Tag Archives: Microsoft

Now Every Company Really Is A…

My stump speech seven or eight years ago included two assertions: 1.) every company is now a media company and 2.) every company is now a software company. Someone recently reminded me of that pitch and while it seems obvious today, it was definitely before its time. The globe-spanning organizational behemoths I was then hectoring weren’t buying it (but unlike with mainframe customers, I don’t think anyone ever called me “son” in the course of the conversation).

The media company prediction came out of the path we were taking with Microsoft’s developer platform business. That business at Microsoft, despite Steve Ballmer’s infamous and sweaty “Developers, Developers, Developers!!!” performances (and you should see him order lunch: “Pastrami, Pastrami, Pastrami!!!” with all credit to Bruce Ryan for not only coming up with that line, but shouting it out while Steve was in the sandwich line), was strategically important but a sideline by any quantitative metric. The developer audience had an endless thirst for content but was also very suspicious of anything that reeked of marketing. Intermediaries, particularly the press, had a tendency to water things down and didn’t always fully comprehend the topic at hand. So we started to reach out directly to the developer audience and sidestep the traditional gatekeepers.

Those were the early days of corporate blogging. We had a sign in the office showing “Days Since Last Blogging Accident” (I’m looking at you Scoble ;-) and spent too much time fighting off a prominent executive who wanted to ban blogging across the company (ironically, he went on to probably blog more sheer word volume than any other blogger ever). The genesis of Channel 9 also happened in this time, which provided an authentic and humanizing behind the scenes look at the Microsoft developer platform (it was also as much a rejection of MSDN, a CD-ROM library of developer tools that had clumsily migrated to the web, as anything else). Channel 9 also quickly metastasized into a vibrant community around that content channel. The end result is we found ourselves using cheap digital technology to program (in the TV sense) directly to our audience.

It seemed obvious at the time that everyone would be doing this soon. And this was before the rise of social media, the christening of content marketing or the fixation on the CMO as the new Great White Whale of IT, all of which have fueled the ability for anyone to be their own media business. Meanwhile, the traditional media continue to face gale force headwinds (e.g. the New York Times recently paying to get rid of the Boston Globe, which they paid over a billion dollars for not so long ago). Dan “Fake Steve Jobs” Lyons chronicles the ranks of traditional journalists taking to the lifeboats to join the corporate media ranks, a path he too has taken. There is some irony that being in the media business is increasingly attractive to everyone except those actually in the media business. Even the old line about not getting into a fight with someone who buys ink by the barrel has far less applicability when printing presses are ridiculously cheap (and the guys who buy ink have to budget for bankruptcy lawyers).

In terms of every company becoming a software company, Marc Andreessen nailed this with his Wall Street Journal essay “Why Software is Eating the World”. Software no longer just replaces older generations of software, but everywhere you look software is chewing up and spitting out enormous traditional industries. Skype finished off the long distance business. iOS and Android broke the operator chokehold on the mobile experience (“hello Mr. dumb pipe!!!”). Netflix destroyed the DVD rental business (remember Blockbuster?) and is now driving the DVD itself to extinction as a medium. Uber has pushed the taxi business to lawyer up in the absent of any other strategies for coping with change. Barnes & Noble is a case study in understanding the software threat but then mismanaging its play to the point of threatening the viability of their still profitable bookstore business. AirBnB is not appreciated by hoteliers for opening lots of vacancies. The hottest thing in cars is software that powers the entertainment system. connects with your smartphone, manages the hybrid powertrain and is poised to resurrect the slogan “leave the driving to us”. The energy revolution that has pulled the rug out from under OPEC, Vladimir Putin and predictions of peak oil owes much to advances in data analysis and visualization software. And we’ve recently learned that even the world’s second oldest profession — spying — appears to have become a vast software play.

At a time when the assumption is you outsource everything you can outside your core business, both media and software development are being in-sourced with a vengeance. You just can’t live without them.

Enter The Matrix: Microsoft’s Reorg

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The new super-matrixed structure doubles down on “integrated innovation”, a model that has historically been tantalizingly just out of grasp from an execution standpoint. The new theory is shorter product cycles will mitigate failures of alignment across teams.

The pendulum swings to functional away from divisions that had clear customer focus and segmentation (ironically, Steven Sinofsky wins philosophically, even as he and most of his disciples lose personally).

