The future for Microsoft

Microsoft is in the process of reinventing itself. While some may argue that it’s “too little, too late” or that their growing consumer-focused strategy is wrong, the truth of the situation is that Microsoft is reinventing itself into a new company. While Microsoft is now calling themselves a “devices and services” company, that’s not entirely accurate. Let’s look at some facts:

Microsoft will always (for the long-term foreseeable future) be financially split into the following divisions:

  • Windows/Operating Systems, which for FY13 made up approximately 24% of overall revenue.
  • Server and Tools, which for FY13 made up approximately 26% of overall revenue.
  • Enterprise/Business Products, which for FY13 made up approximately 32% of overall revenue.
  • Entertainment and Devices, which for FY13 made up approximately 13% of overall revenue.
  • Online Services, which for FY13 made up approximately 4% of overall revenue.

It is important to realize that hardware products like the Surface fall under the Windows/Operating Systems division while products like the Xbox 360 fall under the Entertainment and Devices division. (Presumably other hardware, such as mice, keyboards, and cameras, also fall under the Entertainment and Devices division.) It’s also unclear where Microsoft’s recent acquisition of Nokia’s handset division will fall, but let’s assume that it will be under Entertainment and Devices as well.

Now, for the sake of argument, let’s assume a slightly different structure that* I think* is more in line with how Microsoft presents itself and how the general public sees it:

  • Consumer Products and Devices, which would probably make up approximately 9% of overall revenue.
  • Developer Tools, which would probably make up approximately 13% of overall revenue.
  • Enterprise Products and Devices, which would probably make up approximately 47% of overall revenue.
  • Entertainment, which would probably make up approximately 13% of overall revenue.
  • Online Services, which would probably make up approximately 17% of overall revenue.

(Just so we’re clear, in this structure hardware products like the Surface, a portion of Windows sales, and other hardware fall under the Consumer Products and Devices division. I’m assuming that more of the income for the Windows division is coming from enterprise/volume licenses so 15% of that income went to the Enterprise Products and Devices division. Most of the enterprise services, like Azure, fall under the Online Services division so half of the Server and Tools income went there as well.)

No matter how you look at it, the bulk of Microsoft’s income still comes from not just the enterprise but also software sales, and this really shouldn’t surprise anyone.

So, now that the stage is set…what’s the future for Microsoft?

The future I see for Microsoft (again, this is just my prediction based on my own instinct, gut-feel and publicly available information) is this:

Microsoft is becoming a consumer-focused enterprise company.

Let’s look at it a different way. Microsoft is an enterprise-focused company trying to create a larger consumer presence.  To a large extent, this is the exact opposite of Apple, who is really a consumer-focused company trying to create a larger enterprise presence. The major reason consumer-focused companies (like Apple) have started making in-roads into the enterprise is the “bring your own device” phenomenon. Yes, Apple has created some “game-changing” products but their enterprise influence is still relatively small. Unfortunately (for this blog post at least), Apple provides revenue in terms of hardware products rather than business divisions, so it’s not possible to do a direct comparison. However, in the interest of transparency, from Apple’s Quarterly Report (filed 24 July 2013), their revenue breakdown is:

  • iPhone, which for the 3 months ending 29 June 2013 made up approximately 51% of revenue.
  • iPad, which for the 3 months ending 29 June 2013 made up approximately 18% of revenue.
  • Mac, which for the 3 months ending 29 June 2013 made up approximately 14% of revenue.
  • iPod, which for the 3 months ending 29 June 2013 made up approximately 2% of revenue.
  • iTunes, Software, and Services, which for the 3 months ending 29 June 2013 made up approximately 11% of revenue.
  • Accessories, which for the 3 months ending 29 July 2013 made up approximately 3% of revenue.

From this, it’s pretty clear that Apple is a consumer-and-hardware-focused company.

At this point, you may be asking yourself “Where is all of this going?” The answer to that lies in Microsoft’s shift in company focus. They are becoming more consumer focused, but what exactly does that mean?

The biggest change (at least that’s been in the news lately) is the pending purchase of Nokia’s handset division. This, in combination with their Surface line of tablets and the Xbox, will put Microsoft squarely in the realm of a hardware-focused company in addition to being a software-focused company. That can (and most likely will) shift the revenue split to looking at revenue based on software sales (both consumer and enterprise) and also hardware sales (mostly on the consumer side).

If we look at things strictly from a Windows perspective, Microsoft clearly has a lot of irons in the fire at the moment. Discounting the various product SKUs available and painting the picture with broader strokes, there are currently 5 different Windows-based operating systems:

  • Windows Phone
    • Windows Phone 7.x, which runs on top of the Windows CE kernel
    • Windows Phone 8.x+, which runs on top of the Windows 8 kernel
  • Windows RT
    • The ARM-based version of Windows 8, which runs on top of the Windows 8 kernel
  • Windows (Pro)
    • The Intel-based version of Windows 8, which runs on top of the Windows 8 kernel
  • Xbox
    • The Xbox 360, which runs it’s own proprietary OS.
    • The Xbox One, which runs it’s own proprietary OS, a version of Windows running on top of the Windows 8 kernel and a proprietary “manager” OS which manages the other two.

