The Secret Failures of Microsoft
Why Microsoft Can’t Compete With iTunes examined Microsoft’s past success in software development, and demonstrated why its past practices won’t be of any help in expanding into the consumer electronics and digital media download business.
While the mainstream media is conspicuously quiet on Microsoft’s track record in consumer electronics, I’m more than willing to share!
The Secret Failures of Microsoft
Considering how many industry giants have partnered with Microsoft in WMA and PlaysForSure--including WalMart, Napster, MTV, WMA hardware makers, and RIAA label members--it would appear that Microsoft is a leader in successful consumer electronics technology. That’s not the case.
All of these partners hooked up with Microsoft simply because they had no idea of what to do on their own. Few even experimented with their own independent technology plans; they simply picked Microsoft because the company seemed like a safe bet at delivering technology. They obviously didn’t do their homework.
The big secret they missed is that Microsoft hasn't ever earned significant profits in the consumer hardware business, nor has its executives proven any business acumen in delivering what consumers want in hardware or creative entertainment, excluding, of course, Microsoft's impressive and highly sophisticated keyboard and mouse division.
The Problem of Choice
In fact, Microsoft only earns a tiny fraction of its revenues from sales to consumers; the majority of its revenues do not result from buyers choosing a Microsoft product, but from corporations and individuals buying a PC and being instantly bound in a End User License Agreement.
There is no choice involved; even most Linux users are forced to pay for a Microsoft license in order to obtain a brand name PC.
Interestingly, when I pointed out how this gives Microsoft half of the credit for all PCs sold in Market Share Myth: Nailed!, PC enthusiasts went berserk and tried to invent logic to prove otherwise. Ian Betteridge stuck around for two weeks posting comments that insisted a Windows license was no more important than a video card or a bundled game or utility.
But that isn't true; there are multiple sources for video cards and trivial bundled software, but only one source for commercial PC operating systems: Microsoft. PC makers have no choice in competing operating systems, nor can they sell PCs without an operating system, as I presented in the previous article.
They are bound to an oath to swear allegiance to Windows XP Professional, and must never mention Linux and Windows in the same breath. If they step out of line in any way, Microsoft dramatically raises their OEM licensing fees and sends them to indoctrination camp, where they face chairs being hurled at them by angry monkeys.
An Unpleasant Secret
Why do Windows enthusiasts exibit much hostility to an obvious fact? Because if they admit that 80% of the company's revenues come entirely from an OEM tax, and not from any choice on the part of consumers, they also have to admit that Apple's share of the market--which is based entirely on consumers going out of their way to make a choice--is not only underestimated, but a potential disaster looming for Microsoft.
They have to admit that as soon as customers are presented with the freedom of a real choice, they are not likely to choose Microsoft's products over those from rivals.
That's a scary proposition for Microsoft's shareholders and others invested in the company because, outside of automatic OEM sales of PC licenses, all Microsoft has delivered in the consumer electronics industry is a long string of failures:
Phones & PDAs. Microsoft's decade of investments in WinCE and Windows Mobile Smartphones have only barely matched the market share of Palm, which itself is a run down company out of ideas. Microsoft couldn't out-maneuver the incompetent Palm within a decade of trying; now both are ineffectually fighting over the dying PDA industry while Linux and Symbian slaughter them in the smartphone arena:
Symbian 75%; Linux 14%; Microsoft 5%; Palm 5%.
Tablets, Handheld PCs & Origami. While the smoke rises from WinCE's ashes, Microsoft's efforts to sell its full desktop version of Windows on alternative form factor PCs has similarly fizzled. Microsoft admits that its Tablet PCs and so called "ultramobile" devices are not selling and are not at all interesting to consumers. Clunky!
WebTV, Ultimate TV, and MSN TV were all related attempts to find new markets for the regular PC by hiding it in a television. As it turns out, not only have competitors such as Tivo delivered better products without using a PC, but the DVR market is an unprofitable, highly competitive industry anyway.
