Where next, Microsoft?

Apple is a retail aggregator. They own client details of customers of thousands of retailers including over 500-million active credit card numbers. Google sells highly targeted advertising, and gives away stuff in the cause of crowdsourcing their target database. Amazon sells scalable infrastructure, prototyped by building an unprofitable web bookstore.

Microsoft sells software. and is trying to figure out what Apple got right in 1977, forgetting that’s not actually what made them successful. Buying Nokia doesn’t fix that.

Apple, Google and Amazon have a lot in common – highly scalable infrastructure, a market that relies on massive net outreach, and a rapidly evolving product line. But they are not really in the same business.

Microsoft needs to stop thinking of itself as a desktop software supplier, and find a new niche that works for the post-PC world. Owning Nokia’s handset business may be a step in that direction, but they need to change their thinking radically to get there.

Apple had it easy in a way: their computer business was never going to take off in a way that would make them a market leader, so inventing new niches that attacked the economics of their old market was not a show-stopper. Microsoft, on the other hand, has to worry about such things as what a $10 version of Microsoft Office on the Surface (or Android or iOS) does for the credibility of their desktop pricing. That doesn’t mean Microsoft has no options – but an option that looks like Windows on a phone isn’t a good one.

There’s a huge wide open world of opportunity out there for anyone who can operate at scale and can connect with the mass market. That’s their challenge: to find such a connection.

Microsoft’s Future?

Windows 8 is battling to get traction. And it’s not surprising. Microsoft is a bit behind the curve of Blackberry’s catastrophic decline, but the underlying causes are the same.

I remain unconvinced of touch screens for the desktop. On a recent plane trip, I tried a game on the entertainment system that used touch, and reaching the distance comfortable for viewing the screen was uncomfortable after a while, and touching the screen obscures your vision of the detail in a way that using a touch pad or mouse doesn’t.

Just because tablets are outselling desktops it doesn’t mean desktops should work like tablets. In some parts of the world bicycles outsell cars: should we replace the steering wheel by handlebars?

Microsoft is in an unenviable position. When you hold 95% of a market and it tips away from you, what do you do? Try to tip it back, or go the new direction and lose your status as a leader? Think US auto makers when the Japanese first started to make inroads. They’ve never recovered.

British-style interior

US-style interior

British-style exterior

US-style exterior

At the time, I wondered why the US car manufacturers did not simply adopt their own European designs, some of which were quite good, to US conditions – with minimal changes. For example, putting them through additional ruggedness testing for higher distances and worse roads typical of US driving would really have been enough. To the extent that they tried this, they made the wrong changes. Instead of focussing on reliability, they changed the exteriors to look more American (fatter) and interiors so they looked like folded cardboard, in keeping with domestic designs. The Japanese, meanwhile, forged ahead, keeping their designs consistent across all markets and working on reliability – useful in all markets.

Source: WikiPedia (retrieved 5 July 2013: RIM=Blackberry)

So what is Microsoft to do? Their position is inenviable. Almost anything they do is going to be wrong. If they break away from Windows compatibility in mobile devices, they have no edge to grab attention from the dominant players, Android and iOS. Ask Blackberry how well it works to be late in a market that you used to dominate, then let others redefine the user experience before you end up playing catch up. If they stick with Windows as their starting point, no one wants their devices – except hard-core fans. I tried playing with Microsoft’s Surface range on a recent overseas trip, where I finally found some set up for demo in a shop. They keyboard covers are not brilliant to type on, and one I tried was unreliable in its connection to the device. Putting them on a counter-top to demo illustrates exactly the point I’ve made earlier, that it’s a portable device that you can only use comfortably in a fixed environment – a laptop you can’t use on your lap. If an iPad or Android tablet is set up for demo, you naturally pick it up – the way you would usually use it. I saw no one pick up a Surface and if you did, the keyboard cover and kickstand arrangement would make it awkward to hold.

Apple had it relatively easy. At the time they launched the iPod, the start of their current trajectory, the Mac wasn’t doing particularly well, so launching into a whole new niche that had the potential to leave the Mac behind wasn’t a huge risk. The fact that the iPad ultimately has had the momentum to outsell the Mac by a huge margin wasn’t planned, but it also wasn’t hindered by a desire to bring along the Mac base. That indicates where Microsoft is going wrong: they are obsessed with bringing their base along with any major new platform. As long as Windows dominates the desktop, you can see why. But the desktop is fast shrinking to a minority market – even if it remains large in absolute terms.

