Could this gamble be game changer in 2015?

IDC released 2014Q3 report on smartphone OS market. It shows Microsoft Windows firmly in the 3rd place in 2014.

People may have forgotten how and from where it rose to this position, but future business historians will remember this as another successful strategy maneuver from Microsoft.

Techcrunch in a recent article observed that Microsoft went public in March, 1986, barely 5 months after it released Windows OS [Nov, 1985].

In the S-1, Mircosoft's IPO document, Microsoft's future valuation of Windows software is fascinating!

"In November 1985, Microsoft began shipping Microsoft Windows, a graphical operating environment which runs on the Microsoft MS-DOS operating system. As an extension of MS-DOS, Microsoft Windows manages such hardware as the keyboard, screen, and printer. This product allows new applications programs to present themselves in a standard and graphical manner that is independent of video or other output devices. Microsoft is encouraging independent software developers to create applications programs which will take advantage of Microsoft Windows graphical user interface features. Lotus Development recently announced its intent to pursue the development of applications products that will run on Windows. Microsoft’s own new applications software will be based on Microsoft Windows. It is too early in the life of Microsoft Windows to determine what level of acceptance it will attain in the marketplace."

Well one hardly needs anything to be said further to that statement today. Windows not only redefined PC market, Microsoft ensured that Windows' success is leveraged across all emerging computing platform markets, Server, Gaming Console and so on. Before Apple's second wave of growth, people never saw any serious threat to Windows for any foreseeable future.

Unfortunately, Windows never was a serious choice in embedded OS market. Microsoft also appeared to be hesitant, if not reluctant, player in smaller platform segment. Partly to that, all ventures [windows CE for example] from Microsoft in mobile segment were seen as weak, if not tentative. Mobile Phone market was largely proprietary and with Nokia leading the pack, no one saw any incentive to break the status quo.  That hesitation turned into a strategy blind-spot soon when Apple turned the table with iPhone. Microsoft needed something very badly to cover the lost space. For quite some time, beside Apple, there was no serious dominating player in the smartphone market.

Then Google brought Android and Samsung brought Android-based Galaxy series of phones. Android started changing the smartphone market in the same way Linux did to the PC market earlier. Microsoft did not appear to have any play. Some people even started writing eulogy for Microsoft.

Obvious reasons were

1. Linux is eating into Microsoft's PC OS market share.
2. VMware started almost monopolizing the server virtualization market
3. Cloud was fast becoming credible alternative to private data centre for the  enterprises.
4. iPhone and iPad redefined smartphone and tablet market and Microsoft's mobile OS had no play at all.

With slow PC/Laptop growth and exponential smartphone growth, Microsoft needed a serious game changer in the smartphone segment. When no one thought of any future for Microsoft, Microsoft almost created coup-d'etat with Nokia. Fast devaluation of Nokia's valuation and Elop's crucial decision of adopting windows for Nokia phone gave Windows the life-saving chance that it needed so badly.

IDC's recent report seem to indicate that the strategy maneuver has worked for Microsoft. Gartner's press release also indicate the same trend. Microsoft is back to OS game. Below charts from Gartner speak for themselves:

Table1
Worldwide Device Shipments by Operating System in Mature Markets (Thousands of Units)

Operating System	2013	2014	2015
Android	266,701	313,529	337,791
IOS/Mac OS	157,273	167,787	182,564
Windows	138,312	141,977	149,128
Others	100,633	48,130	29,352
Total	662,920	671,424	698,835

Shipments include mobile phones, ultramobiles (including tablets) and PCs

Source: Gartner (October 2014) 

Table 2
Worldwide Device Shipments by Operating System in Emerging Markets (Thousands of Units)

Operating System	2013	2014	2015
Android	632,517	928,135	1,117,860
Windows	187,474	194,091	221,804
IOS/Mac OS	78,928	95,304	112,647
Others	772,562	520,605	383,914
Total	1,671,480	1,738,135	1,836,225

Shipments include mobile phones, ultramobiles (including tablets) and PCs

Source: Gartner (October 2014)

Cost for the gamble

Leaving the development cost of windows 8, let's just look at the cost Microsoft incurred in acquiring Nokia phones:

Microsoft paid to Nokia: $7.2 billion

Adoption cost: $1 billion out of the Nokia operation

Microsoft posted an operating loss of $692 million this July. It claims to stop losses by June, 2016. 

