Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence

by Joachim Kempin

  As I have explained throughout the book, to gain a coveted top spot in the IT industry a company needs to be recognized as the coolest and most groundbreaking innovator. In today’s landscape this means you have to know how to excite and energize the Facebook and Twitter generation. If you succeed, the progressive media will hail you and promote your product through plenty of PR—for free. MS urgently needs to relearn this and do it pronto. She once owned the tennis shoe/sneaker and jeans generation. Will a solidly executed engineering strategy for Windows 8 be enough to earn accolades from this audience? Market challenges have changed tremendously since Windows 95 was launched. The appearances of Google’s, Facebook’s, Twitter’s and Apple’s products have profoundly influenced user experiences and expectations. Today’s excitement is created by hip-hop minded entrepreneurs who appeal to a wide audience projecting revolutionary sentiments of change and progress. Their groovy—or should I say Ray Ozzie—like messages fascinate and reverberate in particular with the mobile information addicted younger generation.

  MS’s image over the last decade seemed stuck with buttoned up business suits or ex-nerds who have become less popular as they moved through the ranks and obtained middle manager status. When announcing Windows 95, we brought Jay Leno up on stage and the PC played “Start me up”—the famous Mick Jaeger song every time I booted it. Gimmicks? The launching of 8 will need to create a special atmosphere demonstrating a brighter future, one the young generation can believe in, trust and talk about as being utmost cool (or as MS would say, modern). For this an image remake of MS needs to occur. MS needs to think Facebook generation, not business community, and leave the booming voice and piercing blue eyes cliché behind. Creating a new social forum for the current generation expressing outmost exhilaration is in my mind the ticket to make inroads and cause a wave of excitement!

  While the former paragraph may sound too tactical for some, let’s return to the more strategic issues. Developers now engaged with Apple and Google need to be converted and ensured that resulting opportunities and profits will be theirs to keep without MS turning from friend to foe rather earlier than later. There is too much fear in the development community today that MS might not keep her promises. Her current CEO might have a trust deficit in this community, and if so he will need to fix this or leave. Without loyal partners MS is nothing!

  To underline my point, Windows 8 has already caused a stir with ISVs. Making it difficult for competitors to port their browsers into the new ARM/METRO environment is not the way to succeed. Returning to the secrecy of the 90s or pursue a walled-garden approach in regard to content as some already claim might awaken the Feds again. Users want choice, and ISVs need a maximum of design freedom for modern Windows to succeed.

  My old OEM customers are venting about MS developing its own proprietary tablet following Apple’s lead. This has happened before and was code named “Courier” early in this century and shut down to avoid hurting OEM partners. No doubt most dropped the tablet ball by not seriously supporting and promoting earlier MS efforts and as such pursuing a proprietary route now is understandable. What is troubling is the secrecy it has been shrouded in. During my time this would never had happened—I would have made sure of it. I am aware that several OEMs have already made substantial investments to develop their own tablets. They feel like being punched in the face. Further perturbing is that MS’s plans to offer a proprietary notebook. It will compete head on with partner offerings and endanger current OEM relationships. If both actions backfire, I envision chances for Linux and Google’s Chrome OS to make inroads with OEMs and take significant market share away from Windows.

  I further believe the P&L71 math does not work for either device. Not considering any losses to Linux and Google as discussed before, the new tablet and notebook should increase revenues but I remain very skeptical about the profit picture. MS does not own a factory and has a track record of having trouble with sourcing hardware components and producing devices as cheaply as her competitors. Hardware margins are super thin. To obtain any, the accompanying software will have to be nearly given away. If competitors respond with launching loss leaders, this picture will get even uglier and compare most unfavorably to MS’s traditional royalty model. The situation will worsen if as a result OEM market share for Windows will get lost through defection. Revenue deterioration will for sure follow and red ink will almost certainly be spilled. I do not know who did the math on this project. The slim revenue gain with not much hope for real profits combined with losing partner’s trust and loyalties seems not worth that risk.

  A much smarter move was and still is available. Understanding the frustration of Apple winning the tablet and notebook category and OEMs’ failure to produce them at all or not making the most attractive design choices, MS should have nevertheless shared her intent to explore both segments early on. In parallel she should have spun off the people eager to design either device, given them some seed money may be combined with a loan and management would have basically created another OEM competing with her current customers. An arm’s length relationship would have been easy to impose and execute. Doing so enables MS to either limit her financial exposure in case of failure or to increase her chance for a nice profit when selling her stake in the future. Should I say back to the drawing board there is no need to play with fire?

  Having a stake in such company would raise few eyebrows and probably just stirred up other OEMs’ desire to finally get tablet and notebook designs right. There is no doubt that MS did exactly that—hats off. The device which sticks out the most is her proposed media tablet. Adding an innovative wireless keyboard makes it a hybrid located between today’s notebooks and tablets. When combined the slick design promises to totally obsolete notebooks in a few years when solid state drives72 will become cheap and small enough to replace traditional hard drive storage units. Its glossy plastics and sexy eye appeal beat Apple’s, and if the flat keyboard finds acceptance, MS’s design may be a real hit. Let’s see how Apple will respond!