Xbox game console. Microsoft's biggest success involved an unusual departure from its software licensing strategy. Microsoft sells the Xbox as an integrated hardware and software system, just like Apple's Mac and iPod. Microsoft has sold fewer than half as many Xbox units (24 million) in the the last five years as Apple has sold iPods (60 million), but Microsoft hasn't been making a profit; they've lost billions! That's a "success" most companies can't afford to experience.
As Microsoft's string of consumer failures point out, the company does not do well when positioned in a market where real competition exists and its software monopoly offers it little or no advantage over rivals.
Burning Ring of Fire
WMA and PlaysForSure specifically failed because the separation of stores, players and technology did not add value for consumers; all it did was create confusion. With Zune, Microsoft is abandoning its PlaysForSure music store and hardware partners in order to deliver an integrated product more similar to Apple's iPod.
But the Zune is too little, too late. Microsoft will repeat its WMA failure with Zune, not because it’s wrong to try shipping an integrated product, but because the Zune lacks of any real connection to the Windows monopoly.
Without any way to tie the new product into its existing, competition-free Windows environment, Microsoft is powerless to force its adoption. Microsoft will be exposed to live competition in real market, which the company has only rarely experienced in the last decade.
The company is in trouble because its core competency is in marketing vaporware using FUD: creating a product illusion that fools enough people to repress sales of existing products, paving the way for the introduction of a ‘nothing special’ product which dominates simply because there’s no competition left to challenge it.
However, the Creative Zen, SanDisk Sansa, and Apple iPod are already established products with satisfied users. FUD isn’t going to work, primarily because the IT cult priesthood is powerless to push Microsoft’s consumer electronics the way it pushed the Windows PC.
An Ugly Battle
Microsoft is in the position of a pro wrestler who has only fought for show in staged fights, but has now been thrown into a no holds barred street fight against assassins with nothing on their minds but survival.
In this fight, Microsoft will not get to choose who to fight against; it will be pitted against a variety of sly characters all fighting over the same alley, and all at the same time.
Microsoft seems to think it is challenging Apple to a gentleman's duel. It tries to spin Zune as a direct competitor to the iPod and somehow entirely independent from its PlaysForSure strategy in a magical way that will allow the Zune and other PlaysForSure devices to coexist in friendly harmony. That's simply not the case.
Everyone who wants a piece of the music player market, including existing PlaysForSure makers, will have to fight against Microsoft. The Zune will quite obviously appeal to customers who don't want an iPod. That segment of the market, which has held consistently at 25% for several years now, is already enflamed with serious competition.
In order to begin to compete against the iPod, Microsoft will have to fight its way past Sony, Samsung, Creative and the second place SanDisk, and it will only get that far by first cannibalizing sales of other PlaysForSure devices! Toshiba, the maker of the Gigabeat/Zune, currently claims so few sales that it’s not even on the chart.
Interestingly, SanDisk recently tripled its market share to 9.7%, but all of its growth came by eating up other WMA players; the Zune can only hope to do as well, but it lacks the Sansa’s differentiation.
Further, SanDisk is certainly not about to give back its gains without a fight; it also has the competitive advantage of being its own RAM manufacturer. Microsoft simply has no guns to pull out at all.
These fighters can also play dirty. Creative, having already collected a $100 million settlement from Apple over its Zen patent lawsuit, is now going after Microsoft. The only difference is that Microsoft hasn't made any money from the Zune yet, nor does it have a “Made for Zune” peace offering to hand Creative. Oh the Humanity!
Another Fierce Market
Paired with the history of failures in the consumer electronics space, what will save Microsoft's bacon? Some analysts seem to think that Microsoft has billions in the bank to throw away while leisurely chasing down the iPod.
But that's not true. That money belongs to shareholders, because Microsoft is owned by shareholders, just like every other publicly held company. Anyone who says Microsoft has lots of money to burn hasn't ever met angry shareholders.
Microsoft's shares are themselves competing in a free market: the stock market. If Microsoft doesn't continue to create new markets and find new revenues, its investors will pull out to invest in companies who can.
When that happens, Microsoft’s valuation will sag. There are plenty of companies with glorious pasts who suddenly lost their stock valuation after a series of badly executed strategies. The mid-90's Apple is a good example.
