Is Microsoft doomed in its Current Form?

It seems Microsoft has had a dose of reality in the last week. At the Consumer Electronics Show in Las Vegas, Tami Reller, the CFO of the Windows division, has warned that PC shipments will be lower than an already gloomy forecast in this quarter. In her case, she put this down to supply problems in the Thai flood regions where the high waters are still causing havoc to component makers, particularly on hard disks. Some UK distributors have plenty of servers but no disks which will impact their sales in the next few months.

Finally, it seems that the penny is dropping at Microsoft. Their figures are actually dependent on the shipment of PCs to a very high degree. I have illustrated before that Windows itself and Office Productivity products constitute the majority of the revenues and profits generated at Microsoft and these numbers are directly dependent on the number of client devices sold into homes and corporates. As PC sales alarmingly decline, so will Microsoft revenues and profits - in their very heartland.

Microsoft is a well spread company, for sure. But with servers taking a decline lately, Windows Server, already under severe attack by Linux, is also suffering. All this is occurring as Apple see sharp increases in the sales of its PC-like devices while tablets and smartphones continue to boom - all these devices coming with largely Apple and Google operating systems.

The threat also is that corporations are wising up. They have paid through the nose for arguably second rate products in their companies for too long. PCs which seem to fail conspicuously in less than 3 years, an operating so clunky it takes 5 minutes to load up each morning, office productivity tools which seem to suspend and crash for no perceivable reason, occupying ever expanding disk space.

Apple may charge top dollar for their hardware but you get a robust operating system, rich in features and free utilities of high quality which takes seconds to load up or resume, no matter what state you left it in. And office suite software is far cheaper with a breadth of products available at below £20 a pop - except Microsoft Office for Mac which is £189 but at least half the price of the PC version and many times better.

The fact is that tablets and smartphones are changing not just the array of client devices and how we use them for home and work but they are changing the way we buy software. Suddenly, we have a plethora, a vast hypermarket of innovative, low cost and clever software available to us that costs just a few pounds to buy. And we buy tons of the stuff. Finally, we are finding there are alternatives to the status quo that has frankly held us back for years in terms of real productivity.

Steve Jobs called it the post-PC era. I would liken it to the IT version of a 'renaissance' as people dream up all sorts of clever software and just punt it out in volume.

But there is a new trend. Bring Your Own Device (BYOD) is the consumerisation of IT. This is the concept that we buy our smartphones and tablets, even PCs ourselves and bring them to work as devices of choice to work with and demand access to the corporate networks and all its facilities and data. In the old days, at job offer time, we were told you would get a salary package and then a PC and phone would be provided. Already in the US, job offers go out with no PC or phone provided but the recruits are invited to bring their own.

This is one reason why Apple as a PC, tablet and smartphone provider and its counterparts in the tablet and smartphone arena are doing so well in the corporate world as users rebel against the constraints of the old PC world and flourish in the new post-PC era.

These are worrying trends for Microsoft. I heard of story of a Microsoft executive going into an Apple store to bait the salespeople with a new Nokia Lumia with its noddy-like tiling on the front having already arrived late and behind the market. It must have been a pathetic sight as an army of Apple customers looked up from their iPhone 4S devices and thought, 'whatever'.

This is part of the problem with Microsoft. This ingrained belief of impregnability and that users really have no place to go, so they swallow whatever Microsoft do and say. It's a Windows world, it's an Office world. The Spanish bank BBVA has proved that this is not necessarily the case in choosing to migrate its entire 110,000 staff to Google Apps for Business after a successful trial - encouraging all their employees to ditch the past. They have embraced the advantage of the Cloud to run their company by allowing the web to be the platform, not the PC which unshackles users from being given sub-standard machines and to choose a device of their own.

15 months ago, I bought the top of the range Lenovo Thinkpad - a great machine in terms of weight, PC sexiness and performance. Its battery life was always rubbish even though it was advertised as 10 hours and even though it runs Windows 7 its performance has degraded over time as I have found with every PC I have ever owned - it's as if they get fatigued from running rubbish software. Yesterday, as I walked into the atrium of a Microsoft building, it literally died. One minute I was looking at the presentation I was about to give, the next it was blank and dead. It still is dead.

In supreme irony, I had my Macbook Pro tucked in my bag (having not wanted to antagonise by using it) and latched onto the guest wifi and loaded up the same presentation from Dropbox. In seconds, without skipping a beat, I hooked up to the projector using my convertor cable and without pressing any button the projector and resolution was detected and my presentation was given. Jaws hit the table when they saw the Mac and I expected to get escorted out by security but when they saw how their own software behaved on a Mac with so many more options on how to run a slideshow from a PC and time your delivery, they were impressed.

But they still don't get it. Even when the graphs point out the clarity of the numbers and trends, they don't seem to get the fact that their very heartland, the core product set of the company is under persistent threat not by their customers but by users. No amount of canoodling with the CIO will make a difference. Users are rewriting corporate policy and deciding the future IT strategy.