The Microsoft org chart cartoon with guns pointed between organizations is getting a lot of airplay. It is worth pointing out it has always been the engineering organizations that had this kind of dynamic (sometimes even implicitly instigated by senior management – there was a a time when internal competition was in many ways more vigorous than external competition) and that there still are multiple engineering organizations. Windows and Office, for example, will always have different priorities, no matter what the organization.

This move elevates some of the strongest engineering managers in the company, but they will have to successfully step up to operate at a whole new level.

The marketing reorg will probably take a long time to sort out, with both new leadership and lots of people moving, which means Microsoft will likely be more internally focused than it should for 6-12 months.

I continue to believe the best, long-term strategy for the company is to proactively split itself up. This reorg of course makes that harder as everything gets mashed into one gigantic blob that will try to successfully span from your house to the warehouse, from the mom and pop shop to the Fortune 500’s top and from the wrist of your arm to the cloud server farm (Rap Genius here I come…).

One of the reasons I believe in splitting the company up is the succession issue. For the all the criticism SteveB gets (some very valid, some completely ridiculous), his are a very difficult set of shoes to fill. I can’t count the number of times I have asked people calling for Ballmer’s head who they would replace him with, only to hear crickets or worse, truly untenable alternatives offered up. This reorg doesn’t bring to light any internal potential candidates and with the elimination of the division presidents, also removes the “mini-CEO” presidential training grounds. Steve is still planning to run the company for a few more years (he has said many times he intends to stay until his youngest child goes to college and has been known to bellow “…and if the kid has to repeat a year, you get me for another year!”), so perhaps there is time to develop an internal candidate. But my guess is the next long-term CEO of Microsoft is not at the company today.

Meanwhile, some of the better posts on the reorg I have seen:

  • Hal Berenson dives deep into internal succession candidates.
  • Ben Thompson on the perils of functional organization in large companies, with the obligatory Apple comparison.
  • Xconomy doesn’t quite go line-by-line, but dissects some of the blather in Microsoft’s memo on the reorg (thereby saving me from having to do something similar). This memo is not an auspicious start for the new marketing leadership (though I suspect the writing team is not new).

Third Time’s a Charm?

So now Microsoft joins the rumored array of aspiring watchmakers.

TechCrunch mockup of Microsoft Watch

Every story includes an obligatory reference to the Microsoft SPOT watch and its FM sideband broadcast technology:

SPOT watch

Yet there was an even earlier Microsoft watch. Industry history, it turns out, predates the archives of any tech blog, even those that stretch all the way back to the early 21st century. The first Microsoft watch was a mid-1990s collaboration with Timex called the Datalink (check out this retro unboxing video, featuring a 3.5” disk and a CompuServe offer). The watch had an optical sensor on the face. You synced your Outlook calendar data to it by awkwardly holding your arm up in front of your monitor while the screen blinked madly. The technique only worked with CRT monitors, not LCDs, which certainly put a damper on its future prospects. I found mine, which is a little worse for the wear:

Timex DataLink watch

And if you go back to the 1970s, there is another famous industry watch which doesn’t even merit a Wikipedia entry, despite an industry titan’s efforts to keep it and the lessons it conveyed alive:

The Microma watch

We’ll see if the next wave of smart watches do better than the previous attempts.

A Very Targeted Tax Cut

Unexplored Territory 

We are in new territory with PC sales in freefall after a new release of Windows and, as some analysts contend, because of Windows 8. Even the Windows Vista “Vistaster” didn’t see PC sales to implode.

Discussions of Microsoft are moving beyond product recriminations to the more fundamental. The time-honored strategy of tying new businesses to the Windows mast is not working, and now the SS Windows is taking on water (if you need some frustration in your life, try Windows 8 on a old-school PC – the tablet-first approach dramatically undermines the traditional keyboard and mouse experience).

Both Goldman Sachs and Nomura’s Rick Sherlund have downgraded the stock today (Goldman to an outright Sell, Nomura to Neutral) and get into more existential questions about the company.

I have argued that Microsoft would be well served to voluntarily break itself up. It would unlock value, deliver a material strategy tax cut to individual businesses and solve the succession question.