The real paradigm shift that could eventually be the killer blow is the shift from corporate-defined equipment purchase to consumer-defined choice. Apple failed in the business market not because the IBM PC was superior, but because business buyers wanted to buy from a trusted source. IBM remains one of the most trusted players because they look after their customers – no one ever got fired for buying IBM, as the saying goes. Microsoft rode in on IBM’s coattails. The problem is, in the consumer space, that sort of preference doesn’t apply, and now that devices have become so cheap that anyone (on a salary) can afford one, they have the same purchase status as buying a pen of a watch. With that paradigm shift, Blackberry and Microsoft, to survive, have to appeal directly to the consumer not to the corporate buyer.

Microsoft has demonstrated that capability to some extent with Xbox, and Blackberry with selling to consumers in lower-income countries on the basis of providing cheap Internet access – but both have yet to show that they can leverage those successes in the broader consumer space. As long as they primarily see themselves as owning the corporate space in their respective segments, they will have a block against shifting to the consumer space. And the fear of losing their major advantage over outsiders in the corporate space further exacerbates that block.

Tablet Wars

No, not anything to do with the war on drugs.

One thing Apple does well is secret. The 23 October iPad mini launch was widely leaked, though the originally rumoured date earlier in October passed uneventfully. What did take everyone by surprise was a major overhaul of the full-sized iPad. There had been some rumours of an iMac update; I don’t recall seeing any rumours of a Mac mini update.

All of this of course was designed to upstage the Windows 8 and Microsoft Surface launch scheduled for 26 October.

It remains to be seen whether people really want something closer to a full computer in this form factor. Once you add a mouse or trackpad, you can’t hold it in your hand any more, and stylus-based devices have been around more than 10 years and never sold in big numbers. The kick stand is not a great design feature, because it implies the need for a firm surface, reducing again the scenarios when you can use it comfortably. Currently this space is owned by Apple and Android variants (Kindle Fire, Samsung) and Microsoft does not have the app base to take them on. If you are going to buy one of these as a notebook alternative, why not get a notebook?

I bought an iPad mainly because it gave me the option to take something much lighter to a conference, where I need to read email and give a presentation. When I have that option, it works pretty well for me. If I need a real computer, I bring that instead, so I don’t need to compromise on issues like keyboard quality and a poor alternative to a mouse or track pad.

It will be great if Microsoft can bring new competition to this space, but I have my doubts (and an early review is not too promising). An important thing to understand what business a company is really in. Although most people focus on Apple’s hardware and the question of what value it really represents, Apple’s real competitive edge is in a huge bank of credit card numbers. If they wanted to switch their business model tomorrow to slim margins on hardware and making most of their money from their app and iTunes stores, they could. Microsoft on the other hand has built a business out of high-margin software. How can they turn that around overnight?

Check this out: current total app count in Windows 8 RTM Store = 4,284 (mostly free); compare with iOS total available apps: 694,566 and current number of Android apps in the market: 548,200.

The real big killer number is Apple has (at last count I’ve found) 435-million credit card numbers. Only Amazon is in likely to be in this league: a much higher fraction of of Android customers only download free stuff.

As for the new Windows look of huge fat, flat icons, if it works as badly as the Ubuntu Unity interface (some say worse), meh.

Back to Apple’s announcements: I’ll hold off judgment on whether the iPad mini is too expensive for the market (vs. more expensive than I’d like it to be). The overhaul of the bigger iPad is unexpected, and an indication that Apple is not willing to let Microsoft steal any territory back from them. The Surface RT (ARM processor, not able to run most Windows software) is the target. The Surface Pro will have to take its chances selling against Ultrabooks that are a little heavier and work better as a full computer. The ultra-thin iMac is an engineering marvel; my 2009 27" iMac has just had to go in for repairs because of a recall on its 1TB drive; had Apple designed it to be easy to repair as well as to look good, they could have couriered the drive to me rather than requiring that I send the whole machine in to repair.

Looking great is important, but if you end up with a Lamborghini that needs a specialist technician with special tools to service, even if it only costs as much to buy as a BMW, you have a practicality problem. So I am genuinely disappointed that no one is seriously competitive with Apple in the things it does best: providing a seamless end-to-end experience centred on the user.

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This article lists Microsoft's lessons from the Zune fiasco. Did they learn? I have my doubts. Microsoft's development model, cemented by the success of Windows 95 at a time when Apple was floundering, is to get at least two iterations wrong: design refinement on the back of customers. With Apple on top form, I'm not placing any bets on the once good old strategy.

Will Microsoft Surface Sink?

In the wake of complaints that Microsoft didn’t give their hardware partners sufficient notice of their Surface announcement, it seems Ballmer thinks he can get close to Apple’s success by copying the jerk side of the Jobs persona. Nice try, but there was more to Jobs than that. There’s also the perfectionism, the sense of style and the ability to get the best out of people.

