microsoft

The Fantastic Apple Car

 

by Jean-Louis Gassée

Forget the iWatch, Apple Pay, and the iPhone 7…the next big thing from Cupertino will be the Apple Car.

At first, I didn’t pay much attention to the Apple Car rumors. I saw them as the another wave of clickbait along the lines of the wiped-out Apple Television Set canards.

I even thought of writing a little parody piece:

WinCar, Microsoft Disrupts The Auto Industry.

After penetrating offices and homes, Microsoft will now hitch a ride in the third most important location (and time slice) in peoples’ lives: The Car.

As part of Satya Nadella’s Mobile First – Cloud First vision, the Azure-enabled WinCar is the ultimate personal mobility and connectivity device. Quoting Nadella’s July 10th message to the troops:
“We will think of every user as a potential ‘dual user’ – people who will use technology for their work or school and also deeply use it in their personal digital life.
[…] Microsoft will push into all corners of the globe to empower every individual as a dual user – starting with the soon to be 3 billion people with Internet-connected devices. And we will do so with a platform mindset. Developers and partners will thrive by creatively extending Microsoft experiences for every individual and business on the planet.”

Microsoft’s connections to the auto industry are old and obvious: Steve Ballmer’s father was a manager at Ford; Microsoft wrote successive generations of Sync, Ford’s dashboard infotainment system; Dr. Helmut Panke, an illustrious auto industry figure and former Chairman of BMW’s Board of Management, sits on Microsoft’s Board of Directors. Bill Gates drives a Ford Focus. Ballmer? He’s a Ford Fusion man...

No.
As I saw the growing stream of Apple Car tweets and blog posts, two minutes of research took me to what seems to be the source of the reverberating fracas, a single Wall Street Journal story titled Apple Gears Up to Challenge Tesla in Electric Cars; iPhone Maker Has 100s Working on Design of a Minivan Like Vehicle. The article tells us that the project, code named “Titan”, is being shepherded by Steve Zadesky, a former Ford engineer who “helped lead the Apple teams that created the iPod and iPhone” — two products that have many, many fathers.

Most of the echoes of the rumor emanate from that one story. The Financial Times’ Apple hiring automotive experts to work in secret research lab isn’t much more than a rewrite. The always “reliable” Business Insider tells us that Tesla and Apple are poaching each other’s engineers and throws in a quote from an unnamed Apple employee: “We’re working on something that will give Tesla a run for its money”. A Mac Observer post tells us that they have it on good authority from someone who “travels in more rarefied circles” that “a lot of people at the top in Silicon Valley consider it a given that Apple is working on a car”.

The posts and reposts are quick to find “evidence” that back up the rumors. Apple’s Sr. VP Eddy Cue, who sits on Ferrari’s Board (a fact that’s omitted from Cue’s official bio), has long been a conduit between choice automobiles and highly paid company engineers and executives. Apple recently hired Johann Jungwirth, former president and chief executive of Mercedes-Benz Research and Development North America. Recent sitings of Apple’s mysterious unmarked vans fitted with a dozen cameras proves they’re building an autonomous vehicle.

The picture wouldn’t be complete without a juicy link to complaints about American cars by “design god” Jony Ive and no less divine watch designer Marc Newson, who says that American car design is on the “shit we hate” list.

(Let’s give ourselves a moment of contemplation, here. These two august industrial artists come from Britain, whose auto industry is now either German or Indian. Bentley, Sir Jony’s choice, is owned by Volkswagen; Rolls Royce is a subsidiary of über Bavarian BMW; Jag-ü-ar and Land Rover are in the competent hands of the Tata conglomerate.)

Just as in the little Microsoft parody above, the signs are unmistakable, Apple is definitely making a car.

Let’s count the ways….

The company has the money. With $178B in the bank, it could easily afford to build a car factory. The cost of doing so, a couple billion, is certainly less than the price of a microprocessor fabrication unit where costs approach $10B. And the company is no stranger to large industrial bets. As Horace Dediu notes, Apple spent close to $4B in Machinery and Equipment in the quarter preceding the launch of the latest iPhone; for the latest quarter, spending of more than $3.2B is 60% higher than a year before. As Horace tells us, large increases in Machinery and Equipment spending presage big product launches – which is a little besides today’s topic:

355_dediu
Short of building everything from the ground up, perhaps Apple is going to buy their way in. Why not acquire Tesla and enjoy a running start? Tesla’s market cap of $26B makes it an affordable acquisition. The current Model S is, in several ways, the first Silicon Valley car, built nearby in Fremont, with a modern touch-based UI, autopilot features, and regular over-the-air software updates.

An Apple car would almost certainly be out of many drivers’ budgets, but let’s recall that Apple has a history of disrupting from the top. They took over the MP3 player market and the smartphone industry by providing a more expensive product and carefully building an ecosystem of software, content, services, and retail operations that deliver user experiences that, in turn, generate higher margins. And as car technology matures, Moore’s Law will help drive down prices.

But now let’s look at the reality.

Yes, Apple has plenty of money, but the century-old auto industry doesn’t seem like a good way to make more of it. Ford, the healthiest US car company, made $835M in net income last quarter, less than 4% of their $34B in sales. Compare that number to Apple’s record-breaking $18B profit. Tesla, Apple’s supposed rival in the fantasy blogs, pulled in a little less than $1B last quarter, and it lost about 10% of that. There isn’t an inkling of an explanation for why and how a superior product designed and built by Apple would bring superior returns.

Furthermore, there is no Moore’s Law for cars. In a Tesla Model S, the computers are a small part of the bill of materials. Batteries, which contribute the most to the price, don’t double in power or halve in cost every 18 months.

A simple chart by Benedict Evans sheds light on the opportunities before us:

355-UniqueTech

The sort of money that apple has come to expect just isn’t in cars.

An autonomous car is good PR and to some it may seem like an inevitability, but as Lee Gomes, a former tech writer for the Wall Street Journal, explains in this Slate piece: The autonomous Google car may never actually happen. This isn’t because Google engineers are incompetent, but because actual, in-the-wild autonomous driving is fraught with countless intractable exceptions. What happens in heavy rain or snow, or when the software behind the camera has trouble recognizing objects that are blown onto the road?What happens when your car approaches a a last minute detour around new construction site?

Apple’s life today is relatively simple. It sells small devices that are easily transported back to the point of sale for service if needed. No brake lines to flush, no heavy and expensive batteries and cooling systems, no overseeing the installation and maintenance of home and public chargers. And consider the trouble Tesla faces with entrenched auto dealers who oppose Tesla selling cars directly in some states. Apple doesn’t need these headaches.

There is a simpler and regrettably less grand explanation for the rumors.

Johann Jungwirth, the Mercedes Benz R&D exec that Apple hired last September, worked on infotainment systems, which makes him a natural for Apple’s work on CarPlay. The mystery vans are most likely part of the company’s Maps product.

Apple has made a commitment to better in-car systems, not in and for themselves in isolation, but as a reinforcement of the iOS ecosystem. If the large number of engineers that they’ve “poached” from Tesla seems a bit much, consider again the enormous size of iPhone (and iPad) revenue for this past quarter: $60B – compared to GM’s $40B for the same period. To Apple, anything that helps the iOS ecosystem is well worth what looks like oversized investments to outsiders.

Cars have always excited humans, they are a way to extend the reach of our bodies. As Roland Barthes once said about the Citroën DS 19 [emphasis mine]:

“I think that cars today are almost the exact equivalent of the great Gothic cathedrals; I mean the supreme creation of an era, conceived with passion by unknown artists, and consumed in image if not in usage by a whole population which appropriates them as a purely magical object.”

An Apple car feels good: design, quality, service, trust. A winner. I’ll buy two. It’ll work because it’d be really great if it did… but a small matter of implementation – actually the larger Moore’s Law intrudes.

The fantastic Apple Car is a fantasy.

JLG@mondaynote.com

Microsoft Makes Clever Moves

 

by Jean-Louis Gassée

While Microsoft Office for mobile is a satisfying success, the company can’t seem to create — or even buy — a mobile operating system that can compete with iOS and Android. Perhaps they’ve been looking in the wrong direction and can return to their “trusted” Embrace and Extend tactics.

