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Microsoft Directors Have Much Explaining To Do

software By September 29, 2013 Tags: , , 29 Comments


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.


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.


[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.]


Microsoft Reorg: The Missing Answer

software By July 14, 2013 Tags: , 26 Comments


by Jean-Louis Gassée

After repeatedly tweaking its divisional structure, Microsoft tries a more radical realignment  along functional lines like, you know, that other company. The lengthy, bombastic but confusing announcement leaves one big, vital question unanswered: What happens if PC sales keep falling?

In a July 11th, 2013 memo to Microsoft employees, Steve Ballmer announces a “far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability in a fast changing world.”

In a few words: Microsoft will switch from a divisional to a functional organization; from what has often been labeled as silos — or even warring fiefdoms — to a set of functional groups aligned to execute the company’s new “devices and services” strategy.

Inevitably, several observers have called this new structure Apple-like, that it’s a clone of the model developed and ferociously enforced by Steve Jobs, and now shepherded by Tim Cook.

As the healthily satirical Bonkers World visualizes, Microsoft wants to move away from this…

MS Org Chart

and become more like this…

Apple Org Chart

Nick Wingfield’s NY Times article, titled Microsoft Overhauls, the Apple Way, puts it this way:

It is yet another sign of how deeply Apple’s way of doing things has seeped into every pore of the technology industry.

Or see Fortune’s Adam Lashinsky, in Seeing Apple in Microsoft’s reorganization:

I think I’m being completely rational in my shock at Steve Ballmer’s latest reorganization of Microsoft. His long memo explaining it to employees is one long homage to the Apple that Steve Jobs re-created between 1997 and 2011. Everything about the reorg sounds like Ballmer wants Microsoft to behave more like Apple.

The comparisons to Apple, by Mssrs. Wingfield and Lashinsky, aren’t just piquant stabs at a flailing giant. They see the problems.

I’ll add my perspective.

There are enormous differences between the scorched-earth reorganization of Apple ’97 and the “far-reaching realignment” of MS ’13:

  • 16 years ago, Apple was on the ropes. The market numbers spoke loudly and cleared minds.
  • Apple’s business was extremely simple: Macintosh personal computers.
  • A charismatic co-founder returned and told everyone to Think Different – and then he enforced the diktat.

Apple came up with a string of monumental hits after Jobs’ return in 1997– iPod/iTunes, Apple Stores, iPhone, App Store, iPad. All of these offerings were facilitated by the company’s now celebrated functional structure, but none of them were created by the reorganization. Put another way, functional structure is a necessary but not sufficient condition (a point to keep in mind when considering Apple without Steve Jobs).

I greatly admire Ballmer’s determination to never give up, never admit failure, always look forward, attitudes that are well-served by his imposing physical presence, impeccable speech, and unshakable composure. But this change isn’t the sort of organizational tune-up that he has perfected over the last three years, it isn’t another iteration of spring cleaning that has resulted in the high-level departures of Robbie Bach, Ray Ozzie and, earlier this year, Steven Sinofsky (who was found guilty of Windows 8).

Removing a loyal but obdurate contradictor, sanctioning bad performance and foul politics is one thing. Reshaping the culture of a huge organization (97,000 employees) is a qualitatively and quantitatively different task. Habits of the mind and, even more challenging, of the heart are extremely hard to change. And, certainly, Microsoft’s culture needs an overhaul. It has caused the company to miss or mishandle Search, Social Networks, Advertising, Smartphones, and Tablets, and to make a meal of the latest version of their iconic Windows product.

Can a reorg suddenly bestow the vision and agility to regain lost ground, undo (at least) one bad decision, and also win the next land grab?

In attempting to answer these questions, Ballmer’s memo manages to confuse rather than reassure. In the first place, it’s way too long — over 2,700 words — and points to yet another memo that’s even longer.

The satirical site, Joy of Tech, had its way with Ballmer’s epistle. First, the executive summary…

Ballmer Memo Joy of Tech Header

Then the details (click to enlarge)…

Ballmer Memo Joy of Tech Body

And their effect…

Ballmer Memo Joy of Tech Ending

Read both memos and ask yourself two questions: Who writes such corpospeak (or is it copro-speak)? And what does it say about its authors’ clarity of thought?

Despite its length, Ballmer’s pronouncement manages to avoid a fundamental question: What happens to Microsoft if PC shipments continue to fall?

According to the usual suspects, PC shipments fell by 11% this past quarter compared to the same period last year, marking the fifth consecutive quarter of the “longest duration of decline in the PC market’s history.” The state of the economy and the tepid reception to Windows 8 are partial explanations, but the primary reason is plain to see: Android and iOS tablets and (to a lesser extent) smartphones are cannibalizing PC sales.

According to a VentureBeat post:

Tablet shipments are expected to grow by almost 70 percent in 2013, sending desktop and laptop computer shipments into a “nosedive.”

When looking at these numbers we should keep in mind that Microsoft’s Windows 8 “tablets” or hybrid devices are counted as PCs while Gartner and IDC keep separate tabs for the PC-devouring devices, which they gingerly call “media-consumption” tablets.

Let’s take a step back and look at the history of Microsoft’s business model.

The company was reasonably prosperous even before DOS/Windows and Office, but its never-before-seen riches came from a division of labor: PC OEM vassals were left to fight among themselves for market share while the licensing overlord enjoyed monopoly pricing for its Windows + Office sales. (When Ballmer cheekily says ‘We’re all about choice’, he means the choice between PC makers racing to the bottom, not choice between Windows/Office and alternatives.)

After Local Area Networks (remember The Year of The LAN?) and then the Internet emerged, the company looked invincible. The Windows + Office stronghold yielded a natural tie to Exchange and Windows Server products.

With this in mind, the decline in Windows PC/tablet sales are bound to have a cascading effect on Microsoft’s business. Fewer PCs means smaller Windows licensing revenue and, in turn, diminishing Office dollars. The once powerful tie-in between Windows and Office now turns against Redmond.

And the cascade continues: Smaller Office volumes result in lower demand for extremely high-margin Exchange and Windows Server products. In the meantime, non-Microsoft tablets and smartphones continue to invade formerly Microsoft-only Enterprise customers. The erstwhile truism You Won’t Get Fired For Buying From Microsoft has lost its lustre.  Permission is now granted to buy from interlopers.

Microsoft greased this downward slope by clinging to its tactic of always having it both ways; that is, doing something new while preserving backwards-compatibility. The approach has been successful in the past… but it foundered Windows 8 and tablets. The step into the future was a different touch-based UI; the foot in the past was the old desktop User Interface. For customers, the result was confusion and frustration; for PC manufacturers, the outcome was lower than expected sales.

Google and Apple took a different route: Instead of shoehorning a desktop OS onto less-powerful and battery-constrained hardware, they designed operating systems that easily slide into the slimmer, sexier footwear. Under the hood, we see a similar “from scratch” approach: Tablets and smartphones aren’t just “smaller PCs”, they’re target-specific devices built around custom (System On a Chip) processors.

The market has voted: Tablets that are just tablets are trouncing Microsoft’s hybrid tablet/PC devices.

