Microsoft’s Crisis of Perception (Part 2)

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In Part 1 of this post I explained why I do not believe Microsoft is a consumer products company and some of the strategic perception issues this causes for the company. In part 2 I will discuss the business Microsoft is really in and how that has come to dominate strategic decision making at the company.

Before I move on I wanted to thank my old friend Alan Yates for pointing out that I was incorrect to state that Microsoft never had been a consumer products company. He is of course correct. Alan was a 1990 veteran of the company and he pointed out that it was in 1990 that Microsoft first hit $1Billion in retail sales. That is individual users and small business owners picking up shrink-wrapped product from a store shelf which, by my previous definition, makes you every bit a consumer company. Alan went on to point out that it was very shortly after this milestone that the company embarked on a fundamentally new growth strategy which would redefine the company and its market focus.

So what business is Microsoft in? In a colloquial sense Microsoft is in the ‘Plumbing’ business. Doing ‘Plumbing’ is not sexy or exciting, it does not get you many front page headlines nor does it excite consumers but doing it well does satisfy the goose that has been laying golden eggs for the last fifteen years. The goose has a name and it’s called the Enterprise. Making the goose happy generates billions and billions of dollars for the company every year.

When Alan joined the company in 1990 he worked on a project to bring a new version of windows to market. That version was called Windows for Workgroups. At that same time I was working for an Oil company running the PC support group. I can remember the joy of finally being able to install a version of Windows that started to address many of the configuration challenges we faced in trying to deploy Windows inside a large enterprise organization. WfW was Microsoft’s first product step on the long road to becoming the worlds largest enterprise software vendor. I joined the company in July 1994 and the group I belonged to became the first dedicated enterprise sales and marketing organization six months later. The brilliance of the strategy and the strength of the products which enabled Microsoft to grow that kernel from zero a dominant portion of Microsoft’s revenue stream is rarely recognized but important to understand.

As with any business strategy which spans fifteen years, lots of things change, dead ends are driven down and the whole complex business evolves beyond recognition. However, some very core strategies have remained central. At risk of over-stretching my previous analogy I’d like to go back and talk about ‘Plumbing’. Microsoft would identify a ‘Building’ (Competitor) with tenants (Enterprise customers) who were stuck with inflexible and generally complex ‘Plumbing’ (Server, Messaging, Database software.) The pipes were all different sizes and took huge amounts of money to force them to fit together and to stop them from leaking. Tenants were enticed to move into a a shiny new building (Microsoft) where all the plumbing was designed to work together, be efficient and to not leak. In exchange for moving in all the customer had to do was sign a three year lease (Enterprise license agreement) with the option to renew or move out at the end of the term. There was only one small problem with this strategy; the company needed to start delivering ‘Plumbing’ that would increasingly meet these customer’s very complex and evolving needs. It was the very deep process of engagement with these enterprise customers that slowly mutated the original consumer focused DNA into the form we find today.

Early in my career with the company I was responsible for hosting the very first series of Enterprise Chief Information Officer Roundtables in Redmond. We would fly in CIOs from some of our most important large enterprise customers, put them in a conference room for two days and wheel each of the product group executives in front of them for a lengthy debate about their needs and the deficiencies of Microsoft’s products. Each session was closed with a two hour session with Steve Ballmer and occasionally BillG. To see Steve in this type of engagement is to see him at his absolute best. He would arrive with notepad and pen; listen intently to the customer complaints, push back politely when he thought necessary, explain his thinking and strategy and would always leave the customer satisfied and wanting further engagement at this level. After those meetings Steve would go back to his office and fire off a long series of emails to BillG and the relevant divisional executives telling them what he had heard from the customers and what needed to be done to satisfy these very important customers.

The ‘Virtuous’ cycle of customer engagement in product design is compelling: The influence of very large enterprise customers on product design meant that increasingly Microsoft’s products became a closer and closer fit for their needs. As a result the revenue base from these customers grew dramatically which further cemented their importance and the need to listen to them. Furthermore once the world’s largest companies, with all their vast complexity, use and trust your products it becomes the best endorsement for all the other smaller enterprise customers to do the same. It used to be said that a CIO would never get fired for picking IBM. Remarkably, during the first decade of this century choosing Microsoft as your enterprise software vendor has become the accepted low risk choice for most CIOs around the world and Microsoft’s growing stream of enterprise revenue reflects that reality.