Microsoft published its numbers for its Fiscal Year 2015 2nd quarter ending in December 2014. While the company isn’t the money machine it once was, it is healthy: Revenue grew 8% to $26.5B, Operating Income declined only a bit (- 2%) at $7.8B, there will be another $.31 dividend for the quarter, and cash reserves stand at $90B.

Such numbers give Satya Nadella the space he needs to implement the Mobile First – Cloud First vision he outlined last year. A key component of this plan is to spread Office applications across all platforms and devices: PCs, tablets, and smartphones – native apps as well as Web versions. Last week, Microsoft took another step in this direction with the release of its historic Outlook PIM (Personal Information Manager) app for Android and iOS.

While the Outlook release was warmly received, I’ve learned to take enthusiastic press reviews with caution. I prefer to “play customer”: I buy and use the product in klutzy ways engineers can’t foresee and, as a result, I get a better idea of how the product will fare in the real world. So, I installed Outlook on my iPad mini and, not to pour salt on some wounds… It Just Works. It runs my Exchange account at work, and it speaks Gmail and iCloud as well. No ifs, no buts.

Perhaps the most interesting aspect of the release is that it completes the core components of the native MS Office bundle: Word, PowerPoint, Excel, and now Outlook. It doesn’t matter which platform you use — Windows, Mac, Android, or iOS — you now have the full complement of Microsoft’s productivity apps built specifically for your device.

I used to think that if Apple could get its software house in order and work out the  (numerous) bugs, iWork could easily displace Microsoft Office on Mac, iCloud, and iOS. After all, iWork is free… Now, I’m not so sure. With this release, MS Office provides a fit and finish, a safe and effective cross-platform solution that’s worth the price of admission, particularly in the Enterprise world.

But Apple isn’t the competitor Microsoft worries about. Cross-platform Office is a powerful countermove against Google Apps. Microsoft doesn’t have a dog in the old Web vs. Native Apps fight, it offers both everywhere.

In other matters, however, things aren’t entirely rosy for Microsoft. Its smartphone hardware business isn’t doing well. A look at the recent 10-Q and at the slide presentation for the Earnings Release shows hardware revenue of $2.3B, for 10.5M Lumia phones and 39.7M on-Lumia devices:

Phone Hardware

Microsoft’s smartphone business is still dealing with the Nokia acquisition trauma, so these numbers are less reliable than in a stable business. But even if we proceed with caution, when we divide the $2.3B revenue number by 50.2M (the total number of devices), we get a meager ASP (Average System Price) of $46.

One could argue that the computation is misleading because it throws Non-Lumia phones — such as the Nokia X running Android — into the same pot as worthier Lumia devices. So let’s take take another stab at the numbers: Let’s imagine that all non-Lumia phones are simply given away, $0 ASP. That leaves us with 10.5M Lumia phones divided into $2.3B revenue for a yield of $219 ASP. Compare this to the $687 ASP Apple got for its iPhones last quarter. Playing with numbers a bit more, if you assume a $20 ASP for non-Lumia “dumbphones”, the ASP for Lumia smart devices comes to $143.

As discussed here last December, even with “forever” cash reserves, why bother? Big enterprises such as Bank of America and Chase that have discontinued Windows Phone support agree.

After fruitlessly jumping into a Broad Strategic Partnership with Nokia and then promptly Osborning it, Microsoft acquired the company’s smartphone business rather than letting it die. It’s still not working and, as the most recent industry numbers show, there’s little hope that Microsoft’s phone hardware business, while saddled with the hapless Windows Phone OS, will be anything other than a waste of time, money, and reputation. Many have suggested that Microsoft drop its OS efforts and fork Android, returning, in Ben Thompson’s words, to “its roots of embracing and extending”.

That brings us to Cyanogen. In the grand tradition of Homebrew Computing that gave birth to Microsoft, Apple and countless others, developers have taken the Open Android operating system and opened it even more, creating a raft of improved versions.

Initially, many thought these variants were just for the hacker who wanted to play with his Android device, reflash its ROM, and grow hair on his chest. But one Android strain, CyanogenMod, exhibited such vitality hat it spawned an organized, for-profit company. In 2012, Benchmark and Redpoint led a $7M Series A investment in Cyanogen, Inc. (“Series A” is typically the first serious VC money, after a Seed Round.) In December, 2014, there was a more substantial $23M Series B round, led by another member of the Valley’s VC nobility, Andreessen Horowitz. And now, there is talk of a $70M round…  in which Microsoft might be a “minority” player.

Kirk McMaster, Cyanogen’s CEO, has been unusually candid about the company’s goal [emphasis mine]:

“I’m the CEO of Cyanogen. We’re attempting to take Android away from Google.”

and…

We’ve barely scratched the surface in regards to what mobile can be. Today, Cyanogen has some dependence on Google. Tomorrow, it will not. We will not be based on some derivative of Google in three to five years. There will be services that are doing the same old bulls— with Android, and then there will be something different. That is where we’re going here.”

Ambitious words, indeed, but they’re backed by some of the Valley’s smartest money.

Microsoft’s role in Cyanogen is probably just a minor one; perhaps it will help with the patent portfolio it unleashes on Android OEMs. But the company’s involvement at all could be seen as part of its long battle with Google. Recall that “Google acquired Android in 2005 as a defense against Windows Mobile dominating smartphones just as Windows dominated PCs.” Later, in 2008, Microsoft acquired Android founder Andy Rubin’s previous company Danger, whose Sidekick design inspired Google’s pre-iPhone G1 devices.

Cyanogen has long been in Google’s cross-hairs. In its early days, CyanogenMod (since renamed to Cyanogen OS) was perceived as such a nuisance — or a threat — that its users suddenly found that they needed to perform contorted workarounds to load Google’s proprietary apps (Google Map, YouTube, GTalk, and so on). Can Microsoft resist the temptation to aid this Google irritant?

Tantalizing as the Cyanogen investment is, it might not be enough to keep Microsoft in the brutal smartphone hardware business, but it’s consistent with the company’s efforts to undermine Google’s ecosystem by any means necessary. Including gathering allies to do to Android what Bill Gates once did to Lotus 1-2-3.

Let’s keep in mind that the mobile industry is no more mature than the PC industry was in the mid eighties. Things could get interesting as Cyanogen reveals more of the business model its muscular investors have bought into. And they will become particularly interesting if the company can corral support from industry players who are eager to get out from under Google’s thumb.

JLG@mondaynote.com

The Sweet Spot On Apple’s Racket

 

iPad sales are falling – but the sky is not. We’re merely dealing with a healthy case of expectations adjustment.

The tablet computer has always felt inevitable. The desire to harness the power of a computer in the comfortable form of a letter-size tablet with a keyboard, or perhaps a stylus for more natural interaction — or why not both? — has been with us for a very long time. Here we see Alan Kay holding a prototype of his 1972 Dynabook (the photo is from 2008):

Alan_Kay_and_the_prototype_of_Dynabook,_pt._5_(3010032738)

(credit: http://en.wikipedia.org/wiki/Dynabook)

Alan prophetically called his invention a personal computer for children of all ages.

For more than 40 years, visionaries, entrepreneurs, and captains of industry have whetted our appetite for such tablets. Before it was recast as a PDA, a Personal Digital Assistant, Steve Sakoman’s Newton was a pen-based letter-size tablet. Over time, we saw the GridPad, Jerry Kaplan’s and Robert Carr’s Go, and the related Eo Personal Communicator. And, true to its Embrace and Extend strategy, Microsoft rushed a Windows for Pen Computing extension into Windows 3.1.

These pioneering efforts didn’t succeed, but the hope persisted: ‘Someone, someday will get it right’. Indeed, the tablet dream got a big boost from no less than Bill Gates when, during his State of The Industry keynote speech at Comdex 2001 (Fall edition), Microsoft’s CEO declared that tablets were just around the corner [emphasis mine]:

“The Tablet takes cutting-edge PC technology and makes it available wherever you want it, which is why I’m already using a Tablet as my everyday computer. It’s a PC that is virtually without limits — and within five years I predict it will be the most popular form of PC sold in America.