To reverse this downward spiral Microsoft needs to come out with a real tablet, not the insincere and unsuccessful ARM-based Surface RT device. This means a tablet that’s powered by Windows Phone with Office applications that are specifically, integrally designed for that OS. Once this is done, why not go all the way by selling iOS and Android versions of the same productivity suite? This would protect the rest of Microsoft’s Enterprise ecosystem, and would be much better than today’s half-baked Office apps on the iPhone, or their absence on the iPad and Android devices.

We’ll see if the new Microsoft regime can really Think Different.


PS: Only for the technically inclined, Drew Crawford’s learned, articulate post on the effect of small RAM size on mobile device system and application software. As this long post attempts to cloud the Web vs. Native apps discussion with facts, it brings up a little-discussed fact: PCs easily offer 8Gb of RAM (as opposed to SSD “disk space”), but mobile devices are generally limited to 1Gb or less because RAM needs to be always powered on, thus limiting battery life. This significantly smaller RAM fundamentally impacts the design of the system and application software. Mobile OS and apps are not like PC products only smaller.


Microsoft and Nokia won’t beget a Googorola clone

hardware By June 23, 2013 Tags: , 26 Comments


by Jean-Louis Gassée

Microsoft, after its highly visible 2011 bet on Nokia, could have decided to go one step further and buy Nokia to become a fully integrated smartphone. That it didn’t happen doesn’t portend a great future for Windows Phone.

Last week, the Wall Street Journal outed Microsoft’s unsuccessful attempt to acquire Nokia:

Microsoft recently held advanced talks with Nokia about buying its handset business, people familiar with the matter said, as laggards in the fast-moving mobile market struggle to gain ground.

Many saw an acquisition as an inevitable next step, that by acquiring the Finnish handset maker Microsoft could “finish the job” that they started when they licensed a special Windows Phone to Nokia. It would be a blessed union of two vigilant, watchful companies: Microsoft had watched as Android and iOS made its own OS a distant also ran; Nokia, once the world’s largest cell phone maker, couldn’t help but notice that Google and Apple had killed its handset business from both the high and low ends.

But, according to the WSJ, the parlay came to a negative and apparently definitive end:

The discussions faltered over price and worries about Nokia’s slumping market position, among other issues, these people said. One of the people said talks took place as recently as this month but aren’t likely to be revived.

To call Nokia’s fall a “slump” is more than polite. The company saw its market share fall from 39% in 2009 — more than 100 million handsets per quarter — to an estimated (and angrily debated) 3% by the end of 2012.

Microsoft hasn’t done much better with its mobile software. In 2008, Windows Mobile OS held a 11% market share, even as the underlying Windows CE engine was getting long in the tooth, particularly when compared to the Unix-ish Android and iOS engines. With a modern NT kernel, Microsoft’s mobile OS was reborn as Windows Phone 8 and scored a modest 3.2% market share in Q1 2013.  This number comes from IDC, the “research” group that has assured us that come 2016, Microsoft will be the number 2 mobile OS provider with a 19.2% share:

09-table nokia

Behold the vision and precision of IDC’s psychics: Back in June 2012, they could see four years into the future and predict that Windows Phone would edge out iOS… by two tenths of a percent!

We’ve heard the Microsoft-is-buying-a-handset-maker rumors before. Starting in 2007 and recurring year after year, Microsoft was said to be eyeing RIM/Blackberry. For some, yours truly included in January 2012, the RIM story was compellingly straightforward: RIM’s clientèle of loyal, hardcore Blackberry users in businesses and governments made it an ideal fit for the Redmond giant.

Microsoft’s defenders will argue that RIM ’07 was too expensive. Priced at $200 a share (they’re running at about $14 today), RIM would have cost more than a $100B before any acquisition premium. At the time, Microsoft was valued at approximately $250B (similar to today’s $277B). Ideal or not, the match didn’t make sense for Microsoft shareholders. Then, when RIM’s price began to slide, the Blackberry was seen as having lost too much of its shine, too much of its market momentum. The company was damaged goods. (Or, as we might have forgotten, the two co-CEOs, Mike Lazaridis and Jim Balsillie, the ones who spoke in tongues, may have proved too difficult for even Steve Ballmer to deal with.)

Someday, Microsoft’s inability to grab RIM might be seen as a signal failure, a key episode in the company’s slide into irrelevance in the smartphone market. I doubt anyone will see Nokia in a similar light, as the “one who got away”.

The “MicroNokia” relationship has been challenging from the start. In February 2011, Nokia committed itself to a special partnership with Microsoft. It would ditch its operating systems (Symbian, Meego, QT) and become a beacon and standard bearer for Windows Phone 7. Money changed hands: $250M of “platform support” per quarter was sent from Redmond to Espoo in order to offset the unspecified Windows Phone licensing payments that flowed in the opposite direction.

This messy, technologically and culturally unsound arrangement only got worse when Stephen Elop, the former Microsoft exec now running Nokia, announced the switch to Windows Phone ten months before the company would end up shipping devices that ran the new (and problematic) OS. Unsurprisingly, Nokia’s revenue evaporated, leaving it with losses and a minuscule 5% market share (including Symbian-based smartphones).

Why Elop would make an announcement that effectively Osborned the business still mystifies and enrages Nokia supporters such as Tomi Ahonen who keeps calling for Elop’s head in long, irate blog posts. (In industry lore, to “Osborne” is to prematurely announce a product that so clearly obsoletes your current offering that it kills revenue. The suicidal maneuver is named in loving memory of portable computer pioneer Adam Osborne who destroyed his business by bragging that his next product would be so much better than the current one.)

I’m also mystified, but for another reason. I can’t fathom why Nokia picked Windows Phone instead of Android, whose explosive success was obvious even as early as 2010 when the company ditched its CEO. (I’m a little biased here as, in June 2010, I wrote a tongue-in-cheek piece titled Science Fiction: Nokia goes Android.)

Nokia’s excuses for not adopting Android were vague, ranging from “we don’t want to lose control of our destiny”, to Microsoft being a “stronger partner” (read: They paid us). The potential-loss-of-destiny rhetoric falls flat, especially when you look at Android’s licensing terms and see the freedom Samsung and others enjoy with their interpretations of the platform. (We’ve heard that Nokia and Google once talked, but we don’t yet know the reason for their not becoming highly visible partners.)

Today, investors say Nokia is worth about $15B, a tenth of its 2007 peak (I’m excluding the 2000 Internet Bubble number from the comparison). Even with a “25% acquisition premium”, a Nokia acquisition would cost Microsoft less than 10% of its capitalization. So, contrary to the charitable explanation offered to the WSJ by “persons familiar with the matter”, price couldn’t have been an obstacle. That leaves us with Nokia’s “slump”: Microsoft thinks Nokia would be unable to carry Windows Phone to an influential, sustainable market position.

Now, what?

Nokia’s revenue keeps sliding down and, after a brief incursion into the black, it keeps losing money. Is there anything in sight that will reverse the trend? It’s doubtful that the company can try for the high end by offering better hardware than Samsung, nor can they squeeze into a low end that’s inhabited by official and unofficial Android clones that are swiftly killing off feature phones. This leaves Nokia’s future as an independent company in doubt and logically gives rise to more acquisition speculation.

