Microsoft’s tablet strategy — wait for the next version of Windows — will probably end up costing the company its long-held Windows monopoly, at least among consumers.
But it’s the LEAST BAD strategy Microsoft could have followed.
Earlier this week, Fortune criticised Steve Ballmer for his lack of vision, pointing to his decision to kill the Courier tablet prototype and instead build tablet functionality into Windows. In a follow-up article based on interviews with ex-employees, Fortune cited Ballmer’s “slavish devotion” to Windows and Office.
All true. But it’s not Ballmer’s fault.
Microsoft is forced to operate this way because of the huge profit margins it earns on Windows and Office — at least 60%, and sometimes up to 80% on Windows. Ballmer would be crazy — and possibly legally liable to shareholders — if he approved any strategy that knowingly cannibalised those two businesses.
Insiders call it the “strategy tax,” and it’s been around for at least a decade.
A former employee once told a story of pitching a feature to Bill Gates back when he was still doing product reviews. Gates said “That sounds like the f*** Windows strategy.” Then he started going around the table. “Do you want to f*** Windows? How about you? You?” The team got the message loud and clear.
That’s why the Xbox, which was meant to conquer the living room, never had a digital video recorder in it — that function was reserved for Windows Media centre. That’s why Microsoft scrapped a plan to move Office to the Web (called NetDocs) way back in 2001.
So imagine Ballmer’s mindset in 2009, when it became pretty clear that Apple was going to move iOS into a portable computer. What could Microsoft have done?
- Design and build a tablet like Courier, which would require huge up-front investments to get a hardware production line off the ground and would never earn the kind of margins Windows and Office earn. Case in point: Xbox.
- Use Windows CE or Windows Phone 7 to build a tablet OS and licence it to hardware makers at a price of $5 (CE) or $15 (Windows Mobile/Phone) a pop — compared with a minimum of $30 (and up to $120 or more) for full Windows.
- Split part of the Windows team off to do an emergency tablet version of Windows, creating delays, fragmenting the platform which developers (especially corporate devs) hate, and creating a logistical nightmare when it came time to move the tablet features back into the mainline OS.
- Make sure that the next version of Windows runs on tablets. This is the only answer that keeps costs down and profit margins stable. The cost: competitors get a two or three-year head start.
As Microsoft watcher Manan Kakkar points out, Ballmer and the Windows team are actually trying to pull off a pretty interesting coup with Windows 8. It will have elements of Windows Phone 7 — like a design based on the “Metro” interface and the ability to run Silverlight apps (the same platform used for building Phone 7 apps). That should make reviewers and — Microsoft hopes — consumers happy. But because it’s Windows, it will have the broad application and backward compatibility that IT buyers require.
The thing is, most consumers don’t care about app compatibility. As Apple has shown with the iPad, if you can build a new computing platform that works well, is reasonably priced, and has enough apps, people will buy it and buy new apps to go with it. By the time the first Windows 8 tablets come out in 2012 or 2013, tens of millions of consumers will already own iPads or other tablets.
Microsoft will be hard-pressed to convince these folks to run out and buy a Windows tablet.
If Microsoft loses 10% or 20% or 50% of the consumer PC market to non-Windows tablets, that’s a huge problem. That means Windows growth comes to a screaming halt. It could even end up costing Ballmer his job.
But he had no other choice.
Tragic figures in classical Greek drama often suffered from a condition called hamartia — a fatal flaw that isn’t necessarily their fault, but is impossible to overcome.
It still makes for great drama today.
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