After two decades of brilliant success, Apple's valuation dropped into the toilet in the mid 90's when the company failed to deliver progress and demonstrated an inability to find new markets and new sources of revenue.
The tech industry is full of one-time leaders who fell down dead. Anyone who thinks Microsoft is immune to failure is simply choosing to not pay attention to reality.
Next: consider the lessons learned in the real world reversal of fortune between Microsoft and Apple from just over a decade ago, in Platform Deathmatch - 1990-1995: Apple vs. Microsoft in the Enterprise
Thanks baggs, good read.
Very fasinating read - thanks. I just read a few months ago, from a pro-Microsoft writer that Microsoft was following basically the same pattern as GMC and that one major loss could be overly disasterous to them. Cannot help but wonder if Vista might be that loss.
this thread is going to take me 4 or 5 sittings in order for me to read the entire thing. so far so good though!
What's up with all the great longs posts here at the moment?
First trpnmonkey, now baggss - great reads for the boring hours at work!
Always felt that way... Was forced to get a Windows PC because it was "cheap" (dell)
But i'm gonna get a Mac soon!
Its not only that every pc comes with it. Its also that at schools mostly have windows computers and dont really bother to think how much better and easier a mac is to use. they fear the unknown.So by extending that microsoft with windows kinda scare people to keep using their os.....
never saw this thread before. great stuff.
[hugs my sandisk player ;)]
I will dare to raise a contrary voice here. Let me first establish my credentials though! I grew up with Microsoft, with the first computer I ever owned being delivered with MS-DOS 5.0 and Windows 3.1. I've used all of their offerings since... WFWG, Windows 95, Windows NT, Windows 98, Windows 2000, and most recently (and for a unnaturally long time!) Windows XP.
Over the years, I grew more and more disgusted with Microsoft. Their business practises are odious, their products bloated beyond belief and their innovations... well, not very innovative. In late 2004 to early 2005 I had had enough, and cut my ties with them, moving to Linux.
Ahhhh, Linux. Fresh air at last. Breakneck evolution, total freedom, true innovation... at a price though. Linux is not for the faint of heart, even now. If I were not an engineer with long unix experience, I would have never made it. But I did, and I prospered in the Linux environment ...and boy did I enjoy thumbing my nose at Microsoft.
BUT, I couldn't get rid of the Windows millstone around my neck. I use Photoshop extensively, and I LOVE my iPod - couldn't live without iTunes. For both, I needed my PC/Windows machine. There simply is no support for these on Linux. So, I lived and worked day-to-day in Linux and booted up Windows when I had to. I hated it though and dreamed of a better way.
Of course it was out there all along. It is called Mac OS X. Mid last year that realization dawned on me, along with the FreeBSD heart that beats inside every Mac. It occured to me that I divorce myself from Window PERMANENTLY *and* get a truly innovative state of the art machine and continue to enjoy the best of open source software - all on a Mac!
I did just that, and I am typing this very post on that Mac. I love my Mac as much as I love my iPod. I will never go back to Windows.
Good enough, I hope I have convinced everyone that I am no Microsoft fan. Quite the inverse to be perfectly honest.
So, where is that contrary word I dare to raise? Here it is: I am not sure that this thread addresses Microsoft's business model. Microsoft isn't about selling to consumers, it is about selling to businesses. That is what its strategy has been all about for a long time. This is where the golden egg (i.e. the BIG money) is. Microsoft is the safe boring choice for safe conservative businesses. Say what you will about Windows, it works, and is quite stable. I may not like Windows, but even I have to admit that Windows XP is very, very stable. So, Microsoft products don't have to be innovative, they just have to be safe. They need not to rock the boat, and enable business to keep on doing business. Microsoft is all about money, and this enables them to continue making money. Continuing to be safe and boring has allowed business to continue to view Windows as the safe choice that will keep the minions successfully toiling away at their desktops without interruption.
With that objective in in mind, Microsoft's products have been a spectacular success. Windows XP, with its multi year life time, has been very successful in providing a stable platform for business. This is the "computer as a tool" mode of operation.