This series of posts is titled a “Crisis of Perception.” The most common ‘Perception’ issue facing the company, and the one most frequently stated, is that Microsoft does not innovate. The problem with most of these accusations is that they are leveled by members of the ‘Digerati’ who almost always use consumer products as their frame of reference. What these commentators mean is that Microsoft does a lousy job of bringing ‘Shiny Objects’ and compelling consumer experiences to market. In that regard they are correct. However, I hope it is now clear that this is not the business Microsoft is in. Sit down with an executive from IBM,Oracle,VMWare or SalesForce and ask them ‘Off the record’ if they believe Microsoft innovates. If they are being honest you’ll get a good deal of acknowledgment that indeed Microsoft has and continues to deliver a huge amount of innovation. This continued flow of innovation driven by the intimate relationship Microsoft has with its largest customers and the resulting revenue stream this drives is a very real competitive advantage and a very real threat to the company’s competitors.

Innovation is not just about what new ‘Functionality’ you build into the next version of your products. How you market, sell, license, deploy, and support are all valid areas for innovation. I would argue that not only is there a huge amount of genuine technical innovation at the core of Microsoft’s enterprise product portfolio but the company’s innovations in its overall business model have fundamentally transformed the global enterprise software business.

Microsoft’s core ‘Perception’ problem is that innovation in ‘Plumbing’ is not very visible or exciting. If you want the proof of this then watch any on-line video of a Microsoft executive trying to demonstrate fail-over clustering, systems management or large scale database technology. These are generally not existing presentations. However the peace of mind and the problems that these innovations solve for enterprise customers are worth many millions of dollars in incremental revenue to the company.

Far from being a company that does not innovate Microsoft may be the poster child for the ‘Innovator’s Dilemma‘. The strategic question facing the company today is whether such a heavy dependence on the enterprise revenue stream is a blessing or a curse and how do you avoid killing the goose that laid the golden eggs as you attempt to enter new markets?That is the central challenge facing Microsoft’s executive ranks today.

In part 3 I will take a look at some of the structural issues facing the company’s today and impacting its ability to address a series of critical challenges.

Microsoft’s Crisis of Perception (Part 1)

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Microsoft faces a growing crisis. The company is increasingly perceived as an under performing ‘Consumer’ products company which lacks the ideas, innovation and strategy to drive long term growth. The crisis is of the company’s own making and one that is getting worse particularly as performance is held up to the mirror of Apple, Google and FaceBook’s success. There is only one small problem with this situation; its a crisis of ‘Perception’ not of reality.

Microsoft never has been a consumer products company; it is not one today, and though it might become one, at some point in the future, that will require a gross mutation in the company’s core DNA. The brutal reality is that until the executive mindset, the internal focus, and billions of marketing dollars and R&D dollars are spent in a way which deals with this reality, perceptions of the company will continue to deteriorate along with the stock price.

You may be shocked by the assertion that Microsoft is not a consumer products company. What about all those cute TV commercials with kids telling you “I’m a PC” or all the consumer focused Windows 7 commercials? What about Frank X. Shaw’s ‘Microsoft By The Numbers‘?Microsoft sold 150,000,000 copies of Windows in eight months. That’s seven copies, every second of every day since launch. Is this not the epitome of a volume consumer products business?

To draw that conclusion you would need to know more about the 150 Million number than Microsoft discloses publicly. For example what percentage of the 150 Million came preloaded on new PCs, what percentage were attached to a volume license agreement with a corporate customer and finally what percentage were packaged goods sales where a customer picked a box off a shelf or bought a digital copy on-line making a competitive choice between Windows and an alternative. In my view, only the latter category qualifies as consumer product sale? One might object to that definition by claiming that the preloaded copies of Windows 7 sold with new PCs should also be counted as consumer sales but should they?

