Learning of Steve Ballmer’s departure from Microsoft, I wasn't particularly surprised: after several decades of near seven-day weeks and with a nice eleven-figure nest egg, who wouldn't want to spend more time enjoying life?
Looking Behind the Curtain
Reading further, I ran into the probable reason for Ballmer’s departure: the Surface laptop debacle that culminated in a nearly US$ 1 billion dollar (so far) write-down for un-recouped costs and unsold inventory; by some estimates more than six million units still on the shelf.
Now my interest was piqued: how could a firm with Microsoft’s experience and resources find itself in such a corner? The literal and widely reported answer was a collection of mistakes more characteristic of a Three Stooges movie.
The reported gaffes included a lame introduction, long delayed to product availability, highly restricted retail purchase channels and thin app availability due to a failure to placate a developer community still smarting from the rocky road of the Silverlight program. Somehow, it seemed, Microsoft believed that just having a laptop running Windows would attract the marketplace.
But how, I wondered, could this happen if Microsoft had its eyes even partially open in a landscape rich with experience in the introduction of new hardware products for the consumer market? There had to be something at work in Redmond beyond merely failing to do its homework.
Finding the why behind the what … the “Company Store?”
With that assumption in hand, I looked for factors in Microsoft’s experience that might insulate it from the reality of how one successfully offers a new product in today’s personal digital assistant (PDA) market. As I looked at the world Microsoft has come to view as normal, I noticed something interesting. I call it the “Company Store” syndrome -- from the 19th century when workers were often paid in scrip usable only at the company store.
Today, the company store is a firm’s position as the provider of the foundation, DOS/Windows in Microsoft’s case, that other vendors must use as their gateway to their markets. Microsoft, in an early flash of brilliance, developed cooperative relationships with IBM and other personal computer manufacturers to deliver their products with its DOS and later Windows O/S pre-installed. Since the latter 1980s, virtually everyone who bought a PC -- Apple and Linux zealots notwithstanding -- found themselves in a Microsoft world.
Moreover, competing PC application software firms found their products tied to Microsoft’s operating system and, as several have claimed in litigation, even faced subtle roadblocks that put them at a disadvantage against their Microsoft equivalents.
IBM enters the fray
Further sweetening Microsoft’s position, in 1981 IBM, after largely owing the large computer market through the 1960s yet missing the boat on microcomputers in the 1970s, developed the first mass market personal computer, selecting Microsoft’s DOS operating system as its standard offering.
Big Blue then made its plans for both hardware and software available to anyone who wished to build and sell machines compatible with the PC and its Microsoft-developed O/S and while the wisdom of that move is debatable, it resulted in a huge market for PCs, adding a hardware component to Microsoft’s company store no matter who built and sold the PC ...
… and Microsoft finds the Catbird Seat
As this situation matured, Microsoft became used to a world in which, for the most part, its customers would wait for whatever was coming from Redmond and, if the product didn’t perform as advertised, would wait for the fix or next release because they had little alternative. New customers, buying their first PCs, were implicitly encouraged to accept and use Microsoft products, from Windows to Word and IE to Excel and Power Point to whatever, regardless of whether they were best in class or most economical. Adobe and other firms made some inroads but the mass market remained solidly tied to the sages of Redmond.
In 1987, IBM, perhaps sensing its gaffe at delivering the OS market to Microsoft, tried to join the party with the joint IBM/Microsoft developed OS/2 operating system, a multibillion dollar effort that went nowhere and was finally tabled after a 2001 release.
For Microsoft, it was a comfortable and seemingly safe perch from which to view its marketplace.
“What goes up …” The market moves on
Then something happened.
The table and smart phone made their appearance starting in 2007 with the introduction of the Android and, in 2010, Apple iOS devices. This began an entirely new chapter in personal automation with tablets, smart phones and other hand-held devices being developed by Apple and a number of firms using the Android OS. Suddenly, or so it must have seemed in Redmond, Microsoft’s company store was threatened. Buyers were turning to the new devices, produced by other companies and using operating system and application software in which Microsoft had little or no stake.