And what will happen to Windows Phone? We now hear that Microsoft is paying developers as much as $100,000 to write or port an application to the platform. This is a rational move on Microsoft’s part, an attempt to create the critical mass that doesn’t seem to be able to happen naturally. But it can also be seen as desperation, an admission that Windows Phone is having trouble gaining momentum as developers and customers are embraced in a downward spiral.

One can’t imagine that Ballmer will call it a day and cede the field to Google and Apple. Personally, I admire his never-give-up attitude, always talking up the future, unfazed by past bold pronouncements gone wrong, but enthusiasm isn’t a strategy. And in the smartphone market, Microsoft doesn’t have many moves left. Regardless of the technical merits of its new mobile OS, momentum seems elusive; market forces that once worked against Windows competitors in the PC field now seem to confine Windows Phone to an insignificant market share against the two dominant and their complementary business models.

We don’t know yet how Google’s acquisition of Motorola will fare, but the Android platform is healthy enough without it. The same can’t be said of Windows Phone without Nokia, which leads one to believe there will be a forced marriage between the once proud Finnish handset maker and an ambitious player, probably Chinese — with Microsoft providing a substantial dowry once again.

In the meantime, we can count on IDC to provide fresh numbers… for 2017.


Post-PC: Wall Street Likes the View

hardware By May 26, 2013 Tags: , , 4 Comments


The conventional PC business is now on the decline and yet share prices for of key players Microsoft and HP are moving up. Why?

In an April press release, IDC painted a bleak picture for the PC. Compared to last year’s first quarter, worldwide shipments of PCs are down 13.9%, the “steepest decline ever in a single quarter”. US numbers are about the same: -12.7%. On a graph, the trend is unmistakable:

Is this a trend Wall Street likes?

When you consider Microsoft, it seems so. In a corporate blog post titled Windows 8 at 6 months, the company proudly claims to have “recently surpassed the 100 million licenses sold mark for Windows 8.” This is an interesting number. A quarter ago, MS announced it had sold 60 million licenses, meaning that only 40 million were sold in the last three months. That’s a 33% drop…hardly a rousing success. (The “licenses sold” phrase requires caution, it doesn’t only mean “sold with new PCs”, there are also updates to existing machines, with or without enthusiasm for the new Windows OS.)

“Ignore the Windows 8 numbers and IDC analysis”, says Wall Street. While the tech-heavy Nasdaq climbed only 6.6% in the last 60 days, Microsoft shares went up by 21%.

The same apparent illogic holds for Hewlett-Packard. Last week, the largest PC maker disclosed its second quarter numbers. Compared to the same quarter last year, they’re not exactly pretty:

Revenue down by 10% to $27.6B
Operating Margin at 5.8%, down by about 20% (HP prefers “down 1.4 points”)
EPS (Earnings Per Share) at 55 cents, down 31%

Zeroing on HP’s PC business, things look worse:

Revenue down by 20% to $7.6B
Operating Margin at 3.2%, down 44% (“down 2.2 points” sounds better)

As one would expect, Wall Street reacted, and HP shares went…up. By 17.8% the day after the announcement:

What was the good news for investors? Resorting to one of the usual bromides, HP “handily beat Street expectations” by posting Earnings Per Share (EPS) of $0.55 vs. a projected $0.30 to $0.40.

As discussed in the December 16th Monday Note, Chapter 2 of the Turnaround Artist Manual prescribes exactly what we’re seeing: Drastically lower expectations within days of taking on the job. “Things are worse than I was told. We’ll have to touch bottom before we bounce back…'”

Following the script, HP CEO Meg Whitman called 2013 a “fix and rebuild year”. Everyone should expect a “broad-based profit decline”. But a 17% rebound in the stock price can’t be explained solely by a collective sigh of relief when the actual numbers aren’t as bad as the CEO had led everyone to expect.

(In its earnings release, HP still calls itself “The world’s largest technology company”. I guess they think smartphones and tablets aren’t “technology”, but PCs and printers are…)

As quoted in a VentureBeat post, Whitman thinks that the other US PC maker, Dell, is in no better shape:

“You saw a competitor, Dell, completely crater earnings,” Whitman said in response to a question. “Maybe that is what you do when you are going private. We are setting up the company for the long term.”

Ironically, and without a hint of self-awareness, she accuses Dell of playing the Setting Artificially Low Expectations game:

She implied that Dell did that on purpose, since Michael Dell is motivated to repurchase shares in the company as cheaply as possible, and deliberately lowering earnings is a good way to get the share prices to fall.

 Actually, Whitman must envy what Dell is attempting to do: Get out of the PC clone Race To The Bottom. Because PCs make half of Dell’s revenue, getting out of that hopelessly commoditized business would cause trouble if done in public. Going private allows Dell to close the curtain, perform the unappetizing surgery out of view and, later, return to Wall Street with a smaller company endowed with a more robust earnings engine, focused on higher-enterprise gear and services.

This helps explain the apparent paradox: Wall Street doesn’t like HP and Microsoft shares despite their lower PC numbers but because of them. Investors want to believe that future earnings (the ones they count on when buying shares today) will come from “Post-PC” products and services instead of being weighed down by shrinking PC volumes and margins. In particular, those who buy HP shares must believe that the company will sooner or later exit the PC clone business. For Microsoft, the bet is that the company will artfully manage a smooth transition to higher Enterprise and Entertainment revenues and their fatter margins.

I’m not in fond of the “Post-PC” label, it lacks nuance and it’s premature. The desktop and laptop machines we’ve known for more than three decades may no longer be the sole incarnations of our personal computing – our affection, time, and money have shifted smartphones and tablets – but the PC will continue to live in our offices and homes.

Regard Lenovo, the Chinese company that seized on IBM’s PC business when Big Blue decided to exit the race. They’re doing quite well, posting a record $34B in revenue for this year.

There is life left in the PC business, just not for US incumbents.



Dell Buyout: Microsoft’s Generosity

hardware By January 27, 2013 Tags: , 30 Comments


To perform painful surgery on its business model, Dell needs to take the company private. Seeing challenges in raising the needed $22B, Microsoft “generously” proposes to contribute a few billions. Is this helping or killing the deal?

The news broke two weeks ago: Dell wants to go private. The company would like to buy back all of its publicly traded shares.

The Apple forums are abuzz with memories of Michael Dell’s dismissal of Steve Jobs’ efforts to breathe new life into Apple in 1997:

What would I do? I’d shut it down and give the money back to the shareholders.

Is it now Michael’s turn to offer a refund?

Now we hear that Microsoft wants to lend a hand, as in “several billion dollars”. The forums buzz again: It’s just like when Bill Gates came to Jobs’ rescue and invested $150M in the Cupertino company, thus avoiding a liquidity crisis.

The analogy is amusing but facile. Dell 2013 isn’t Apple 1997. A look at Dell’s latest financials shows that the company still enjoys a solid cash position ($14B) and a profitable business (3.5% net profit margin). It’s profits may not be growing (-11% year to year), but the company is cash-flow positive nonetheless ($1.3B from the latest quarter). There’s no reason to fold up the tents.

