UPDATED 00:32 EDT / AUGUST 02 2013

All is Not Quiet on Microsoft’s Battle Fronts

Microsoft is facing a number of challenges on a number of fronts.  This post describes some of the challenges and provides some of my thoughts on how Microsoft might address them.

The Surface and Windows 8

This week, I was on SiliconAngle’s morning News Desk discussing Microsoft’s truly awful Surface sales figures. The short version is this: Surface has been a colossal failure as evidenced by sales figures of $853 million against write offs of $900 million in excess inventory and almost that much in combined Windows 8 and Surface marketing costs.  In other words, Microsoft spend more trying to sell the Surface than they made on the Surface.

That’s pretty horrible and is resulting in the company losing almost a staggering $1 billion on this single product line.  Of course, Surface was not helped by the generally negative reaction to Windows 8 itself, either.  I remain convinced that Microsoft simply ignored a lot of the feedback that the company received in betas and forged ahead with a new vision that simply failed.

Given the terrible results Microsoft announced regarding Surface, it’s more than obvious that it’s an area which, if Microsoft intends to remain in the hardware business, absolutely needs attention and is but one battle among any that the company will face.  By the end of the first quarter of 2013, Surface had garnered just 1.8% of the tablet market share.

Steve Ballmer, Microsoft CEO, in conjunction with the news of the company’s reorganization has said that Microsoft is “not a software company, but a cloud-based devices and services company.”  With Surface sales not nearly covering their own expenses and Windows Phone controlling only 4% of the market, Microsoft is in serious trouble.  Things on this front aren’t looking much better in the long term as developers focus on the much more lucrative iOS and Android markets.  Having used Windows Phone, I actually find it an excellent foundation, but without the ecosystem that has been built around Apple and Google, Microsoft is finding it very difficult to find a way to entice users and developers to their comparatively empty services and, while the Windows 8 Phone hardware has been generally well-reviewed, it also hasn’t really stood out in any way (except for maybe the new Nokia Lumia 1020 with its 41 megapixel camera of awesomeness.)

Internationally, the picture is a bit better, but not by much.

Windows 8.1 will be released soon and will correct many of the most egregious issues that plague Windows 8.  In addition, Microsoft is reportedly working on a new line of Surface tablets.  My advice to Microsoft is to aim both high and low – make sure that there is a tablet that can address the lower end of the mainstream market and price it to sell.  At the higher end, make a tablet that differentiates itself from the norm and doesn’t use a cheap keyboard.  Make it sturdy and less “cheap” feeling.  Add features not found elsewhere and, again, make sure to price the device where people will buy it.

Most importantly, though, Microsoft must figure out how to eliminate confusion between Windows RT 8.1 (if there is such a version) and Windows 8.1.  Apple has done surprisingly well with iOS and OS X with only very loose coupling between the two operating systems.  They are very different experiences, but the solutions work without user complaint.

If Microsoft can truly achieve a “one instance” (One Microsoft) vision whereby all of a user’s devices access the same information and share everything between them, I think the company could differentiate itself from some of the others out there.  This would mean making sure that common applications across platforms – Surface, PCs, Phones, Xbox One – all share details.

Microsoft has traditionally enjoyed an advantage in the enterprise since users used the same tools at home.  If Microsoft can’t correct the structural issues that are facing the Surface and Windows 8 markets, there could be some risk on the enterprise side as users become familiar with different tools.

Enterprise and Cloud

Whereas the consumer space seems to be a serious challenge for Microsoft these days, their enterprise portfolio seems to be doing well.  Of course, the future is far from certain and Microsoft has been gearing up to be ready to take on whatever is thrown their way.

According to this article, Microsoft is doing very well across the enterprise board:

  • The Server and Tools business grew revenue 9 percent in Q4 2013 vs. Q4 2012.
  • Over 50 percent of Fortune 500 businesses now leverage the Windows Azure cloud in some capacity.
  • System Center revenue grew 14 percent, and Microsoft claims Hyper-V continues to take market share from VMware.
  • SQL Server revenue grew 16 percent.
  • Lync revenue grew 30 percent and is now a $1 billion-plus business.

These numbers are no small achievement.  System Center growth is particularly telling, particularly since it’s so tightly identified with Hyper-V these days.  These numbers indicate that Microsoft’s battles in these areas are bearing fruit and that Microsoft is positioning itself well for the future on the enterprise side.  And, as I wrote here, as Microsoft enjoys further success with Hyper-V, I believe that this will translate into more success with Azure.

Speaking of cloud, when it comes to specific numbers, some of Microsoft’s cloud-based services are doing well and growing fast.  For example, Office 365 is currently providing $1.5 billion in annual revenue (run rate) compared to just $1 billion last quarter.  That’s a big number to begin with and the fact that it’s grown so much in a single quarter is a testament to its success.

In the enterprise and cloud arena, Microsoft needs to continue executing well and finding ways to entice more customers to the Azure platform and to the Office 365 offering.  Obviously, this space also includes traditional on-premises software, such as Exchange and SharePoint, but these have been traditionally strong areas of Microsoft’s business.

Summary

Ballmer has some serious challenges ahead of him, but Microsoft is also doing well in a number of areas.  Most importantly, the company needs to find ways to lure developers to the company’s emerging platforms as well, Ballmer knows this, but his efforts so far have not proven sufficient, hence the results Microsoft announced this week.


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