NOW, I see that changing quickly in the near future. Microsoft is under attack on all fronts. Web 2.0 promises to abstract most major services from the underlying platform. Mac OS X is resurgent and Linux is becoming more and more of a choice. With the major services moving out to the web, the web becomes the "platform" that needs to be safe and stable, and the underlying machine need only provide access. OpenOffice/NeoOffice are now successfully competing for the Office suite and Linux and Mac OS X are competing for the desktop.
Ultimately however, I agree with the general thrust of this thread. Windows will ultimately fail, or at least completely lose its current stranglehold. When the desktop is no more than the access vehicle to the web platform, real choice will shine through, and competition may well start to modify the picture. I would argue however that Linux is better positioned to win the enterprise business away from Windows than Mac OS X, because this is all about business. Linux is simply cheaper, and it is very good - good enough for business.
That leaves Microsoft's engine sputtering on all cylinders. Its OS business will erode, its office business will erode, and Microsoft's cashcow revenue streams will start to fade away. The realization of this has has led to Microsoft's most recent forays into consumer electronics, office telephony and the like. You are looking at a fading giant thrashing around desparately looking for new sources of revenue.
As Windows starts to fade, the battle for the consumer desktop will become very interesting. Here I expect Mac OS X to dominate over time. Ultimately I see Linux and Microsoft duking it out in the enterprise, and Mac OS X and Microsoft duking it out on the consumer desktop. No matter what, the Wintel hegemony is over.
Sorry aptmunich, yet another massive post!
Microsoft BOB..... nuff said.
mac57, re: stable xp/windows.
tell that to my wintel and unix admins. actually ask me who we need to wake up more.
anecdotally, in a HUGE retail shop (data center), on non-application related issues - and trying to exclude hardware as much as possible:
for every 1 call we make to a mainframe person on a problem, we probably call unix admins about 5 times.
for every unix call we make, we absolutely call wintel admin (or fix issues ourselves) 50 or more times.
of course we run more windows boxes. on sheer numbers, we certainly have more little HP stand alone servers and blade servers (which cook themselves on a regular basis, but thats beside the point) than we have unix servers. maybe 1/2 to 1/3 as many. and of course we only have a couple mainframes with a few partitions a piece. but the workload obvioulsy increments inversely.
all in all, i can't really agree that windows is a very stable environment. maybe in and of itself, seperated from a network and without running any applications on it; sure. but who does that?
and does it crash every time it has an issue. of course not. but instability can stem from all sorts of issues, not just blue screening.
here's a good one. one of our wintel servers over the last few months has decided to delete it's own boot.ini file intermittantly. no one knows why. the first few times we ran into that after post-patching reboots we were, as you can guess, surprised.
Good read, baggs.
My WindowsXP machine is plenty stable. 15+ months on the same build, running 24/7 except when I'm away for several days at a time or during a storm. To tell you the truth, it's more stable than my Mac, but I think a lot of my Mac freezes are user-induced (never been a shy one when it comes to over-loading a computer!). I don't particularly dislike windows, but I don't particularly like it, either. I was a user by default, now I'm a Mac user by choice.
I won't disagree on the Windows side, but mac57 raised some interesting points. MS doesn't target consumers, it targets businesses. This article was not really about Windows vs OSX, it was more about the DAP market and the Zune. Much like the X-Box, the Zune is going to have to compete for market share, unlike X-Box, the Zune has to compete in a market with a clearly dominant leader and bunch of other wanna be's. The Game market was lead by Sony, but not the same way or extent that the DAP market is lead by Apple. Sony is so big they shooting themselves in the foot and the PS3 is not as impressive as the X-Box 360 OR the Wii.
The Zune is a good player, but for a company with all of the resources of MS, they could have done better, much better. MS could have come out the gate and "wow'd" the market. Instead, they came out with "just good enough". I'm sure the next Zune will be better, but so will the next iPod, Creative and SanDisk product as well. All the while it seems as if MS loses more and more focus on what their real business is, making Windows. They divert resources to things like X-Box and Zune, but the moneymaker is on the brink of release and it's already getting panned by the corporate and consumer worlds. I'm sure Vista will be nice, but again MS has come out with a "just good enough" product when they could have "wow'd" the computing world.
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