As for Microsoft’s involvement: The Redmond company’s “investment” in Apple was part of a settlement of an on-going IP dispute. Microsoft avoided accusations of monopoly by keeping alive a highly visible but not overly dangerous adversary.

So what is Dell trying to accomplish by going private? To answer the question, let’s step back a bit and explore the whys and hows of such a move.

First, we have the Management Buyout. Frustrated with Wall Street’s low valuation, executives buy back their company “on the cheap” and run it in private for their own benefit. This rarely ends well.  Second-guessing the market is never a good idea, and the enormous amount of money that’s needed to pay off shareholders puts the execs at the mercy of bigger, smarter predators who turn out to be the ones who end up running the company for their benefit.

A good reason for going private is to allow a company to shift to a radically different business model without being distracted by Wall Street’s annoying glare and hysterics. This is what Dell is trying to do. They’re not shutting down shop, they’re merely closing the curtain.

Is it necessary to privatize for such a move? For an example that never came to pass, recall Bill Gates’ suggestion, in 1985, that Apple should get out of the hardware business and, instead, license the Mac operating system. At the time, the average revenue per Mac exceeded $2,500; a putative Mac OS license would have sold for $100. The theory was that Apple would eventually sell many, many more OS licenses than it did Macs.

The pundits agreed: “Just look at Microsoft!”.  Apple would jump from one slowly ascending earnings curve to a much steeper one.

Now picture yourself as John Sculley, Apple CEO, going to Wall Street with the following message: “We heard you, we’ve seen the light. Today, we’re announcing a new era for our company, we’ll be licensing Mac OS licenses to all comers for $100 apiece. Of course, there’ll be a trough; licensing revenue won’t immediately compensate the loss of Mac hardware sales. We need am ‘earnings holiday’ of about 36 months before the huge software profits flow in.”

You just became the ex-CEO. Wall Street dumps your shares, effectively telling you to take them back and only return after your “holiday” is over.

As another example that didn’t happen but probably should have, imagine if Nokia CEO Stephen Elop had taken his company private in 2011. Instead of osborning its Symbian business, Nokia would have had the latitude to perform the OS gender change behind closed doors and reemerge with a shiny new range of Microsoft-powered smartphones.

I’ll hasten to add that these made-up examples are somewhat unrealistic: To engineer a buyout, one must raise amounts of money commensurate with the company’s current valuation. Around 1987, Apple was worth about $2B, a great deal of money a quarter of century ago. In early 2011, Nokia’s market capitalization was about $40B, an impossibly large sum.

Still, thanks to these buyout fantasies, we get the two key ideas: First, Dell wants to go private because it plans to alter its business model in ways that would scare nervous, short-term Wall Street shareholders; second, the required amount of money (Dell’s market cap is about $22B) is a potential deal-killer.

We don’t have to look very far for the changes Dell wants to make. Dell no longer likes its legacy PC business and has made efforts to reposition itself as an enterprise player (expensive iron, software and services). Going private will allow it to perform the needed surgery, stanch the bleeding, and reemerge with a much stronger income statement, rid of low-margin commodity PCs.

When we look at the money that needs to be raised, things become really interesting. Michael Dell’s 15.7% ownership of the company undoubtedly helps, but the $22B market cap is still a big hill to climb. Several buyout firms and banks got involved in preliminary discussions; one group, TPG Capital, dropped out, but another, Silver Lake, has persisted in its attempt to round up big banks and other investors with enough funds to vacuum up Dell’s publicly traded shares.

That’s when Microsoft walks in on the discussions and offers to save Private Dell.

Clearly, Microsoft’s money will help in the buyout…but will its involvement torpedo Dell’s intentions? The NY Times DealBook article makes the case for Microsoft propping up the leading PC maker:

A vibrant Dell is an important part of Microsoft’s plans to make Windows more relevant for the tablet era, when more and more devices come with touch screens.

This would give Microsoft some amount of control over the restructured Dell, a seat on the Board of Directors, perhaps, with ways to better align the PC maker’s hardware with Redmond’s software. Microsoft wants Dell’s reinvigorated participation in the “Windows Reimagined” business.

But note the phrasing above: “Dell is an important part of Microsoft’s plans…” Better vertical integration without having to pay the full price for ownership, the putative “several billion dollars” would give Microsoft a significant ownership, 10% or 15%. This is completely at odds with the buyout’s supposed intent: Getting out of the PC clone race to the bottom.

Or maybe there’s another story behind Microsoft’s beneficence: The investor syndicate struggles and can’t quite reach the $22B finish line. Microsoft generously — and very publicly — offers to contribute the few missing billions. Investors see Microsoft trying to reattach the PC millstone to their necks — and run away.

Hats off to Steve Ballmer: Microsoft looks generous – without having to spend a dime – and forces Dell keep making PCs.


Summer Fun: The HR-Less Performance Review

hardware, software By August 12, 2012 Tags: , 8 Comments

The idea for today’s off-topic note came to me when I read “Microsoft’s Lost Decade“, an aptly titled Vanity Fair story. In the piece, Kurt Eichenwald tracks Microsoft’s decline as he revisits a decade of technical missteps and bad business decisions. Predictably, the piece has generated strong retorts from Microsoft’s Ministry of Truth and from Ballmer himself (“It’s not been a lost decade for me!” he barked from the tumbrel).

But I don’t come to bury Caesar — not, yet, I’ll wait until actual numbers for Windows 8 and the Surface tablets emerge. Instead, let’s consider the centerpiece of Eichenwald’s article, his depiction of the cultural degeneracy and intramural paranoia that comes of a badly implemented performance review system.

Performance assessments are, of course, an important aspect of a healthy company. In order to maintain fighting weight, an organization must honestly assay its employees’ contributions and cull the dead wood. This is tournament play, after all, and the coach must “release” players who can’t help get the team to the finals.

But Microsoft’s implementation — “stack ranking”, a bell curve that pits employees and groups against one another like rats in a cage — plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realized that it was more important to focus on organization politics than actual performance:

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees.

This brought back bad memories of my corpocrat days working for a noted Valley company. When I landed here in 1985, I was dismayed by the pervasive presence of Human Resources, an éminence grise that cast a shadow across the entire organization. Humor being the courtesy of despair, engineers referred to HR as the KGB or, for a more literary reference, the Bene Gesserit, monikers that knowingly imputed an efficiency to a department that offered anything but. Granted, there was no bell curve grading, no obligation to sacrifice the bottom 5%, but the politics were stifling nonetheless, the review process a painful charade.

In memory of those shenanigans, I’ve come up with a possible antidote to manipulative reviews, an attempt to deal honestly and pleasantly with the imperfections of life at work. (Someday I’ll write a Note about an equally important task: How to let go of people with decency — and without lawyers.)

