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Microsoft (MSFT) on stage. Bill on The Daily Show. It's Vista time, baby.

Survey says - thud. It is a hard thing to watch. A cranky, defensive and inarticulate Bill:

Trends in the data that have to be massively disconcerting to Microsoft management (not to mention its external shareholders). Dripping, gloppy Apple (AAPL) envy coming from the top. Incredulity at the public's lack of understanding of Vista's greatness. These are not signs of a company, of a culture, of a management team doing well. They are failing. Failing to understand their customers. Failing to understand the tone of the market. Failing to understand the kind of messaging that is necessary to get people excited about their products. And yes, failing to transition into the Consumer Era of Computing, a phenomenon I had written about in a post about six weeks ago.

And I've got to say that this latest leg in the Microsoft/Apple battle bears stunning similarity to the duel (although it is hard to have a duel when one of the participants is already dead) between Sony (SNE) and Nintendo (OTCPK:NTDOY) in the PS3/Wii war, while a story that still needs to be fully played out looks increasingly like the nimble, adaptive, consumer-focused company kicking the crap out of the Grand Dame of Gaming. And I am sure over the ensuing months and years we will see more of this stuff happening, where the more consumer-centric, lighter, friendlier applications will dominate the legacy titans of yesteryear. It is all just beginning, and the first and highest profile casualty may well be Sony, closely followed by Microsoft. Anyway...


Structural Issues Limiting Early Adoption

eWeek had an interesting post on the day of the Vista consumer launch:

SEATTLE (Reuters)—After more than five years of development, over 50 million lines of software code, a $6 billion investment and a few headaches, Microsoft Corp.'s Windows Vista finally reaches consumers this week.

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Many corporate information technology executives are taking their time, as they often do for major software changes.

"If I was an IT manager and I valued my job, I wouldn't move to Vista or migrate my people to Vista for 12 months. I'd sit and wait," said Andy Walker, a technology columnist and author of an upcoming help book on Windows Vista.

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Research firm Gartner estimates that Windows Vista will be running on more than half of the world's consumer PCs by late 2008, but it won't be the dominant operating system for corporate computers until 2010.

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Only 15 percent of today's computers are capable of running Windows Vista Home Premium, considered to be the mainstream consumer version, according to Gartner. That is just one reason why people probably won't be lining up outside stores to buy Windows Vista out of the box on the first day of release.

In addition, the growing complexity of upgrades and general satisfaction with existing operating systems could result in a Vista launch that lacks the fanfare of previous Windows releases. A decade ago, people lined up outside stores to get a copy of Windows 95.

"You're not going to have people waiting around the block for CompUSA to open like they did 12 years ago," said Gartner's Silver. "However, Vista can still be successful even if people aren't lined up around the block."

Is it just me, or is Gartner looking at statistics different than their own? For the Gartner statistics to become reality doesn't it require a perfect storm, where almost all consumers who trade up their computers over the next 18 months buy Vista and don't, say, buy an Apple? I must say, lately some stuff I've been seeing from research firms like Yankee Group (PS3 will win, with the famous quote "Casual gamers don't buy consoles") and Forrester (iTunes store has declining sales trends, though the data used was incomplete, leading to a quasi-retraction) has been leaving me cold, and I expect this Gartner report to leave me with that same chilly feeling. Only 15% of consumers have machines powerful enough to run Vista Home Premium? I generally like to invest in businesses that have the wind at their back, not in their face. But hey, that's just me.

Bill's Public Persona Isn't Helping Matters

Bill's quick exit from the set of The Daily Show aside, he has not been doing Vista or Microsoft any favors with his recent performance. Contrast this with his alter-ego, Mr. Jobs, who even in the face of controversy surrounding the Apple options backdating scandal can get up on stage and wow his employees, his customers and the technology community at-large. Steve is a rock star. Bill looks as if he's been living under a rock. Check out some of his answers in a February 1st interview with Steven Levy of Newsweek:

NEWSWEEK: If one of our readers confronted you in a CompUSA and said, “Bill, why upgrade to Vista?” what would be your elevator pitch?

