Jonathan Rettinger & Microsoft’s 4 Biggest Problems

Microsoft
Microsoft

I don’t often read the Huffington Post, so I missed this when it was posted. After reading it, well, Jonathan Rettinger doesn’t understand Microsoft, and he doesn’t understand business.

Mobile

Microsoft’s biggest, most glaring shortcoming is. of course, the fact that it hasn’t yet figured out how to gain a foothold in the mobile market. At the present time, Microsoft’s mobile market share amounts to just 3.5 percent. That’s a dismal number, especially compared with Apple’s 14.8 percent and Google/Android’s 80.2 percent.

Let me guess – this would be the Mobile market that Microsoft used to hold 25% of the smartphone OS market share? Yes, Microsoft was a major player in mobile. Was. Problem is, Microsoft shot themselves in the foot. The mobile market moves fast, and you need to have a new OS version every year.

At that time neither Apple nor Google/Android were in the mobile market. Nokia was the kingpin. Which isn’t surprising, since Nokia invented the smartphone. Microsoft managed to turn 25% market share into quite a bit less…

Microsoft supposedly has 3.5% market share according to Jonathan. Problem is, he’s wrong. Microsoft-Nokia sold 7.7M units, is in eleventh place for sales, and is under 3% market share for the second quarter of 2014 (thanks to Tomi Ahonen for the numbers).

What should Microsoft do? Personally, I think Windows 8 is a solid platform, and the Nokia hardware itself is also excellent, so the problem isn’t with the quality of its products; it’s with getting people to take a chance on them. How does Microsoft do this? Cut prices on its mobile line, across the board. If Microsoft could offer deep discounts on smartphones and tablets on a par with Google and Amazon, they will gain traction in the marketplace. They could also leverage Office and Xbox to increase the value add for these devices; after all, a tablet or phone that offered free Office 365 or free Xbox game titles would be a real draw for consumers.

His suggestions to Microsoft are just wonderful. Microsoft could do this, if Microsoft was wholly owned by the Gates family, and didn’t care about profits. But Microsoft is a public company, and has a fiduciary responsibility to its investors.

This limits Microsoft’s options. Microsoft literally cannot afford to do this. If the company tries, there will be a shareholder lawsuit, probably within minutes. Microsoft might win in court, but it could take years. Years during which the company may be limited in what it can do, by the court.

Ecosystem

Another problem for Microsoft is that its ecosystem isn’t standing up to the competition. Of course, Office 365 is the exception to this — and it’s a huge one, no doubt. But its Windows Store is about one-fifth the size of the App Store and Google Play, it doesn’t have a viable rival to iTunes (unless you count Xbox Music), Google’s Chrome browser surpassed Internet Explorer in total market share for the first time this month (and IE has lost roughly 50 percentage points since 2008), Bing remains a distant second to Google Search (18.7 percent versus 67.6 percent, respectively), and Microsoft only recently released a free online version of Office — Microsoft Office Online — in response to Google Drive. Having a robust ecosystem is critical to retaining customers and growing device sales, and Microsoft clearly has a long way to go here. On the bright side, Outlook.com gained the same number of users as Gmail within a few months of launching last year, and it remains popular. Its Office Online product has also been highly rated.

Office 365 is an exception? In my research I’ve never run across anyone using Office 365. I have no doubt there are companies that do, but I haven’t found them. Instead many companies are still using Office 2004 and 2007. Why tie yourself into a subscription service that forces you to have all your employees on the same version of Office, with lots of upgrade charges, when you can use a perfectly good, older version?

If you are still running Windows XP, you can even get by on Office 2K. It has all the features you need for basic operations. It might not be able to do the latest and greatest, but most users won’t care, because all they use Office for is the odd spreadsheet.

As for Office Online, it doesn’t matter how highly rated something is. It’s another subscription service, and with Google, Mega, and Dropbox giving away free storage, why pay?

What should Microsoft do? Microsoft has to get more apps in its store, but it’s a chicken-and-egg kind of problem: Developers don’t want to build apps that there isn’t demand for, and consumers don’t want a phone that doesn’t come with all their favorite apps. Microsoft has to find a way to incentivize developers. It could do so by paying app developers outright, offering higher margins on sales and offering consumers significant credit toward app purchases. Of course, by slashing prices on its mobile line to generate more sales, it will solve this problem more directly.

