Long Way Down For Microsoft

Submitted by Peter Ko as part of our contributors program.

Reporters and a lot of analysts who never worked inside the company and do not understand what is going on are too peachy when covering the limping giant.

Look MSFT really has several real businesses. (1) Windows Consumer, (2) Office, (3) Server & Tools (Win Server, SQL, Exchange, .Net tools), (5) Xbox, (6) Mobile. Yes I break out Xbox and Mobile because each deserves its own comments.

Microsoft also has several large businesses where it just loses money and has NO real opportunity to ever make money. These are Bing, Display Ads, adMarekt, adExchange and other advertising and websites properties. You may ask why are they in that space? The answer is to slow down Google, MSFT cleverly wanted to create pressure on Google in their own business so they have less time and money to go into Microsoft’s profitable businesses (OS, Office). This collection of Ad and Search businesses are losing $2-4 Bln a year depending on how you count it. The culture is terrible inside as everyone knows that the business is there to distract Google and some other start ups. Mobile is quickly moving from the first category to the losing business category.

The strategy backfired as MSFT instead of focusing on making the best simple OS for Mobile, Laptops and Desktops has poured its best people and most of R&D into Search and Ads depriving the real business of great people and money for last 7 years. You can relate to this like chasing returns of a ETF or mutual fund. So the result of this is a minor position and a losing business in Google’s primary market and massively weakened or no position on the new growing markets where Google was investing meanwhile.

MSFT can afford to pay for the losing business right now because it has a very strong source of revenue from Win + Office. But that is about to change! Why you ask? That is because the price MSFT can charge for Windows and Office is about to collapse, by 2015, MSFT will be forced to give away most of its OS. Think about what that will do to the company!

Let me explain:

Windows Desktop is standing on 3 legs which form the core of workloads on Win desktops (1) Messaging and Communication, (2) Business Apps, (3) LOB Apps developed by other companies. You have to think about what is it that holds people tied to a MS desktop or laptop. In general these 3 “legs” are examined below.

Let’s examine each leg:

(1) Messaging and Communication: arguably the ship has sailed here. Most people now prefer writing e-mails on Phones and iPad’s and communicating using other platforms on mobile devices, Facebook, Face time and thousands of other apps. In fact most of the interface communication is better on a phone and mobile device than on MS laptop or desktop.

Leg stability: nonexistent.

(2) Business Apps: Sure Excel and Power Point are somewhat holding their own, but the need for them is quickly disappearing, in fact most students will get by with just Evernote, Google docs, Apple Keynote and Pages or 100,000 other apps which are free and many times as well as MS Office. There is a strong support for Excel in the business, finance and science community. I use it all the time myself. But the whole business is worth about 1/10 or less, if Excel is the only thing holding it together.

Leg stability: weak to poor

(3) LOB Apps: Here is where there are millions of apps and systems built on top of Windows think production systems, control systems, SAP, People Soft, Seible, and million other things. In fact you can argue this is the last lag which supports the MS desktop OS business AND the replacement cycle. A lot of smart people are working on moving these interfaces to beautiful portable devices and making them simple to develop. This will take time and this leg will be here for a while.

Think about this: will Win 8 encourage an UPGRADE cycle or a SWITCH cycle?

While I think that Win 8 is a new skin on an old body, most companies and devs will think three times before upgrading their apps to Win8 (only). Why would I as a developer or company not use iOS, Andriod or any one of the great Web frameworks to update my interfaces, if I have to do it anyway? Mark my words, Win 8 will speed up the demise of the Win Desktop, not slow it down.

Second is pricing. Android is free, sure Linux was free before, but Android has MILLIONS of great running Apps and Linux did not. Same with iOS, it is absolutely ridiculous, Windows is so FAR behind after a couple years, I do not think it can ever catch up, unless the OS is what?? FREE! BAM! Put that into your model analyst.

There are several key enterprise services which Widows deliver in large companies, so some form of the revenue will be preserved, BUT this is not a lot. Recall I am talking Desktop not the Company IT piping, that is covered in the Server and Tools.

Leg Stability: Good for now weakening after Win 8 ships.

Once the 3rd leg falls, MSFT Windows revenue will collapse, I mean so badly most people will want to puke. What people do not realize that at that time, MOST of the losing businesses will have to get shut down. I predict the end of the advertising business at Microsoft within 24 -36 months. Note this piece was written well before it was public that MSFT is negotiating the sale of MSNBC.com. This will trigger rounds of very large layoffs, which should be happening now to be honest. I am talking 50 – 70% reduction of the workforce should happen.

Microsoft should be around 25,000 people to be competitive, mostly devs, support and sales. But it will NOT, every company is in denial, until it is too late. So the layoffs will be in round after round, the company will start losing the best people and as the mediocre people are left in leadership roles, anyone good still left will leave! It will absolutely destroy MSFT ability to compete. Look the company already has a huge problem with very mediocre middle management who is stifling the growth of new cool products and burring young people under a huge layer of bureaucracy and meetings, if you never worked there you have no idea. I was in meetings which would cost over 20,000 in salaries ad would accomplish nothing. I left myself because of this and during my ten years saw almost everyone any good already leave.

Mobile business is so far behind it is not even funny. You know why? Steve B. called the smartphone a fad even when MSFT was still competitive in 2003-04. He said he would resign if iPad (original) sold more than 10M the week before it shipped. He did not remember that promise he made in front of 300 employees. He just did not and does not get it.

Xbox is doing well. But Xbox is under heavy attack from Mobile gaming solutions (iPad, iPhone, Android etc) which can stream the visual portion to ANY TV. In fact fixed consoles are dead. I would be surprised if there will be market for fixed consoles after xBox 360, outside of the hardcore gamer. If you still do not get what I am talking about look at OnLive to understand where hardcore gaming is moving. The computing power to run the latest 3d games will move to the cloud as well, and with it the power will shift completely to the Game developer, not the console producer.

Server and Tools:

This is the ROCK inside Microsoft. It has the ability to prevail long term and generate pretty amazing value. However it should be organized differently, the learnings from Big Data, Xbox, advertising should go into developing the best system and platforms to allow other customers to create the services of tomorrow. Unfortunately the antiquated structure of the company will not allow these people to work together for a long period of time in order to create competitive offerings. Also this business is not sexy! So the attractiveness of the business for both employees and investors will be somewhat limited.

The world is changing and people now have the ability to develop killer services with minimal start up cost and attract millions of users in short period of time. The apps are easily accessible in marketplaces and all tied together in host OS such as iOS. . The tolls, App Stores, Integrated Data Centers have created a tsunami. If you are one of the companies riding the wave, it is awesome. If you are an old guard sitting on the beach you are about to get crushed.