Fear and Loathing in Redmond
“Great occasions do not make heroes or cowards; they only unveil them to the eyes of men. Silently and imperceptibly, as we wake or sleep, we grow strong or weak; and at last some crisis shows us what we’ve become.”
It’s an astute observation from Brooke Foss Wescott, which can be applied to companies just as much as it can be applied to men. So let’s apply it to Microsoft.
Recently, Steve Ballmer got all loquacious at a meeting with financial analysts, many of whom were using Apple laptops. He was moved to comment on the preponderance of Macbooks, referring to Apple as “a fine company” that was prospering from a low-volume, high-price strategy.” He then proclaimed that Microsoft hadn’t lost market share to Apple over the past year and any changes in the reported market share numbers were a rounding error.
Nobody needed to butt in and tell him that his statistical skills needed a little polishing, because he contradicted himself in the next sentence by saying that “market share gains by Apple cost Microsoft nothing” and “hopefully we’ll take share back from Apple.”
Math Problems
Ballmer is whistling in the dark. Microsoft’s revenues collapsed 17 percent in the last quarter, mostly from the decline in Windows revenues, while Apple still managed to post growth in Mac sales – albeit of a modest 4 percent. Meanwhile the iPhone was taking off like a rocket.
The tendency of CEO’s whose companies are in trouble to become suddenly inept with statistics is legendary, but it’s not in a CEO’s nature to stand up and proclaim “the competition is killing us.” But that’s what’s happening to Microsoft. Competition is killing it.
The twin threats of Apple and Google are gradually bringing Microsoft to its knees. Microsoft works fine as a monopoly and it has been skilled in maintaining its monopoly with intelligent and innovative monopolistic practices. But it’s no longer good at competing outside its monopolistic domain.
It was once a skilled marketeer and public relations ringmaster, but no longer. You don’t need marketing skills to maintain a monopoly, so they atrophy. It was once even an innovator in some respects, although innovation has never been its forté. Microsoft’s business model always placed the highest priority on market share and innovation is not a great contributor to building market share. With Microsoft it was mostly about bundling and the drag-along of monopoly power.
Arrogance is the Curse
In The Prince, Machievelli advised famously; “Never wound an enemy, except fatally.”
Bill Gates should have read the book and he would have known never to give Apple breathing space. By the late 1990s Microsoft must have thought it was bullet proof. It had laid the Netscape threat to rest and, even though it faced anti-trust action, it was sweeping all competition away in every direction. Sun, IBM, Oracle and Novell all seeemd to be ont he run from Microsoft.
Wintel reigned supreme and Microsoft was swimming in its own Kool-Aid. And that’s when Bill Gates put to rest the long running dispute with Apple, over Microsoft Windows infringement of Apple patents. Microsoft invested $150 million in Apple and agreed to develop and ship future versions of Microsoft Office, Internet Explorer, and development tools for the Mac. The announcement was made jointly by Bill (via satellite) and the newly appointed Steve Jobs at Macworld Expo.
At that time both the world and Microsoft regarded Apple as a basket case. A couple of years later, Apple was selling its iMac in 5 different colors and its marketing messages were beginning to resound a little.
Bill Gates remarked, mockingly; “The one thing Apple’s providing now is leadership in colors. It won’t take long for us to catch up with that.”
Well a decade has passed, and the whole of the PC industry still hasn’t caught up with the Apple’s design leadership. There’s no guaranteeing that it ever will. Microsoft should have strangled Apple when it had the chance, but Bill probably thought Apple was dying anyway. The boot is now on the other foot. Microsoft is the wounded animal, not Apple.
In the aftermath of Microsoft’s decline, commentators will argue about whether Steve Ballmer was the architect of Microsoft’s misfortunes or whether the rot had set in long before his CEO tenure began. It will be a subject worthy of debate, but the latter theory is more compelling. Corporate culture was the problem – or should I say – it is the problem.
Playing Catch-up
Apple has left Microsoft in dust in so many ways. Up to now Microsoft’s competitive strategy has been all “me too.” Nice interface on OS X, well “me too” with Vista. Nice music store with iTunes, well “me too” with MSN Music. Good business with the iPod, well “me too” with Zune. Impressive Apple Stores, well “me too.” (See The “Bootleg Apple” Strategy and Why It Will Fail).
Microsoft has finally realized that the second mover is always a move behind. It’s an advantage when you’re playing monopoly and you’ve got your hotels on all the pricey locations, but in the game of technology leadership it’s a huge negative. There’s no evidence that Microsoft has the wherewithal to react quickly any more. When you need to change direction quickly, momentum is not an advantage – it becomes inertia. That’s what has happened to Microsoft. It still has momentum, but that now hinders it.
Innovation is the key to Microsoft recovering and at last it’s starting to perform, even though it’s very late in the game. Particularly impressive is the new X-Box “virtual reality” interface it is set to deliver. It’s real and it’s groundbreaking and it’s a pity it’s only a sideshow – like the X-Box itself. Microsoft can do this and when it does, it is a force to be reckoned with, but Microsoft has wasted years watching its foes grow stronger. So it’s probably too little too late.
Look Out! There’s A Monster Coming
What Microsoft really suffers from in its competition with Apple: It has no phone platform worth talking about. If anything, it’s RIM and Palm that compete with Apple in this market, and they have their work cut out (see The iPhone and the Smartphone Market). Nokia may be a strong player in the smartphone game – it certainly used to be. Google is now suddenly there and attracting attention. But Microsoft is nowhere. It’s smartphone strategy was lame from the start – and now it just hobbles along.
Think back. Microsoft stormed into the computer business and began to eat into the computer industry from below: smaller devices, low entry costs, cheaper software, larger numbers and great margins. That surge was irresistible and it carved out a huge market share as a consequence. Well it’s happening again. But this time the industry being eaten from beneath is the PC industry and right now the vendor that is carving out the territory is Apple – soon to be joined by Google.
The coup de grâce here will be the Apple tablet. See There’s Another Apple Revolution Coming for the full details, but the skinny is this. The new Apple tablet will be a big bad iPhone. It will start to consume the laptop market from the get go. It will be what the Netbook should have been, but never was.
Apple now has 90 percent of the high-end PC market. It has slaughtered the competition in that area. But Ballmer thinks that’s unimportant, because it’s low volume. Well take a look at the iPhone’s grip on the hearts and minds of consumers and watch what happens to the Apple tablet, Mr Ballmer. It won’t be low volume. Apple is coming at you from both directions and you’re caught in the sandwich.
A new market is about to emerge. Microsoft could have been there and should have been there, but it got complacent – and now it’s nowhere.
Arrogance is the curse.