A review must start with three key ingredients, in this order:

  • First: Because your performance meets/exceeds requirements, we’ll renew our vows, our work relationship will continue.
  • Second: Here are your new numbers: salary, bonus, stock.
  • Third: We’re sufficiently happy with your performance as it stands today, so feel free to disregard the observations and suggestions for improvement I’m about to make. Now let’s talk…

This might sound a little too “different” (that’s Californian for “batty”), but there’s a serious purpose, here. We’ve all been reviewed, we all know the anxiety — and sometimes the resentment — that precedes the event. Mealy-mouthed comments about team-spirit, loyalty, how the company cares for its people and other insufferable HR pablum only makes things worse. You tune out, you can only hear the noises in your own head: Am I being led to the exit? Am I being shafted out of a raise/bonus/stock? Am I supposed to think that loyalty is its own — and only — reward?

To be heard, the reviewer must silence these questions. Hence the preamble: Your job is safe; here are the $$; we like what you do enough that you can safely continue to behave in the manner we have come to expect, no need to course-correct.

There follows a pause to let the news sink in. Anxiety quelled, the reviewee is now prepared — and willing — to listen.

On to the observations and suggestions. It’s probably a good idea to start with the minus side of the ledger — this isn’t much different from a sales pitch: Get the product’s negatives out of the way first. Stick to specific comments about goals missed, undesirable habits, and the like. “When you arrive 20 minutes late at our staff meetings, you’re being disrespectful to your colleagues, including me.” Defensive reactions to the negative part of a review are unavoidable, so you sing the refrain: The objectionable behavior, while imperfect, doesn’t jeopardize your job.

(As an aside, and seriously: Objecting to a behavior that you insist will be tolerated because of the overall goodness of the relationship…this approach works wonders outside of work. It’s a lot more constructive than the comminatory “You must stop doing this”, which invites the sarcastic and unhelpful response: “And if I don’t? What? You’ll divorce me?”)

The review can now proceed to the positive, to praising the individual’s performance and giving thanks. Saccharine is to be avoided, examples are a must, and exaggeration is only welcome in moderate doses.

Finally, ask for feedback… but don’t kid yourself: Hierarchy trumps honesty, so you may have to ask twice. Explain that you understand the challenge in giving feedback to the reviewer. You might get some useful tidbits, especially if they sting a bit.

Back in the real world, this simple, direct approach might not fit a large organization where you need to protect the rest of the team from the demoralization of a metastasized employee. The habitual backstabber, the knee-jerk naysayer, the self-appointed “Fellow” must be excised before too much harm is done. It’s a difficult task that requires a degree of human judgment and courage that’s not afforded by a mechanical ranking system.

Next week, we might return to topics such as Apple’s uneasy relationship with file systems, Android tablets and phablets, or some such tech disquisition.


Microsoft: Apostasy Or Head Fake?

hardware By June 25, 2012 Tags: , 33 Comments

My appetite whetted by three days of rumors, I went online last Monday and watched Microsoft introduce its Surface tablets. After the previous false starts — the moribund Tablet PC and the still-born Courier — Microsoft finally took matters into its own hands. Ballmer & Co. could no longer wait for OEMs to create vehicles worthy of Windows 8’s “reimagined” beauty and function, not while the A-team ran away with the tablet market.

It was a terrific performance that hit all the right notes:

• World-class industrial design by Microsoft’s guru, Panos Panay.
• An ARM-based consumer tablet running Windows RT, and an x86 enterprise version on Windows 8, both with the innovative Metro UI.
A “digital ink” stylus for handwriting and drawing, faithful to Gates’ famous dictum: “I’ve been predicting a tablet with a stylus for many years, I will eventually turn out to be right or be dead.
• Creative, thoughtful touches: the integrated kick-stand, a novel smart cover with an integrated keyboard, the magnetic stylus that sticks to the side of the device.
• MicroSD, USB 2.0, and Micro HD video connectors.
• 10.6” displays: ClearType HD for the ARM-based tablet, ClearType Full HD for the x86 device.
• Both tablets are slim and light: 9.3 mm/676 grams for the consumer model, 13.5 mm/903 grams for enterprise. (That’s .37”/1.5 lbs, .53”/2 lbs, imperial.)

47 minutes later, Microsoft has jumped to the head of the tablet race. Yesterday’s laggard is now the Big Dog. Thrilling. I want one — probably the lighter Windows RT model.

The live demo wasn’t fumble-free, as a number of critics have pointlessly pointed out. Yes, Windows Chef Steven Sinofsky had to swap out a busted tablet, but this (probably) means nothing, it happens all the time, trust me — I gave my first computer demo 44 years ago and have fumbled through a few more since then.

I smile when I imagine Ballmer on the phone to Tim Cook, letting Apple’s CEO know that a complimentary toaster/fridge – the “convergence” of his nightmares – is on its way to Cupertino’s One Infinite Loop. (Perhaps I should explain: In a recent D10 Conference interview, Cook dismissed the notion of a hybrid tablet + laptop with a quip: “You can converge a toaster and a refrigerator, but those aren’t going to be pleasing to the user.”)

Fantasy phone call aside, this is an historic event. Microsoft decides to make its own hardware and, straight out of the gate, unveils two attractive products that combine the best features of tablets and laptops, both supported by the huge Windows ecosystem.

Unsurprisingly, the momentous happening unleashed an orgiastic excess of premature evaluation. Reactions were fast and predictably polarized. It was, in the repurposed words of one witty blogger: Choo, choo, all aboard the Pundit Express to PageHitsVille! (He was referring to a different event, but I can’t resist repeating the epigram.)

After a few hours, a pattern started to emerge:

– Reviewers who weren’t in attendance, unencumbered by direct experience, were more inclined to view the new products through pre-existing biases and to issue clear-cut predictions.

– The privileged few who were invited to the press event in Los Angeles were more nuanced in their analyses, but with a recurring complaint: They didn’t have an opportunity to use the product for themselves, they were hurried along in small groups to look at non-functioning machines. A couple examples:

I was only permitted to touch the device while the machine was powered off. Microsoft representatives were happy to show off the device, but they didn’t let me actually use the new tablet (Slate’s Farhad Manjoo).
As for performance, we’ll be honest: tech press were treated to about two minutes at each of several stations, some of which demoed design, and not so much the power that lies inside that thin frame.

Unfortunately, we didn’t get to see a working demo of the keyboards. As in, we weren’t permitted to type sample sentences and feel what it’s like to hammer out characters on a flat keyboard, or on keys that have just 1.5mm of travel (Endgadget’s Dana Wollman).

With these observations in mind, I took another look at the video and realized how many other important details were omitted from the well-oiled presentation: Price, delivery dates, battery life, wireless connectivity, display resolution (could we have an unequivocal definition of the ClearType HD and ClearType Full HD?).

The missing data, the evasions, the lack of hands-on examination, even the circumstantial evidence of a stage struck device…it all smacks of products that aren’t ready — or even almost ready — for customers’ mitts and credit cards.

This leaves us with a list of questions.

First: Why now? Microsoft’s agitprop specialists aren’t new to the game. They know what happens when you show up with less than fully-baked devices and refuse to answer simple, important questions. Why not announce on, say, October 15th – the beginning of the Holiday shopping season — when they would have a better chance of running a FUD (Fear Uncertainty and Doubt) campaign against the opposition? Why the rush?

