Microsoft In 2013: 7 Lessons Learned
If a key to success is learning from your mistakes, Microsoft should be well positioned for 2014.
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This was an up and down year for Microsoft.
January opened with Microsoft still licking wounds suffered the previous fall, when Windows 8 arrived with a thud and the much ballyhooed Surface RT somehow managed to fare even worse. After holiday sales failed to lift sagging computer shipments, many critics rang in the new year by blaming Microsoft for the PC industry's woes.
In retrospect, this criticism was somewhat overblown. Windows 8 didn't do any favors for Microsoft and its partners, but falling PC sales have had more to do with consumer preference for tablets than with desktop users' disdain for Win 8's Live Tiles. Even so, Windows 8 and its struggles remained the dominant Microsoft narrative for most of the year.
In fact, the OS overshadowed the fact that certain Microsoft ventures were having one hell of a year. Windows Azure not only grew into a formidable and fairly open cloud platform, but also matured as the backbone for a variety of successful ventures, including Office 365 and Xbox Live. It's no coincidence that Satya Nadella, the executive who oversees Microsoft's cloud business, is frequently named as a leading candidate to be its next CEO.
Investors began to take notice as Microsoft's cloud divisions continued to accrue business from enterprises and governments. The company's stock began to inch higher as winter turned to spring, and when CEO Steve Ballmer announced a companywide reorganization, most commentaries emphasized the upside. But then Windows 8 reared its head again.
Even though investors became optimistically cautious, Windows 8 adoption remained weak. The poor performance didn't show up in Microsoft's bottom line until July, when, a week after confirming the reorganization, the company missed Wall Street estimates and took a nearly $900 million writedown on unsold Surface inventory.
Microsoft had positioned the Surface line as the Windows 8 standard bearer, and critics called the tablets' failures an indictment of both Microsoft's device strategy and Win 8 in general. Goodwill among investors disappeared overnight. "We built a few more [Surface] devices than we could sell," Ballmer would later concede.
Ballmer caused the next big wave when he announced in August that he would retire within the next 12 months. Investors immediately signaled their approval, sending the stock up.
Since then, the ups and downs have continued. Windows 8.1 garnered better reviews than its predecessor and restored faith among some longtime Windows users. Still, Win 8.1 adoption hasn't exactly soared, and the Start button still doesn't have a real Start menu. The Surface 2 and Surface Pro 2 appear to be performing better than Microsoft's first-generation tablets, but it's still obvious they're getting killed by iPads. If this weren't the case, Microsoft surely would have trumpeted a few Surface sales figures, like it has for recent Xbox One milestones.
Most commentators have agreed that the company needs fresh leadership, but should it be someone who can facilitate Ballmer's vision or someone who will focus on enterprise customers? Was the Nokia device business acquisition a mistake or a sign that Microsoft is finally getting serious about mobility? The Microsoft board has indicated that the next CEO will follow Ballmer's One Microsoft blueprint, but some influential shareholders are reportedly wary of the company's strategy. At least a few allegedly have called Bill Gates a corrupting influence in the CEO selection process.
Luckily for Microsoft, it's a very rich company, and that lets it weather storms that would bankrupt lesser companies. How much the company has learned from the aforementioned missteps will become clear in coming months and years. Will it beat Amazon in the cloud? Will it be able to build an ecosystem that competes with Apple or Google? Will Office remain the dominant productivity platform? What are Microsoft's plans for wearable devices? Will Microsoft unleash disruptive advances in voice-controlled natural language technology? What about Cortana, Windows Phone's rumored answer to iOS's Siri and Android's Google Now?
For all the uncertainty, though, some of the lessons are clear. Click the image above for a slideshow of seven things Microsoft learned in 2013.
Michael Endler joined InformationWeek as an associate editor in 2012. He graduated from Stanford in 2005 and previously worked in talent representation, as a freelance copywriter and photojournalist, and as a teacher.
In some ways, Steve Ballmer might never get the credit he deserves. Though Microsoft's stock price hasn't moved much during his tenure, the CEO oversaw years of revenue growth that made the company what it is today. Nevertheless, he's also placed some terrible bets, such as infamously dismissing the potential of devices such as the iPhone and iPad.
