Can Microsoft Save Itself?

| FROM THE PRINT EDITION |
 
 

Coming this fall! a new, reenergized Microsoft.

When pundits talk about the future of technology, their conversations tend to focus on the gang of four: Facebook, Apple, Amazon and Google. Microsoft rarely gets a mention. That’s not surprising. The tectonic shifts that have taken place in the computer industry, from the rise of cloud computing to the surge in sales of tablets and smartphones, have steadily eroded the software giant’s once dominant position in computing.

But the company’s next fiscal year, which begins July 1, could well be the year Microsoft reemerges as a player and rids itself of a reputation as the Rodney Dangerfield of the technology world.

Microsoft CEO Steve Ballmer is confident the company will hit its stride in the coming year. “We’re driving toward exciting launches across the entire company,” he said in an April statement. “With the upcoming releases of new Windows 8 PCs and tablets, the next version of Office, and a wide array of products and services for enterprise and consumers, we will be delivering exceptional value to all our customers in the year ahead.”

Rising expectations among analysts about the company’s financial performance in the next two years tied to the new cycle of products, which includes new versions of SQL Server, Windows Server and Office, have helped the stock price climb sharply since the beginning of 2012.

But Microsoft will have to deliver on those expectations, which are particularly high for Windows 8, scheduled for release this fall in time for the holiday season. “If Windows 8 ships in a form that [makes] people really want to buy the product, the company will have a great future,” said Ray Ozzie, Microsoft’s former chief software architect speaking at a GeekWire conference earlier this year. “If people want something different, it won’t have a great future.”

Microsoft is well aware of the difficulties it faces. “It’s crystal clear that we have very tough business challenges in the year ahead,” says Frank X. Shaw, vice president for corporate communications at Microsoft. “We have some great competition and we have to execute against that. We have to do it.”

There is a great deal at stake not just for Microsoft’s many employees and shareholders, but also for the economy of the Puget Sound region, which benefits mightily from Microsoft’s large presence. A 2008 economic impact study estimated the company’s direct and indirect impact amounted to 267,611 jobs, 8.4 percent of the total employment in the state of Washington.

Microsoft’s past performance in releasing important consumer products doesn’t induce confidence. The Zune digital media player was an utter failure as a response to the iPod, while the Windows Vista operating system was so bad that many chose to stick with Windows XP, the previous version of Windows. Microsoft seems to fail most spectacularly when it tries to be hip, as it did with the Kin phones, which were designed to work well for social networking but were pulled from the market two months after they were introduced.

In the business world, however, thanks to the popularity of such products as SharePoint, a kind of internal Facebook for companies, SQL Server, a database product that has been stealing share from IBM and Oracle, and Windows Server, Microsoft has continued to grow steadily. At press time, analysts estimated income for the year ended June 30 would be $23 billion, almost triple what it was in 2004, while sales would double to $74 billion. More important: Analysts expect profits to surge 14 percent next year to $27 billion.

“The issue for Microsoft is who it defines as its competition,” says Andrew Bartels, vice president and principal analyst at Forrester Research. “Against competitors like IBM and others like it, it’s really doing rather well,” he notes. “It’s in the domains where Apple competes that Microsoft is looking shabby.”

Unfortunately, in the world of technology, increasingly it is the consumer that leads the way. If Microsoft loses the battle for the consumer, over time it could lose many of its business customers as well. The popularity of tablet computers, for example, has already dragged down sales of personal computers, where Microsoft dominates. Market researcher IDC expects sales of tablets to rise by 54 percent this year to 106 million units, and then to rocket to 326 million by 2015, while growth in PC sales remains in the single digits.

The success of Apple's iPad and iPhone products could give the company a wedge into a business market Microsoft still dominates. Forrester predicts, for example, that Apple’s share of corporate PC revenues will rise to 20 percent in the next several years, up from 10 percent in 2011.

To hold onto its big business accounts, Microsoft has introduced new updates to its System Center, a suite of systems management software, to allow companies to incorporate devices using software from companies like Apple and Google. Ryan McCune, senior director for technology infrastrucutre at Avanade, a business technology solutions provider, believes Microsoft’s massive investment to move its software into the cloud will also help keep its business presence strong.

Still, if Microsoft is to have a bright future, it needs to win the hearts and minds of the next generation. The key question, says Mary Jo Foley, whose blog All About Microsoft is closely followed inside and outside the firm, is this: “How does Microsoft stay relevant to younger people—the people who believe Apple can do no wrong, the ‘cult of Steve Jobs’ folks, the startups?”

 

The Metro Agenda

One answer to the challenge is Windows 8 and its new interface called Metro. When he released the beta version of the product earlier this year, Steven Sinofsky, president of Microsoft's Windows and Windows Live Division, called Windows 8 “a generational change” in terms of its capabilities and how it was designed.

Sound pretty important? Ballmer was certainly excited during his keynote in January in Las Vegas before an audience of 3,000 when he pumped his fist into the air and screamed: “Metro! Metro! Metro!” followed by “Windows! Windows! Windows!”