How do the Microsoft shareholders look at this? This Business Today report says, Microsoft shares hit new 14-year highs just after quarterly result announcement, and were up by 1.1 per cent at $45.33.

Microsoft is charting new territory

Microsoft recently launched Lumia 535. They dropped Nokia logo in the new phone. Not sure how many are observant that Microsoft is charting a new path here.  More than 91% of Windows mobile phone sales bring revenue directly to Microsoft. In a recent report, IDC projects that Windows Phone will account for $7.8 billion (about 2%) of the $382.9 billion in revenue expected to be generated by the smartphone market in 2014. Although windows share in smartphone market is not high, the fact that almost all windows phone sales happen from Microsoft now, this gamble has already created success for Microsoft. Here Microsoft is charting Apple path [hardware + software] unlike what they did in 1985. Although Microsoft has treaded complete hardware and software path before with Xbox, smartphone market is likely to pose a lot harder challenge since there are too many dominant players and market is too nuanced already. But if there is anything to cheer about, it is that Windows has moved from PC-only market to PC plus Tablet plus smartphone market.

Finally, Nokia and Elop story reached logical end

Two and half years ago, when Stephen Elop was brought in to lead Nokia, many asked the question openly if Elop was the trojan horse for Microsoft. Though Elop publicly denied that charge at that time, Nokia's journey for last two and half years with him at the helm, has however reached the conclusion that many feared with announcement that Microsoft is buying Nokia mobile business at $7.2 billion and Stephen Elop returning to Microsoft. With Steve Ballmer's announcement of retirement, people are making simple arithmetic with Stephen Elop. We, humans, are good in drawing sweeping conclusion based on only 2-3 data points and this is also no exception to that rule. Truth, as often is found to lie somewhere in between.
The legacy of Elop in Nokia is hardly anything to be jealous about. Since he came on board, Nokia's valuation came down by 85%, the market space where Nokia was world leader, saw Nokia receding ground to Samsung and other OEMs. The smartphone space which was the key element driving Nokia to cannibalize Symbiosis and embrace Windows OS, decidedly went with Apple's iOS and Google's Android. Now did anyone know for sure that these were going to happen when Elop came on board?
Social psychologists use the term Fundamental Attribution Error to our natural bias to attribute personal disposition instead of situational artifacts as a cause of certain eventuality. We feel higher satisfaction if we can find someone to hold responsible for an event that we do not like. So we feel doubly eager to attribute Nokia's ill-fate to Elop. Psychologists also tell us that that bias changes when one is involved and is answerable for the course of event. In the scenario where the person is involved, it is often observed that he/she attributes the cause of events to the situational changes instead of his/her own decisions. That means, Stephen Elop will attribute the cause of the present state of Nokia to the changing situations!
Rational minds would ask, "Was the decision taken only by Elop? Would Nokia board agree to allow Elop to take the decision if they knew they had better alternatives [other than going windows way] two and half years back?"
 Given that the board members had access to all the information that Elop had, it is reasonable to assume that each member individually vetted all the different options in their personal capacity before agreeing to Elop's solution. What Elop most likely have done at that time is that he influenced these members in evaluating the potentials and risks that each option provided. He might have been successful in creating fear for future failure in sticking to existing course. He might have projected the value of Windows and Microsoft alliance much higher than it actually was. But ownership of the course steering lies with all the executive members of Nokia board.
Once the decision was taken, it was clear which path Nokia is heading. Mounting accumulated losses, market pressure, competition from Apple, Samsung and other Android-based smartphone OEMs took Nokia further away from its root and towards further grip of Microsoft.
But did Elop think that bringing Nokia mobile to Microsoft could make him a strong candidate for Ballmer's successor? Even if he did, how much could he bet that course of events will take the shape the way it happened when he took the plunge 2.5 years back? Nobody realistically could be sure. At most, he could do is play his cards the way he played and hope things will eventually take him to the coveted post that he might have been eying for.
Now how does this change for Microsoft? Would this bring the hardware success that eluded Microsoft and Ballmer all along? Well, fact is Nokia Lumia series with windows 8 has become a success. It is capturing market quite fast, providing a credible alternative to Android based smartphones, even at lower cost point. Merger in fact positions Lumia at stronger ground with control on both smartphone hardware and OS. It will give Lumia leverage to bring price of smartphone further down and present a credible competition to Android-based low cost phones in all emerging markets where the real smartphone battle has to be fought and won.
It will also help Microsoft to boost its advertising business where the battle with Google is being fought, by making advertisement more personalized for the users by integrating smartphone's on-device data with skydrive [Microsoft Cloud] and Outlook [Microsoft email]. But for this to work, Microsoft's existing strong culture of internal competition [and therefore wastage of creative bandwidth in political rivalry] must change and find a way to work like collaborative set of engineering/business functions. Lumia hardware engineering must be allowed to function independently of Windows software division for them to build on each other's strength. But if this strategy succeeds, Microsoft will have evolved itself for the new generation of users and move to a new position of strength.
So, good luck to Mr. Elop and RIP Nokia mobile [that's a bit hurtful for someone who always used Nokia handsets]!
The next news to watch is who is going to buy Blackberry/RIM!