Goldman views a breakup as ultimately unlikely but still makes it the first of four “Plan B” strategic options they present (the others are leverage offshore cash/increase debt, massive subsidies for mobile hardware to get into the game or significantly cut costs):

Are the parts worth more than the whole? Our sum of the parts analysis suggests a valuation at the midpoint of about $37.

Their sum of the parts analysis is interesting:

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Note that Server & Tools will basically catch up to Windows in revenue this year and gets the highest multiple of any Microsoft business. Windows is the median business.

Sherlund, the once and future axe on Microsoft, weighs in on taking the company private (maybe Dell actually is an innovator and trailblazer…):

“I’d like to think you could make something happen, but the enterprise value is $200 billion. That’s a pretty big company.”

But another Sherlund comment really makes the case for breakup:

It’s all about Office. There’s so much they could do to sell Office, but Microsoft is focused on trying to sell the Windows. Office is Microsoft’s anchor. How do you compete with Google‘s (GOOG) Android? The hardware guys can produce commodity tablets in China. The lever for Microsoft is Office. But they should deliver office on alternative platforms as well. You would hurt Windows 8 traction, but where is your better revenue opportunity? There is going to be a point in time where Windows has to stand on its own because we are missing an opportunity for a big annuity revenue stream. People are learning Evernote and Dropbox. Microsoft should be pulling Skype and Yammer sales through Office.

I have always believed the Office business was Microsoft’s to lose, as opposed to some competitor being able to take it from them. But if the rumors of Office for iOS not coming until 2014 are to be believed, they seem determined to lose it. I find it difficult to believe the development hasn’t been done for a while, so it is hard to know whether it is an issue of sitting on it to try to help Windows get a tablet foothold and/or not wanting to share 30% of revenues with Apple (the Office 365 subscription model with free clients being the obvious path out of this, but it hasn’t achieved the necessary volumes to make this work well). Office is the bigger business, but Windows comes first at Microsoft and will continue to as long as they reside under the same roof.

Pushing through the strategy tax cut at Microsoft would solve a lot of problems for SteveB.

(Interesting that though the stock is down over 4% today, it is only back to Monday’s price and is still at a six month high. Makes you wonder if the insider trading game that is Wall Street knows something about next week’s earnings).

WARMer or Colder?

Here we are, over a year since we last checked in on Windows 8, and the latest aspirant to the Microsoft operating system dynasty continues its slow meander to market. Since our last installment:

  • Apple has shipped over 55 million iPads. I wonder how many versions of the iPad will ship before we see Windows 8 tablets. iPad 2 shipped since our last installment and iPad3 looks to be announced next week. A modest slip and we could be asking about iPad 4.
  • PC sales continue to shrink in absolute terms, while the Mac grows and takes share.
  • The next version of Windows Phone is confirmed to run “big Windows” (as predicted), but the messy euthanasia of Silverlight continues to cloud the future of Windows Phone 7 applications. Microsoft pledges support for Windows Phone 7 applications going forward on “big Windows” but the successive departures of not just one but two execs responsible for Windows Phone developer evangelism might give cause for skepticism. No one in that role likes to renege on promises to developers.
  • Microsoft has embarked on a quixotic crusade to get us all to describe ARM-powered Windows tablets as WOA (Windows on ARM) as opposed to WARM.  I admit I have forgotten what the politically correct and corporately decreed alternative to Wintel was back in the day.

The “consumer preview” was delivered yesterday, which is basically the first beta. There is little noteworthy new functionality in this release. The most interesting thing was the vague disclosure that “Although the ARM-based version of Windows does not include the same manageability features that are in 32-bit and 64-bit versions, businesses can use these power-saving devices in unmanaged environments.”

Evidently WARM tablets can’t join a Windows domain, which has major implications for a Microsoft proposition that its tablets are better suited for the enterprise than the iPad. This is probably just a schedule casualty in the enormous effort required to port to a new processor architecture (ARM support is almost certainly the long pole for Windows 8), but it could also be a convoluted attempt to advantage notebook PCs or, even more implausibly, represent a bold endorsement of Intel’s power consumption roadmap.

It means Windows 8 ARM tablets are going to be consumer devices that don’t integrate with the Microsoft enterprise infrastructure any better than the iPad, so Microsoft loses what should have been a major selling point. You will have to sacrifice battery life and go with x86 to get enterprise features and manageability. This is a big blow to Microsoft’s tablet proposition for the enterprise and WOA may be DOA as a result.  It will be fascinating to understand the decision-making behind this result.