Metro is the new graphic interface, the software design language of colorful tiles, which is featured on all Windows Phones including Nokia's recently released Lumia 900. The tiles are constantly updated with recent information such as emails or Facebook posts. The same Metro look will be available on desktops, tablets and Xboxes as well. Metro is a less geeky, more natural user interface that offers greater ease with touchscreens and voice control.

Many observers are skeptical of the impact of Windows 8 on the desktop environment, where most people will still prefer to use a mouse rather than a touchscreen. “[A] lot of things being added to Windows 8 just aren’t that important for [desktop] PCs,” says Robert Helm, managing vice president for research at Seattle-based Directions on Microsoft. And since corporations are at the tail end of a major upgrade from Windows XP to Windows 7, they will be reluctant to upgrade again to Windows 8. Helm believes many companies that buy new PCs that automatically come with Windows 8 installed may simply install Windows 7 on the systems.

But for laptops and notebooks, the touchscreen capabilities and Metro look of Windows 8 could be compelling. Microsoft expects computer makers such as Dell to release an impressive array of new devices this fall that take advantage of the Windows 8 platform to offer the best combination of the productivity advantages of a laptop-style keyboard and the intimacy and ease of use of an iPad-type touchscreen tablet. A big plus: Office will be available on the devices. If those products prove compelling, Microsoft may still be able to leverage its strength in the business environment, where some firms still prefer the security of sticking to Microsoft products that work well together. “If [Microsoft] can catch businesses just as they’re adopting tablets for the first time … they can build themselves a base that will last into the future,” says Helm.

Microsoft also hopes Windows 8 will help boost acceptance of the Metro interface on the smartphone. That product category is so important that Microsoft paid Nokia an estimated $1 billion to adopt the Windows platform, helping to cover many of its development and marketing costs. Nokia has deployed its full technical and design expertise to come up with a strong lineup, including the Lumia 900, which operates at faster speeds yet sells for less than comparable iPhones. Even so, the phones have yet to build a strong following.

One problem is the shortage of apps for the Windows devices. As of May, there were 85,000 apps available for the Windows phone compared to more than 600,000 for iPhones and 500,000 for Android devices. Microsoft is working hard to fix that problem. Last year, the company conducted more than 850 sessions around the world to help developers create. It reportedly is paying $100,000 or more to developers to make sure the most popular apps are available on the Windows phone. And Microsoft and Nokia recently announced they would jointly invest about $23 million over three years in a new mobile application development program at Helsinki’s Aalto University.

Microsoft is also investing about $600 million to buy a chunk of Barnes and Noble’s Nook business, one result of which will be a Nook app for Windows 8.

One emerging business in which Microsoft may have an advantage is in the market for what some refer to as the home entertainment center. While Apple, Google and Microsoft are all competing to offer devices that add new media and internet capabilities to televisions, Microsoft has an edge because of the 68 million Xboxes already in use worldwide.

Microsoft has already taken important steps to adapt the Xbox for its expanded role. By adding Kinect’s gesture- and voice-recognition capabilities and the Metro interface to the device, for example, Microsoft has made the game console more user friendly. Microsoft has added a broad menu of free and paid video and audio content, as well. Xbox users now spend 40 percent of their time on non-game forms of entertainment, including media such as Netflix, ESPN and Hulu, and live TV such as Comcast and Verizon FIOS.

Microsoft is tapping its large cash pile to win over more consumers. The company spent $8.5 billion for Skype and access to its 247 million monthly connected users. And it has spent billions of dollars in a vain effort to chip away at Google’s dominance in search, recently exploiting its alliance with Facebook to improve search results.

One thing is clear: Microsoft’s campaign to win over consumers has been expensive. Even if it succeeds in making some gains, it’s unlikely these new sectors will ever provide the rich returns Microsoft has earned in its Windows and Office businesses.

By the end of this year, for the first time in a very long time, Microsoft should be a contender in virtually every major product category in computing, from tablets to telephony, from entertainment to search. With such a strong lineup it has the potential to raise its batting average. But after so many strikeouts, it will have to start hitting some home runs if it wants to win back its fans. As Seattle investor Dan Rosen, chairman of the Alliance of Angels investor group, said recently in commenting on the foibles of his former employer, “I never underestimate the ability of Microsoft to screw something up.”

Additional reporting for this story was provided by Leslie Helm.

 

Microsoft's Billion Dollar Businesses

System Center, Server management Software - $1 billion

Visual Studio, Software Development Tools - $1 billion

Dynamics, CRM and Accounting Software - $1.1 billion

Skype - $1.2 billion

SharePoint, collaboration and portals - $1.5 billion

Exchange Server - $2.2 billion

Online advertising on Bing (Yahoo Search), MSN, etc. - $2.3 billion

SQL Server Database Software - $3 to $4 billion

Windows Server - $6 billion

Xbox - $8.3 billion

Office - $15 billion

Windows - $19 billion

Source: Business Insider

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