Windows 8: Will Microsoft’s Latest Big Bet Pay Off?

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Financially, Microsoft appears to be able to weather some Windows turbulence. For the fiscal year ending June 30, Microsoft’s Windows and Windows Live division had the third-highest revenues at the company. The Windows unit had fiscal 2012 revenues of $18.37 billion, down from $19 billion in 2011. Microsoft’s enterprise units, which focus on software for corporations, had stronger sales. The Servers and Tools division delivered fiscal 2012 revenues of $18.7 billion, up from $16.7 billion in 2011. The Microsoft Business Division, which includes Office, had fiscal 2012 revenues of $23.99 billion, up from $22.5 billion in 2011. In terms of operating income, the Windows division is No. 2 at Microsoft behind the business unit.

On the Surface

Experts at Wharton say that the fate of Windows 8 may rest on whether Microsoft can successfully build its own hardware to showcase its new operating system. And so far, Microsoft has made a few missteps.

Along with the launch of Windows 8, Microsoft introduced its Surface device — a tablet with a keyboard that snaps onto the screen. The Surface uses the Windows RT operating system, a version of Windows 8 that runs on a more power-efficient processor and provides longer battery life. Microsoft’s starting price for the 32GB Surface is $499 without the keyboard. The catch is that while the Windows RT Surface runs a version of Microsoft’s Office products, it isn’t compatible with the full range of existing Windows programs.

Microsoft said that in January it will launch a 64GB Surface with Windows 8 Pro starting at $899 without a keyboard. The Surface Pro will get roughly half the battery life of the Windows RT Surface but be compatible with previous Windows programs and include a stylus for notes. Both Surface versions have keyboards starting at $119.

According to Fader, the Surface has a few hurdles to overcome to be a hot seller. The biggest issue is that Microsoft chose to sell the Windows RT Surface only in its own stores, which are few relative to the number of outlets Apple has. On December 11, Microsoft announced that the Surface will be available at retailers such as Best Buy and Staples. “Microsoft made a grave mistake on distribution,” notes Fader. “I love the first concept [the Surface with Windows RT], but it’s in the hands of very few.”

Matwyshyn predicts that the Surface with Windows RT could have a tough time threading the niche between a laptop and a tablet. “The Surface is an improvement in work integration and usability. But Windows RT is a mistake. The Windows RT [operating system] feels crippled in comparison to Windows 8” due to the incompatibility with previous Windows programs. “If Microsoft views the future of Windows 8 as being tied to the mass appeal of the Surface, that may prove to be overly optimistic,” she adds. “If Windows 8 and Surface don’t do well, [there will need to be] a tough internal discussion within the company on Microsoft’s positioning and core competencies.”

According to Whitehouse, the Surface could be interesting for corporate customers, but he says that “the jury is still out” until a key question is answered: “What’s the niche that the Surface can fill that will give Microsoft a unique advantage [in the enterprise]?”

Technology industry insiders also wonder how the Surface and other Windows 8 devices, which are largely new designs, will fare. Intel CEO Paul Otellini said on the company’s third quarter earnings conference call that many devices are trying to be the best of both worlds by combining laptops and tablets. However, “we honestly won’t know for 12 months” what device ultimately moves the most Windows 8 volume, he noted. Not surprisingly, Apple CEO Tim Cook views the Surface as a product that tries to do too much. “I suppose you could design a car that flies and floats, but I don’t think it would do [both] of those things very well,” he said during Apple’s earnings conference call on October 25.

Spread Too Thin?

Some analysts say that Microsoft may be trying to juggle too much at once. Currently, it has enterprise juggernauts like Windows Server, Dynamics CRM and Office. On the consumer front, it has Windows Phone, Xbox and Bing, the No. 2 search engine behind Google.

Yet Wharton management professor¬†David Hsu¬†argues that Microsoft is doing the right thing by having several experiments and businesses going at once. “The general idea is that you want to spread your bets and hit as many tipping points as possible. Microsoft is forced to even out its bets in multiple directions.” The company’s enterprise business is a traditional strength, says Hsu. The Surface is an experiment in tweaking Microsoft’s partnership with hardware vendors and represents the software company’s move to integrate its own software with hardware, he notes.

If Microsoft refrains from going after the tablet and smartphone markets, it risks watching Apple and Google take its computing crown, Hsu says. A rule of thumb, he adds, is for companies to pursue related markets as long as there is some benefit even if the efforts don’t succeed. “If Microsoft strikes out on tablets and smartphones, there should be some value in learning” from those initiatives that can be applied to the development of future products. “There will be convergence over time.”

In addition to mobile devices, another potential area of growth for Microsoft is “cloud computing,” which offloads local processing to Internet services. Microsoft has various efforts on the cloud front — including Azure for businesses and Office 365. “The organization is pushing toward the cloud,” says Matwyshyn. “Moving in multiple directions is a good thing to see.”

The larger question is whether Microsoft can help its newest efforts gain a foothold in the market. After all, the company was pushing tablet computers in 2000. “They have brilliant ideas in the organization, but the ideas get lost internally,” Matwyshyn notes. “Microsoft can be first to market with a great idea and not understand the consumer.” For instance, Microsoft’s initial tablets were bulky laptop hybrids and required a stylus.

One side effect of Microsoft’s penchant for chasing multiple markets is incoherent marketing, says Fader. “Microsoft’s problem is that it has a mishmash of products. It has divisions with different business models, and the umbrella branding is off — it has all of these [products], and the consumer doesn’t know where [they fit in].” One possible way of reorganizing would be for the company to split its enterprise and consumer businesses, Fader suggests, but it’s too early for that decision. Overall, Microsoft needs a more coherent tale to explain its businesses and a brand that can span multiple products. “Apple has an umbrella brand…. Google has a good umbrella brand. But Microsoft represents an operating system company stepping out of its comfort zone.”

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