Sorry Jonathan. Microsoft already pays for app developers to port to Windows Mobile. Of course the little issue that Windows Mobile and Windows Desktop programs can’t be compiled from the same code, well, that’s not good. Developers really don’t like doing things twice (note that most of the code – say 99.9% is the same – the small amount that isn’t means extra work).

Again he suggests dropping prices. Right. Microsoft is already losing money on Mobile, in part because Windows is a resource hog. An Android or Apple IOS device with the same capabilities costs less to build. A 16GB iPad has, well, nearly 15GB of free space. You can’t buy a 16GB Surface RT. A 32GB Surface RT only has 15GB free space.

Needing to install an extra 16GB of memory just to have a basic usable system has a negative impact on the bottom line. The technical term is ‘too freaking expensive’ and unless Microsoft strips Windows RT, they can’t fix the problem.

So how does Microsoft drop the cost? Simple. At present they can’t. Maybe in a year or three they can by modifying the Operating System, but that may be too late.

Market Disconnect

Is Microsoft out of touch with consumers? Over the past few years Microsoft has seen its influence waning, and it’s also made a number of key mistakes. For instance, the company waited almost three and a half years after the first iPhone debuted before launching its own modern smartphone operating system, Windows Phone 7 (which failed miserably); it took two years to launch its first tablet after the iPad; it went all in with a new operating system for PCs as well as mobile, Windows 8, which uses a metro-tile interface that is best used with a touchscreen device, not a standard mouse and keyboard, as most consumers have; its latest iteration of the Xbox game console was positioned as an all-in-one entertainment unit for the living room instead of as a pure gaming device, was priced $100 higher than the PlayStation 4 and required a $60-per-year membership fee just to be able to use Netflix, Hulu and other apps; etc. Its product pricing continues to be out of step with consumers, as it’s overpriced several key products — Xbox One, Surface, Windows Phone and Office — and then had to slash prices later.

I’ve covered this before. Microsoft is not used to selling direct to consumers, doesn’t know what consumers want, and doesn’t seem interested in learning. Let me qualify that. I’ve seen no evidence that Microsoft is interested in learning what consumers want.

There’s solid historical reasons for this. When Micro-Soft was founded in 1975 (and yes, that is the original spelling of the name) the aim was to sell languages to personal computer manufacturers, with their first sale being to MITS for the Altair 8800.

The generic term for this sort of sales model is B2B or Business to Business. This is what I was doing while I was in sales. When you get a hit, it can really count (I once took away 40% of a competitor’s business in a single deal).

But…

If you have a loss, it can really hurt. Like our competitor losing 40% of their yearly sales in one shot. Since they were a publicly traded company, required to make SEC filings, I was able to see the damage (publicly held American firms have to file their financial statements with the Securities and Exchange Commission).

So Microsoft made sales to Apple (a Basic language interpreter), Commodore (several different basic language interpreters), and so on. Each deal was financially significant, unlike the Apple model where an individual sale of an iPhone or iPad in an Apple Store is a drop in the bucket.

Of course Microsoft requires a smaller sales and marketing staff than Apple does, but Microsoft makes a smaller profit on each unit sold. Each sales model has its advantages. I personally like B2B. I was really good at it, until my body gave out.

But the problem is the market has shifted. While Microsoft was selling DOS to computer manufacturers, it didn’t have to worry about consumers (and it actually did extremely well with some products, like the DOS 6.1 upgrade). Microsoft still does really well in the corporate market.

In the consumer market, it seems unable to deliver what the consumer wants consistently. Take the XBox. The first two versions were decent units, that sold reasonably well (even if there were issues with both units). The new one seems to be a disaster. The PS4 has nearly twice the sales (FYI, this chart updates when viewed).


This is what you call trouble. Sales of Windows Phone, and Windows RT Tablets are also terrible.

What should Microsoft do? Again, a better pricing strategy is what’s needed most of all. Microsoft has to stop taking the premium-model approach with many of its products — phones, tablets, laptops, Xbox. Microsoft also needs to stop pushing the Windows 8 metro-tile interface as a universal solution for its mobile devices, laptops and PCs. On a mobile device it makes sense, but for traditional computers it’s just not what consumers want right now.

Again he harps on pricing. But that’s where Microsoft has the biggest problem. Assume that Microsoft decided two years ago that they had to reduce costs. They might be delivering the first, lower cost products now. More likely they’d be delivering them next year.

This problem isn’t specific to Microsoft. Apple was working on the prototype iPad for nearly ten years before the iPad’s introduction. Product development is not something you do on the fly.