Unfortunately, the first Tablet PCs, especially those made by Toshiba (I owned two), are competent but unwieldy. All the required ingredients are present, but the sauce refuses to take.

Skip ahead to April 2010. The iPad ships and proves Alan Kay right: The first experience with Apple’s tablet elicits, more often than not, a child-like joy in children of all ages. This time, the tablet mayonnaise took and the “repressed demand” finally found an outlet. As a result, tablets grew even faster than PCs ever did:

PNG - Tablets Fastest Ever

(Source: Mary Meeker’s regular Internet Trends 2014 presentation, always long, never boring)

In her 2013 report, Meeker showed iPads topping the iPhone’s phenomenal growth, climbing three times faster than its more pocketable sibling:

PNG - iPad 3X iPhone Meeker 2013

(Source: Mary Meeker Internet Trends 2013)

There were, however, two unfortunate aspects to this rosy picture.

First, there was the Post-PC noise. The enthusiasm for Android and iOS tablets, combined with the end of the go-go years for PC sales, led many to decree that we had finally entered the “Post-PC” era.

Understandably, the Post-PC tag, with its implication that the PC is no longer necessary or wanted, didn’t please Microsoft. As early as 2011, the company was ready with its own narrative which was delivered by Frank Shaw, the company’s VP of Corporate Communications: Where the PC is headed: Plus is the New “Post”. In Microsoft’s cosmos, the PC remains at the center of the user’s universe while smartphones and tablets become “companion devices”. Reports of the PC’s death are greatly exaggerated, or, as Shaw puts it, with a smile, “the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding”.

(Actually, the current debate is but a new eruption of an old rash. “Post-PC” seems to have been coined by MIT’s David Clark around 1999, causing Bill Gates to pen a May 31st, 1999 Newsweek op-ed titled: Why the PC Will Not Die…)

Both Bill and Frank are right – mostly. Today’s PC, the descendant of the Altair 8800 for which Gates programmed Microsoft’s first Basic interpreter, is alive and, yes, it’s irreplaceable for many important tasks. But classical PCs — desktops and laptops — are no longer at the center of the personal computing world. They’ve been replaced by smaller (and smallest) PCs — in other words, by tablets and smartphones. The PC isn’t dead or passé, but it is shape-shifting.

There was a second adverse consequence of the iPad’s galloping growth: Expectations ran ahead of reality. Oversold or overbought, it doesn’t matter, the iPad (and its competitors) promised more than they could deliver. Our very personal computers — our tablets and smartphones — have assumed many of the roles that previously belonged to the classical PC, but there are some things they simply can’t do.

For example, in an interview with the Wall Street Journal, Tim Cook confides that “he does 80% of the work of running the world’s most valuable company on an iPad.” Which is to say Tim Cook needs a Mac for the remaining 20%…but the WSJ quote doesn’t tell us how important these 20% are.

We now come to the downward trend in iPad’s unit sales: -2.29% for the first quarter of calendar year 2014 (compared to last year). Even more alarming, unit sales are down 9% for the quarter ending in June. Actually, this seems to be an industry-wide problem rather than an Apple-specific trend. In an exclusive Re/code interview, Best Buy CEO Hubert Joly says tablet sales are “crashing”, and sees hope for PCs.

Many explanations have been offered for this phenomenon, the most common of which is that tablets have a longer replacement cycle than smartphones. But according to some skeptics, such as Peter Bright in an Ars Technica op-ed, there’s a much bigger problem [emphasis mine]:

“It turns out that tablets aren’t the new smartphone…[t]hey’re the new PC; if you’ve already got one, there’s not much reason to buy a new one. Their makers are all out of ideas and they can’t make them better. They can only make them cheaper.”

Bright then concludes:

“[T]he smartphone is essential in a way that the tablet isn’t. A large screen smartphone can do…all the things a tablet can do… Who needs tablets?”

Hmmm…

There is a simpler – and much less portentous – explanation. We’re going through an “expectations adjustment” period in which we’ve come to realize that tablets are not PC replacements. Each personal computer genre carries its own specifics; each instils unique habits of the body, mind, and heart; none of them is simply a “differently sized” version of the other two.

The realization of these different identities manifests itself in Apple’s steadfast refusal to hybridize, to make a “best of both worlds” tablet/laptop product.

Microsoft thinks otherwise and no less steadfastly (and expensively) produces Surface Pro hybrids. I bought the first generation two years ago, skipped the second, and recently bought a Surface Pro 3 (“The tablet that can replace your laptop”). After using it daily for a month, I can only echo what most reviewers have said, including Joanna Stern in the WSJ:

“On its third attempt, Microsoft has leapt forward in bringing the tablet and laptop together—and bringing the laptop into the future. But the Pro 3 also suffers from the Surface curse: You still make considerable compromises for getting everything in one package.”

Trying to offer the best of tablets and laptops in one product ends up compromising both functions. In my experience, too many legacy Windows applications work poorly with my fingers on the touch screen. And the $129 Type Cover is a so-so keyboard and poor trackpad. Opinions will differ, of course, but I prefer using Windows 8.1 on my Mac. We’ll see how the upcoming Windows 9, code name Threshold, will cure the ills of what Mary Jo Foley, a well-introduced Microsoft observer, calls Vista 2.0.

If we consider that Mac unit sales grew 18% last quarter (year-to-year), the company’s game becomes clear: The sweet spot on Apple’s racket is the set of customers who, like Tim Cook, use MacBooks and iPads. It’s by no means the broadest segment, just the most profitable one. Naysayers will continue to contend that the prices of competing tablets are preordained to crash and will bring ruin to Apple’s Affordable Luxury product strategy…just as they predicted netbooks would inflict damage on MacBooks.

As for Peter Bright’s contention that “[tablet] makers are all out of ideas and they can’t make them better”, one can easily see ways in which Google, Lenovo, Microsoft, Apple, and others could make improvements in weight, speed, input methods, system software, and other factors I can’t think of. After we get over the expectations adjustment period, the tablet genre will continue to be innovative, productive, and fun – for children of all ages.

JLG@mondaynote.com

Microsoft’s New CEO Needs An Editor

 

Satya Nadella’s latest message to the troops – and to the world – is disquieting. It lacks focus, specifics, and, if not soon sharpened, his words will worry employees, developers, customers, and even shareholders.

As I puzzled over the public email Microsoft’s new CEO sent to his troops, Nicolas Boileau’s immortal dictum came to mind:

Whatever is well conceived is clearly said,
And the words to say it flow with ease.

Clarity and ease are sorely missing from Satya Nadella’s 3,100 plodding words, which were supposed to paint a clear, motivating future for 127,000 Microsoftians anxious to know where the new boss is leading them.

LE WEB PARIS 2013 - CONFERENCES - PLENARY 1 - SATYA NADELLA

Nadella is a repeat befuddler. His first email to employees, sent just after he assumed the CEO mantle on earlier this year, was filled with bombastic and false platitudes:

“We are the only ones who can harness the power of software and deliver it through devices and services that truly empower every individual and every organization. We are the only company with history and continued focus in building platforms and ecosystems that create broad opportunity.”

(More in the February 9th, 2014 Monday Note)

In his latest message, Nadella treats us to more toothless generalities:

“We have clarity in purpose to empower every individual and organization to do more and achieve more. We have the right capabilities to reinvent productivity and platforms for the mobile-first and cloud-first world. Now, we must build the right culture to take advantage of our huge opportunity. And culture change starts with one individual at a time.”

Rather than ceding to the temptation of quoting more gems, let’s turn to a few simple rules of exposition.

First, the hierarchy of ideas:

328_strategy_graph

This admittedly simplistic diagram breaks down an enterprise into four layers and can help diagnose thinking malfunctions.

The top layer deals with the Identity or Culture — I use the two terms interchangeably as one determines the other. One level down, we have Goals, where the group is going. Then come the Strategies or the paths to those goals. Finally, we have the Plan, the deployment of troops, time, and money.

The arrow on the left is a diagnostic tool. It reminds us that as we traverse the diagram from Identity to Plan, the number of words that we need to describe each layer increases.  It should only take a few words to limn a company’s identity (Schlumberger, oil services; Disney, family entertainment), describing the company’s goals will be just a tad more verbose (“in 5 years’ time we’ll achieve $X EPS, Y% revenue growth and Z% market share”), and so on.