True consumer products companies retain complete control of the end-to-end brand identity, value proposition, and other attributes which anchor their relationship with the consumer and define their competitive position in the market place. In modern parlance the very best companies deliver a consistent, high quality ‘Experience’ which consumers ‘Trust’ and ‘Value’. It does not matter whether you are selling Sony Bravia TVs, Pringles Chips or Apple iPods; the focus on quality and consistency of brand experience remains central to those company’s success with their customers and against their competitors.

When a consumer buys a PC, preloaded with Windows 7, who defines the brand experience? The answer, unfortunately, is everyone and no one. The manufacturer of the PC has a big influence through their industrial design choices, the machine’s value vs. performance positioning and the quality of their support services. Microsoft defines a large part of the experience through the ease of use, functionality, reliability, security etc. of Windows. Then there are the thousands of software and peripheral companies who impact the consumer’s experience every time they download a new piece of software, buy a new printer, scanner or blue tooth headset. Of course the quality of the drivers, utilities and software packages is highly variable, and is often buggy or insecure (Adobe Flash) which over time degrades the performance of Windows, opens the consumers machine to malware attacks and ultimately undermines the initial brand experience.

In light of the the issues Microsoft faces controlling the consumer experience with Windows its easy to see why Apple has become the very definition of a successful consumer products company. You may have a fundamental disagreement with Steve Jobs about the ‘Openness’ of the Apple ecosystem, the curated (Closed) nature of Apple’s Apps store or the lack of support for Adobe Flash on the iPad but he truly does not care about your opinion. Jobs understands that maniacal control of the complete end-to-end consumer ‘Experience’ is his competitive advantage in a very competitive market. Ninety nine percent of the consumers who buy an apple product don’t give a fig about, open protocols and standards, they paid a premium for a brand ‘Experience’ defined by simplicity, elegance and consistently high performance; an ‘Experience’ which is almost impossible to find in the Windows ecosystem. How did a PC hardware manufacturer with less than 10% market share become the dominant player in the digital content business? By delivering a consistent, high quality, ‘it-just-works’ consumer experience.

The iPad is a very challenging problem for Microsoft. The price point squarely positions it as a consumer device with the brand experience to match the functionality matches, and in many respects, exceeds that of low end NetBooks. There is a raging debate about whether iPad sales are cannibalizing the NetBook market. My guess is they are but I’d also bet that Apple is more than willing to cannibalize it’s own low end Mac sales in pursuit of establishing the iPad as De facto standard consumption device for digital content.

What is interesting is that in the few markets where Microsoft can completely control the brand experience they have been successful. The standout case is XBox. Its worth considering that the brand ‘Values’ of the XBox experience are so high that even when the company screwed up in execution by delivering machines with a high failure rate they were able to overcome this with great customer support and replacement services. Despite these manufacturing challenges they were able to control the brand experience; keeping their customers happy. There’s only one small problem with this success. The most valuable 18-35 (Male) demographic consumers are loyal to the Xbox brand and not the Microsoft brand. It would be interesting to know what percentage of this young, affluent and influential audience are also loyal to the Apple brand and use a Mac as their primary computer? I would bet that it would be a far higher share than in the broader market. If correct that should be a very scary concern for Microsoft’s leadership team.

In reality XBox might as well be a separate company. Over time, Microsoft’s leadership will be tempted to drive a strategy with builds deeper links and dependencies between the XBox, Windows and Web, platform. Some of this will make sense but only to the degree that it enhances the XBox brand. Share holders should be very concerned if it looks like the XBox brand is being ‘Milked’ to enhance Microsoft’s other core brands. Leaders like Robbie Bach and Jay Allard acted as a bulwark against these tendencies.  With their departure Microsoft’s most successful consumer business faces an interesting future.

A hint at how Microsoft might start to reposition itself as a true consumer products company can be seen in the evolution of the company’s search strategy. Once the company gave up trying to play poor imitator to Google and decided to set itself apart with Bing the business started to turn around. You may think the Bing name is lame but you cannot argue about the differentiated brand identity. Bing’s consumer positioning as a ‘Decision Engine’ clearly sets it apart from Google and the functionality supports that brand promise in the two most important search categories; shopping and travel. One indicator of a true innovator is the degree to which incumbents are forced to respond. One only has to see the recent improvements and changes in Google search functionality to know that Bing is viewed as an innovative threat to their business.