Maybe it’s the expectation that Google will announce its own Android tablet at Google I/O later this week…but I find the argument unconvincing. Microsoft would have been better off letting Google speak first so they could analyze the product and come up with a sharply targeted counter, especially if Google ships much sooner than Microsoft.

Second, the Apostasy question. For decades, the Redmond company has preached the Righteous Way of its OEM ecosystem, the wide range of hardware configurations and prices for its Windows platform. Now Microsoft pulls a 180º, they design and contract/manufacture Surface tablets by themselves, with distribution through the Microsoft Stores and online. That’s a whole different religion.


Is it because, as one supporter put it, “greedy” OEMs have become “obstacles of innovation”, that “the software giant has bled too much for OEMs far too long”? That’s one way to look at it. (Another reading of history sees that under the Windows thumb, Microsoft’s vassals have had little choice but to engage in a price war, in a race to the bottom. For PC makers, this undercut the margins they needed to design and manufacture the “innovative” products that their overlord now chides them for not having in their arsenals.)

There must be a more sensible explanation, and our friend Horace Dediu doesn’t disappoint. In his Who will be Microsoft’s Tim Cook? Dediu comes up with an eye-opening analysis that focuses on the “business model inversion” that has taken place in the last two years.

For decades, software generated much higher margins than hardware. Microsoft was admired for its extremely high margins, while Apple was criticized for stubbornly sticking to hardware and its lower profitability — to say nothing of lower volumes as a marginal PC player. But now, as Dediu points out, Apple is the company with both the higher revenue and operating margin [emphasis mine]:

If we simply divide revenues by PCs sold we get about $55 Windows revenues per PC and $68 of Office revenues per PC sold [1]. The total income for Microsoft per PC sold is therefore about $123. If we divide operating income by PCs as well we get $35 per Windows license and $43 per Office license. That’s a total of $78 of operating profit per PC.
Now let’s think about a post-PC future exemplified by the iPad. Apple sells the iPad with a nearly 33% margin but at a higher average price than Microsoft’s software bundle. Apple gives away the software (and apps are very cheap) but it still gains $195 in operating profit per iPad sold.
Fine, you say, but Microsoft make up for it in volume. Well, that’s a problem. The tablet volumes are expanding very quickly and are on track to overtake traditional PCs while traditional PCs are likely to be disrupted and decline.
So Microsoft faces a dilemma. Their business model of expensive software on cheap hardware is not sustainable. The future is nearly free software integrated into moderately priced hardware.

Which leads Horace to his killer conclusion:

For Microsoft to maintain their profitability, they have to find a way of obtaining $80 of profit per device. Under the current structure, device makers will not pay $55 per Windows license per device and users will not spend $68 per Office bundle per tablet. Price competition with Android tablets which have no software licensing costs and with iPad which has very cheap software means that a $300 tablet with a $68 software bill will not be competitive or profitable.
However, if Microsoft can sell a $400 (on average) device bundled with its software, and is able to get 20% margins then Microsoft is back to its $80 profit per device sold. This, I believe, is a large part of the practical motivation behind the Surface product.
The challenge for Microsoft therefore becomes to build hundreds of millions of these devices. Every year. Sounds like they need a Tim Cook to run it.

It’s difficult to argue with Horace’s logic, but there’s another way to look at Microsoft’s new posture: It’s just that, a posture, a way to wake up PC OEMs and force them to react. “If you do the right thing and come up with the world-class product Windows 8 deserves, we’ll back off and let you enjoy the just deserts of your efforts.” It’s a devious thought, but it could be more realistic than the notion that Microsoft will produce something in the order of 100 million Surface tablets in 2013 in order to keep their dog in the fight. (For reference, the lead PC maker, HP, currently ships about 16M devices per quarter.)

I’m also curious about Microsoft’s rigid insistence on calling these devices PCs. See their official site announcing a “New Family of PCs for Windows”:

Try as they might, Microsoft won’t be able to convince folks to refer to the Surface as anything other than a “tablet”. The Redmond team seems fixated on a best-of-both-worlds product: Everything a PC does plus the best features of a tablet. This is what John Gruber calls being caught Between a Rock and a Hardware Place. (Gruber’s post, which quotes Dediu’s, is itself quoted and felicitously expanded upon by Philip Elmer-DeWitt.)

Peter Yared offers his help with a witty clarification:

In the end, I can’t see how Microsoft can suddenly morph into a tablet, er, PC maker capable of pumping hundreds of millions of devices per year. The fuller Surface story is yet to unfold.


Lumia 800: Nokia’s Comeback?

mobile internet By February 12, 2012 Tags: , 27 Comments

Let’s go back to Spring 2010. Nokia friends invite me to their US headquarters in White Plains, NY, where we’ll discuss Apple with an audience of local management and remote viewers in Europe.
As the conversation proceeds, I’m struck not by what I hear but by what I don’t. They’re right to wonder about Apple, about what makes it tick…but they have an even bigger problem called Android.
I venture a few politically impolite suggestions:

1. Replace your CEO. Olli-Pekka Kallasvuo, a little too proud to be a lawyer and an accountant, is way past his “best if used by” date.
2. Drop all your aging software platforms, your Symbian S60, S^3 and S^4, your Maeemo/Moblin/Meego chimera (I didn’t say clusterf#^k). You’re doomed by pursuing so many projects…and you might want to consider that your competitors are a bit better than you are at writing system software.
3. Go Android right now. Join the winning OS team.
4. Focus on your strengths: Hardware, industrial design, manufacturing, worldwide distribution.
5. Move to Silicon Valley, that’s where the action is. The future of smartphones won’t be decided in White Plains, NY.

People don’t appear overly upset. Actually, quite a few heads nod when I mention kicking the mercurial OPK upstairs. Judging by audience reaction, the Go Android suggestion isn’t news, it’s been debated already, heatedly it seems.

I get two kinds of pushback: “We’ll lose control of our destiny!” and “How will we achieve differentiation?”

With the regard to the former, by 2010 Nokia is already past the point of controlling their destiny; sales are “gaining vertical speed”…in the wrong direction. And to the differentiation objection, I suggest that the audience share my faith in Nokia’s proven hardware strengths and in their Finnish tradition of sparse, elegant designs.
It becomes an open — if occasionally pained – exchange. My hosts are visibly as concerned as I am about Nokia’s current direction.

On my way back to the Valley, I try to put a humorous spin on the discussion: I pen a Science Fiction: Nokia goes Android piece that shows the great company waking up and turning itself around. But, inside, I know humor is the politeness of despair, and I can’t avoid a somber note at the end of the otherwise lighthearted article:

In a more plodding reality, Nokia is likely to continue on its current course, believing their problem is one of execution, of putting more faith in their sisu.
The king will be deposed, Google and Apple will divide the spoils.

A few months later, Nokia’s situation worsens, OPK is deposed and Stephen Elop, a former Microsoft executive, replaces him.

A year ago exactly, Nokia’s new CEO writes his infamous Burning Platforms memo. In it, Elop makes three crucial statements:

1. The smartphone war isn’t one of platforms any more, it is a war of ecosystems.
2. Our current system software won’t win.
3. To win the war, we’re joining the Windows Phone ecosystem via a special alliance with Microsoft.

