Microsoft are evolving to a changed market, but can they evolve quickly enough to beat their competitors?

Today’s investor briefing by software giant Microsoft shows the company’s evolution as their markets shift.

Microsoft Chief Operating Officer Kevin Turner broke out the key numbers for the company’s revenues which illustrate just how the company’s business model is changing.

Over half of Microsoft’s revenues are coming from enterprise customers and of the product lines, Office unit makes up just under a third, Server and Tools slightly more than a quarter while Windows has fallen to 25 percent.

Despite the decline in Widows’ revenues, there’s no doubt about Microsoft’s determination to drive the PC upgrade cycle through the retirement of Windows XP as Turner explained.

We have a giant XP install base. But guess what? We’ve made so much progress on that XP install base. It’s down to 21 percent worldwide, and we have plans to get that number to 13 percent by April when the end-of-life of XP happens.

A big part of the change is the shift to the cloud with Turner claiming two hundred percent growth in Microsoft’s Azure services.

Despite the change in Microsoft’s focus, the threats remain with Apple releasing both iOS7 and their new range of iPhones along with Google making their QuickOffice mobile app free to iOS and Android users.

While Microsoft are steering their ship around, the incumbents in other sectors are protecting their positions. In an evolving world, survival is not guaranteed.

Intel and the upgrade cycle

Can the upgrade cycle save Microsoft and Intel as the computer market moves against the once dominant duo?

Once dominant PC industry duo Microsoft and Intel have had their positions shaken with the rise of cloud computing and smartphones. Can the PC upgrade cycle help them reclaim their fortunes?

In the early days of the PC industry, chips mattered. Twenty years ago the release of the Intel 486 CPU was big news and careers rose or fell depending on whether an IT manager chose DX-33 or SX-66 chips for the company’s fleet of desktops.

Today few people care enough to get passionate about what’s driving their smartphone or tablet computer.

Intel, who are currently promoting their new range of Central Processing Units, and Microsoft are in an interesting position as their traditional dominance in server, desktop and laptop computers is being challenged by the rise of smartphones and tablet devices.

For most of the 1990s and 2000s the two companies dominated the PC market so completely that the generic term for the sector was ‘Wintel’ – the combination of Windows and Intel.

A core part of the old Wintel business model was the four year upgrade cycle, that most computers would be replaced every three to five years giving Microsoft, Intel and the rest of the IT industry a ready made market for new equipment.

That business model was broken by Microsoft’s disastrous Vista operating system and never recovered as non Wintel portable devices and cloud computing services took away the need to upgrade a server, desktop or laptop computer every four years.

For Intel, matters weren’t helped by their powerful but energy hungry chips not being suitable for tablet computers and smartphones which further eroded their sales as the market moved to portable devices.

Despite those changes to the marketplace, Intel continue to focus on that four year cycle, at their media lunch in Sydney yesterday they emphasised the costs of running older technology.

They do have a point with their claims that servers older than four years deliver four percent of the computing power but consume 65% of the energy, making those antiquated systems far less efficient than newer equipment.

Unfortunately for Intel many businesses will be looking at outsourcing their servers to the cloud when the next technology refresh comes along, so the energy and efficiency arguments are a different matter.

On the desktop, things are somewhat different as most workers still prefer to work at a PC and Intel do have a case for upgrading both business and home systems.

Probably the biggest opportunity will be Microsoft’s pending retirement of Windows XP which will see a wave of business and home users who’ve been content with decade old computers looking at moving off systems that are no longer supported.

Another feature going for Intel and Microsoft are newer computer technologies such as touchscreens and Intel’s own wireless display technology, branded as Wi-Di, which older systems can’t support.

Whether this is enough to entice technology addled consumers and businesses across to new systems remains to be seen, but it’s a challenge for both Microsoft and Intel to reclaim their once dominant market positions.

Building the post-agile workplace

Yammer founder Adam Pisoni believes the Microsoft owned business could be then next phase of the industrial revolution.

“I personally believe we haven’t seen a major change in how companies work since the industrial revolution,” says Yammer co-founder Adam Pisoni. “We’re, I think, on the brink of a change as large as that.

Pisoni was speaking at Microsoft’s Australian TechEd conference on the Gold Coast and gave an insight into how Yammer’s development philosophy is being implemented at Microsoft since the smaller company was acquired last year.

