Microsoft Financial Analyst Meeting 2010
by Mark W. Hibben
August 2, 2010
Not Just Sound Bites
Microsoft’s Financial Analyst Meeting (FAM) held July 29 offered an unprecedented degree of insight into the company’s corporate strategy and product plans. Partly, this was meant to distract analysts from certain unpleasant facts of the present: the slowness of response to the iPhone, and the surprising success of iPad despite lower cost netbooks. Nevertheless there was much useful information to be gleaned, assuming an appropriate level of filtration. Despite some failures of technical vision, Microsoft remains a very successful company with some fine products such as Windows 7, Windows Server, Xbox, and a host of development tools for everything from mobile devices to web applications. Ballmer and company wanted very badly to project an image of forward thinking, with some success. Microsoft’s vision for cloud computing at both the enterprise and personal levels is certainly compelling from a business standpoint. The new Xbox Kinect system, due out in the Fall, uses video cameras to allow users to control games without any physical contact or controller and is truly innovative. Like an aircraft carrier, Microsoft may be slow to change direction, but it can project a lot of firepower once it arrives at its destination. The FAM gave us a list of ports of call for the USS Microsoft in the coming year.
A Not-bad Present
Many months ago, I described the War for Mobile Internet Supremacy (WMIS) as a three way battle between Microsoft, Google and Apple. This was partly to emphasize that WMIS has become a battle of operating systems more than hardware and that the leaders of the respective alliances were first and foremost, purveyors of OS software. In the interim it may have seemed that Microsoft was a no-show, offering at best unexciting smart phones, obsolete tablets and underpowered netbooks, but Microsoft has been quietly winning the battle of market share against Google and Apple. Defining mobile internet devices broadly to include smart phones, tablets and netbooks, Microsoft wins by a large margin.
It’s estimated that in calendar year 2010, 60 M Windows netbooks will be sold, versus roughly 44 million iPhones and iPads (my estimate based on the current pace of iPhone and iPad sales) and 30-40 million Android phones . Furthermore, from Google’s most recent financial statement it appears that Android generates no direct revenue, and if there is a breakout of Android-based traffic on Google sites, Google hasn’t published it. Giving away an operating system may seem like a good promulgation strategy, but it’s never really worked. Operating systems require considerable maintenance and frequent updating. Without a healthy revenue stream to support this maintenance, operating systems become rapidly antiquated and fall out of favor as users become frustrated with bugs that never get fixed and features that never arrive.
For the short term at least, we can expect all three combatants to put up a strong fight as the table below shows, summarizing their most recent quarterly results.
|Latest Quarter||Quarterly Revenue||Quarterly Net Income|
|Microsoft||Fiscal Q4||$16.0 B||$4.5 B|
|Apple||Fiscal Q3||$15.7 B||$3.25 B|
|Fiscal Q2||$6.82 B||$1.84 B|
Ballmer was also happy to report that Windows notebooks, which I assume included netbooks, gained market share against Mac OS laptops for the first time in several years in 2010, going from 91.8% to 92.8% in Q1 of CY2010 compared to 2009. Mac OS laptop share actually shrank, going from 8.2% to 7.2 %. Of course, this didn’t include iPad or iPhones.
In other major business areas, Microsoft is also performing well. 175 M Windows 7 licenses have been sold to date, and IDC estimates that over 400 M PCs with Windows 7 will ship in 2011 as the business refresh cycle takes hold. Office 2010 is supposed to be doing well, but Microsoft didn’t produce any hard numbers on adoption rates.
Given the abrupt user interface changes introduced in Office 2007, and given that Office 2010 just looks like more of the same, I doubt that people are rushing out to get the new version, but Office will be helped by its new and commendably free on-line version.
As if Google didn’t have enough to worry about with the impending release of Windows 7 Phone, Bing has been gaining search engine market share, which Microsoft now estimates to be between 8-12.7%. Since this is Google’s core business, it’s no wonder that Google shares have been in free fall, despite the “success” of Android.
Ballmer also made the point that Xbox had finally become profitable, though he didn’t give specific revenue numbers. 1.5 M Xbox consoles were sold in the quarter, and 42 M Xbox consoles have been sold to date, while Xbox live membership stands at 25 M. As a model for a TV and internet connected entertainment appliance, Xbox makes much more sense than Apple TV, which only reinforces why I think Apple TV is not long for this world.
Microsoft has even opened up three “me too” retail stores in Oak Brook, IL, Bloomington, MN, and Bellevue, WA, but there were no numbers on store revenue. Apple’s formula for retail success may be very difficult for Microsoft to duplicate, since it depends so much on the character of the Apple fan base as well as the paucity of other retail representation for Apple. Apple stores fill a retailing vacuum for Apple products that doesn’t really exist for Windows, so it remains to be seen what impact Microsoft’s retail stores will have.