While one can probably assume that this reality wasn’t discussed openly at Microsoft, the pressure to reinstate the comfortable -- and safe -- environment of the company store must have been intense. No firm that hasn't had to compete very much wants to find itself in a competitive marketplace. Otherwise, why would a firm with no significant history in hardware development or marketing jump into an already maturing market with a machine using an O/S (Windows RT) largely untried in the new personal device world?
Seeking the future in the past … Microsoft enters the device market
But jump they did, designing the Surface to use a version of Windows … and a cute but hardly game-changing cover/stand.
At this point, you might think that Microsoft, realizing its “new kid on the block” status in the tablet/smart phone market, would reach out to people and firms with deep backgrounds in navigating these uncharted waters. They didn't, probably because that feeling of being in control of their market dies hard, and the Powerpoint presentations in Redmond made things look like everything would go just fine. They didn't, as we all now know, including (if we are to agree with a recent class action lawsuit against Microsoft) covering up the Surface shipwreck in their financial statements.
I’m guessing, but my bet is that the order for millions of units was based on a calculated target margin per unit and on Apple’s ability to sell tens of millions of units each time a new iPad model was introduced, rather than on any reasonable estimate of how many Surface units were likely to sell.
Indeed, given the blizzard of negative publicity the Surface has received since its introduction in 2012, one could project, and reality has borne out, sales figures infinitely lower than the 8 million units -- estimates [Microsoft hasn't said] of two million sold plus another six million on the shelf -- Microsoft allegedly ordered.
There’s always a lesson in failure … here, too
So what does this sad situation mean for we consumers and for other firms in the personal device marketplace?
Perhaps the most prominent characteristic of this new world is that it plays by very different rules from the past. People buy tablets and smart phones for different reasons, developers commit their talents to software environments for different reasons and the entire universe operates as much on what they see on Facebook and Twitter as on what the vendor thinks or claims.
Firms wanting to succeed in this market must approach it as it is and is becoming, not as their experience suggests it should be, and corporate culture can often retard a company’s ability to do that.
There are some successes that highlight this reality: for instance, in the early 80s after having botched the 1970s minicomputer market, IBM realized that it must break free from its corporate culture if it was to enter the new microcomputer world, so it chose a small team -- twelve people by most estimates -- and sent them off to a facility in Boca Raton, Florida to design a new personal computer, isolated from its corporate traditions.
The team not only succeeded, it did so in one-fourth the time usually required for a new product at IBM. Building on this start, Big Blue then chose Microsoft’s DOS operating system for its new machine, opting as well for third-party hardware components to avoid the ponderous nature of IBM’s hardware manufacturing culture. Finally, IBM opened its plans so that anyone could build “IBM compatible” PCs, vastly increasing the overall market for PCs … in which IBM got a significant share as the “father” of the new machines.
Not Everyone is Listening
Despite the success of “open” approaches to hardware and software, today’s Apple devices use essentially closed proprietary operating systems (iOS) that, while allowing the company’s products to leverage and protect their unique function set, also require developers to create multiple versions of their apps so that both Android compatible and Apple devices offer equivalent functionality.
As the worldwide Android sales haves overtaken Apple sales in the past year or so, one must wonder if the iOS wall is, as one reporter put it, “fortress or prison.” For firms capable of realizing their error and changing their outlook -- as Intel did after suffering for its resistance to the move from PCs to mobile computing -- this can lead the firm to a new strategy that embraces it.
It has been said -- truthfully I think -- that an army and its Generals usually fight the last war in which they were victorious. This truth can and often has had disastrous results throughout military history -- France’s WWI-inspired Maginot Line, for instance, that ignored the growth of mobile mechanized infantry and was quickly bypassed at the opening of WWII -- and is, if we are to believe recent history, likely to be equally dangerous for the computing world.
It appears that firms, especially big ones with big designs on the marketplace, must make avoiding a repeat of the past their first priority. That can only be accomplished, it would seem, by creating a vision of one’s market looking forward, immune to the usual penalties for breaking with the past. Microsoft -- although hardly alone -- has shown us just how difficult, and expensive, this can be.
It should, however, give organizations and their leadership a powerful incentive to try.
Title image courtesy of Javier Domínguez Ferreiro on Flickr via a Creative Commons Attribution-NonCommercial-ShareAlike License