He believes all businesses can benefit from collaborative, cloud based tools like Yammer however software companies like Microsoft are the ones being affected the earliest from their adoption.

“We sometimes joke that Yammer’s development methodology is post-Agile, post-Scrum” says Pisoni. “Because they were not fast enough and don’t respond to data quickly.”

Understanding modern workplaces

This will strike fear into the minds of managers who are only just coming to understand Agile and Scrum methodologies over the traditional ‘waterfall’ method of software development.

“We focused primarily in the past on efficiency,” states Pisoni. “In many ways things like scrum attempt to make you more agile but still focus on efficiency. Everyone is tasked based and hours and burn down points and all that”

“The name of the game now is not efficiency, it’s how quickly you can learn and respond to information.”

“Yammer is less of a product than it is a set of experiments running at all times. We take bold guesses about the future but then we try to disprove our hypotheses to get there.”

“So we came up with this ‘post-agile’ model of a small, autonomous, cross-functional teams – two to ten people for two to ten weeks who could prove or disprove an hypotheses based on the data.”

“This lets us quickly move resources around to double down on that or do something else.”

Flipping hamburgers the smart way

Pisoni sees this model of management working in areas outside of software development such as retail and cites one of his clients, Red Robin burgers, where the hamburger chain put its frontline staff on Yammer and allowed them contribute to product development.

The result was getting products faster to market – one burger that would have taken eighteen months to release took four weeks. The feedback loops from the customer and the reduced cost of failure made it easier to for the chain to experiment with new ranges.

With companies as diverse as hamburger chains, telcos and software developers benefitting from faster development times, it’s a warning that all businesses need to be considering how their employees work together as the competition is getting faster and more flexible.

It remains to be seen if this change is as great as the industrial revolution, but it’s now that can’t be ignored by managers and entrepreneurs.

Paul attended Microsoft TechEd Australia as a guest of Microsoft who paid for flights, accommodation and food.

Today marks a moment of reinvention

Regardless of what it means for the wider industry, Microsoft’s deal with Nokia means both companies have entered fundamentally different phases of their businesses.

In announcing the company will acquire Nokia’s mobile and devices business, Microsoft said “Today marks a moment of reinvention”.

This is certainly true, with the retirement of Steve Ballmer, Microsoft officially enters the post Bill Gates era and today’s announcement is an admission from Nokia that their moment as the world’s dominant mobile phone manufacturer is over.

What’s notable about the deal is what Microsoft doesn’t get — particularly Nokia’s maps service. While Microsoft gets a license to use Nokia’s mapping services, it leaves the Finnish company with a valuable asset and possibly leaves it as the only company capable of competing with Google in that market.

For Microsoft, acquiring the expertise of Nokia’s engineers shouldn’t be understated, although integrating 32,000 Nokia employees will test Microsoft’s management as this increases their workforce by a third.

Possibly the most fascinating part of Microsoft’s announcement though is the comment in the second paragraph of their media release.

Microsoft will draw upon its overseas cash resources to fund the transaction.

US technology companies have been struggling to deal with the massive profits they have accumulated offshore as part of their tax minimalisation strategy. What we may now be seeing is a wave of foreign takeovers as American companies start to reduce their offshore cash stashes without incurring domestic tax bills.

If that’s true, Microsoft’s agreement with Nokia may well indicate we’re about to see many more takeovers around the world .

Regardless of what it means for the wider industry, both Microsoft and Nokia have entered fundamentally different phases of their businesses.

Google’s lost Docs mojo

Has Microsoft seen off Google’s threat to their office suite dominance?

Last week I spent the day at Xero’s Australian convention speaking to various cloud service companies, bookkeepers and accountants.

One of the notable organisations missing in the conversations was Google – two or three years ago, Google Apps would have been at the front and centre of conversations about cloud services and integration. Yesterday the company was barely mentioned.

Part of the reduced buzz around Google Apps at XeroCon is due to Xero’s closer relationship with Microsoft, but it also betrays how Google Docs is no longer the smartest, newest product on the block.

“We tried to eat their dog food, but our staff rebelled,” one manager of a marketing agency who worked with Google told me. “We thought we’d go Google Apps for all the work we were doing with them but we just found the products lacked the functions we needed.”

The main problem for business users are Google Docs’ slimmed down feature. While most people don’t use 95% of the tools included in Microsoft Word or Excel, each person uses a different 5% and find something critical missing from the cloud based challenger.