The first point is beyond dispute. Two successful ecosystems, Google’s for Android and Apple’s for the iPhone, have settled that score.
To outsiders, Elop’s second statement is merely a frank assessment of Nokia’s failure to play in the same software league as its Californian competitors. A few insiders and fans take offense but…numbers are numbers.

Things take a turn for the worse with the jump to Windows Phone. In the abstract, the decision is defensible, but by announcing the switch ten to twelve months ahead of actual shipments, Elop has effectively osborned his current product. Who will buy Symbian-based smartphones when Nokia’s own CEO tells the world it’s a has-been platform with no future? Nokia’s fans are furious; so are the shareholders. (See Tomi Ahonen’s blog for a rich, vocal, well-argued compendium of everything wrong with Stephen Elop’s move.)

Nokia’s market share and profits drop precipitously. The December 2011 quarter shows a loss with little hope of a turnaround in the short term.

But the wait is finally over: Nokia now ships Lumia smartphones running on the latest Windows Phone 7.5 release. A Nokia friend asks if I want to try a Lumia 800, the top-of-the-line model in Europe. Having read good things about both hardware and software, I jump at the chance.

When the package lands on my desk, I ask myself The Question: Is this the phone that will put Nokia and Microsoft back in the race? By late 2011, Microsoft’s share of the smartphone market stood below 2%. Does the Lumia line of devices have what it takes to regain the ground lost to Samsung’s Android devices and to iPhones?

What follows, here, is a highly impressionistic diary, with no pretense of objectivity, chronicling a week of abuse of the Lumia 800. (I’ll skip over the phone waking up speaking Finnish, or that it arrived with a European plug for the power adapter. Not a problem, we have Google Translate and I have my own stash of euro-gizmos.) For a dispassionate and professional discussion, please turn to AnandTech’s exhaustive review (12 pages).

At first glance (literally), very good: Elegant, sleek hardware with equally elegant type on the welcome screen, followed by the clean Metro UI (Nokia UK provides a nice tour here). All it takes to get a pre-paid month-to-month subscription and micro-SIM is a short walk to the T-Mobile store.

I encounter my first problem when looking for ways to take screenshots for today’s note. The documentation is mute on the subject, and all Google can offer is that I need software developer tools. Is there really nothing for normal humans? I email my friends, I tweet nokia-connects (as recommended in a nice handwritten note that came with the phone)…still nothing. A simple two-button procedure, followed by a no-hands Photo Stream upload – in other words, the iPhone method — seems to be the type of solution to aspire to.

Cognoscenti will argue over details, but I was impressed by Lumia’s email presentation and management. Setting up my Exchange, Google, and iCloud accounts is as simple and reliable as the best of what I’ve seen with Android and iOS devices. So is the polished use of type, the ease of linking and unlinking mailboxes, handling single messages, and bulk-editing an inbox loaded with spam. Office attachments read well, naturally — as they do on all leading smartphones. But while competitors read PDF docs natively, Windows Phone tells you There’s An App For That. It’s free and installs easily, as every other app I tried. But, for such a basic function, rendering PDF files, why not make it part of the device?

Surfing the Web proves less satisfying. Tabbed browsing isn’t as intuitive as on an iPhone 4S, and there’s no “Reading List” of pages you can save for later or sync with your PC. Worse, there appears to be a purplish tinge on the screen as I read Web pages and the type rendering is lackluster — I wish I had screenshots to better explain what I see. I don’t know enough about what’s under the hood to place the blame, but perhaps it’s the lower screen resolution (480 by 800 vs. 640 by 960).

Music, at least on the device I got, is also disappointing. Contrary to the claims of the Nokia Music support page, there’s no Nokia Music Streaming on my Lumia. Perhaps this is just a temporary or regional situation. Downloading music from iTunes is theoretically possible, although it seems one needs a DRM Removal Tool, followed by a batch conversion to Windows Phone music files. Spotify offers a Windows Phone application, or one can turn to the Microsoft’s Zune Unlimited Pass, both with a $9.99/month subscription. Opinion will differ as to the attractiveness of these music offerings. In any case, there’s no ‘‘iPod Inside”, as I hear an AT&T salesperson say.

The Lumia 800 features an 8 megapixel camera with a “Carl Zeiss Tessar” lens. As a test, I took side-by-side pictures using the Lumia and an iPhone 4S, both in idiot mode (auto white balance mode, auto everything else).

First, my two pigs. I found them 20 years ago in an antique shop in Arcachon, France, and christened them Victor and Charles, as in VC. This was in my early entrepreneurial days, when I thought VCs were…you know. Now that I’ve gone over to the Dark Side, I still keep them on my desk and show them to entrepreneurs who give me lip about my brotherhood.

The Lumia photo:

…and the iPhone:

To the inexperienced viewer, the iPhone 4S picture looks better

I tried another subject: Handwritten numbers on a piece of paper.

The Lumia:

…and iPhone:

Take a close look at these pictures and you’ll see that the iPhone images are marginaly sharper.

The rather dull tint of the Lumia pictures can be corrected using any decent photo processing program (I just did it in iPhoto, it works quite well). Of course, that means moving the pictures to a “real” machine.
Perhaps the dull tint is unique to the phone I got. If it isn’t, it needs to be fixed in order not to disappoint. The Autofix feature in the phone’s camera software didn’t fix the picture.

I used Microsoft’s SkyDrive, a free “drive in the Cloud” that appears as one of the sharing options in Windows Phone. It’s not as clever as DropBox, or as automated as parts of iCloud, but it works well (and reliably) on PCs, Macs, Windows Phone, Android, and iOS.

Still on the camera topic: unlike other leading smartphones, there is no front-facing camera. As a result, no video calls in Skype or FaceTime fashion.

Using Nokia-owned Navteq maps, navigation work as expected: very well.

Last item for this cursory review: battery life. The Lumia’s screen dims in a matter of seconds and shuts down soon thereafter. My unscientific impression is that the battery drains quickly if you do a lot of browsing and downloading on 3G or WiFi. A glance at AnandTech’s thorough numbers shows that this is indeed the case.

…or nearly the last item: I forgot to mention phone calls, we use smartphones for those, too. Nothing to report; voice, SMS…everything works as expected.

This is a well-made, elegantly designed, and capable phone. But let’s return to The Question: Is this the Killer Phone? Will the Lumia 800 and its siblings put Nokia and Microsoft back in contention? My answer is, regretfully, No.

The Lumia contains neither the revolutionary new features nor the fresh approach that any serious smartphone needs to compete with the two new giants, Samsung and Apple. The Korean company is very, very determined; it takes no prisoners — ask Sony. And Apple is no longer Little David fighting the Microsoft Goliath: Last quarter, the iPhone alone generated more revenue and profit than all of Microsoft.

I can’t help but retro-fantasize an alternate reality: In 2010, Nokia starts a secret project with Google and an Asian contract manufacturer. The industrial design is done in-house, the rest in collaboration. In February 2011, Elop announces a special relationship with Google — and starts shipping the device immediately. No osborning, no revenue gap.