The arrow also tells us that the “rate of change” — the frequency at which a description changes — follows the same trajectory. Identity should change only very slowly, if ever. At the other end, the plan will need constant adjustment as the company responds to rapidly shifting circumstances, the economy, the competition.

Using the old Microsoft as an example:
— Identity: We’re the emperor of PC software
— Goals: A PC on every desk and home – running our software
— Strategy: Couple the Windows + Office licenses to help OEMs see the light; Embrace and Extend Office competitors.
— Plan: Changes every week.

Returning to Nadella’s prose, can we mine it for words to fill the top three layers? Definitely not.

Second broken rule: Can I disagree? Any text that relies on platitudes says not much at all; in a message-to-the-troops that’s supposed to give direction, irrefutable statements are deadly. Some randomly selected examples in an unfortunately overabundant field:

“[…] we will strike the right balance between using data to create intelligent, personal experiences, while maintaining security and privacy.”

or…

“Together we have the opportunity to create technology that impacts the planet.”

 or…

“Obsessing over our customers is everybody’s job.”

If I’m presented with statements I cannot realistically disagree with – We Will Behave With Utmost Integrity – I feel there’s something wrong. If it’s all pro and no con, it’s a con.

There are other violations but I’ll stop in order to avoid the tl;dr infraction I reproach Nadella for: Never make a general statement without immediately following it with the sacramental “For Example”.

For example:

“[…] we will modernize our engineering processes to be customer-obsessed, data-driven, speed-oriented and quality-focused.”

… would be more believable if followed by:

Specifically, we’ll ask each each software engineer to spend two days every month visiting customers on even months, and third party developers on odd ones. They will also spend one day per quarter seconding Customer Service Representatives over our phone banks.” 

Satya Nadella is an unusually intelligent man, a Mensa-caliber intellect, well-read, he quotes Nietzsche, Oscar Wilde, and Rainer Maria Rilke. Why, then, does he repeatedly break basic storytelling rules?

Two possible explanations come to mind.

First, because he’s intelligent and literate, he forgot to use an unforgiving editor. ‘Chief, you really want to email that?’ Or, if he used an editor, he was victimized by a sycophantic one. ‘Satya, you nailed it!’

Second, and more likely, Nadella speaks in code. He’s making cryptic statements that are meant to prepare the troops for painful changes. Seemingly bland, obligatory statements about the future will decrypt into wrenching decisions:

“Organizations will change. Mergers and acquisitions will occur. Job responsibilities will evolve. New partnerships will be formed. Tired traditions will be questioned. Our priorities will be adjusted. New skills will be built. New ideas will be heard. New hires will be made. Processes will be simplified. And if you want to thrive at Microsoft and make a world impact, you and your team must add numerous more changes to this list that you will be enthusiastic about driving.”

In plainer English: Shape up or ship out.

Tortured statements from CEOs, politicians, coworkers, spouses, or suppliers, in no hierarchical order, mean one thing: I have something to hide, but I want to be able to say I told you the facts.

With all this in mind, let’s see if we can restate Nadella’s message to the troops:

This is the beginning of our new FY 2015 – and of a new era at Microsoft.
I have good news and bad news.
The bad news is the old Devices and Services mantra won’t work.

For example: I’ve determined we’ll never make money in tablets or smartphones.

So, do we continue to pretend we’re “all in” or do we face reality and make the painful decision to pull out so we can use our resources – including our integrity – to fight winnable battles? With the support of the Microsoft Board, I’ve chosen the latter. We’ll do our utmost to minimize the pain that will naturally arise from this change. Specifically, we’ll offer generous transitions arrangements in and out of the company to concerned Microsoftians and former Nokians.

The good news is we have immense resources to be a major player in the new world of Cloud services and Native Apps for mobile devices. We let the first innings of that game go by, but the sting energizes us. An example of such commitment is the rapid spread of Office applications – and related Cloud services – on any and all mobile devices. All Microsoft Enterprise and Consumer products/services will follow, including Xbox properties.

I realize this will disrupt the status quo and apologize for the pain to come. We have a choice: change or be changed.

Stay tuned.

Or words (about 200) to that effect.

In parting, Nadella would do well to direct his attention to another literate individual, John Kirk, whose latest essay, Microsoft Is The Very Antithesis Of Strategy, is a devastating analysis that compares the company’s game plan to the advice given by Sun Tzu, Liddell Hart, and Carl von Clausewitz, writers who are more appropriate to the war that Microsoft is in than the authors Microsoft’s CEO seems to favor.

The CEO’s July 10th email promises more developments, probably around the July 22nd Earnings release. Let’s hope he’ll offer sharper and shorter words to describe Microsoft’s entry into the Cloud First – Mobile First era.

JLG@mondaynote.com

Science Fiction: Mining My Own Exhaust

 

A few thoughts on Big Data, self-knowledge, and my hopes for the emergence of a new genre of services.

I’m about to fulfill an old fantasy — the Great American Road Trip. Over the next three weeks, we’ll be driving all the way from Key West, FL to Palo Alto. In that spirit, today I’ll luxuriate in another, more distant reverie: Mining my own data exhaust.

I’m spurred to this indulgence by the words of Satya Nadella, Microsoft’s new CEO, at an April 15th event in San Francisco [emphasis mine]:

“The core evolution of silicon, software and hardware is putting computing everywhere humans are present,” Nadella said. “And it’s generating a massive data exhaust of server logs, sensor data and unstructured social stream information. We can use that exhaust to create ambient intelligence for our users.”

Nadella’s right. I leave a cloud of data exhaust with my Web browsing, credit card purchases, cell phone use, monthly blood tests, pharmacy purchases, and airline trips. Server logs detail the length and breadth of my social interactions on Facebook and Google+… And I don’t have to be on a computer to add to the cloud: I’m tracked by toll passes and license plate snapshots as I drive my car. The car itself monitors my driving habits with its black box recording of my speed and direction. This list, far from exhaustive [no pun intended], is sobering – or exciting, full of possibilities.

Today, we’ll skip the Orwellian paranoia and fantasize about an alternate universe where I can “turn the gratis around”, where I can buy my data back.

Google, Facebook, and the like provide their services for free to induce us to lead them to the mother lode: Our cache of product preferences, search history, and web habits. They forge magic ingots from our personal data, sell the bullion to advertisers, and thus fuel the server farms that mine even more data. I’m not here to throw a monkey wrench into this business model; au contraire, I offer a modest source of additional revenues: I’d like to buy my data back. And I’ll extend that offer to any and all entities that mine my activities: For you, at a special price today, I’m buying my data.

(We all understand that this fantasy must take place in an alternate universe. If our legislators and regulators were beholden to us and not to Google, Verizon, and “Concast” [a willful typo from Twitter wags], they would have long ago made it mandatory that companies provide us with our own data exhaust.)

Pursuing this train of thought, one can conceive of brokers scouring the world for my exhausts — after having secured the right permissions from me, of course. Once this becomes an established activity, no particular feat of imagination is required to see the emergence of Big Data processing companies capable of merging and massaging the disparate flumes obtained from cell carriers, e-merchants, search engines, financial services and other service providers.

So far, especially because it lacks numbers and other annoying implementation details, the theory sounds nice. But to what end?

The impulse can be viewed as a version of the old Delphic injunction: Know Thyself, now updated as Know Thine Quantified Self: Quantify what I do with my body, time, money, relationships, traveling, reading, corresponding, driving, eating… From there, many derivations come to mind, such as probabilistic diagnoses about my health, financial situation, career, and marriage. Or I could put my data in turnaround, mandate a broker to shop facets of my refined profile to the top agencies.

Even if we set aside mounds of unresolved implementation details, objections arise. A key member of my family pointedly asks how much do we really want to know about ourselves?

This reminds me of a conversation I once had with a politely cynical Parisian tailor. I ventured that he could help his customers choose a suit by snapping a picture and displaying it on a 80” flat screen TV in portrait mode. My idea was that the large scale digital picture would offer a much more realistic, a more objective image than does a look in the mirror. The customer would be able to see himself as others see him, what effect the new suit would produce – which, after all, is the point of new duds.