The Bing team do an amazing job of delivering a consistent brand experience no matter what platform and browser the consumer is using. I’m authoring this post on my Mac and the Bing shopping sites have identical functionality when viewed with either Chrome or FireFox which in turn are identical to the experience when using Internet Explorer 8 on Windows 7. This sort of cross-platform agnosticism is expected and required when building on-line consumer experiences today. Even so, Microsoft should be applauded for the huge progress they have made in this area since the days when Microsoft’s on-line properties only worked well with the company’s own browser technology running the Windows platform.

This commitment to delivering a consistent experience no matter how or through what channel the consumer chooses to access your brand is critical. It will be interesting to see whether the on-line team receive pressure from Windows management to deliver a differentiated experience for consumers choosing future versions of Internet Explorer. It may be telling that the IE team is using demos of an Amazon shopping experience to highlight the  GPU acceleration functionality in the next version of IE. If all Microsoft’s on-line properties are standards based and deliver equivalent experience across platforms then what will make consumers choose Internet Explorer over the competition? For a true consumer products company that would be an easy decision to make for the business that sits at Microsoft’s core the answer is not so obvious.

In Part 2 I explain what business I believe Microsoft is really in and what implications that has for the future direction and strategy of the company.

The Reality of ‘Private Cloud’

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Mary-Jo Foley posted a provocative article yesterday about the reality of ‘Private Cloud’ offerings and who is driving the demand; customers or vendors?

As I was one of the people responsible for designing Microsoft’s Public Sector ‘Cloud’ strategy I have some opinions about this issue which I wanted to share.

It’s fair to say that until we started looking at the worldwide customer requirements for ‘Cloud’ in the public sector the whole issue of ‘Private Clouds’ was not a major part of the company’s overall ‘Cloud’ strategy. However, once you start looking at the requirements of public sector organizations outside the US you very quickly realize that standard ‘Public Cloud’ offerings will not cut it.

The majority of foreign governments have data sovereignty regulations which prohibit the storage and transport of data beyond the country’s borders. Many governments also have very serious concerns about the reach and implications of the US Patriot Act which requires any US based ‘Cloud’ provider to disclose any data held within their systems to the US Government, upon request, no matter where that data is stored. Obviously these requirements do not affect the provision of ‘Cloud’ services to the US government. However, providers will still need to ensure that US government data is not ‘Smeared’ across the provider’s global ‘Cloud’ infrastructure and is instead kept within data centers hosted in the US.

On face value these requirements might be seen as a complete barrier to the adoption of ‘Cloud’ by foreign governments. However, these challenges are balanced by a huge pressure to improve the efficiency of IT provision across the Public Sector. The extreme budgetary pressure being faced by many governments is forcing a re-evaluations of how IT services are delivered and at what costs. In this light the costs advantages of ‘Cloud’; scale, elastic and automated provisioning, pay-as-you-go, reduction in capital expenditure and consolidation of operations etc. are all highly attractive.

The only way to ‘Square the Circle’ is to offer a ‘Private Cloud’ solution i.e. a set of technologies which will let governments implement IT infrastructure which has ‘Cloud’ attributes but which can be kept separate from the ‘Public Cloud’ infrastructure and compliant with the country’s required policy, regulatory and security regimes.

The UK is a good example. The UK government is expecting all the advantages of ‘Cloud’ without the exposure of putting UK government data into the ‘Public Cloud’ infrastructure with all the exposure that implies. At the end of the day ‘Cloud’ is a particular approach to systems and workload ‘Management’ that delivers the benefits I’ve outlined above. Whether these benefits are delivered within a private datacenter or across a public infrastructure is really immaterial.