For writers, Google Docs’ lack of a word count function is a deal breaker. Speakers find the Presentation function far too basic concerned to the Microsoft Powerpoint or Apple Keynote packages.

In the cloud computing industry, Application Program Interfaces (APIs) are all important as these allow other services to plug into data and enhance value for users. Over the last two years, Microsoft have done a good job in cultivating their developer community while Google have taken theirs for granted.

Most importantly though is that Google seems to have lost focus on their productivity suite, it may be another example of the company’s corporate attention deficit disorder, or it may be be that Microsoft have seen off another challenge to their dominance in that sector.

If it is the latter, then Microsoft have done a good job with Office 365 in seeing off the threat that Google posed.

Despite the company’s challenges in the post-PC, post- Gates era it would be dangerous to write Microsoft off.

A question of incentives at Microsoft and Apple

Incentives create a company culture as we see within Microsoft, Apple and Amazon

Ben Thompson on his Stratechery blog speculates what Apple would be like were Steve Ballmer running the company.

Thompson makes an excellent point – that Ballmer has been very good in building a company driven by incentives like salaries, bonuses and titles. It describes Microsoft very well and highlights the companies strengths and weaknesses.

Were Ballmer to run Apple, Thompson concludes, it would be a far more profitable company than it is today but it would be fading into irrelevance just as Microsoft is.

That makes sense as Microsoft under Ballmer has been able to profit from the dominant market position it built up in the late 1990s, but the company has struggled against innovative competitors or the big market shifts following the arrival of smartphones and tablet computers.

Where Thompson is on more shaky territory is citing Amazon as another example of where profit is less important than innovation;

Amazon famously makes minimal profits; Microsoft made more money last year than Amazon has made ever, yet Amazon too is far more relevant in the consumer market today than is Microsoft.

Amazon may well be more relevant to the consumer market today than Microsoft, but that’s largely on the back of a business model built on shareholders subsiding customers – something that Apple has never done.

It may well be that when investors get sick of propping Amazon up, the company’s business model will have to change. Should Amazon have a Microsoft like dominance of the online retail or cloud computing markets then customers might be in for a nasty dose of sticker shock as profits are maximised.

Ultimately incentives are what shapes a company’s culture – whether the incentives are built around stack ranking, commissions or currying favour with the founder, they will determine how the business behaves.

Mr Ballmer regrets

The successor to Steve Ballmer as Microsoft CEO has some major decisions about the company’s future.

Following the announcement of his pending retirement, Microsoft CEO Ballmer held his first interview for twenty years with ZD Net’s Mary-Jo Foley.

During the ZD Net interview, Ballmer and Foley ranged over subjects ranging from his possible replacement, reasons for retirement and his greatest highlight during his thirteen year tenure as CEO.

Foley’s asked Ballmer what was his greatest disappointment as Microsoft CEO and, not surprisingly, he nominated the development of Microsoft Vista.

I would say probably the thing I regret most is the, what shall I call it, the loopedy-loo that we did that was sort of Longhorn to Vista. I would say that’s probably the thing I regret most. And, you know, there are side effects of that when you tie up a big team to do something that doesn’t prove out to be as valuable.

Those side effects of Vista’s botched development were felt across the PC industry as the operating system’s overlong development and disappointing performance broke the three year upgrade cycle that underpinned the sector’s business model.

Unlike the similar debacle eight years earlier with Windows ME where Microsoft’s market position was unchallenged, Vista came along at the time the computer industry itself was being disrupted by smartphones leaving the entire PC industry exposed to a major shift.

Now Ballmer’s successor will have to deal with the industry’s broken upgrade model along with the post-PC era where desktop and server operating systems are no longer the key to controlling the market. Every option is a challenge to Microsoft’s existing businesses.

As discussed in Ballmer’s interview with Mary-Jo Foley, Microsoft still sees its future in consumer IT, whether that includes continuing the company’s three screen strategy of supplying Windows on the desktop, tablet and smartphone will be one of the early and critical decisions the next CEO will have to make.

While Microsoft Vista might have been Steve Ballmer’s biggest mistake as Microsoft CEO, the challenges ahead for the company’s board and management are great, it’s going to take strong leadership for the once dominant software giant to maintain its place in a radically changed market.

Song of the day – Ms Otis regrets by Kirsty McColl and The Pogues.

Tag: microsoft

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