  Despite getting the tablet design right first time I have yet to spot a Steve Jobs like product fanatic in today’s MS. I hope Steve Sinofsky, president of MS’s Windows division, will step up to play this role. Like others I always wait for a service pack to be released before trusting a new OS version. He will need to correct this notion with product excellence right out of the chute to gain vital momentum. This is in particular important for changing MS’s fortune in the media tablet market where Apple, Google and Amazon are seen as leaders.

  The cooperation with Nokia on the Windows 7 smart phones is off to a good start. A jointly developed Windows 8 phone promises to build on this early success. Yet only a few contenders, in particular weak ones, are neither enough for an early splash nor for enduring success. With Apple having a nearly insurmountable image and perceived quality lead and Google’s Android systems outselling Apple’s two to one, time to market is more than ever of the essence. Only a broad-stroke attack with a multitude of eager and healthy partners promises to regain the lead. The company needs to go back to the future and cut super attractive flat-fee deals to gain market share and combine it with going totally for broke by massively paying for partner advertising to propel this new breed of phones on a steep trajectory to success. Especially after Google bought Motorola’s phone business! MS acquiring a similar supplier would not be an effective counter move either. Neither MS nor Google have enough expertise to be a successful low margin component or device manufacturer.

  Other way more effective weapons exist to stimulate market share for Windows 8–powered mobile devices. The integration of slick video communication means—using Skype features restricted to Windows—seems to be one promising idea. The reduction of communication costs is another. Amazon is showing the way here by offering limited free cloud storage and an annual $50 data plan—less than half of what the large carriers charge today—for the just announced new Kindle e-reader. Deep-pocket MS needs to respond and beat this!

/>   Finishing the device discussion, let me comment on Apple’s rumored plan to market her own TV sets and Google having similar intentions with her so-called Fiber TV services. Obviously both companies are working on integrating the Internet, mobile devices and PC experiences into a revolutionary TV realm comparable and way beyond to what Apple currently offers with Airplay. A slick and advanced proprietary Apple or Google inspired TV set will find plenty of buyers—even for an initially high price. Google’s closest partners Samsung and LG will make sure of that.

  The difference, Apple’s move in particular will create more enemies in the industry and I predict any ingenuity advantage shall be short-lived. The TV industry, already plagued with super low margins, will fight tooth and nails to stop this provenly dangerous competitor right away. First, patent challenges like the ones Apple and Samsung are experiencing with smartphones and media tablets can be expected. Second, Apple has no distribution depth beyond her own stores, a handicap her competitors will explore to their advantage.

  Third, over the last two to three years efforts to connect TV sets to the Internet have been quite successful and constantly improved. Whatever novel idea Apple comes up with will therefore cause a storm of imitations in a very short time span. A lot of traditional TV manufacturers are PC, phone and tablet producers. They are more than capable of finding ways to hook up their devices to TV screens. Let’s not forget the TV market is profoundly different from the phone or tablet market. The average replacement time is seven years and not the two to three years Apple is used to with her current product offerings. The giant Sony has lost money in this market for years, and companies like Panasonic and Sharp are struggling equally. Why should Apple be the exception? The best way to make profit here might be to dominate the movie download industry or sell annual software updates, which take advantages of hidden hardware options. The latter has never been tried before, and MS—the software DNA driven company—might be much better positioned to take advantage of such an opportunity when she enters this field in particular if she is willing to share some revenues with her TV manufacturers.

  “SmartGlass” technology will provide MS with sufficient technology to at least equalize Apple and Google. It will let users control a TV, an Xbox or other entertainment devices from a tablet or phone, using Windows 8. Add to this the availability of Xbox’s music services73, which my old friend Yusuf Mehdi, now VP of MS’s interactive entertainment division just announced. It makes me believe that MS is finally right on the ball and ready for a counterstrike. The technology will work across all competitors’ devices as well and more trouble for competitors might be ahead if MS’s Wallpaper74 efforts will bear fruit.

  Nothing hinders MS to license the SmartGlass software and a TV adapted version of Windows 8 to Apple’s competitors. This allows them to quickly integrate a low cost ARM CPU into their TV set or the remote—whatever works best. Creating a great opportunity for these OEMs to beat Apple to the punch! Add MS’s Kinect interface or the even more advanced “Leap Motion” controller75 to the equation and the relative passive way to operate a TV, as my generation knew it, will soon be forgotten. I predict generation F will immediately embrace and enjoy such a dramatic and cool—sorry, modern—feeling providing changeover.

  At the end, the possibility to easily fit Windows technology into TV sets might be the most unforeseen yet overwhelming reason why that OS finally had to meet ARM. The battle for dominance in the living room will be renewed and this time it will not be fought over game console’s market share. It will go way beyond and create a chance for every end-user to have the most encompassing and enjoyable digital entertainment experience the world has experienced so far. Consumers and businesses will be allowed to simultaneously access what they desire—at their fingertips—in the living room or on an office wall. As always, all this naturally comes down to just the right software and synergistically emerging digital devices creating opportunities galore for all market participants.