This fantasy comes with a bonus: Google doesn’t have to buy Motorola and it gets Nokia’s patent portfolio – infringement of which Apple has paid more than $600M — as part of the “special relationship”.

Back to reality: Without a clearly superior product and a dominant ecosystem, Microsoft and Nokia are now forced to shell out big marketing dollars against richer adversaries. This isn’t going to be pretty: Microsoft can ill afford to be a bit player in the smartphone revolution and Nokia can’t keep bleeding money, squeezed between the new giants and the emerging Asian providers of entry-level devices.


Will Microsoft buy RIM or Nokia?

hardware, mobile internet By January 15, 2012 Tags: , , , 14 Comments

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.


2011: Shift Happens

Uncategorized By December 18, 2011 Tags: , , , 14 Comments

Whatever 2011 was, it wasn’t The Year Of The Incumbent. The high-tech world has never seen the ground shift under so many established companies. This causes afflicted CEOs to exhibit the usual symptoms of disorientation: reorg spams, mindless muttering of old mantras and, in more severe cases, speaking in tongues, using secret language known only to their co-CEO.

Let’s start with the Wintel Empire

Intel. The company just re-organized its mobile activities, merging four pre-existing groups into a single business unit. In a world where mobile devices are taking off while PC sales flag, Intel has effectively lost the new market to ARM. Even if, after years of broken promises, Intel finally produces a low-power x86 chip that meets the requirements of smartphones and tablets, it won’t be enough to take the market back from ARM.

Here’s why: The Cambridge company made two smart decisions. First, it didn’t fight Intel on its sacred PC ground; and, second, it licensed its designs rather than manufacture microprocessors. Now, ARM licensees are in the hundreds and a rich ecosystem of customizing extensions, design houses and silicon foundries has given the architecture a dominant and probably unassailable position in the Post-PC world.

We’ll see if Intel recognizes the futility of trying to dominate the new theatre of operations with its old weapons and tactics, or if it goes back and reacquires an ARM license. This alone won’t solve its problems: customers of ARM-based Systems On a Chip (SOC) are used to flexibility (customization) and low prices. The first ingredient isn’t in evidence in the culture of a company used to dictate terms to PC makers. The second, low prices, is trouble for the kind of healthy margins Intel derives from its Wintel quasi-monopoly. Speaking of which…

Microsoft. The company also reorged its mobile business: Andy Lees, formerly President of its Windows Phone division just got benched. The sugar-coating is Andy keeps his President title, in “a new role working for me [Ballmer] on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8”. Right.

Ballmer once predicted Windows Mobile would achieve 40% market share by 2012, Andy Lee pays the price for failing to achieve traction with Windows Phone: according to Gartner, Microsoft’s new mobile OS got 1.6% market share in Q2 2011.

Microsoft will have to buy Nokia in order to fully control its destiny in this huge new market currently dominated by Android-based handset makers (with Samsung in the lead) and by Apple. In spite of efforts to ‘‘tax” Android licensees, the old Windows PC licensing model won’t work for Microsoft. The vertical, integrated, not to say “Apple” approach works well for Microsoft in its flourishing Xbox/Kinect business, it could also work for MicroNokia phones. Moreover, what will Microsoft do once Googorola integrates Moto hardware + Android system software + Google applications and Cloud services?
In the good old PC business Microsoft’s situation is very different, it’s still on top of the world. But the high-growth years are in the past. In the US, for Q2 2011, PC sales declined by 4.2%; in Europe, for Q3 this time, PC sales went down by 11.4% (both numbers are year-to-year comparisons).

At the same time, according to IDC the tablet market grew 264.5% in Q3 (admire the idiotic .5% precision, and consider tablets started from a small 2010 base). Worldwide, including the newly launched Kindle Fire, 2011 tablets shipments will be around 100 million units. Of which Microsoft will have nothing, or close to nothing if we include a small number of the confidential Tablet PC devices. The rise of tablets causes clone makers such as Dell, Samsung and Asus (but not Acer) to give up on netbooks.

In 2012, Microsoft is expected to launch a Windows 8 version suited for tablets. That version will be different from the desktop product: in a break with its monogamous Wintel relationship, Windows 8 will support ARM-based tablets. This “forks” Windows and many applications in two different flavors. Here again, the once dominant Microsoft lost its footing and is forced to play catch-up with a “best of both world” (or not optimized for either) product.

In the meantime, Redmond clings to a PC-centric party line, calling interloping smartphones and tablets “companion products’’. One can guess how different the chant would be if Microsoft dominated smartphones or tablets.

Still, like Intel, Microsoft is a growing, profitable and cash-rich company. Even if one is skeptical of their chances to re-assert themselves in the Post-PC world, these companies have the financial means to do so. The same cannot be said of the fallen smartphone leaders.

RIM: ‘Amateur hour is over.This is what the company imprudently claimed when introducing its PlayBook tablet. It is an expensive failure ($485M written off last quarter) but RIM co-CEOs remain eerily bullish: ‘Just you wait…’ For next quarter’s new phones, for the new BlackBerry 10 OS (based on QNX), for a software update for the PlayBook…

I remember being in New York City early January 2007 (right before the iPhone introduction). Jet-lagged after flying in from Paris, I got up very early and walked to Avenue of The Americas. Looking left, looking right, I saw Starbucks signs. I got to the closest coffee shop and saw everyone in the line ahead of me holding a BlackBerry, a.k.a. CrackBerry for its addictive nature. Mid-december 2011, RIM shares were down 80% from February this year:

Sammy the Walrus IV provides a detailed timeline for RIM’s fall on his blog, it’s painful.

On Horace Dediu’s Asymco site, you’ll find a piece titled “Does the phone market forgive failure?”. Horace’s answer is a clear and analytical No. Which raises the question: What’s next for RIM? The company has relatively low cash reserves ($1.5B) and few friends, now, on financial markets. It is attacked at the low end by Chinese Android licensees and, above, by everyone from Samsung to Nokia and Apple. Not a pretty picture. Vocal shareholders demand a change in management to turn the company around. But to do what? Does anyone want the job? And, if you do, doesn’t it disqualify you?

Nokia: The company has more cash, about 10B€ ($13B) and a big partner in Microsoft. The latest Nokia financials are here and show the company’s business decelerates on all fronts, this in a booming market. Even if initial reactions to the newest Windows Phone handsets aren’t said to be wildly enthusiastic, it is a bit early to draw conclusions. But Wall Street (whose wisdom is less than infinite) has already passed judgment:

Let’s put it plainly: No one but RIM needs RIM; but Microsoft’s future in the smartphone (and, perhaps, tablet) market requires a strong Nokia. Other Windows Phone “partners” such as Samsung are happily pushing Android handsets, they don’t need Microsoft the way PC OEMs still need Windows. Why struggle with a two-headed hydra when you can acquire Nokia and have only one CEO fully in charge? Would this be Andy Lees’ mission?

All this stumbling takes place in the midst of the biggest wave of growth, innovation and disruption the high-tech industry has ever seen: the mobile devices + Cloud + social graph combination is destroying (most) incumbents on its path. Google, Apple, Facebook, Samsung and others such as Amazon are taking over. 2012 should be an interesting year for bankers and attorneys.