“No way,” said the Parisian fashionista, “are you nuts? My customers, you included,” he tartly added, “really don’t want the cruel truth about their aging bodies…”

Still, I’m curious. And not just about the shape and color of the data exhaust that I leave in my wake, about the truths — pleasant or embarrassing — that might be revealed. I’m curious about the types of companies, services, and business models that would emerge from this arrangement. Even more fascinating: How would the ability to mine and sell our own data affect our cultural vocabulary and social genetics?

JLG@mondaynote.com

PS: As offered here, I recently downloaded my Facebook data set. The data doesn’t appear to be very revealing, but that could be the result of my low Facebook involvement — I’m not a very active user. I’d be curious to see the size and detail level associated with a more involved participant.

PPS: I’ll be on the road, literally, for the next three weeks and may or may not be able to post during that time.

Nokia Goes Android – Part II

 

Next week, we might see Nokia’s entry-level feature phones replaced by a low-end device running Android Open Source Project software. The phone may just be a fantasy, but the dilemma facing Nokia’s feature phone business is quite real: Embrace Android or be killed by it. 

Nokia will announce an Android phone! So says the persistent rumor, started about three months ago by an @evleaks tweet, and followed by more details as weeks went by. Initially code-named Normandy, the hypothetical feature phone is now called Nokia X, and it already has its own Wikipedia page and pictures:

Nokia X

Nokia is on the path to being acquired by Microsoft. Why introduce an Android-based phone now? The accepted reasoning is simple…

  • Even though it doesn’t generate much revenue per handset (only $42), Nokia’s feature phone business is huge and must be protected. Nokia’s Form 20-F for 2012 (the 2013 report hasn’t been published, yet) shows its phone numbers compared to the previous year:
    • 35M smartphones (-55%) at an average price (ASP) of $210 (+ 11%)
    • 300M feature phones (-12%) with an ASP of $42 (- 11%)
  • These 300 million feature phones — or “dumbphones” — keep the Nokia flag waving, particularly in developing economies, and they act as an up-ramp towards more profitable smartphones.
  • Lately, dumbphones have become smarter. With the help of Moore’s Law, vigorous competition, and Android Open Source Project (AOSP) software, yesterday’s underfed, spartan feature phones are being displaced by entry-level smartphones. Asha, Nokia’s offering in this category, has been mowed down by low-end Android devices from China.
  • Nokia can’t help but notice that these AOSP-based feature phones act as a gateway drug to the full-blown Android smartphone experience (and much larger profits) offered by competitors such as Samsung, Huawei, and Motorola’s new owner Lenovo.
  • So Nokia drops its over-the-hill Symbian software core, adopts Android, adds its own (and Microsoft’s) services, design expertise, and carrier relationships, and the result is Nokia X, a cleaner, smarter feature phone.

That’s it. Very tactical. Business as usual, only better. Move along, nothing to see.

It’s not that simple.

There’s an important difference between the Android Open Source Project (AOSP), and the full Android environment that’s offered by Samsung, LG, HTC and the like.

The Android Open Source Project is really Open Source, you can download the source code here, modify it as you see fit for your application, add layers of services, substitute parts…anything you like.

Well, almost anything. The one thing you can’t do is slap a figurative “Android Inside” sticker on your device. To do that, you must comply with Google’s strict compatibility requirements that force licensees to bundle Google Mobile (Maps, Gmail, YouTube, etc.) and Google Play (the store for apps and other content). The result isn’t open or free, but smartphone makers who want the Android imprimatur must accept the entire stack.

As an added incentive to stay clean, a “Full Android” licensee cannot also market devices that use a different, incompatible version (or “fork”) of the Android code published by Google. A well-know example of forking is Amazon’s use of Android source code to create the software engine that runs its high-end Kindle Fire tablets. You won’t find a single instance of the word “Android” on these devices: Google won’t license the name for such uses.

(For more on the murky world of Android licensing, bundling, and marketing agreements, see Ben Edelman’s research paper: Secret Ties in Google’s “Open” Android.)

The hypothetical, entry-level Nokia X can’t offer an entire Android stack — it can’t be allowed to compete with the higher-end Lumias powered by Microsoft’s Windows Phone — so it would have to run an “unmentionable” Android fork.

Even without the “Android Inside” label, everyone would soon know the truth about the Android code inside the new device. This could give pause to software developers, carriers, and, the more curious users. “Where is Microsoft going with this? Won’t the Android beast inside soon work its way up the product line and displace the Windows Phone OS?”

Microsoft will make soothing sounds: “Trust us, nothing of the sort will ever happen.  Nokia X is a purely tactical ploy, a placeholder that will give Windows Phone enough time to reveal its full potential.” We know how well attempts to create a Reality Distortion Field have worked for Microsoft’s Post-PC denials.

The Redmond not-so-mobile giant faces a dilemma: Lose the Asha feature phone business to aggressive forked-Android makers, or risk poisoning its Windows Phone business by introducing potentially expansionist Android seeds at the bottom of its handset line.

Several observers (see Charles Arthur’s penetrating Guardian column as an example) have concluded that Microsoft should follow Amazon’s lead and accept the “Come To Android” moment. It should drop Windows Phone and run a familiar Embrace and Extend play: Embrace Android and Extend it with Bing, Nokia’s Here Maps, Office, and other Microsoft properties.

Critics, such as Peter Bright, an energetic Microsoft commenter, contend that forking Android isn’t feasible:

“Android isn’t designed to be forked. With GMS, Google has deliberately designed Android to resist forking. Suggestions that Microsoft scrap its own operating system in favor of such a fork simply betray a lack of understanding of the way Google has built the Android platform.”

Dianne Hackborn, a senior Android engineer (and a former comrade of mine during a previous OS war) contradicts Bright in great point-by-point detail and concludes:

“Actually, I don’t think you have an understanding of how Google has built Android. I have been actively involved in designing and implementing Android since early on, and it was very much designed to be an open-source platform… Android creates a much more equal playing field for others to compete with Google’s services than is provided by the proprietary platforms it is competing with. I also think a good argument can be made that Android’s strategy for addressing today’s need to integrate cloud services into the base platform is an entirely appropriate model for a ‘real’ open-source platform to take.”

In the end, Microsoft probably doesn’t trust Google to refrain from the same games that Microsoft itself knows (too well) how to play. Microsoft used its control of Windows to favor its Office applications. Now it’s Google’s turn. The Mountain View company appears set to kill Microsoft Office, slowly but surely, and using all means available: OS platforms and Cloud services.

None of this draws a pretty picture for Microsoft’s mobile future. Damned if it introduces Android bits at the low end, damned if it lets that same software kill its Asha feature phone business.

JLG@mondaynote.com
@gassee
———————-
PS: Almost four years ago, I wrote a light-hearted piece titled Science Fiction: Nokia goes Android. It was actually less fictional than I let on at the time. In June 2010, I was asked to give a talk at Nokia’s US HQ in White Plains, NY. I was supposed to discuss Apple but I declined to spend too much time on that topic arguing that the Cupertino company was too “foreign” to Nokia’s culture. Instead, I made two suggestions: Fire your CEO and drop your four or five software platforms — Symbian and Linux variants — and adopt Android. Nokia’s combination of industrial design expertise, manufacturing might, and long-standing, globe-spanning carrier relationships could make it a formidable Android smartphone maker.

The first recommendation was warmly received — there was no love for Olli-Pekka Kallasvuo, the accountant cum attorney CEO.

The second was met with indignation: “We can’t lose control of our destiny”. I tried to explain that the loss had already taken place, that too many software platforms were a sure way to get killed at the hands of monomaniacal adversaries.

Three months later Kallasvuo was replaced…by a Microsoft alum who immediately osborned Nokia’s smartphone business by pre-announcing the move to Windows Phone almost a year before the new devices became available.

—–

Nadella’s Job One

 

Microsoft has a new CEO – a safe choice, steeped in the old culture, with the Old Guard still on the Board of Directors. This might prevent Nadella from making one tough choice, one vital break with the past.

