Microsoft's Strategy

Steve Ballmer announced his intention to retire on Friday. The news came as a bit of a surprise because Microsoft's board had always stood squarely behind him despite widespread calls for his resignation and the fact that Microsoft shed over half its value during his thirteen years at the helm. Microsoft's market capitalization was over $600 billion when he took over and less than $270 billion on Friday. Stock price isn't the only metric for a CEO's performance, but Microsoft is a publicly traded company and accountable to shareholders.

There has been a lot of speculation around what triggered his decision. As I see it, these are the three possible scenarios:

• Ballmer and the board agreed that Microsoft needed a major change in direction and a new CEO. However, the new CEO would face enormous backlash if he or she came in and tried to change direction too quickly. It was decided that Ballmer would initiate the changes, moving Microsoft toward vertical integration and a functional structure, and then the new CEO would come in and finish the job. No one would be able to question Ballmer's love for Microsoft or the old way of doing things, so the changes would be accepted as good and necessary.

• Ballmer, finally realizing that Microsoft needs a major change in direction, begins moving Microsoft toward vertical integration and a functional structure. The board gives its tentative approval for these initiatives, but panics when the road gets bumpy. OEMs are up-in-arms over the Surface, enterprise and the channel are up-in-arms over the changes in Windows 8, shareholders are up-in-arms over last quarter's $900 million write-down, and company insiders are up-in-arms over the new functional structure. In attempting to change direction, Ballmer has put the company at risk. Instead of facing a slow decline, during which huge profits are still being raked in, the board now sees the potential for a rapid collapse and cans Ballmer.

• Ballmer, finally realizing that Microsoft needs a major change in direction, begins moving Microsoft toward vertical integration and a functional structure. But the board, feeling like these moves are too little and too late, decides that Ballmer needs to go. If change is necessary, they would rather start with a clean slate and a new CEO.

Does Microsoft even need a new direction? If they want to stay relevant in the consumer space, I think they do. Fifteen years ago, if someone sent me a text document, it was in the .doc format, and I needed Microsoft Word to open it. Documents were created in Word and sent as Word files. (If the recipient didn't have a copy of Word to open the document, that reflected poorly on the recipient and not the sender.) That was enough to ensure that I owned a fairly up-to-date version of Microsoft Office. Today, not so much. It is now bad form to assume that everyone has a copy of Word and most text documents I receive are sent in the .pdf format, even if they are still often created in Word. If I am exchanging text documents with someone and those documents need to be editable on both ends, then we negotiate the use of Word or Google Apps.

For me, the value proposition of owning Microsoft Office was to guarantee that I could seamlessly exchange documents with other people. In the 80s and 90s, I also used Office for creating documents (since I owned it and it did the job well), but I've since moved on to other applications that I enjoy using more. The old value proposition is going away and it is unclear what the new value proposition for using Microsoft products will be.

The biggest troll at Horace Dediu's blog, Asymco, is this fellow, obarthelemy. He recently posted this comment:

To me, Apple's innovation recipe is fairly simple: in a market that's tech-driven, make a product that's both easy to use and socially desirable.

That works wonder for markets that have historically been tech-driven, with ugly product and unfriendly UIs. I'm just unsure if there are any more such markets (TVs maybe, desktops maybe), and if Apple can work up a new recipe ?

That is Apple's value proposition! If there is something that you use everyday but hate using, Apple will sell you their version that is attractive and easy to use, which means that you will enjoy using it and get more out of it. Lots of us see the value in that even if obarthelemy doesn't. Many people may not like Apple as a company, but most of them still wish that the companies they do prefer would care more about design and ease-of-use.

Google's value proposition is services that are free, useful, cool, uncluttered (Google may be an ad company, but they don't bombard you with ads or serve up noisy user interfaces), and that have a large user base, which is important when you want to interact with other people through those services.

Microsoft needs to offer something similar to its consumers. At one point, it was developers, developers, developers! Microsoft Windows was the platform that developers developed for, which meant a rich ecosystem of applications. That value proposition still exists today, but like the value proposition for Office, it is weakening and unlikely to survive the transition to mobile unless Microsoft takes steps to shore it up. Just putting Windows Phone, Windows RT, and Windows 8 on a shared kernel — and then bragging about it — is not enough. OS X and iOS already share a kernel, and Apple has put far more work into optimizing iOS for mobile, implementing APIs to facilitate integration and frameworks for creating well-designed apps, and pushing the envelope with their own apps.

With so many strong platforms out there to target, I'm not sure if Microsoft's old strategy of winning over most developers is even possible any more. But if they are going to try, there are some things that I'm going to want to see. I'm still waiting to see Microsoft Office and key third-party apps like Photoshop Elements for Windows RT. If Adobe won't port Photoshop Elements to Windows RT, that says a lot about Microsoft's lack of a value proposition. You can talk all you want about the power of a tablet that runs down-scaled desktop apps instead of up-scaled phone apps, but right now, the Windows App Store is full of apps that would run just as easily on Android or iOS, and those tablet apps won't even run on your phone. Without more powerful apps, Windows RT simply feels bloated and unoptimized.

Talk is cheap, and a strategy with a black box at its center is no strategy at all.