Microsoft must be ready to accept, as has Apple, that it's better to cannibalize one's own sales than to let others do it, a research analyst says.
"This is going to be a tough shift for Microsoft, to ask them to now accept that the world is a very different place than it used to be," said Al Gillen of research firm IDC.
That shift is the corporate reorganization unveiled last week to support a radical strategy of retreating from decades of selling packaged software and advancing on sustainable services and potentially-lucrative devices.
As part of the reorganization, Microsoft will consolidate all of its client operating systems, including Windows 8, Windows RT, Windows Phone 8, Windows Embedded, and Xbox, into a single engineering group led by Tony Myerson, head of Windows Phone, which was part of a soon-to-be-defunct Entertainment and Devices division.
"The Windows desktop client and mobile have a lot of common functionality, and a combined group could have a lot of synergy," Gillen said of the under-one-roof reshuffle. Like most outside analysts, Gillen and his IDC colleagues believe that the marriage of Windows under Myerson will eventually lead to a common code base, which will in turn let developers write an app that runs on the "Modern" side of Windows as well as on Windows Phone.
"The larger question that remains is whether a consolidation of the operating systems engineering work and the consolidation of the client division will make it not only possible, but also more probable, that Microsoft will make the right decisions," Gillen and other IDC analysts wrote in a recently-published research note.
And those decisions may include a big and bitter pill for a company that, for better or worse, is identified by "Windows" as much as by its "Microsoft" nameplate.
To pull off the switcheroo from software to "devices and services," Microsoft may have to abandon the high margins of the former for the lower margins of devices.
"[It] may mean taking actions that cannibalize some dimensions of its business through the sale of lower-cost, lower-profit products," Gillen wrote in the note. "Historically, Microsoft has resisted internal cannibalization, and while such a move may still seem like a grim option, it remains infinitely more attractive than allowing competitors to do the cannibalization on Microsoft's behalf."
Move to devices
CEO Steve Ballmer himself hinted last week at that approach when he hammered home the phrase "family of devices" in a public memo outlining the reasons for the corporate realignment. In that memo, Ballmer relegated Windows to a "shell"—his word—subservient to the device, a 180-degree turn from Windows-as-preeminent, the common denominator of virtually all PCs.
If that's the case, and if Microsoft is to capture a meaningful share of the phone and tablet markets as its historic base, the personal computer, shinks, the company must produce—either on its own or in partnership with OEMs—mobile devices that consumers and businesses want.
It's failed to do that thus far.
IDC, then, was suggesting that Microsoft must, at least in the main, sell devices based on lower prices. And the only significant component of a Windows-powered device that can be cut further—hardware margins are at or very near the bone, and have been for years—is the Windows license.
In other words, the IDC researchers implied that Microsoft must be prepared to accept lower revenue from Windows as an OS, and hope to make up the difference—and ideally much more than that—on device volume. Higher volume there means more end-points in the potential services sales pool.
Failure means that tablets and smartphones sold or backed by rivals Apple and Google will continue to gnaw at PC sales: cannibalization. Success could create a classic "virtuous cycle," where progress reinforces progress through a positive feedback loop.
Apple, for instance, accomplished that with the iPhone by selling phones to create a market for app developers, who then responded with the largest mobile app inventory on the planet, which in turn convinced customers to buy even more iPhones.
Apple as a template
Ballmer offered no clues as to exactly how Microsoft will do that, offering only optimism that the company was up for the challenge. "Frankly it's different to deliver something that has production costs, if you will, than it is software, which basically has no production costs, and we're going to get excellent at that [emphasis added]," Ballmer said during a conference call with reporters and Wall Street analysts last week.
He does have a template: Apple.
Although their sales volumes are wildly different—Apple sold a mere 4 million Macs in the first quarter, a three-month stretch when OEMs shipped 77 millions PCs, nearly 20 times more—Apple has embraced cannibalization of its personal computers.
"I see cannibalization as a huge opportunity for us," Apple CEO Tim Cook said in January when reporting 2012's fourth quarter results. "Our base philosophy is to never fear cannibalization. If we do, somebody else will just cannibalize it, and so we never fear it. We know that iPad will cannibalize some Macs, [so] that doesn't worry us."
Ballmer has never breathed such blasphemy. But he'd better, Gillen contended, even though it would be painful.
"On devices like tablets and phones, the operating system is a differentiator," said Gillen. "But customers have zero visibility as to the OS [on a device]." While people may recognize "iPhone" or "Galaxy," and refer to the devices by those names, most would be hard-pressed to name "iOS" or "Android" as the operating system.
"That'll be tough," Gillen said of Microsoft walking away from "Windows" as a self-expression of the company to focus on devices and services. "It's built so much brand equity around Windows."
Yet that's the path Microsoft should walk. "Microsoft will be a lot healthier and prepared to create and compete in new markets, rather than just defend its legacy markets, when the brand 'Microsoft' becomes more important [and] prominent at Redmond than the brand 'Windows,'" Gillen said.
This story, "Microsoft strategy should take hint from Apple, analyst says" was originally published by Computerworld.