Once upon a distant time, the new CFO of a colorful personal computer company walks into his first executive staff meeting and proudly shares his thoughts:

“I’ve taken the past few weeks to study the business, and I’d now like to present my top thirty-five priorities…”

This isn’t a fairy tale, I was in the room. I didn’t speak Californian as fluently as I do now, so rather than encourage the fellow with mellifluous platitudes — ‘Interesting’ or, even better, ‘Fascinating, great vision!’ — I spoke my mind, possibly much too clearly:

“This is terrible, disorganized thinking. Claiming to have thirty-five priorities is, in fact, a damning admission: You have none, you don’t even know where to start. Give us your ONE priority and show us how everything else serves that goal…”

The CFO, a sharp, competent businessman, didn’t lose his cool and, after an awkward silence, stepped through his list. Afterwards, with calm poise, he graciously accepted my apologies for having been so abrupt…

Still, you can’t have a litany of priorities.

Turning to Microsoft, will the company’s new CEO, Satya Nadella, focus the company on a true priority, one and only one goal, one absolutely must-win battle? For Nadella, what is Microsoft’s Nothing Else Matters If We Fail?

In his first public pronouncement, the new Eagle of Redmond didn’t do himself any favors by uttering bombastic (and false) platitudes (which were broadly retweeted and ridiculed):

“We are the only ones who can harness the power of software and deliver it through devices and services that truly empower every individual and every organization. We are the only company with history and continued focus in building platforms and ecosystems that create broad opportunity.”

One hesitates. Either Nadella knows this is BS but thinks we’re stupid enough to buy into such pablum. Or he actually believes it and is therefore dangerous for his shareholders and coworkers. Let’s hope it’s the former, that Nadella, steeped in Microsoft’s culture, is simply hewing to his predecessor’s chest-pounding manner. (But let’s also keep in mind the ominous dictum: Culture Eats Strategy For Breakfast.)

Satya_Nadella

Assuming Nadella knows the difference between what he must say and what he must do, what will his true priority be? What battle will he pick that, if lost, will condemn Microsoft to a slow, albeit comfortable, slide into the tribe of has beens?

It can’t be simply tending the crops. Enterprise software, Windows and Office licenses might not grow as fast as they used to, but they’re not immediately threatened. The Online Services Division has problems but they can be dealt with later — it continues to bleed money but the losses are tolerable (about $1B according to the Annual Report). The Xbox One needs no immediate attention.

What really threatens Microsoft’s future is the ebullient, sui generis world of mobile devices, services, and applications. Here, Microsoft’s culture, its habits of the heart and mind, has led the company to a costly mistake.

Microsoft has succeeded, in the past, by straddling the old and the new: The company is masterful at introducing new features without breaking older software. In Microsoft’s unspoken, subconscious culture, the new can only be defined as an extension of the existing, so when it finally decided they it needed a tablet (another one after the Tablet PC failure), the Redmond company set out to build a better device that would also function as a laptop. The best of both worlds.

We know what happened. Users shunned Microsoft’s neither-nor Windows 8 and Surface hybrids. HP has backed away from Windows 8 and now touts its PCs running Windows 7 “Back By Popular Demand”  — this would never have happened when Microsoft lorded over its licensees. And now we hear that the upcoming Windows 8.1 update will boot directly into the conventional Windows 7-like desktop as opposed to the unloved Modern (née Metro) tiles.

Microsoft faces a choice. It can replace the smashed bumper on its truck with a stronger one, drop a new engine into the bay and take another run at the tablet wall. Or it can change direction. The former — continuing to attempt to bridge the gap between tablets and laptops  — will do further damage to the company’s credibility, not to mention its books. The latter requires a radical but simple change: Make an honest tablet using a version of Windows Phone that’s optimized for the things that tablets do well. Leave laptops out of it.

That is a priority, a single, easily stated goal that can be understood by everyone — employees and shareholders, bloggers and customers. To paraphrase a Valley wag, it’s a cri de guerre that’s so simple you can remember it even if you’re tired, drunk, and your spouse has thrown you out in the rain at 3 A.M. in your jockey briefs.

This is an opportunity for the new CEO to make his mark, to show vision, as opposed to mere care-taking.

But will he seize it?

Nadella should know the company by now. He’s been with Microsoft for over twenty years, during which time he’s proven himself to be a supremely technical executive. The company is remarkably prosperous — $78B in revenue in 2013; $22B profit; $77B in cash. This prosperity bought the Board some time when deciding on a new CEO, and should give Nadella a cushion if he decides to redirect the company.

Of course, there’s the Old Guard to contend with. Bill Gates has ceded the Chairman role to John Thompson, but he’ll stay on as a “technical advisor” to Nadella, and Ballmer hasn’t budged — he remains on the Board (for the time being). This might not leave a lot of room for bold moves, for undoing the status quo and for potentially embarrassing (or angering) Board members.
I can’t leave the topic without asking another related question.

We’ve just seen how decisive Larry Page can be. He looked at Motorola’s $2B red ink since they were acquired by Google — no end in sight, no product momentum — and sold the embarrassment to Lenovo. If regulators approve the sale, Motorola will be in competent hands within a company whose leader, Yang Yuanqing also known as YY, plays for the number one position. (Lenovo is the company that, in 2005, bought IBM’s ailing PC business and has since vaulted over Dell and HP to become the world’s premier PC maker.)

With this in mind, looking at the smartphone space where Apple runs its own premium ecosystem game, where Samsung takes no prisoners, where Huawei keeps rising, and where Lenovo will soon weigh in — to say nothing of the many OEMs that make feature phone replacements based on Android’s open source software stack (AOSP) — is it simply too late for Microsoft? Even if he has the will to make it a priority, can Nadella make Windows Phone a player?

If not, will he be as decisive as Larry Page?

JLG@mondaynote.com
@gassee

Microsoft CEO Search: Stalemate

 

The Microsoft CEO succession process appears to be stalled. This is a company with immense human, technical, and financial resources; the tech industry is filled with intelligent, energetic, dedicated candidates. What’s wrong with the matchmaking process?

Blond, Japanese, 25 years old, 15 years experience – and bisexual. This is a caricature, but only barely, of the impossible CEO job specs that executive recruiters circulate when on a mission to replace the head of a large company.

The real list of requirements describes a strategist with a piercing eye for the long term… and daily operational details; a fearless leader of people, willing to inflict pain… but with a warm touch; a strong communicator, a great listener, and an upstanding steward of shareholder interests…and of the environment.

When I gently confront a recruiter friend with the impossibility of finding such a multi-talented android, he gives me the Gallic Shrug: “It’s the client, you know. They’re anxious, they don’t know what they want. So, to tranquilize their Board, we throw everything in.”

I ask the distinguished headhunter what character flaws will be tolerated in a candidate. The query is met with incomprehension: “What? No, no, we can’t have character flaws; this situation requires impeccable credentials.” And perfect teeth, one assumes.

Still in a caustic mood, I prod the gent to picture himself driving to Skyline Boulevard and walking to the top of Borel Hill, a great place to meditate. Turning away from the hills that gently roll down to the Pacific, he faces the Valley. Can he sit, quiet his mind, and visualize the gentle crowd of pristine CEOs down there?

No. He’ll see a herd of flawed men and a few women who regularly exhibit unpleasant character traits; who abuse people, facts, and furniture; and who are yet successful and admired. Some are even liked. There are no Mother Theresas, only Larry Ellisons and Marisa Mayers, to say nothing of our dearly departed Steve Jobs. (Actually, the diminutive Albanian nun was said to have had a fiery temper and, perhaps, wasn’t so saintly after all.)

For a large, established company, having to use an executive recruiter to find its next CEO carries a profoundly bad aroma. It means that the directors failed at one of their most important duties: succession planning. Behind this first failure, a second one lurks: The Board probably gave the previous CEO free rein to promote and fire subordinates in a way that prevented successors from emerging.

Is this the picture at Microsoft? Is the protracted search for Steve Ballmer’s successor yet another sign of the Board’s dysfunction? For years, Microsoft directors watched Ballmer swing and miss at one significant product wave after another. They sat by and did nothing as he lost key executives. Finally, in January of this year, Board member John Thompson  broke the bad charm and prodded Ballmer to accelerate the company’s strategic evolution, a conversation that led to the announcement, in August, of Ballmer’s “mutually agreed” departure.