From a competitive perspective its also important to understand why players like Amazon and Google want to play down the relevance of ‘Private Cloud’. The public sector is a very large and important IT market. In many countries the government is the single largest spender on IT. Vendors who only offer ‘Public Cloud’ services are failing to meet the most basic needs of public sector customers outside the US. If you want to play in the public sector market around the world you will need both a ‘Public’ and  ‘Private Cloud’ strategy.

It was interesting to see that having driven this set of requirements out of the public sector side of the business the concept of ‘Private Cloud’ started to find significant traction in the enterprise segment. There are plenty of large private sector companies who are not yet ready to move their sensitive data into the ‘Public Cloud’ and yet want the benefits of ‘Cloud’ workload management to drive efficiency in their IT service provision. In my view most large enterprise organizations will end up using a blend of both ‘Public’ and ‘Private’ cloud.

IT Platforms and the Ecology of Innovation

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It has been fun being back in Beijing this week. My first visit to the city was in 1989 when the streets were still filled with bicycles. I’ve been back here about once a year since then yet the pace of progress on so many levels is still hard to comprehend. Growth of the ‘Starbucks Index’ alone is mind blowing and seems to be reaching Seattle or New York densities. The other thing I’ve noticed is the incredible focus on efficiency; from the three hour turn-around for a visa at the Chinese Consulate in Zurich (Try that at the US Embassy), to the immigration process and flow through the airport. Yes, the traffic is still a nightmare and seems to be getting worse. I don’t live here so I can imagine there is an alternate reality I’m not aware of. However, the general experience for visitors is pretty impressive.

I had a chance to catch up with Microsoft’s National Technology Officer Sean Zhang on Wednesday for a great evening of conversation. I’ll also be able to see Peter Moore and Michael Thatcher before I leave so that’s an added bonus.

The reason for the visit to Beijing was an invitation to present at the Chinese Academy of Governance today. The Academy is responsible for training senior civil servants in the PRC administration. My presentation is titled “IT Platforms and the Ecology of Innovation” (PDF copy here) and focuses on the how the evolution of IT platforms has enabled the development of the global service economy. I’ll take a historic look at how these platforms have evolved and then will talk about the coming disruptive effects of the ‘Cloud’ platform and those which follow.

This is presentation comes out of ongoing work with Prof. John Zysman and the team at UC Berkeley’s BRIE. One of the things which is central but still the center of a heated debate is how you define an IT Platform i.e. rigorously enough for it to be used as an analytical definition when looking at the surrounding political economy issues. The current definition I’m using is:

A consistent development environment supported by new software and hardware architectures, based on standards and available at scale, that enables service and business model innovation

This is not perfect and I’m open to suggestions about how to improve it. Any definition needs to be able to delineate historic platform transitions in a clear and defensible way and also be able to help identify when a new transition is taking place.

I’m looking forward to a interesting discussion and debate about the opportunities and policy challenges these new platforms will create in the Chinese context. Should be fun.

iPad: To 3G or not to 3G? That is the question.

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Huawei E5
Huawei E5

Here’s a tip; save yourself some money and buy the WiFi version of the iPad instead of the 3G model (Thanks to my good friend Stephen McGibbon for the suggestion) and buy a Huawei E5 with the money you save. Not only will your iPad be covered for all networking eventualities but so will all your other WiFi enabled devices.

I bought one from my local 3 Network store in Linz as I have a data plan with them in Austria. The unit was sim-locked to the 3 Network when I picked it up but a quick download from DC-Unlocker and 15 Euros later I had the thing unlocked and working with all my sims.

I’ve been using the E5 for a couple of days and its an amazing piece of gear. You can use it as a standard 3G modem by tethering it to your PC or Mac. Or you can use it untethered, connecting to it over WiFi.

After experimenting with the various combinations I found that using it untethered worked best for me. I would also recommend skipping the client side software install. The device boots up with a 192.168.2.1 address so once the WiFi is turned on (Press and hold the ‘wifi/wps’ button above the power button until the blue ‘W’ indicator lights up) you can manage everything through the browser interface.

Don’t forget to change the default password and set your own (Strong) WPA key. You’re going to use this in public spaces so keeping the bad guys out is a good idea.