In November 2010, Xbox Kinect will arrive on store shelves. Kinect is a separate box containing video and audio sensors and processing hardware and software. The system analyzes the body position of a user standing in front of the sensors and sends this information to the Xbox console which can use it to control some aspects of the game, such as character position or actions such as throwing a punch or swinging a golf club. Think Wii without the Wii wand. Kinect represents the first major consumer product to emerge from one of the hottest areas of computer user interface research, which is non-contact gesture recognition.
Many companies currently have research projects underway, including Apple, and most approaches employ some form of video camera system to allow users to make gestures that can control certain aspects of the computer. For instance, one might use pointing or other hand gestures to control a mouse location. Much of the research applies sophisticated image processing algorithms borrowed from military target recognition and tracking. That Microsoft was able to get out in front of the rest of the industry shows that they actually can lead rather than just catch up.
Windows 7 Phone
I have to admit, I didn’t really get the point of Tiles, the button format for the new Windows 7 Phone, when I first saw it demonstrated earlier this year. The demo at FAM took pains to point out that Tiles are actually mini-windows that can be updated dynamically with information and images important to the user. It’s a clever concept, but it smacks a little of Microsoft one-upsmanship. Tile organization doesn’t seem quite as intuitive as the iPhone home screen, which is basically an extended desktop on which all applications sit as button icons. With iOS4, users now have complete freedom to organize their apps into folders as they see fit. For some reason, Microsoft, both in Windows and Windows Mobile has seemed to discourage this self-organization in favor of enforced groupings of applications and access through some form of “Start” menu. This continues to be true in Windows 7 Phone, where applications are grouped as “hubs” of related applications, such as an Office Applications hub, which are launched from a Tile in the home screen. It’s not clear how much flexibility there will be in adding tiles or how large the home screen can be. The FAM demo showed at least 3 vertically scrolled screens of tiles in the home screen.
The FAM demo also went to some lengths to make sure that everyone could see that the phone implemented multi-touch sensing, by displaying the user’s touch positions on the conference room display. Despite this, gesture recognition was very limited. Only swipe to scroll was demonstrated. There was no demonstration of pinch or rotate, and zooming was performed by double tapping. It may be that Microsoft is finding it difficult to get through the minefield of touch interface and touch sensor patents that Apple has accumulated to protect iPhone IP. This could hobble any touch-exclusive Windows 7 Phone devices and may explain the delay in getting them to market, but Windows 7 Phones are expected in time for the holidays.
Touch Enabled Windows 7 Devices
Ballmer frankly acknowledged that Microsoft had been surprised by the success of iPad. Based on what was demonstrated in the way of Windows 7 touch enabled devices (tablets and all-in-ones), I doubt that it had occurred to anyone at Microsoft to deviate from the preferred stylus approach for tablets up until the debut of iPad. The stylus conforms to the mouse pointer paradigm, in which the stylus simply drags the mouse pointer around on the screen. Such an approach would require minimal changes to the underlying Windows 7 operating system, and therefore was preferred for perfectly sensible business reasons. Microsoft was caught completely flat-footed by the iPad’s exclusive use of touch, and the realization that all future tablets would have to fully implement touch forced Microsoft to chuck their existing tablet development program and start over. Based on what was demonstrated at FAM, they haven’t gotten very far, which is why Ballmer refused to commit to a specific roll-out date for the tablet.
The touch interface capability that was demonstrated lacked both multi-touch capability and significant gesture recognition. There were no single or multi-finger swipes, let alone pinch or rotate. There was some progress, however, beyond merely substituting the touch for a mouse click, in that touching and dragging to provide drag and drop or a window scrolling capability (in a web browser) was demonstrated. Touch and drag scrolling rather than using touch to try to grab scroll controls that are sized for mouse pointers is a significant improvement, but not nearly enough. Touch requires a complete rethinking of the OS user interface, and it’s not at all clear that merely adapting the Windows 7 user interface to touch can really be successful. Recall the Jobs recently revealed that the touch interface had been in development at Apple and demonstrated to Jobs before the development for the first iPhone had even begun. This is the kind of lead time that’s required for innovations such as Apple’s touch interface. Time will tell whether Microsoft has really done enough work in this area, but what was demonstrated was much too primitive to be very appealing to the consumer.
Ballmer did allow that Microsoft was working with Intel to bring out tablets based on the Intel Oak Trail SOC in early 2011. I haven’t been able to dig up much info on Oak Trail, other than it’s a Moorestown processor, but this is the first indication since Moorestown was announced of when an actual Moorestown processor would be available for sale. It’s becoming clear that my “Moorestown Arrives” article was inappropriately titled. So, iPad will get a little more breathing space, but 2011 is shaping up to be the Mother of All Battles in the WMIS.
Enterprise Cloud Computing
So badly did Ballmer want to make a point about Microsoft’s cloud computing strategy that that he wrote an article about it in Forbes.com in addition to the presentations at FAM. I find I can’t share Microsoft’s corporate excitement about cloud computing, since there’s nothing really technically innovative about it. Cloud computing is really just a form of outsourcing, enabled by web based applications, internet servers, and the high speed internet connection. What used to be done by local area network servers for business and other institutions, file server, database server, application server, mail server, etc. can be done remotely over the internet by a third party server as a service that the company or institution pays a fee for.