A Tale of Two Stocks

 

IBM

MSFT

Revenue (TTM) $101.62 billion $68.62 billion
Profit (TTM) $15.1 billion $21.79 billion
Net Margin 14.9% 31.8%
Price/Earnings 14.28 9.72
Forward P/E 11.67 8.84
Price/Sales 2.03 3.01
PE/Growth 1.33 0.9
Price/FCF 19.19 10.74
Dividend Yield 1.76% 2.61%
Debt/Equity 1.33 0.22
EPS 5 yr growth 18.59% 13.34%
Revenue 5 yr growth 1.85% 9.45%

Source: www.finviz.com

A WARM-Up Act

As WARM (Windows-ARM) reportedly takes the stage in Las Vegas tomorrow, some thoughts:

  • This is “big” Windows, not yet another repackaging of Windows CE.  Remember Windows NT got its start supporting multiple CPU architectures.
  • This has huge implications for Windows Phone’s future.  It makes no sense to have two separate operating systems and application ecosystems for increasingly overlapping touch devices (phones and tablets).  It sucks for customers, developers, OEMs and is terrible for Microsoft economically to have to build and support parallel operating systems.  And Windows Phone’s road is profitability is hard to imagine.  Even if you assumed a wild leap to 20% market share, at <=$10/unit, it isn’t going to pay for the 3,000+ people working on it, never mind the marketing spend and OEM “incentives”, any time soon.  Windows Phone 8 probably is a configuration of big Windows on ARM which lets that team focus on the phone experience and not have to build an operating system top to bottom.
  • This also explains the demise of Courier – a third operating system in the mix would be exponentially worse.  Presumably the Courier application experience is being implemented on big Windows as the shell for Windows tablets.
  • While iOS is Apple’s branded operating system for touch devices, it shares the same underlying kernel, tool chains, etc. with Mac OSX.  Microsoft aspires to have a single, modular operating system that can be factored appropriately for the increasing variety of form factors.  Better modularization will also help power efficiency from a software perspective.  Expect new configurations of big Windows for TVs, settop boxes, etc.
  • In theory Windows apps can be recompiled for ARM, but in reality they all need new user interfaces for the touch world.  So much for the vaunted “applications barrier to entry”.
  • Meanwhile, the modest traction Microsoft is making with application developers for Windows Phone 7 is at risk as it is not clear whether the Windows Phone application model will be supported in the future or whether something new will be introduced.  History suggests the big Windows team will have opinions on the application model.
  • The ARM support won’t show up until Windows 8 (presumed to be 2012), which is an awfully long time to wait.  The incredibly late to materialize Windows 7-based tablets look like sacrificial offerings.  Meanwhile, analysts variously estimate Apple ships between 30 and 50 million iPads this year.  And we’ll see how whether Android 3.0 is as successful with tablets as it was with smartphones, with devices hitting the shelves shortly.  There is a huge difference between being number two and number three in  market (and I guess I should mention RIMM and WebOS for completeness and the possibility Microsoft could be number five in this market).  Microsoft might consider stopping spotting multiple competitors multi-year leads in some of these markets.  But maybe the company just likes a good challenge.
  • Needless to say, Microsoft is in a tough position.  Getting to a single operating system and single application model is desirable for the long term, but the degree of difficulty to get there is incredibly high being a year or more from shipping product, having a full slate (yuck, yuck) of competitors in the market and potentially Osborning the current Windows Phone along the way.
  • But it could be worse – you could be Intel.  Microsoft porting to ARM is a serious indictment of Intel’s power efficiency roadmap.  Historically, Intel-Microsoft executive meetings have had colorful moments and I’d pay to see video of some of the recent ones.  I do expect Microsoft to take the high road and throw Intel a conciliatory bone or two, deeming the next generation of Atom chips to be “pretty good (for you guys…)”.  And while client-focused, this move also improves Microsoft’s options for supporting ARM-based servers in the future, making this a double-barreled nightmare for Intel.  But at least they control their own destiny with that MeToo, er, MeeGo operating system.

Will be fun watching to see how Redmond plays this one.