Bill Gates: The most effective thing would be if I could sit down with them and just take them through the new look for a couple of minutes, show them the Sidebar, show them the way the search lets you go through lots of things, including lots of photos. Set up a parental control. And then I might edit a high-definition movie and make a little DVD that's got photos. As I went through, they'd think, “Wow, is that something I could use, would that make a difference for me?”

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You also talk about improved security in Vista.

Yes, although security is a [complicated concept]. You’re [referring to] the fact that there have been some security updates already for Windows Vista. This is exactly the way it should work. When somebody comes to us [after discovering a vulnerability] we’ve got [a fix] before there is any exploit. So it’s totally according to plan, and that’s why we have the whole Windows Update thing. We made it way harder for guys to do exploits. The number [of violations] will be way less because we’ve done some dramatic things [to improve security] in the code base. Apple hasn’t done any of those things.

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Are you bugged by the Apple commercial where John Hodgman is the PC, and he has to undergo surgery to get Vista?

I've never seen it. I don't think the over 90 percent of the [population] who use Windows PCs think of themselves as dullards, or the kind of klutzes that somebody is trying to say they are.

How about the implication that you need surgery to upgrade?

Well, certainly we've done a better job letting you upgrade on the hardware than our competitors have done. You can choose to buy a new machine, or you can choose to do an upgrade. And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say? Does honesty matter in these things, or if you're really cool, that means you get to be a lying person whenever you feel like it? There's not even the slightest shred of truth to it.

Does the entire tenor of that campaign bother you, that Mac is the cool guy and PC—

That’s for my customers to decide.

Are you kidding me? Bill sounds a little like Glenn Close in Fatal Attraction, and that he is getting ready to boil Steve Jobs' bunny. First off, Bill, after having spent an amount exceeding the GDP of several sovereign nations - $500 million - to launch Vista, don't you think you could have spent even a little of that on media training? THAT is your elevator pitch? Sorry, Bill, but you're not getting the VC funding you desire. You're not even getting out of the elevator. Your answer on security: poor. Your paranoia and irritation at Apple's successful branding and image-making? Nauseating. You're the richest guy in the world. You do lots of great things with your money. You're a brilliant man. The Apple threat and a changing world is making you become unhinged. Do something about this. Fast. For your shareholders sake. Please.

And if you think that's bad, our friend Bill a/k/a Mr. Malaprop is getting the crap kicked out of him by former friends in the media - everywhere. For some reason Microsoft and Bill just don't get the props they used to. This thread was beautifully captured on the CyberPsych blog. You really should check out the post - it is quite thoughtful and has many humorous pictures - but I've recorded the more salient points below.

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I've looked at quite a few interviews featuring Bill Gates touting Vista's advantages on the mainstream networks, and if I'm not mistaken, he's actually getting a hard time of it.

In other words, he's being asked some challenging questions by media hosts who actually seem to have done some homework. Perhaps because they themselves use Windows XP and are asking why the need to update, or they're Mac users and, well, same question, truncated: "why the need?"

Whatever, from the video streams I've seen, Bill has got to do something with those flailing hands - has nobody at Microsoft said to the boss, "Boss, you need some media training?"

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No, it seems to me that even mainstream media is not going to fall over just to please Bill. Because they too have put up with Windows all these years, journalists have themselves as their own test platforms from which to pitch questions, and from what I'm hearing, Bill is now working hard for his money.

This is no Windows 95 release. I'm seeing a lot of "hrummphing" and shoulder-shrugging in mainstream media's handling of Vista's release.

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The sense I'm getting (probably because I'm sensitive to it) is that Microsoft's free ride is coming to an end...

I've never seen non-techie mainstream media give MS such a hard time... you will find tech journalists going Wow! but by now we know that they are likely to be dipping into that $500million publicity well for their handouts in exchange for uncritical commentary.