Having badly and repeatedly misjudged the company’s business and its CEO, is the Board looking for an impossibly “well-rounded” candidate: the man or woman who can draw the sword from the stone, someone with a heart and mind pure enough to put the company back on track?

For some time now, we’ve been hearing rumors that Ford’s current CEO, Alan Mulally,  could become Microsoft’s new CEO. Mulally is well-respected for his turnaround experience: Since 2006, he’s been busy reviving the family-controlled Ford, the only Detroit automaker that didn’t need (or take) bailout money. Before Ford, Mulally spent 37 years in engineering and executive management positions at Boeing, where he rubbed elbows with Microsoft royalty in Seattle.

As the rumor has it, Mulally would be appointed as a transitional leader whose main charge would be to groom one of Microsoft’s internal candidates and then step aside as he or she assumes the throne. Will it be (the rumor continues) Satya Nadella, Exec VP of  Cloud and Enterprise activities? Or former Skype CEO Tony Bates, now a post-acquisition Microsoftian? Both are highly regarded inside and outside the company.

(I’m surprised there aren’t more internal candidates. Tech pilgrim Stephen Elop is sometimes mentioned, but I don’t see him in the running. Elop has served his purpose and is back in Redmond — some say he never really left — after a roundtrip to Finland during which he Osborned Nokia, thus lowering the price of acquisition by his former and again employer.)

On the surface, this sounds like an ideal arrangement.

And yet…

For all his intellectual and political acumen, his people and communication skills, Mulally possesses no domain knowledge. He has none of the bad and good experiences that would help him understand the killer details as well as the strategic insights that are needed to run Microsoft — insights that, in retrospect, Ballmer lacked.

But, you’ll say, this is no problem; he can rely on the CEO-in-waiting to evaluate situations for him and make recommendations. No. Mulally would have no way to really weigh the pros and cons outside of the streamlined charts in a fair and balanced PowerPoint presentation.

In addition, the grooming process would prolong the company’s confusing interregnum. The people who have to perform actual work at Microsoft will continue to wonder what will happen to the party line du jour when the “real” CEO finally assumes power. The uncertainty discourages risk-taking and exacerbates politics — who knows who’ll come in tomorrow and reverse course?

Fortunately, the Mulally proposition no longer seems likely. The latest set of rumors have Mulally staying at Ford until the end of 2014. Let’s hope they’re right. Wall Street seems to think so… and expressed its disappointment: After regularly climbing for weeks, Microsoft shares dropped by 2.4% on Thursday, Dec 5th, after Mulally declared that he wouldn’t jump ship.

So where does Microsoft turn, and why are they taking so long? Once you put aside the Mr./Ms. Perfect fantasy, there’s no dearth of capable executives with the brains and guts to run Microsoft. These are people who already run large corporations, or are next-in-line to do so. Exec recruiters worth the pound of flesh they get for their services have e-Rolodexes full of such people — some inside the company itself.

Now, place yourself inside the heart and mind of this intelligent candidate:

‘Do I want to work with that Board? In particular, do I want Bill Gates and his pal Steve Ballmer hovering over everything I do? I know I’ll have to make unpopular decisions and upset more than a few people. What’s in it for me – and for Microsoft – in a situation where unhappy members of the old guard would be tempted to go over my head and whine to Bill and Steve? How long would I last before I get fired or, worse, neutered and lose my mind?’

Consider it a litmus test: Any candidate willing to accept this road to failure is automatically disqualified as being too weak. A worthy contender makes it clear that he or she needs an unfettered mandate with no Office Of The Second Guessing in the back of the boardroom. Bill and Steve would have to go — but the Old Duo doesn’t want to leave.

It’s a stalemate…and that’s the most likely explanation for the protracted recruitment process.

We’ll soon know where Microsoft’s Board stands. Will it favor a truly independent CEO or will it cling to its past sins — and sinners?

Or, as a Valley wag asks: Which elephantine gestation will end first, that of Microsoft’s new CEO, or Apple’s equally well-rounded Mac Pro?

JLG@mondaynote.com

 

Microsoft Mission Impossible

 

You’re Microsoft’s new CEO. How do you like staring at the abyss between two mutually exclusive ways of making money? The old business model, Windows and Office licensing, is going away. The Devices and Services future puts you in direct competition against the likes of Google and Apple as well as former licensing vassals such as HP and Dell. Can you take the company to the other side, or will you fall to the bottom of the business model transition canyon?

Life used to be simple and immensely profitable at Microsoft. As its name implies, the company started as a supplier of microcomputer software. Simplifying a bit, it all started with the BASIC interpreter, which found its way into many early personal computers including the Apple ][. After that came DOS, the operating system for IBM’s Personal Computer; and Multiplan, an early foray into desktop productivity. DOS begat Windows, and Multiplan was succeeded in steps by the full Office suite. Through a series of astute business and lawyerly maneuvers, the Windows + Office combo eventually spread to virtually all PC clones.

This made Microsoft the most successful software company the world had ever seen, and its founding CEO, Bill Gates, became the richest man on the planet. In 2000, the company’s market capitalization reached $540B (approximately $800B in today’s dollars). As this Wikinvest graph shows, Microsoft dwarfed all other tech companies:

msft_graph1

(At the time, the NASDAQ index of mostly tech stocks stood a little above 4,000, it closed at 3,792 this past Friday.)

Back then, Windows + Office licensing was the only money pump that really mattered. Everything else — all other software products and even sales of enterprise servers — either depended on Microsoft’s huge PC installed base, or didn’t move the needle. Hardware and entertainment lines of business were largely immaterial; online activities weren’t yet the money sink we’ve seen in recent years.

According to the company’s 2000 Annual Report, the combination of the “Windows Platforms” and “Productivity Applications” accounted for $19.3B in revenue ($9.3B and $10B, respectively). That’s 84% of the company’s $23B total revenue and, even more important, 98% of Microsoft’s Operating Income!

Moving to Q1 2013, the market capitalization picture has drastically changed:

msft_graph2

Google is in many ways becoming Microsoft 2.0, Oracle has grown nicely, and Apple is now on top.

What happened?

Mobile personal computing happened. Smartphones and tablets are displacing conventional PCs, desktops, and laptops.

To put it even more succinctly: the iPhone did it.

When Steve Jobs stepped onto the stage at MacWorld in January, 2007, there were plenty of smartphones on the market. Windows Mobile, Palm Treo, Nokia, Blackberry… But Apple’s iPhone was different. It really was a personal computer with a modern operating system. While the iPhone didn’t initially support third party apps, a Software Development Kit (SDK) and App Store were soon introduced.

Android quickly followed suit, the Smartphone 2.0 race was on, and the incumbents were left to suffer grievous losses.

Riding on the iPhone’s success and infrastructure, the iPad was introduced, with Android-powered tablets not far behind. These new, mobile personal computers caused customers to Think Different, to re-examine their allegiance to the one-and-only PC.

As these products flooded the market, Microsoft went through its own version of the Stages of Grief, from denial to ultimate acceptance.

First: It’s Nothing. See Steve Ballmer memorably scoffing at the iPhone in 2007. Recall ODM Director Eddie Wu’s 2008 predication that Windows Mobile would enjoy 40% market share by 2012.

Second: There is no Post-PC…”Plus is the new ‘Post’“. Smartphones and tablets are mere companion devices that will complement our evergreen PCs. The party line was eloquently asserted two years ago by Frank Shaw, Microsoft’s VP of Communications:

“So while it’s fun for the digerati to pronounce things dead, and declare we’re post-PC, we think it’s far more accurate to say that the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding.”

Next comes Bargaining: Microsoft makes a tablet, but with all the attributes of a PC. Actually, they make two Surface devices, one using an ARM processor, the other a conventional Intel CPU.

Today comes Acceptance: We’re indeed in a Post-PC era. PCs aren’t going to disappear any time soon, but the 30-year epoch of year after year double digit growth is over. We’re now a Devices and Services company!

It’s a crisp motto with a built-in logic: Devices create demand for Microsoft services that, in turn, will fuel the market’s appetite for devices. It’s a great circular synergy.