Microsoft's board appears to believe in the One Microsoft vision, but both the CEO and his co-directors know that someone else needs to take the helm. Under his leadership, the company executed the rollout of Windows 8 and the Surface line with the nuance of a bull in a china shop. The company has corrected much of this in recent months with Windows 8.1, but some of the missteps, such as initially forcing Win 8 users to boot to the Modern UI, were foreseeably wrong-headed.
Ballmer represents an era of PC monopolies, stack-ranking employee evaluations, and siloed management. By his own admission, he realized the company needed new blood to lead it into an era of collaborative, multidevice, cross-platform workplaces. The Microsoft board reportedly accepted his decision without debate -- lesson learned.
Any additional lessons derived from Ballmer's departure will become clear in 2014, when the company will announce its next CEO. Will he or she be an insider? Someone with a technical background? Will the next CEO share Ballmer's desire to reach consumers?
When Windows 8 launched, most of Microsoft and Intel's partners dutifully fell in line, talking about how touchscreens were going to revolutionize the PC business. When that didn't happen, leaders at many of these partner companies quickly changed their tone.
Literally all OEMs aside from Microsoft dropped support in 2013 for Windows RT, and executives at many companies spoke disparagingly of its device strategy. Commentators debated whether the Surface line was established to give partners an example, or whether Microsoft was actually invading its partners' turf.
Reports since last spring have claimed Microsoft has tried to cut deals to secure OEM support, including discounted Windows and Office licenses. It's not clear if these deals occurred as reported, let alone whether they're responsible for the low-cost Windows 8.1 tablets and two-in-ones that come preloaded with Office today. It's also not clear if they portend, as was recently rumored, a day when at least some Windows licenses are given away. But this much is certain: A dynamic clearly shifted in 2013.
At many points in its history, Microsoft has enjoyed enormous leverage. If companies wanted to build PCs, they could either license Windows or develop their own OS. This power structure changed as mobile devices rose in prominence. With Windows 8 floundering throughout the last year, companies such as HP and Dell began producing Android devices that ran on ARM processors. By the summer, it was clear that the traditional unity among Microsoft, Intel, and various PC OEMs had fractured. By October, HP CEO Meg Whitman had declared Microsoft a rival.
What has Microsoft learned from all this? The specifics aren't clear, but it learned something. Last year, many of the Windows 8 devices available at launch didn't even have touchscreens, and those that did were expensive and clunky. This year's flock of devices is much more compelling, and Microsoft, HP, Toshiba, Dell, and others actually seem to be on the same page.
Microsoft also appears to have learned it doesn't have the leverage it once did. By purchasing Nokia's device business, the company effectively conceded that OEMs don't have a reason to license Windows Phone when Android is already available for free.
When the Surface RT launched, it lacked the app ecosystem, intuitive UI, and responsive operation of an iPad, yet it cost a comparable amount. What made Microsoft think its product was entitled to premium pricing, despite so many important competitive deficiencies? Microsoft Office.
Windows 8 and Windows RT tablets were (and remain) the only ones that can natively run Office, far and away the most relied-upon productivity suite in the world. Microsoft leaders evidently figured this asset would count for something, but they figured wrong.
We don't know how holiday sales will pan out, but before now Office didn't persuade people to buy Windows tablets, and it certainly didn't stop them from buying iPads. The fact that most Windows tablets didn't come with Office until recently only compounded matters.
What has Microsoft done since learning this lesson? For starters, it released Windows 8.1, which makes the OS usable for more than legacy software. Secondly, the most recent crop of Windows tablets are cheaper, faster, and lighter than those that came before, and many smaller models, such as Dell's Venue 8 Pro, come with Office preinstalled.
One important dilemma Microsoft's next CEO will face is how and when to launch Office for Android and iOS. Ballmer has confirmed that a touch-first version of Office is coming to Windows tablets and other platforms. But will the touch-optimized versions be cheaper (or free) for Windows users? Will the software require an Office 365 subscription? In what order will Microsoft release the products for different OSes?
Microsoft's Surface 2 and Surface Pro 2 haven't set any sales records, but they've been better received than their predecessors. One reason? Microsoft refined a lot of small details. The first-generation devices actually got a lot right -- but when they missed, they really missed.