Absent all that, why announce a product with so little detail? The biggest effect this is likely to have is chilling prospects of aggressive hardware development for Windows 8. Anyone partway through a design will be strongly tempted to go Android instead, with the threat of such a big player invading their space. An example of this effect: Intel’s IA64 (Itanium). IA64 never delivered in a big way, yet it essentially killed off development of future generation MIPS processors for the high performance market, and killed both the HP PA-RISC processor and the Alpha (by then also owned by HP, but for practical purposes killed by Compaq, who bought DEC and drank the Itanium Kool-Aid).

I don’t understand why the media have been so conned into reporting this as the product that will knock down the iPad. That story has been done so often it’s become ridiculous. The only thing Microsoft adds to the game is some hardware innovation that no one really wants. We have at this stage no data on some rather fundamental details like when it will ship, performance, battery life and what communications it supports besides WiFi. To add an edge to the bizarreness of the whole thing, the case is made with a technology called “VapourMg”. You can just imagine the jokes that will provoke around Microsoft announcing vapourware.

The big thing missing here is how Microsoft will tackle Apple’s massive lead in free and low-cost apps targeting this market. And also Apple’s massive lead in a customer base in hundreds of millions who’ve entrusted their credit card details to a 1-click order process. The x86 version will run standard Windows software and dropping the price on those will be a huge risk when Microsoft and partners are dependent on a much higher pricing model on desktops, and the cheaper model with an ARM processor will require recompiles at very least, and it will look very odd if Microsoft has two very similar looking options with radically different pricing policies on apps. The most likely scenario is that the two will have completely different software models, adding confusion to the market. It’s not just a matter of choosing based on speed and screen resolution; if trading up to the faster model means replacing all your software, the two devices might as well be different brands.

What they still don’t get about the Jobs story is the big breakthroughs happen when you don’t listen to your customers. Arrogant though that sounds, customers used to an old paradigm aren’t the best people to ask about game-changing ideas. I bet this thing was designed based on focus groups who said, “If only we could get a tablet that worked just like a desktop machine.” Guess what? The same people in those focus groups won’t buy one, any more than people in 1900, asked what an automobile should be like, and who said it should have a horse manure scoop, would buy one for that feature.

Tablets with keyboards have been done, and failed. Doing the keyboard better in some way (thinner, sort of possible to ignore because it’s a semi-rigid dust cover you can presumably fold out of the way) doesn’t fix that. I don’t see the value of a keyboard without tactile feedback (if they’ve achieved that with something a few mm thick, that would be a real first, and no one has mentioned that). It means you have to keep looking to type, negating the value of separating it from the touch screen.

Microsoft is trying to find a reason to use Windows in this new form factor, and it doesn’t add up. If Microsoft wants to get into hardware, they would do better making an Android tablet and adding value, as others like Samsung and Amazon have done. There really are only two operating system kernels in wide use (if you don’t count embedded systems where the market is highly fragmented): variants on UNIX (including Linux and Apple’s OS X and iOS), and variants on Windows. Maintaining your own kernel without some significant value you can add is nuts. The cost is huge for no perceptible benefit. Apple discovered that only after nearly going broke (I told them to use a UNIX kernel with a Mac outer layer in the late 1980s: there are times when they should listen).

Another missing detail: how well will it work away from a rigid surface (aka desktop)? If Microsoft have invented a notebook computer you can’t use on your lap top, that would be an interesting first.

In the meantime of course the rest of the field won’t stand still. Apple, Samsung and the rest of the Android crew have time to think up other ways to add value.

I’ve been wrong before but not as often as the journalists who’ve reported yet another iPad killer. Time will tell.

The Market Share Bug

Ford did it with the Model-T. VW nearly went broke for the same reason. Is Microsoft heading for trouble by listening to their customers too much?

Not so long ago, I recall reading somewhere that Microsoft was not going emulate Apple's iPad design, because they had consulted their business clients and they all wanted something that looked like Windows.

This all reminds me of how VW battled to break away from selling the Beetle (Bug if you're American) for much the same reason. All their customers said they wanted one (or something much like one); as many as 90% could say that and still lead a company to terminal decline.

This picture is a tad complex but captures the basic problem. Let's assume a company launches a new product in a market with an overall growth of 10% per annum, and it consistently scores a 90% retention rate with clients (the red line): that fraction can be relied on to buy it again. Despite this very consistent figure, market share rises very fast at first, peaks, then goes into slow decline. Growth follows an even more spectacular variability, starting at over 40% the first year of production, shooting up to over 80%, then going into steep decline, steadying at around 5%. They key to understanding all this is the yellow curve, the fraction of the market the product doesn't already have that it takes from the competition. This fraction rises very fast until it levels off at 40% (first arrow, a) for a couple of years, then the competition starts retaining its customers a bit better (second arrow, b), and the rate of converting competitors declines for a couple of years to 20%, where it sticks for a while until the competition comes out with a product with significant new appeal (arrow c), and conversion from the competition enters a steady and terminal decline.