But the others... those who just want a system that works... all seems to be asking of Bill tough questions about Apple and OS X and the need for Vista.

About time mainstream media got a little backbone and saw PR spin for what it is...

The world has changed. Bill either doesn't see it or doesn't want to see it. The Newsweek interview really reminds me of an extract from my December 12th post on Microsoft vs. Apple:

I guess the question is whether or not those 73 million households are a gimme. A lot has happened in the consumer market since the release of XP: the rise of the Mac Book, the popularity of iTunes, the ubiquity of the Apple consumer experience. Analysts frequently love to base projections on previous product adoption cycles. Is Mr. Schadler correct in assuming that Vista will enjoy the same uptake as XP did when it went live? Today's world is clearly different, my friend, and woe be those who are bounded by yesterday's thinking in projecting tomorrow's reality. Even a small dent in Microsoft's OS market share would have a huge impact on its P&L (with the benefit going straight to Apple). I'm just saying it's a possibility, but apparently not to Mr. Schadler.

By the way, for context, the 73 million number refers to households running Vista by 2011, predicts Ted Schadler, an analyst at Forrester. This is, of course, an extrapolation of how XP penetrated the household market. The same kind of analysis done by the Yankee Group analyst when predicting PS3 dominance (by extrapolating the meteoric success of PS2). So even professional analysts don't see it, so why should Bill? Because he owns $50 billion of stock, that's why. Clearly mainstream media sees it (not to mention the blogosphere). So what gives?

The Smell of Fear is Palpable

What do you get when you take arrogance, a ton of cash, an enterprise software-laden culture and fierce competition? Microsoft. People (and what are companies but conglomerations of people, anyway?) react to fear in different ways. Some clam up and stick to what feels comfortable. Others challenge this comfort by acknowledging that something has changed and recognizing that they need to make decisive change. Microsoft, unfortunately, appears to be in the former camp. But why, when the sledding gets tough, would a company's response be arrogance? This was recently illustrated by a post on Gizmodo summarizing Microsoft's response to the slow uptake of the Xbox 360 in Asia. Though this doesn't directly relate to Vista, it does reflect a deep flaw in the culture that could well be pervasive. You will simply not believe this:

If you're in Singapore, Hong Kong, Taiwan or Korea, Microsoft wants to know what's wrong with you. That's right, your tepid response to their console isn't their fault, it's yours. Which leads Microsoft to launch the website "whatswrongwithu.com" questioning what really is wrong with you. C'mon, it's got great Japanese games, blockbuster titles, and it looks cool! Was it your inadequate parenting? Perhaps a childhood trauma? Fetal alcoholism? Just plain stupid? Tell Microsoft what's wrong with you at their website.

I clicked through to the site. It's real. Some heads should roll at Microsoft PR in Redmond. What is going on there? Actively calling out your customer base? Is this supposed to be edgy and cool? How about stupid and ill-conceived? First the Zune launch was an unmitigated disaster. Then Vista's was something less than stellar, notwithstanding the eyeball-popping budget. Now they are on a mission to undermine the one cool product that they actually have that is making headway? I just don't get it...

But if you really want to freak out Bill, share with him an analysis done at a blog called 10layers. It posits a scenario where Apple - yes, Apple - has revenues exceeding Microsoft's within 5 years. And I've got to tell you, it isn't totally crazy when you look at the numbers. But I'm sure Bill has an explanation (or at least a few juicy rationalizations) to do away with such talk.

Both Microsoft and Apple have seen healthy revenue growth in the last 5 years. Microsoft’s revenues have grown approximately 60% from just under $30B in 2002 to over $44B in 2006. However, while Microsoft has grown linearly for this period, Apple has accelerated with revenues of just under $6B in 2002 growing to just under $21B in 2006. An impressive 250% revenue growth! In other words, Apple has been growing much faster than Microsoft.