The problem is consumer tastes do change ‘on the fly’ and no company can keep up with them. Some companies (Nokia with phones up till Elop became CEO, Apple in the years after Jobs came back, till he passed away) have done a better job than others. None have managed to keep up with consumer tastes unless they already had a product in development.

Manufacturer Partnerships

One of the reasons that Microsoft came to dominate the PC market was that it licensed the Windows operating system to a wide array of third-party manufacturers like HP, Dell, Samsung, Lenovo, Acer, Asus, etc., which all flooded the market with cheap products. These are the same manufacturers that today are producing Windows 8 laptops, ultrabooks and tablets. Without this large group of manufacturers behind it, Microsoft would face even greater competition in the markets that matter. But it’s a mixed blessing: With this entanglement of third-party companies, Microsoft doesn’t have the ability to control the design, style, features, marketing and pricing of the majority of its Windows products. Microsoft has tried to overcome this by buying Nokia and producing its own branded tablet, the Surface, but in so doing it’s run the risk of alienating its tablet partners, and, as a result, the Surface has always been priced considerably higher than third-party Windows 8 tablets. Overall, Microsoft’s manufacturer partnerships are a net positive for the company, but this lack of control over its products makes it harder to control the brand and innovate with new features and designs.

This is the only place I agree with Jonathan. Microsoft is defined by relationships. All companies are. Your sales tomorrow depend upon who you’ve managed to interest in your product today.

What should Microsoft do? This is one area where there’s not much that Microsoft can do. Its manufacturer partnerships are simply too important to risk. The company should discontinue its Surface line and focus instead on the Surface Pro, where it can charge a premium and the market is growing fast, and on the Nokia handsets, where it doesn’t face as much partner competition.

Again I agree. But…

Microsoft has already damaged relationships with the Original Equipment Manufacturers. Windows Surface RT, Windows Surface Pro, and the Nokia deal to go 100% Windows Phone, have all damaged relationships. That’s why you see so many of the OEMs selling Android devices. Whether phones, tablets, or eReaders, Android has taken market share from Windows.

This is a huge issue. Microsoft’s biggest profit base is Office with about 28% of gross sales, as compared to Windows PC with about 19% of sales.

If something cuts into the sales of Windows PC or Windows RT, it also cuts into the number of systems that Office can be installed on. Microsoft has an Office for Mac, and an Office for iPhone/iPad too, but lower priced competition from Apple limits Microsoft’s ability to gain market share.

Even on Windows PC systems, Microsoft is having issues. When I took a course in Fiction Writing several years ago, I was astounded to hear the teacher recommend OpenOffice/LibreOffice. All of my own sales are edited in LibreOffice (though I do most of my writing in Scrivener).

Microsoft has managed to continue to increase gross sales, however there are limits to what it can do. Price is a huge issue as Apple has been learning. Less expensive Android tablets and phones have cut into Apple’s sales, and Apple doesn’t have the huge hardware requirements that Microsoft Windows RT/Windows Phone has.

Microsoft’s only option seems to be to use Patents to slow adoption of Android. The recent Supreme Court ruling in Alice v. CLS Bank is likely limit their ability to play that game.

I predicted that Microsoft was in trouble five years ago. I based my prediction on Microsoft’s SEC filings, which showed immense weaknesses in the company. It turns out I was totally wrong about the time frame, but Jonathan’s article is a confirmation that others are seeing the issues too – if a bit later than I did.

Microsoft is in deep trouble. The fact that the company is still very profitable it going to limit its ability to take action. If sales drop over the next 5-10 years the way I expect them to, Microsoft will be in a position where it no longer has the resources to fix the problems.

That’s what happened to Nokia, and RIM/Blackberry.

Regards

Wayne Borean

Monday August 12, 2014

References:

Microsoft 2014 Annual SEC filing (10K)

Russian Ministry of Health is dumping Microsoft

Microsoft Wants Us to Think That ODF is Bad for Britain

Bad Microsoft Android patents may lie behind Samsung lawsuit

Wikipedia on Alice v. CLS Bank

Microsoft’s tablet moves make Nokia look cunning

Will Microsoft’s XBox One survive?

Microsoft’s Surface Business Has Lost An Estimated $1.7 Billion Since Debut

Can Surface survive the new Microsoft?

South Korea gives up on Microsoft

Microsoft’s job cuts are going to be nasty

Latest Attacks on Android From Apple/Microsoft and Their Network of Trolls/Partners

 

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