Microsoft's online adv business after its first quarterly loss and aQuantive writeoff

We are continuing with your fictitious Microsoft interview in this post too. You were little lost in your thought when the interviewer came back with another person. Customary to strange interviewing process, the interviewer stepped out of the room 30 minutes ago, requesting you to wait for a while. 
The interviewer simply introduces his companion as a colleague who works in Microsoft’s online advertising vertical. For our convenience, let’s call this colleague of the interviewer, interceptor. The interceptor thanks the interviewer, greets you nicely at which point you notice that the interviewer gets up and takes leave from both of you. As the interviewer walks out of the room, the interceptor tells you that he would like this to be free-format discussion rather than a strict question-answer session. This is a new tack and it could mean that he will judge you based on how forthcoming you are in picking up the leads and how resourceful you are in fleshing up the conversation.
So, you start neutrally, “I read that Microsoft wrote off aQuantive and took a hit of $6.2 billion in its quarterly result. But you guys must be seeing this for some time?”
His eyes flickered, “Yes, you could say that.” He seemed to weigh his words before going any further. You decide to use silence as your tactical tool. Finally he spoke, “Online Advertising itself is a very new area and is going though continuous changes both from providers and advertisers’ point of view. Market saw explosive growth of online advertising spots in last two years, far exceeding the demand. In the hindsight, Microsoft may have put a little too high price for aQuantive.”

This is as far as it could get, you realise. You decide not to press further.  The interceptor goes back to more familiar line and asks you to talk about your experience, your achievements, and your failures. These are fillers and you know that all you need is repeat your well-rehearsed pitch, not too aggressive, neither too submissive, not too short, neither too elaborate, leaving pointers that lead to known territory, your space of comfort. You know that he will play with them for next 30 minutes. The important thing here is to maintain the flow but to not make any obvious mistakes. Eventually he will move to the ‘challenge’ phase. He will use chosen few questions as deal-breaker, assuming you have managed to maintain his interest till that point.