The original tablets were difficult to use on one's lap, for example, which is a pretty big indictment against an alleged laptop replacement. But the new models' two-step hinge makes a surprisingly big difference. At first brush, the revamped models don't look very different from the earlier ones, but nicer screens, better battery life, and other small improvements make the Surface 2 and Surface Pro 2 better from top to bottom.
With Windows 8 and the Surface line, Microsoft hoped to address two related problems: It missed the initial move toward mobile devices, and it was losing influence to Apple, Google, and other competitors riding the consumerization wave into the workplace.
It established a retail presence to show off new Windows 8 gear, particularly its Surface RT tablet. It also built a Hollywood-style marketing blitz around the new products. Neither of these was an intrinsically terrible idea, but both were mired in awful execution.
The poorly communicated difference between Windows 8 and Windows RT was just one noteworthy example. And that's to say nothing of baffling commercials that expressed the Surface tablets' virtues by way of interpretive breakdancing.
What did Microsoft learn? It's ditched the RT language altogether, which is a start. Reports also indicate the company still knows its platform strategy doesn't make sense, and that Windows RT and Windows Phone will eventually merge.
Microsoft also built a more cohesive network of big-box retailers to complement its fledgling chain of stores. And it's started airing ads that actually depict people using Windows products, rather than holding them while they jump and stomp.
It made its Modern platforms more user-friendly with Windows 8.1 and managed to get its OEM network in order, which has resulted in more affordable and attractive devices. Microsoft is still a long way from connecting with consumers the way Apple does, but progress is progress.
Windows 8 confused many users because its Live Tile UI was such a drastic departure from previous versions. Windows 8.1 might not have corrected as many problems as some would have liked, but by restoring the Start button, including a boot-to-desktop mode, and adding other customization options, the company showed it has learned a lesson: Microsoft can't neglect its longtime customers in its haste to develop platforms.
Microsoft's Xbox One launch also touched on this lesson. With early sales of more than 2 million units, the device debuted auspiciously, but in previous months, Microsoft went back and forth with gamers -- often contentiously. Points of conflict included whether the Xbox One would require a persistent Internet connection, how it would support used games, and whether the Kinect sensor could spy on users. Microsoft had to retreat from several of its plans, some of which might have been too forward thinking for the time and manner in which they were introduced.
Microsoft leaders no doubt knew the device business would present challenges, but they probably didn't expect the Surface tablet fiasco. They've responded to the devices' early failures in a number of ways.
The Nokia device line acquisition is an obvious example. Microsoft can't develop a mobile ecosystem without a strong presence in smartphones, and Windows Phone can't currently compete with Android for handset OEMs. With the purchase, Microsoft effectively admitted that it hadn't been playing hard enough or seriously enough to justify its device ambitions.
But Microsoft has also started to get its supply chain and distribution infrastructure in order. The Nokia purchase helps in this regard, but the company has also expanded its Surface line to a growing number of channel partners and united with big-box retailers.
Will Microsoft learn other lessons? By continuing to offer the original Surface RT at a discount, the company is partially sacrificing desired margins for greater volume. But the device is still pricey for what it offers. Will Microsoft continue to pursue Apple-like profit margins? Or would it be better to offer cheaper devices to funnel more people toward Microsoft's software and services?
Microsoft leaders no doubt knew the device business would present challenges, but they probably didn't expect the Surface tablet fiasco. They've responded to the devices' early failures in a number of ways.
The Nokia device line acquisition is an obvious example. Microsoft can't develop a mobile ecosystem without a strong presence in smartphones, and Windows Phone can't currently compete with Android for handset OEMs. With the purchase, Microsoft effectively admitted that it hadn't been playing hard enough or seriously enough to justify its device ambitions.
But Microsoft has also started to get its supply chain and distribution infrastructure in order. The Nokia purchase helps in this regard, but the company has also expanded its Surface line to a growing number of channel partners and united with big-box retailers.
Will Microsoft learn other lessons? By continuing to offer the original Surface RT at a discount, the company is partially sacrificing desired margins for greater volume. But the device is still pricey for what it offers. Will Microsoft continue to pursue Apple-like profit margins? Or would it be better to offer cheaper devices to funnel more people toward Microsoft's software and services?
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