But equally as interesting as the post itself is a very detailed and thoughtful comment by Jack Campbell, who addresses some of the logical concerns with 10layers' analysis while positing his own scenario - where revenue crossover occurs at $40 billion, which implies Microsoft's revenues declining from current levels:

Thought-provoking math exercise, but not a valid proposition in the real world, as it would presuppose Apple’s ability to stack mega-hit products of the magnitude of the iPod. It presupposes that Apple will either (a) continue the exponential sales growth of the iPod [impossible], (b) introduce a succession of new products that individually sustain the exponential iPod sales growth [unlikely], or (c) introduce a palette of mixed products that collectively sustain the exponential growth of the iPod’s peak sales growth period [barely possible]. Historically, few companies with such mega-hit wonder products as the iPod have successfully followed it with sustained growth of the magnitude of that product’s peak performance period. It is exquisitely unlikely Apple will buck this precedent.

With all that true, there is still another factor that could lead to your projected revenue crossover point — a reduction in Microsoft’s growth rate to below the linear pace you project forward. I actually can see a moment in the 2009 - 2011 period where Apple’s revenue surpasses Microsoft’s, but at the about $40 Billion level, not the about $68 Billion level your math exercise predicts. 10 million to 25 million iPhone platform unit sales per year equates to an extra 5 to 10 Billion Dollars in sales. Some similar success with home media platform products, continued Mac platform adoption, and — well, you can rationally see $40 Billion in annual sales, near-term.

As for Microsoft’s softening sales growth, if you reduce your historical data set to the past two years, your own “linear” projection method drops the cir. 2010 revenue crossover point to about $55 Billion. Any further softening in Microsoft’s growth rate reduces that point further, with $40 Billion not being an unrealistic contemplation. With business desktop PC’s having been reduced to basically a replacement cycle revenue base, and Microsoft showing massive weakness against a wide array of Web 2.0 and home media assaults, supposing such a sales growth slide is not unreasonable.

In any case, Microsoft is showing more weaknesses and general executive-level befuddlement that at any prior time. And, Apple is striding forward with its game face firmly in place.

A 2010 revenue crossover at about $40 Billion is conceivable. We’ll see.

Interesting, thoughtful stuff. I hope Bill doesn't see this. He might get those crazy flailing hands going again. But let's consider some facts:

  • A slowing in the replacement rate of Windows-based PCs, which is bad for Vista
  • Strong positive growth trends in Apple's computer business
  • 50% of Apple Mac purchasers are "first timers"
  • Xbox sold 10 million consoles in 18 months; Nintendo sold 4 million in 8 weeks and is poised to top 6 million by March
  • Bill's got a bunch of reasons to feel pretty lousy. Microsoft has never been as vulnerable as it is right now. And the blogosphere is all over this, particularly as it relates to Vista.

    The Matter of Chatter

    From the BBC: Can Microsoft's Vista inspire consumers?

    From CNET: A frat party for Vista's debut

    From Niall Kennedy's Weblog: No One is Lining Up for Windows Vista

    From Blackfriars' Marketing: Windows Vista: The End of One Revolution and The Beginning of Another

    The Blackfriars' post has some particularly interesting comments that put some context around what is happening to Microsoft:

    In 30 years, it's amazing how little has changed.

    It is time for another worker rebellion. But this time, the tools are different. The revolutionaries today are employing a million free Internet services, personal Web sites, and startups without investments in the status quo. The first shots have already been fired by business people forwarding their email to free Gmail accounts to bypass corporate restrictions, airing dirty corporate laundry on personal blogs on Blogger and Weblogs, and launching test versions of new ideas using services from Google (GOOG), Amazon (AMZN), and Yahoo (YHOO). And the famous Windows PC banner is long gone from rebel uniforms. Today's rebel is wearing a Google T-shirt, carrying an Apple laptop and promoting their company from a Linux infrastructure they don't even own.

