Microsoft Reorganizes

Microsoft’s share price just plummeted 11% after a disappointing fourth fiscal quarter including a US$ 900 million writedown on unsold Surface RT devices. As Larry Dignan announced his story on Twitter, “Microsoft is really two companies. Consumer sucking wind. Enterprise killing it.” Tim Anderson provides a nice overview table that highlights the stagnation of Microsoft’s consumer business. As usual, Microsoft provides no clear answers on how this could happen and how to improve the situation.

Jon Honeyball makes a good argument that the early release of an ARM-powered Surface RT was entirely pointless and likely damaged both Windows 8 and the Surface brand. Tim Anderson thinks Microsoft should persevere anyway for strategic reasons. However, I don’t see anyone making a good suggestion of how to fix the chicken-and-egg problem of selling a premium tablet with a poor ecosystem, against the much more attractive iOS and Android options. Outside of enterprises, Windows thrives on the strength of its countless desktop applications. Without that ecosystem, a Windows RT device is about as attractive as a BlackBerry, Zune or Kin to the average consumer.

The Misery of Surfaces

Anyone who followed the news could see this coming. In March, Bloomberg reported that only about 1 million Surface RTs and 400,000 Pros had been sold so far. In April, overall PC sales collapsed by 13.9% compared to the same quarter in 2012. Industry sources told Ed Bott that Windows 8 was “destroying” the PC industry and had “handed over millions of customers to Apple.” In July, Gartner recorded another 11% drop in overall PC sales compared to 2012. Five consecutive quarters of declining shipments constituted the “longest duration of decline in the PC market’s history.” PCs are being displaced by inexpensive tablets for the majority of users – and “inexpensive” means that pricey Windows tablets like the Surfaces are left out.

On the developer side, Dr. Dobb’s had hopefully bought a Windows 8 machine to test the multitude of Metro apps that would surely be arriving shortly… except they didn’t. Suppliers and readers had no interest whatsoever. Microsoft clumsily tried to address this by offering a $100 bounty for writing Windows 8 or Windows Phone 8 apps. If such a low reward had any effect at all, it’s only to fill the store with cheap junk. And in April, in-app advertising mostly stopped for Windows Store apps. Microsoft itself had stopped buying ads and could not find external advertisers willing to pay its rates. Meanwhile, Windows 8 users only launch an average of 1.5 apps per day – and most of those are Microsoft’s own.

It doesn’t help that Microsoft seems unable to serve those who might accidentally wish to buy a Surface. In June, Ian Smith posted a hilarious and terrifying story of his attempts to obtain a Surface Pro in Britain, and then have the ordered canceled, neither of which Microsoft could handle. Later that month, with 4 million Surface RTs left unsold, Microsoft tried to sell them to schools at bargain prices (now followed by an across-the-board price cut).

The Grand Reorganization

Given that background, let’s have a look at Microsoft’s corporate reorganization that preceded the earnings announcement. Steve Ballmer has produced two endless boring memos, but you can get the gist from Mary-Jo Foley. The four new product groups are the following:

  • Operating Systems — Windows Client & Phone, Xbox OS & Xbox Live, SkyDrive
  • Devices & Studios — Surface, other Xbox, peripherals, games & entertainment
  • Applications & Services — Bing, MSN, Office 365, Office Client & Server (Exchange etc.), Dynamics CRM/ERP, Skype, Yammer
  • Cloud & Enterprise — Windows Server & Embedded, Azure, System Center, SQL Server, Visual Studio & tools, Global Foundation Services

Publicly, Microsoft insists that Windows is still important and that all its consumer devices also have enterprise uses – amusingly including video conferencing for the Xbox One. Since the latter’s announcement was botched quite spectacularly earlier this year, one might interpret this as an internal bid for continued relevance, just in case the console does flounder against Sony’s upcoming PlayStation 4.

A number of functions are now centralized at Microsoft, including marketing and finances. That’s known as a “functional” as opposed to “divisional” organization, and Ben Thompson has written a series of articles that present a very cogent critique of this change:

All of these are great reads but I have one problem with them, especially the last part: Thompson analyzes Steve Ballmer’s propaganda, not his actions. If you look at the new organization, you’ll see two Windows products conspicuously missing from the Operating Systems group: Server and Embedded. Sure enough, those are the two essential Windows products for Microsoft’s enterprise market. You know, the one that’s healthy and growing. Microsoft’s handheld components for enterprise infrastructure are based on Windows Embeddednot Windows RT or Phone. And as I’ve speculated before, a business & developer version of Windows that runs desktop applications (including Visual Studio) could easily be spun off Server, regardless of the fate of Windows Client.

Thompson suggests that Microsoft should focus on cross-platform web services. He appears to have missed that behind all its Windows and Surface bluster, Microsoft is doing exactly that (later reaffirmed after Adobe made its premier products exclusive to subscribers). The new organization strictly separates enterprise products and cross-platform services from the consumer products in Operating Systems and Devices & Studios. To me this looks a lot like bundling away all the non-essential products for easy ditching in case they don’t recover. (Christopher Mims had the same idea back in April, so at least I’m not completely alone here!) We won’t know for sure until this actually happens, but maybe Steven Sinofsky will shed some light once his gag clause runs out in 2014.

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