Over time, Windows Phone 7.x devices will fade so that really leaves 4 different versions. Looking at Windows RT and Windows Phone 8.x paints an interesting story. Right now, all mobile phone devices run on some sort of ARM chip and that doesn’t look like it will change any time soon. That means Microsoft has two different Windows based operating systems for the ARM platform. Long term, it doesn’t make sense for Microsoft to continue supporting that arrangement. I have long suspected (since the Surface was first announced) that Microsoft will unify these two variants of Windows and recent speculation from some of the leading Microsoft watchers lends credence to this suspicion. It is rumored that upcoming Windows Phone releases will include support for larger screen sizes, relax the requirement to have a hardware-based back button and will continue to improve API parity between Windows Phone and Windows RT. At the same time, Windows RT will include support for smaller screen sizes. Since both of these operating systems are based on the same core Windows kernel, it makes sense (both from a financial and development resource perspective) for Microsoft to unify them. The user interfaces are already very similar. So similar in fact, that visually it’s difficult to tell them apart. To illustrate this, here are two screen captures:

Other than a few variations (the Bing News app, the picture shown in the Pictures tile and the spacing between the tiles) these are identical. The one on the left is from my Windows 8.1 laptop (which looks the same as on my Surface RT) and the one on the right is from my Windows Phone 8 Lumia 925. This pretty clearly shows that from a consumer perspective, there really is no practical difference between how these two operating systems look and how you interact with them.

For the consumer, your entertainment device (Xbox One), phone (Windows Phone) and mobile computing device (Surface [or some other vendors tablet], laptop, netbook or ultrabook) and your desktop computing device (desktop) will all look and feel the same. While many people will denounce this consistency of user experience, I think this will be a good thing in the long term, especially for the upcoming generations. For example, my 5-year old son knows how to use my tablet, phone and Xbox because they all feature nearly identical user experiences. When Windows 8 was released, Microsoft allowed a Windows Store app to be purchased once and installed on as many as 5 devices. With Windows 8.1, this limit has been increased to over 50. Why is that important? If you consider that your phone, computing devices, and entertainment device will be running the same operating system (with minor differences related to physical hardware chipset), that means that I could potentially purchase my sons favorite Angry Birds game once and be able to install it on all of the devices I own. (And for those of you wondering, it’s only 7 [at the moment].)

From an app developer perspective, the story becomes even more compelling. Right now there are differences between the different operating systems, but those differences are shrinking. The user interface technology for both is XAML but there are different controls available and different user experience concepts. Some of the APIs available are the same while some are not. You can’t develop a Windows Phone app that can also run on Windows (either Windows Pro or RT). With each release of Windows Phone and Windows RT, those difference become smaller and smaller. Add to this mix the Xbox One, which will also feature a Windows-based operating system and the same “modern” (tile-based) user interface and the visible distinctions between the operating systems will become even smaller.

Unifying the operating systems means one set of APIs and one code base to maintain for an app that can run on multiple devices. One code base means it’s easier to add features and fix bugs and that those changes become available on all devices at the same time. It also means a single app store, which will increase the discoverability and reach of your app and consolidate revenue and app profile management. Now, the choice of what devices an app is available on becomes a simple checkbox decision rather than a technical limitation. Ultimately, this means more apps available to consumers, which is always good for the app ecosystem.

Is all of this just rumor, speculation and conjecture? Of course, but it’s not unfounded. As I mentioned earlier, some of the prominent Microsoft watchers are also reporting similar rumors. However, Microsoft itself has even hinted at this future with their recent organizational changes and by telling developers “if you want to develop for Xbox One, start developing for Windows 8 now.” I think this pretty clearly paints the following picture:

  • Microsoft is committed to the “modern” user interface paradigm.
  • Microsoft is changing their release cadence (for all products, not just operating systems) to be faster and more modular.
  • Microsoft is going to continue to unify their OS platforms both from a consumer perspective and a developer perspective.

While this direction will certainly concern some people it will excite many others. Microsoft’s biggest failing has always been following through with a strong and sustained marketing strategy that presents a consistent view point and highlights what this unified and connected experience looks like and how it benefits consumers and enterprises. We’ve started to see some of this over the last few years, but it needs to continue and become more aggressive and consistent. In the long run, I think Microsoft will be able to pull all of these technologies and devices together into one seamless ecosystem. It isn’t going to happen overnight, but my prediction is that we will be there by the end of 2016. As both a consumer and a developer, I, for one, am excited about the future of Microsoft.