When Microsoft Drove Off The Rails (Part 2)

(I set this series up yesterday.)

The Race For Number Three Is Over

I’ve long been a proponent that the smartphone/tablet race will be three-pronged. Android and iOS are clearly one and two. Who will be number three?

But lately I’ve come to the conclusion that there already is a number three, and it is android. Android, after all, is two businesses. One, the one with the big “A”, is the version of Android licensed with Google’s services. The second, the one with a little “a”, is the version of android that is just the raw OS. Big “A” Android is the big winner so far, closing in on a billion devices, with iOS in second with around 250 million devices. Little “a” android is just getting started, though. I suspect in the long run that this will be the big winner, especially with companies like China Mobile behind it.

So where does that leave Microsoft? Left out. And with that reality firmly in place I believe strongly that it is time for Microsoft to consider a different course. I’ve already written about where the company should go and won’t rehash that again. Apparently I’m not alone as Ben Thompson, in essence, said a similar thing near the end of this astute analysis on the MS-Nokia deal.

I thought, however, that it would be worth diving into why Microsoft ended up here. In this and the next post I will explore two core events that affected this point in time. This post explores events outside Microsoft’s control; the next explores events within its control.

Permanent Changes In The Software Business

Like all of us in the software business, Microsoft was caught in a confluence of events that were de-valuing the old model of selling software. It started with the web. Products that we used to pay for — word processors, email clients, web browsers [1] and the like — all became free and started making money in other ways. New business models for software were forming: ad-supported, freemium. But these models were only slowly gaining ground on desktop and laptop software.

Then the iOS App Store and Google Play happened. In mobile, we now had one place to sell software, which meant we had limited ways in which to promote our apps, which meant prices dropped. Add in a lack of upgrades and other traditional methods of software sales and suddenly the bottom fell out of traditional software prices.

It was inevitable that Microsoft would be caught in this. Microsoft charged $50-100 for desktop licenses for Windows and $15 (or so) for mobile versions. $15 is a lot of money on a $200 bill of goods. The model shifted out from under the company. As Dediu points out in his latest podcast, this facilitated the shift to hardware sales. If Microsoft can’t get $15 per license then maybe it can get $80 in profit on the device itself.

How do they move from a world of large priced, one-off purchases to a new era? Obviously the company believes it can hide behind hardware margins. But this is a company that has no real hardware chops and no real value-add for creating hardware besides its operating system [2]. Another obvious option is to hide behind enterprise sales. But this is temporary. Eventually enterprise prices will drop, too.

I grew up in the old model of software sales. powerOne was built for that world with $60-160 products and upgrades. Now we get $5, before Apple’s and Google’s cuts. We are learning the lessons and trying to reinvent ourselves with Equals, a web- and mobile-based service that will have a different, likely freemium, business model.

Microsoft can’t escape these two realities: 1) it is a software company and 2) the old model of selling software has been disrupted. Time for Microsoft to recognize that its future is software subscriptions and services, too.

[1] Yes, Microsoft contributed to this trend significantly, but it would have happened with or without Internet Explorer and Hotmail.

[2] As a $900M write-down will attest, maybe not enough of a value-add in its OS though.

7 thoughts on “When Microsoft Drove Off The Rails (Part 2)

  1. If the $200 refers to the price of a phone then it should be noted that a premium smartphone is a $600+ device. $100-200 will get you a low end end Android or WP8 phone.

  2. There is plenty of room actually but the biggest growth of course will be in the low and mid end market where Apple has no product.

  3. Pingback: When Microsoft Drove Off The Rails (Part 1) | Elia Insider

  4. I think this article is a bit biased against Microsoft :>) As such, I’d like to bring up a mobile success they’ve had called Exchange ActiveSync.

    Virtually every mobile device user that access their corporate email server pays Microsoft about $3 per month for a license to access their servers using the Exchange ActiveSync protocol. This is in addition to the standard seat license, and it is in addition to the device licenses paid by Apple and other hardware manufacturers.

    I think it’s also worth pointing out one area where they have already moved “from a world of large priced, one-off purchases” to a subscription model. This area is with their Exchange Server business.

    I don’t have any hard numbers on this but, based on my own conversations with email users, I think that there has been a great success in moving customers off of old Exchange-2003 servers on onto Office-365 or some other cloud-based Exchange Server. This conversion is a huge win for users in addition to being a success story for Microsoft.

  5. Pingback: When Microsoft Drove Off The Rails (Part 3) | Elia Insider

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