(This is the third and final post in this series of Microsoft. Part 1 and Part 2)

Yesterday I talked about an event outside of Microsoft’s control that led the company to this point in time: the changing structure of software sales. Today I want to discuss an event completely within its control: the abandonment of its corporate strategy.

Most Microsoft business books talk about Microsoft’s strategy in the 1980s and 1990s as an “embrace and extend” strategy. In short, Microsoft embraced existing technologies or products and then extended them to do new or proprietary things. It was wildly successful. A few examples from this era of Microsoft’s history:

• Microsoft embraced the deal with IBM and then extended it to other vendors, particularly Compaq.
• Microsoft embraced the mouse-driven interface and then extended DOS with it.
• Microsoft embraced the word processor and spreadsheet, extending them to mouse-driven interfaces.
• Microsoft embraced the idea of individual apps and extended them to sell as a bundle (Office).
• Microsoft embraced Office’s success and extended it with new applications, including OneNote, Outlook and PowerPoint.
• Microsoft embraced the Internet and extended it with new protocols that were non-compliant with Netscape and 3WC.
• Microsoft embraced Java and C and extended them to be more proprietary.
• Microsoft embraced the browser and extended it by bundling it free with every copy of Windows

In the late 90s, however, this strategy ended. In almost every case since that era ended — game consoles, handhelds, smartphones, tablets, you name it — Microsoft has abandoned the “extend” portion of the strategy. [1]

What caused this? Maybe it was Bill Gates retiring or the Department of Justice’s anti-trust investigations. Maybe it was just hubris. Whatever the case, with only “embrace” remaining from the strategy, Microsoft stopped differentiating its products. Yes, Windows Phone looks nice. But really is this device fundamentally any different from iOS or Android?

“Extend” was Microsoft’s differentiator. Without a differentiator, Microsoft was just a sitting duck waiting to be shot.

—

[1] This doesn’t mean the company wasn’t successful with many of them, just that the strategy changed. And I say “almost” since Azure is definitely vintage Microsoft.

(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.

I started writing a series of posts on Microsoft this weekend intended to look back at where the company went wrong, leveraging that thinking to see where the company can correct itself for the future. Then Microsoft bought Nokia last night. The die, I’m afraid, is now cast and whomever steps in as CEO has his or her future dictated.

Most analysis of late has been around one of two paths for Microsoft: a consumer company or an enterprise one. I never felt either was the right path and, with recent events and my soon-to-be-revealed thinking, I think I’m more right than ever.

Let’s analyze the two options. Option 1 is to be a consumer company, Microsoft doubles down on hardware. XBox, smartphones and tablets become their center-piece. The company re-organizes to emphasize innovation and bringing said innovations to market, moving toward an “Apple-like” company structure. This will fail for one simple reason (although there are likely many reasons why): the Microsoft culture is set and big company cultures can not be changed.

Option 2 is to drop the consumer aspect of its business and go enterprise. As someone pointed out (Horace Dediu?), all the former PC bigwigs are going that way: IBM, HP, Dell. I don’t agree with this strategy, either, for MS. While Microsoft has incredible reach in enterprise, I don’t believe it has the services business that would allow it to do a full-IBM, who was basically a services business that also sold hardware back before it divested itself of hardware.

I wrote an article a couple of months ago entitled, If I Were Running Microsoft… . In it I explained that if I were running Microsoft I’d spin out Windows, drop XBox, and focus all my resources on developer tools. To quote myself:

To most the term “developer tool” means the kind of tool a developer would use to write in C or .net or some other programming language. But in this case I have a much broader meaning. Yes, I mean Microsoft should still create those tools, working closely with the Windows Company to give them away for free, but it should also focus on a series of developer tools we don’t really consider tools: Azure, Server, and Office.

This, my dear reader, is the backdrop for my thinking. Tomorrow I will get into why Microsoft went off the rails and how none of the company’s recent moves gets it back on. (Read Part 2)