But behind the slick corpospeak lurks a problem that might seriously maim the company: Microsoft wants to continue to license software to hardware makers while it builds a Devices business that competes with these same licensees. They want it both ways.

Real business model transitions are dangerous. By real transition I don’t mean adding a new line of peripherals or accessories, I mean moving to a new way of making money that negatively impacts the old one. The old money flow might dry up before the new one is able to replace it, causing an earnings trough.

For publicly traded companies, this drought is unacceptable. Rather than attempt the transition and face the ire of Wall Street traders, some companies slowly sink into irrelevance. Others take themselves private to allow the blood-letting to take place out of public view. When the curtain lifts some months later, a smaller, healthier outfit is relaunched on the stock market. Dell is a good example of this: Michael Dell gathered investors, himself included, to buy the company back and adapt its business model to a Post-PC world behind closed doors.

Microsoft can’t abandon its current model entirely, it can’t stop selling software licenses to hardware makers. But the company realizes that it also has to get serious about making its own hardware if it wants to stay in the tablets and smartphone race.

The key reason for Microsoft’s dilemma is Android. Android is inexpensive enough (if not exactly free) that it could kill Redmond’s mobile licensing business. (Microsoft might get a little bit of money from makers of Android-powered hardware thanks to its patent portfolio, but that doesn’t change the game.) This is why Microsoft offered “platform support payments” to Nokia, which essentially made Windows Phone free. And, now we have the belated, under duress acquisition of Nokia’s smartphone business, complete with 32,000 angry Finns.

(Microsoft is rumored to have approached HTC with an offer to dual-boot Windows Phone on HTC’s Android handsets. It’s not very believable rumor — two competing operating systems on the same smartphone? But it has a satisfying irony: In an earlier incarnation I saw Microsoft play legal hardball against anyone who tried to sell PCs with both Windows and another OS installed at the factory…)

Another example of trying to keep one foot on each side of the abyss is the Surface tablet. Microsoft tried to create a hybrid “best-of-both-worlds” PC/tablet, complete with two different UIs. I bought one and found what many experienced: It doesn’t have the simplicity and agility of a genuine tablet, nor does it offer the classic workflow found on Windows 7. We’ll have to see how helpful the upcoming Windows 8.1 is in that regard.

So… What about our new CEO?

  • S/he finds a company that’s in the middle of a complicated structural and cultural reorganization.
  • The legacy PC business is slowing down, cannibalized by mobile personal computers.
  • Old OEM partners aren’t pleased with the company’s new direction(1). They have to be kept inside the tent while the Surface tablets experiment plays out. Success will let Microsoft discard Legacy PC makers. Failure will lead Redmond to warmly re-embrace its old vassals.
  • The Windows Phone licensing business lost its clients as a result of the Nokia acquisition.
  • Integrating Nokia will be difficult, if not a slow-moving disaster.
  • The Windows Phone OS needs work, including a tablet version that has to compete with straight tablets from Android licensees and from Apple.
  • Employees have to be kept on board.
  • So do shareholders.

How would you like the job?

JLG@mondaynote.com

(1) HP’s Meg Whitman now sees Microsoft as a competitor — and introduces a Google-powered Chromebook. What we think this will do for HP’s Personal Systems Group revenue and profit is best left unsaid.

Microsoft Directors Have Much Explaining To Do

 

Blaming Steve Ballmer for Microsoft’s string of mistakes won’t do. Why did the Board of Directors keep him on the job for thirteen years, only to let him “retire” in the midst of several dangerous transitions — without naming a successor? What does this say about the Board’s qualifications to pick Microsoft’s next CEO?

For more than a decade, a team of physicians has been ministering to a patient who was once vital and robust, but now no longer thrives. Recurring diagnostic errors, stubborn inattention to symptoms, improper prescriptions haven’t yet killed the object of their care but, lately, the patient’s declining health has become so obvious that the doctors, now embarrassed and desperate, have scheduled a heart transplant.

Now comes the test: Would you entrust the patient’s future to such a confederacy of dunces?

With this metaphor in mind, let’s contemplate the record of Microsoft Directors since Steve Ballmer assumed the mantle 13 years ago, and ask if they’re qualified to appoint a successor.

Consider the Directors’ obdurate passivity while they watched the company miss opportunities, take one wrong turn after another, and fail to execute crucial transitions. Search was conceded to Google; digital music (players and distribution) is dominated by Apple; social networking belongs to Facebook, Twitter, and LinkedIn; the smartphone market is handed over to Google’s Android and Apple’s iPhone; tablets from the same duo are now bleeding the Windows + Office Golden Goose; Windows Vista and now Windows 8; Surface tablets… Even the once mighty Internet Explorer browser has been displaced by Google’s Chrome running on all desktop and mobile platforms.

Blaming (and forgiving) the CEO for one or two mistakes is reasonable. But if these missteps were entirely Ballmer’s fault, why did the Directors keep him at the helm? This raises the question: How much of the company’s value did the Directors themselves let Google, Apple, and others run away with? Is Microsoft’s Board a danger to the company?

The latter question comes in sharper relief when looking at the timing and manner of Ballmer’s exit.

ballmer

On July 11th, Ballmer announces a major company reorganization. More than just the usual medley of beheadings and redistribution of spoils, Microsoft was to restructure itself away from its old divisional arrangement and move towards the type of functional organization used by companies such as Apple. In addition, the new company motto became Devices and Services, evoking a virtuous circle: Best-of-class branded devices would sell more great Microsoft services, while the latter would give a boost to Microsoft devices.

A week later, on July 18th, Microsoft releases pedestrian quarterly numbers, the lowlight of which is a $900M write-off attributed to very poor sales of Surface PC/tablets

On August 23rd, Ballmer announces his sooner-than-planned retirement — sometime in the following 12 months. No word of a successor.

And, to top everything off, on September 3rd, with Ballmer on his way out, the Board approves the emergency acquisition of Nokia’s handset business, complete with 32,000 angry Finns. (We’ll discuss their misdirected anger in a future Monday Note.)

A drastic company reorganization makes sense. Instead of one more turn of the optimizing crank, Microsoft acknowledges that it needs to Think Different.

Writing off unsold inventory is the sensible recognition of a problem; it removes an impediment by facilitating a fire sale.

There was a clear and present danger for Nokia’s handset business to fail, or to become the walking dead. Microsoft bought it to avoid the possible collapse of the Windows Phone platform. In theory (i.e., ignoring cultural realities), the acquisition gives Microsoft more control over its smartphone future.

All rational moves.

But letting Ballmer go right in the middle of two huge and complicated transitions — and without immediately appointing a successor? On its face, the timing and manner of Ballmer’s exit defies common business sense. It also raises questions about the Board’s failure to adequately plan for Ballmer’s succession. Supposedly, Succession Planning is a key component of good Corporate Governance. In plain language, a Board of Directors is obligated to identify and groom successors for key positions, starting with the CEO.

Which raises a few more questions.

Microsoft undertakes two risky, company-redefining moves: a profound structural and strategic reorganization, followed by its most foreign, most people-intensive acquisition ever. What was the overwhelming need to announce Ballmer’s departure – without naming a successor – right in the middle of such instability?

Considering its résumé, what makes Microsoft’s Board qualified to pick a new CEO?

And what are the parameters of the search for Mr. Right? Assuming Microsoft hires an industry heavyweight, will this individual be given the space and power to be his own woman or man, that is to reshuffle the Board? And what about the freedom from deferring to the company’s Founder?

And what must the mood be like at Microsoft? “When you receive an order, do absolutely nothing and wait for the countermanding directive.” This ancient Army saying must now be popular in Redmond. It’s not that people working there don’t care, but they just don’t know what the next CEO will want, and they certainly don’t know when. How can one not expect damaging paralysis and politicking when the CEO is let go without a successor?

All interesting questions.

JLG@mondaynote.com

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[I’ll leave alone rumors such as Ford’s CEO Alan Mullally replacing Ballmer. Notwithstanding the obligatory congratulations, there would be much giggling in Mountain View and Cupertino. Competent management is a necessary but not sufficient condition…see Ballmer.]