    Everyone from Bill Gates to high school students sees this change coming. But in this revolution, Microsoft is the defender of the status quo with billions of dollars of revenue and profit at stake, not the poor upstart. And for the new rebel generation that has grown up with computers, they see the Windows Vista PC, not as a tool that will help them build their dreams, but a barrier whose end user license agreements, restrictions on content, and closed development processes stand in their way. The high-school developer in a garage with a cool idea isn't thinking about getting her product to Microsoft -- she wants to get it onto the Internet where it make her world famous, not hold her hostage to lawyers and marketers locked into an obsolete business model. She wants her ideas to be used and shared in millions of devices across the world, not locked in a vault with a thousand others, waiting for a competitor's threat to free them.

    The instigator of one revolution is never the leader of the next. Bill Gates knows that, and he is moving on from Microsoft. It's time the rest of us did too. We have nothing to lose but our nostalgia for when Microsoft actually mattered.

    I think Carl Howe who pens Blackfriars' has it right. And just a quick reminder of the Information Arbitrage view on Microsoft and context from the December Microsoft vs. Apple post. It seems as if maybe Carl and I should go bowling together:

    With the Internet, cheap storage and massive processing power, the playing field has flattened measurably. One doesn't need thousands of developers, hundreds of man-years and tens of millions of dollars in "big iron" to develop applications people want. People want to connect. People want to be able to share. People want to discover. Pictures, movies, music, email, web pages, files, spreadsheets, and more. This means that people want programs and applications that are easy to use. And fun. And open. People and companies became dependent upon Microsoft because the lack of computing power and bandwidth called for a high degree of desktop integration. However, this isn't the case any more. Big, heavy OS and related applications simply aren't necessary. Google threatens Microsoft in search and email. Apple is chipping away with consumers. And these are only two of many companies that are relentlessly challenging the Microsoft franchise. Further, I think what Apple is doing is actually pretty profound.

    Apple has control over its entire value stack, while Microsoft only controls the software. In most places I'd argue that "vertical integration" is a bad thing, but Apple has created a total user experience second to none, which is evidenced by their intensely loyal and growing following. Apple is all about the consumer, and if the Mac wasn't enough the iPod certainly drove the point home. It is this laser-like focus on the customer intersected with innovation and out-of-the-box thinking that has led Apple to the position it's in. Apple is an innovation leader - what about Microsoft?

    Hmmm. Remember that Newsweek article I had cited above? It just so happens that Bill was asked the question about the vertical integration that I had written about, and here is how he responded:

    With Xbox and Zune, Microsoft has adopted an end-to-end approach, where you write the software, design the hardware and run the services. Will Microsoft now change its mobile-phone strategy and adopt an end-to-end approach, the way Apple has with the iPhone?

    No, I don't think so. People like different styling, media storage, capability [in phones]. The benefit we get from having lots of great hardware partners is pretty phenomenal. And our software can run on any one of those things.

    Thud.

    Conclusion

    We may be witnessing an historic changing of the guard, which takes place in every generation. Remember IBM? They were invincible. How could they be beat? By a couple of geeks in a dorm room, that's how. Microsoft rises. And then another snot-nosed kid with a great idea and a dorm room made it happen in the box business, enter Dell. Then others got wise and squeezed their efficiency-based margins to nothing. Apple rose like a phoenix, crashed and rose once again, by virtue of innovation and a customer-centric ethos. Sony was like IBM. Now they've been bloodied by the customer-centric and community-oriented Nintendo. And now there's Google, the poster-child for the democratization of the Internet and the ever-flattening, increasingly frictionless world.

    When put in this context Microsoft just seems so big and slow and old, hidebound by 30 years of culture and organizational silos that seem impregnable. And it appears that Vista - the product, the PR, the marketing approach - is the result of such an organization. At times brilliant, very heavy, complicated and expensive. This is not a product for today. This is a product for an era when the desktop ruled. And that era is long gone.

    Source: Apple Envy Seizes Microsoft