What’s exciting about this for Microsoft is that it’s a made to order business model for them. Instead of separately selling server, database, applications and development software, Microsoft will offer everything as an integrated solution customized to the needs of the client. Microsoft makes a valid point that by virtue of their server and database software solutions, the online version of Office, their Azure on-line application development environment, and on-line search with Bing, that Microsoft is uniquely positioned to offer a complete cloud computing solution. The flexibility to down or up-size as business conditions dictate must be appealing to business users, as well as the reduction in capital investment required to maintain server farms and network infrastructure.
What is the principal issue for Microsoft? Security, security, security. The major impediment to businesses outsourcing to clouds is concern about the integrity of their customers’ data, and protection of proprietary data. It’s a lot tougher to infiltrate a LAN-based system if that system is internal to a company and not physically connected to the Internet. Microsoft seems to be implying that it can keep its own systems more secure than can customers who run Microsoft servers and networked Windows PCs. Perhaps, but given how hackers love to target Microsoft, I wouldn’t be surprised if Microsoft clouds receive a great deal unwanted attention from that quarter. As if in anticipation of this Microsoft appeared to have a ready answer: if a customer really has to have its own data center or even cloud capability, Microsoft will be happy to sell a fully integrated containerized system they can drop almost anywhere in the world.
Personal Cloud Computing
Microsoft’s vision for personal cloud computing is at least innovative from a marketing if not technological stand point, and may well constitute their secret weapon in the WMIS. Microsoft mobile products may not be that compelling in and of themselves, but the degree of integration that Microsoft intends to provide through the personal cloud may make them more appealing. What Microsoft proposes is similar to what Apple has been doing for some time with iTunes and Mobile me, but with a shift of the center of gravity to the cloud from the personal computer. The Microsoft personal cloud functions as the distribution hub for all media content, files, email, and messaging between all of the user’s Microsoft or compatible devices and manages synchronization between them, rather than being merely an adjunct repository of backup files and email messages. The Microsoft personal cloud also represents a significant DRM paradigm shift, since down-loaded protected material will be able to be shared easily among all the devices in the user’s personal cloud, including multiple PCs, tablets and Windows phones, a significant departure from Apple’s current approach. I like the personal cloud concept, although I think it has many of the same security issues that the enterprise cloud has. Given how well Microsoft integrated Windows Mobile and Windows based networks and email, I expect that the personal cloud will be well implemented. Personal cloud computing will be available to Windows 7 users in the fall, probably simultaneously as Windows 7 Phone is rolled out.
It’s all too easy to dismiss Steve Ballmer given his lack of presentation skills and tendency to spout unflattering sound bites, but Ballmer is an intelligent man with a degree in mathematics and economics from Harvard, as well as the billionaire CEO of one of the most powerful technology companies in the world. The FAM was not merely about showing off some new products, it was about an assertion of control of the Wintel duopoly, in which Microsoft exercises ever more leadership in the hardware area. Microsoft’s offering in the integrated data center arena appears to be a direct challenge not merely to IBM but to HP and Dell as well.
It’s clear that the success of iPad blindsided Microsoft in a way that hasn’t happened since Apple’s introduction of the mouse-driven GUI. Once again, Microsoft must play catch-up, but this is something that Microsoft has been able to turn to their advantage in the past. It’s not always desirable to go first. When Microsoft finally surpassed Mac OS in the early 90’s with the bullet-proof and multi-tasking Windows NT, the effect was devastating, and Apple very nearly went out of business.
It’s likely that Microsoft will follow a similar path in catching up with Apple on the touch interface. Early offerings will be laughably primitive, yet still command significant market share by virtue of Microsoft’s overwhelming presence on desktops. This time around, Apple is probably better protected by patents both for the hardware and software implementations of touch, but it may not matter as the full firepower of the USS Microsoft is brought to bear in the WMIS.
Fortunately for Apple, it is now a much larger company than it was in the early 90’s. Apple needs to start acting like the technology superpower it has become, and stop worrying about things like lost iPhone prototypes. Apple is sitting on a huge pile of cash which is mostly gathering dust along with a little interest. Apple needs to use that cash to grow organically its internal research and development to an even greater extent than it is already doing. This is in fact what the internal processor development effort at Apple is intended to do, and why I take this effort so seriously. But Apple needs to do more. Apple’s focus on the mobile arena is commendable, but Apple shouldn’t retreat in the face of Windows 7, either. Apple needs to accelerate development of Mac OS X and OS X Server in order to counter the threat of Microsoft Personal Cloud computing.
The likely first casualty in the WMIS Mother of All Battles in 2011 is Google. Pressured by a frontal assault from Bing on their bread-and-butter business, and not getting enough revenue (indirectly) from Android, Google will probably sell Android off to one of the principal Android phone makers, either HTC or Motorola.