This graph doesn't correspond to a real scenario; plugging in actual market share numbers requires access to stats over a long enough time to do this properly. Nonetheless the basic model applies whenever a company hits a point where it has a very loyal client base and new buyers aren't interested.

Through all this, the company has been maintaining 90% of its loyal clients, yet if this trend continues, they will eventually go out of business. This is what happened with the Beetle (and before it, the Model-T). Increasingly, buyers who had not bought one before saw it as outmoded and uninteresting. Asking the existing client base what they wanted would have resulted in a resounding "more of the same".

This is why Microsoft today asking their clients what they want is to risk oblivion. Ford and VW recovered; will they?

iPhone = iFlop?

Within days of the iPhone's launch, some clown published an article claiming "Apple's iPhone missed a 1 million unit sales target and rivals are rejoicing". I haven't seen this "target" anywhere else and judging from the fact that most AT&T stores and a high fraction of Apple's retail outlets are reporting stock shortages, it is extremely unlikely that Apple missed an internal target.

Then there are the articles that iPhone will not be adopted by business, mainly because it does not fit the "standard" of Microsoft Exchange.

Wake up, people.

Microsoft is not a standards organization, it's a monopoly.

Any organization which ties its infrastructure to a monopoly when there are open standards available (which are technically superior in most respects) has to be run by morons.

Until they lost their dominance, it used to be said that "No one was ever fired for buying IBM". This wasn't always because they had the best technology (they didn't) but because they had a strong commitment to looking after their customers. If you are a huge customer, you may get that from Microsoft. Good luck otherwise.

Another "biggie" is the absence of a "real" (what they mean here is "toy") keyboard. I can't see myself that typing on a tiny keyboard with real keys is going to be a whole lot faster than Apple's touch screen if it works as advertised. As some have pointed out, learning to type reasonably fast on these small keyboards takes time; already some have claimed to be reasonably quick on the touch keyboard. This looks to me like jumping to a conclusion before the facts are in.

I can just imagine these analysts poised over their keyboards for the first reports of functionality to dribble out, so they could finish their headline "iPhone will not be adopted by business because ...".

In any case, why is this such a big deal? What we have is a simplified portable computer with cell phone functionality, WiFi, calendar, web access (with a few features left out), photo viewing and music. The last two clearly indicate a focus on personal use. The market for personal cell phones is huge, as is the market for music players. Putting these two together alone would be pretty big – as several have tried before. The only real question is whether Apple has a compelling enough product to sell. The initial sales are promising – but the real test will be in how sustainable they are.

So, hype and counter-hype aside – it's still early days, and any prediction of how hot iPhone will be long-term is premature. My feeling is that it will be pretty big but there are too many unknowns to be sure: that's what you get with a breakthrough product.

That leads me to the other common thread: is it a breakthrough product?

Just as with the iPod, there are plenty of other options out there that on paper have the same feature list – even add some missing details. (Like toy slide-out keyboards.) Just as with the iPod, the real difference will be how it all hangs together. Apple can fix some of the obvious annoyances (I was really surprised that there is no copy and paste); the competition can't make a solution cobbled together out of mismatched parts suddenly become cleanly integrated. The difference reminds me of a question I ask about cars: how is it that European car makers can build cars that are made all of a piece, whereas US cars are made all of pieces?

A real big difference I haven't seen much positive comment on is the way pricing splits the handset from the phone plan. This is supposedly a negative. At first sight, it doesn't make a whole lot of sense that (aside from non-obvious workarounds) you have to sign up for 2 years of Cingular, yet the handset is sold separately. My guess is that this arrangement is an artifact of Apple's 2-year US exclusivity deal with AT&T, and they would rather maintain this separation for when the deal runs out. To me, this is a positive: it puts real pressure on Cingular to up their act, to keep future iPhone buyers. If they become the major source of complaint, Apple will have no reason to stick with them after 2 years: if iPhone is a huge success, other networks will have little cause to resist adding in the extras Apple needs from them.

So, in summary, talk of iPhone as being a flop is typical FUD from ignorant business columnists. There's no way the initial roll-out can be anything but a huge success. As to the longer term, we don't have the data. My bet is that it will do well, and exceed Apple's 10-million target in the first year easily.