“What in your view is situation with online advertising space?” he changes the line and gives you a large canvas.
“Online advertising is the future, no doubt, but it is highly likely that advertising itself will see a large transformation before we reach there.” His eyes tell you that you have grabbed his attention. Now you need to carefully steer it.
Basic purpose of advertising, to start with, is to reach out to its potential buyers. It starts with a process of building general awareness of the product, its functionality, its value both at functional and emotional plane. In a world that is information-deprived, such as in the post internet-era, advertising was essentially broadcast. Print media or TV/entertainment media were the avenues to reach its audience and the advertisement content producer’s sole aim was to create content that sticks in viewer’s mind the longest. Building a brand is all about creating lasting impression in customer’s mind, creating emotional connectivity with customer’s thought process.

In the internet-era, information access has been practically ‘on demand’. It is buyers’ media now.  While TV and print media advertising continues and will continue to remain broadcast in nature, internet advertising must be focused on customer’s need and reaching to customer when his need arises. If broadcast advertising is more ‘push’ type, internet advertising is more a ‘pull’ type. Depending on the type of information that a person is searching/reading in the internet, the advertising agent has to pick and display the ad. If the agent provides too many irrelevant display ad, the viewer/user may block the content. So the role of the advertising agent is much more delicate, much more crucial here. With doubleclick, if Google has showed how to appropriate the value of display ads, it is also largely using its strength and dominance of its search engine. Microsoft with aQuantive and Bing although tried to emulate the model, fact that Bing commands a lot smaller share went against the model. Of course, with meteoric rise of Facebook, like the interceptor said, supply of advertising spots exceeded the demand by a large magnitude, bringing down the tariff of internet display ad overall.

Note : The average cost to reach 1,000 people with an online display ad fell to about $11.50 at the end of 2011 from $13.35 in late 2009, according to SQAD Inc, which tracks negotiated ad deals – source: Reuters

“Interesting! So how would you correct the course for Microsoft, if you are allowed to? What changes will you bring in?”

This unmistakably is the challenge question. Shying away is not only inappropriate, it will weaken your position. You must take this square on and try to be crisp while you are on it.

“I would start with basics. Microsoft is what it is because of Windows. I will start there. Windows is not only an operating system, it is a complete platform with whole lot of computing resources and with lot of crucial user-specific private data. Transferring the data outside user’s device would be tantamount to violating user’s privacy, so I will incorporate a sophisticated analytical engine inside Windows. It will continuously scan the information content being read/browsed and create a some sort of a live ‘top of mind’ list. When the customer invokes Explorer, I will provide a space which user can disable or resize or run in the background, if he likes to, but like news feed, this space will show display ads or links to the company that is absolutely relevant to his ‘top-of-mind-list’. More it is contextual, the better. Once this done properly same scheme can be used for Windows Phone too. Fact is with Phone the potential is lot higher. The phone soon is becoming the electronic gadget that will treble as communication device, entertainment device, gaming device as well as mobile commercial device and if I have a sophisticated platform like Windows, I will take full advantage of it by incorporating an analytics engine that maintains a live four dimensional profile of the user, the four dimensions being location, time, finance and emotional/behavioural state. With voice-assistance, I suspect that this, if it is done properly, it will be immensely useful to the customer too. Look at how popular Siri is for iPhone/iPad users and this will be lot more smarter that Siri! For amnesiacs, it will take the role of careful companion.

We will feed this engine with all the relevant advertising content which will be entirely contextual where high premium will be attached to relevance and physical/temporal proximity. That would not only create the channel that Microsoft is looking for, it will also be welcomed by its customers.

However, with the knowledge that Microsoft always works on competing strategies, I suspect that Microsoft’s post-aQuantive engineering team already is working on this line for it is the only way to deliver the promises of internet-based advertising which essentially pulls the right ad at right time to the right person, as many say!”

You did not notice when the interviewer came back but you seem to notice their momentary eye-contact as you were coming back from the whiteboard. You know that you have been fairly logical and accurate but were you a bit too assertive?

The interceptor tells you that he thoroughly enjoyed the discussion and gives you his card, when you realize your second interviewer is a Vice President in Microsoft.