I predicted that Microsoft will make a profits warning in 2012 and Keller's announcement prior to Q2 results was seeding some bad news. At some point, a hole will appear in that lucrative area that Microsoft has depended upon for years. If nothing else, the price of MS Office has to collapse in the future - nobody is going to pay the kinds of prices of the past for that product for the future. 

I predict that Microsoft will survive but not in the same form. It will have to radically change and find new ways to make money. Right now, it's not at all clear how they will do that. Is it time for management change? Maybe that's the starting point. 

But what do I know?

Recession Hits Microsoft?

Microsoft has announced a 32% slide in quarterly profits but the shock is that for the first time since 1986, their quarterly sales slid - and by 6% at that.

We can all point to the recession as surely less PCs are being bought and therefore not requiring as much of the core operating system supplied by Microsoft - this, along with core Office applications, is where Microsoft makes most of its money. It's solid, repeatable business, with a long upgrade path.

However, can we really apportion this rather profound aberration down to the recession alone? After all, Microsoft has gone through recessions before and the overall dip in PC sales is actually not massive. While businesses are indeed making cuts, it has not adversely affected Microsoft's sales before?

The Licencing Business

I don't pretend to be a professor of how Microsoft prices it products and sells them to Corporates but I have had enough of a whiff to know that it isn't actually as clear and helpful as it should be. I also know that there was a revenue time bomb looming and in the last year Microsoft people were not talking so much about new licence sales as a phenomenon called 'Deployment'.

The issue stems from that fact that many corporates purchase 'Enterprise Licences' which cover an entire suite of Microsoft applications for all employees. It is priced in a way to tackle all needs of all people and it also includes within the suites, products which may not currently be used but are delivered as part of the package. Good examples of this may be collaborative products like Groove or another example maybe that within a business that has a call-centre function which by and large runs bespoke systems, the staff may not actually use things like Outlook or other applications but the licence is notionally paid for.

Upgrades are part of this too. Many companies choose to stay at certain levels of the applications and operating system because their IT teams have settled at a level which harmonises applications across the business and is more easy to support. Yet large customers will be paying for the upgrades which helps Microsoft pay for the development in advance.

The real problems come when customers either do not deploy all the licences they pay for generally or do not utilise all the applications included in the licence cost or do not upgrade to the new versions. What it means is that the negotiations for the annual renewals become progressively harder.

They have been made harder still by new waves of rival or ancillary technology which are leading customers down different pathways. New operating systems, browsers, search engines, applications, messaging platforms and even 'The Cloud' have come into play and eroded part of Microsoft's hitherto impregnable position. For the first time in its history, the pressure is on.

Pushing The Accelerator

Microsoft has missed out on some of the more lucrative new waves of technology and one obvious one was Search. In reality, Microsoft had killed off Netscape as a rival and had a clear run of owning the entry to the internet via the browser. From there it should have controlled the rest. Google changed that by coming from exactly the opposite way, believing it was not the entry point that was crucial but the content and how it was accessed. Google's land-grab and technological advantages have made it a serious rival to Microsoft and they own 90% of the search market and with it, a large portion of the online advertising market.

Google is now advancing ambitiously down the pathway of applications with its own approach which makes it operating system agnostic by placing all the resources on the web, within 'The Cloud'. We are perhaps seeing the first major wobble of the mighty Microsoft and to some extent, Google has yet to even get a real grip of the market - the next 2-3 years could be crucial for both companies.

An added problem for Microsoft is that it is a company that has avoided the 'hard-nosed' sales types within its business. They have a mixture of evangelising people who just get so absorbed in the technology that they cannot see beyond their noses, and commercial people who just milk the base they have at corporations. Life has been very easy for them as you only have to show a product, make the client pay for it in the 'Stack' in advance, wait for them to upgrade, then hit them again. And again, ad nauseum.

Life has been so easy that there has never been a commission or heavy bonus culture at Microsoft. Stock options were plenty enough to reward the long servers and today Microsoft still has the highest proportion of millionaire employees than any other company in the world. That could change fairly soon but what that has arguably done is that everyone has been convinced by their own Bull. Like IBM in the 80's, managers are rated by who 'gives good slide' and bad news is not coped with well as no one has had to deal with it before, so generally it is not given. Positive attitudes in the face of issues are the order of the day - say it enough times and the customer will agree and everything will be ok.

The Steve Ballmer mantra is always, 'Microsoft is right - now what was the question?'.

The world is changing for everyone and even Microsoft. The recession is playing its part to exaggerate what may be underlying issues, but there was always a hole in the revenue just one step ahead on their way of working. Some day, someone would wake up and ask, 'Why are we paying for that if we do not use it?' or 'If I do not upgrade, why do I still pay?'

For Microsoft's sycophantic salesforce, reality may well bite. The question is, will the management have the fortitude to change?