  With this in mind, let me paint a broader picture for MS and explain how she needs to maneuver most effectively in this fast changing digital landscape. The need for her to be a nimbler company comes to mind first. This is along the lines of what Ray Ozzie recommended five years ago and what I have personally mentioned to Steve. Bring the company back into start-up mode. Easily achievable through spinning off some business units! Being smaller and doing a few things right has a much higher chance to conjure some immediate magic. Let only software DNA guide the company. Hardware will be produced cheaper by others. Consequently, selling intellectual property and services are the way to go to immensely reward shareholders. They have been waiting for this for over a decade.

  Even Apple’s luck will run out one day. It has only lasted this long because the company filled a void and was able to keep her prices high. This is coming to an end and her perceived high quality image is nothing other than a marketing gimmick—her competitors are already at her heels. Let’s see what happens when she only incrementally improves her products like she just did with iPhone 5, when her novelty image peels off and when Apple users cannot be retained as much as today and the user pool from other vendors dries up further. Good–bye, Apple outlets, and good-bye to her current darling status. All the more reasons for MS not to venture into making tablets and notebooks! She needs to put her skin in the game differently by using her corporate cash hoard and seed some desired developments. Reap in some rewards when they succeed, thus limiting exposure and OEM defections as she goes along.

  Steve Ballmer’s recently declaring that Microsoft is from now on a “devices and services company” is the wrong direction for the company. I agree with Paul Thurrott opining in Windows IT Pro that somebody in MS might suffer from a “bout of reality distortion” suggesting that “Microsoft might end up jettisoning the one important differentiator that it has against monoculture competitors such as Apple and Google: the diversity of its ecosystem.“ If carried out to the detriment of the company—it should lead to the CEO’s dismissal.

  As tempting as it looks today, copying the Apple model does not guarantee MS’s future success—only following software DNA does. Freeing avant-gardists from the chains of the company’s bureaucracy and committee politics will lead to pioneer novel go-to-market strategies and foment enduring partnerships. Can the CEO overcome his lust and thrust of empire building and value a leaner and meaner new culture and spearhead such transition? As English historian Edward Gibbon once said: “We improve ourselves by victory over our self. There must be contests, and you must win.”

  There is no reason why this could not be achieved in two steps. First spin off the Xbox and device division including all software and services currently contained within. The resulting entity should be big enough to stand on its own feet, prosper and shortly thereafter launch a successful supplemental IPO76 to gain some operating cash and fund new development efforts. Such move should help to defend Xbox’s market share against the emerging and well-funded Ouya game console as well. A $99 device based on the Android OS promising to deliver the gaming software through the cloud for free—we will see! I further recommend to go one step further and incubate the promising new Windows 8 devices there as well. OEMs might regain trust.

  Second, improve productivity of the distributed work place using Office, Windows, and foremost the cloud and Skype. Observe the car manufacturers as they come up with more and more tricks to save fuel. Do the same with software DNA to save things like battery lives for any mobile device and connectivity cost for enterprises and consumers alike. Last but not least, perfect voice and handwriting recognition to increase security, input accuracy and speed.

  Ideally, MS’s board will embrace a divide and conquer strategy and in the long haul restructure the company into a holding company of tech innovations causing one cool market revolution after another to happen. Instead of coordinating it all with the current bureaucracy, cut the rest of the software divisions loose and allow them be increasingly entrepreneurial when do
ing the hard work. As a result, I would expect huge savings in coordination cost, faster responses to interruptive technologies and a flood of innovations coming to market earlier. In the process the company needs to get rid of all distractions like her doomed retail stores. (Fortunately I don’t need to ask for the same in regard to the MSNBC partnership, it just got severed, hallelujah—what took so long?) These are relicts from a bygone area. Next to address would be ineffective R&D investments and discontinue them. Billions of dollars with not too much to show for in pure research is not healthy for shareholders. Long-term these changes will lead to a new management team. For sure initiating this much change constitutes a challenge to MS’s board which has been pretty lame duck in the past. It will need to start demanding—with fortitude—not only revenues and profit gains but leadership from the executive suite following a change in chairmanship. In the best interest of the company and her shareholders!

  A LAST WORD

  “A heart to resolve, a head to contrive, and a hand to execute.” —Edward Gibbon

  As mentioned before, MS in 2001 abandoned her stock option plan, significantly altering how employees from then on received long lasting rewards. When I joined, stock prices were nowhere on the horizon. After MS went public in ’86, people had substantial incentivized rewards to look forward to, inspiring them to push the company to the loftiest heights of success. In May of ’05 Bill gave an interview declaring the largest mistake he ever made was to shower employees with stock options. Had he gone nuts? I sent him a flame-mail, never receiving a response. Without concrete anticipation of being thusly rewarded, much of the wealth of talent he and Steve had accrued would have marched down the road to any number of competitors at a dizzying and disturbing rate, far faster than anything he could have ever stomached. He is right in one regard. His closest personal friends for sure got way too many.