When Satya Nadella took the helm at Microsoft last year, he quickly stamped his mark on the company. His mantra, ‘cloud first, mobile first’ has proved to be more than a PR slogan, but genuinely the key theme in his aggressive plan to reinvent the firm and cut the umbilical cord with Windows. Launching mobile Office for iOS before Windows was his most symbolic step, but in 2015, of course, Windows 10 will appear, and his challenge will be to prove that the operating system can compete on its own merits, in a multiplatform world – that it still deserves a starring role in the Microsoft strategy, even if it is bringing in limited licensing revenue, and its parent is delivering cloud services to any platform a customer chooses.
If Windows 10 fails to meet that challenge, we may see an even more radically altered Microsoft, ditching its own OS altogether in time and concentrating only on cloud services and applications. However, that would certainly not be the preferred route, even for the reformist and cloud-centered Nadella, so W10 will be truly significant. On the mobile front, it will need to deliver a strong user experience as it converges more with the main system, and prove a single OS can meet the needs of embedded and mobile users as well as PCs. And it will need to prove its worth without licensing fees, since another of Microsoft’s big changes in 2014 was to remove those charges for smaller-screened products, a precedent that may be followed in other categories.
The device landscape is changing, and that will affect the marketing focus of W10 and the extent to which Microsoft can rely on past strengths. The PC market is showing stronger resilience than expected, even as tablet sales slow – according to recent Gartner figures, global PC shipments grew by 1% in the fourth quarter, after several quarters of decline, mainly because the trend for tablets to replace PCs has already peaked (in early 2014). “Now that tablets have mostly penetrated some key markets, consumer spending is slowly shifting back to PCs,” said Mikako Kitagawa, an analyst at Gartner.
The reinvention of the larger-screened device category around ultraslim PCs and cloudbooks should help Windows remain relevant, but will force Microsoft to adapt its platform and its fees to far lower price points. It has already shown off designs for ultra-low cost Windows notebooks and hybrids designed to take on the Google Chromebooks and other cloud-based thin ‘PCs’. In fact, Microsoft has revived the term ‘cloudbook’ to describe the sub-$200 PC devices emerging from partners like Asus, clearly targeting Chrome.
However, that clearly reduces the revenue potential for the OS – and piles on pressure to remove licensing charges across the board, while building up income from the services that are delivered to those slim endpoints.
Microsoft has its own handsets too, and while Nadella almost certainly wishes that his predecessor Steve Ballmer had not acquired Nokia’s devices unit, it is unlikely to be disbanded this year at least. The Lumia smartphones remain the main showcase and revenue stream for Windows Phone, and should be valuable to demonstrate the supposed delights of mobile W10, but Microsoft has also been using its new division to squeeze WP8 into low cost handsets in a quest to gain market share and establish a position in emerging economies (as seen in the launch of a $29 entry level ‘internet phone’ this month).
We suspect this is seen as a last-chance activity – unless mobile Windows can achieve more than single-digit share and secure itself a viable place in key growth markets like India, it is likely to become a small element of Microsoft’s multiplatform mobile applications strategy, and then there will be no point to keeping the handsets alive.
Before such decisions are made, however, Microsoft has a series of Windows 10 launches in the spring, which will refocus attention on its core OS rather than its multiplatform credentials – and most importantly, whether Windows will still have a place in that strategy long term.
On January 21, the company will hold a ‘Windows 10: The Next Chapter’ event and is expected to preview the mobile implementation, which is expected to work on handsets and smaller ARM-based Windows tablets, and probably on Intel processors too. Microsoft’s efforts at spanning ARM and Intel in the same device category have stumbled in the past – as seen in the weak performance of Windows RT, the ARM-based tablet version. However, if W10 delivers and attractive and uniform experience across both processors, there may be a better case for making the chip choice invisible.
Microsoft recently released a Phone Insider application (for its employees only at this stage), which provides registered Windows Insiders the ability to receive pre-release OS updates on their phone, directly from Microsoft. About 1.5m people are registered as Insiders, enabling them to test W10, and so the new app is expected to be extended to them soon, providing valuable intelligence ahead of the expected first public test build of the W10 mobile SKU next week.
Apart from mobile W10’s challenge to keep Microsoft’s own platform relevant in the mobile world, the other big question is whether the firm can continue to charge for its OS, and if not, what sort of new revenues will plug the gap. Now that the giant has opened the Pandora’s box by removing many Windows Phone licensing fees, it knows that a major element of W10’s success will lie in deciding who can be charged for it, and how much. Jan Dawson, principal analyst at Jackdaw Research, wrote in a recent article for Tech.pinions: “The single greatest test may be whether Microsoft can successfully charge large amounts of money for a new operating system to consumers and still see significant uptake.”
Some expect Nadella to announce that strategy at the January 21 event. In December, COO Kevin Turner said that the firm would reveal its Windows business model plans in early 2015 and acknowledged that it would need to find “creative ways” to monetize W10. Of course it has already started to do away with old sacred cows in the licensing area – giving away Windows Phone or Windows 8 for devices with screens of 9-inches or less; providing an almost-free version of Windows 8.1 for traditional PCs (called Windows with Bing), targeted at low cost notebooks such as HP’s Stream. These moves will make it hard to charge consumers $100 or so for W10, or businesses $200, if device licensees are getting the OS free for mass market products.
Turner agreed that “we’ve got to monetize it differently” and said new approaches would aim to “monetize the lifetime of the customer through services and different add-ons.” That suggests a freemium strategy, giving away the basic OS but encouraging purchases of added value applications and features. However, Turner predictably backed away from an analyst question about whether, or when, Microsoft would be prepared to lose money on Windows in order to drive additional revenues elsewhere, just saying: “That’s not any conversations that we’ve had”. But of course, that is already a fact in low cost and mobile devices, and the challenge for W10 in that space will be to support sufficiently compelling user experiences that consumers not only choose the OS, but spend money on additional services, presumably including some of the jewels Microsoft has been putting in its box over the past few years, such as enhanced Skype, Office 365, OneDrive, Xbox Live Gold and others.
This is where there is still a benefit in owning an OS, as Apple well knows – Microsoft will be able to optimize the performance and features of key services when they are on Windows, as Amazon does for its own Android implementation, and so encourage uptake of W10 without blocking out other platforms. A difficult balance, but it’s nice to have the tools to make those decisions.
Turner told a Credit Suisse investor event before the holiday that the old Windows model was “attach our software to as many sockets as we can, and it was licence focused. And the beautiful thing about the old-world business model was that, hey, as a customer bought our software, we got paid 100% of it upfront and we got paid regardless of whether they used it or not.” These days, firms no longer have the luxury of those policies, and must adapt to the drip-drip pattern of ‘as a service’ revenues – and it is unlikely Microsoft will be any different.
The importance of Office 365 in its model shows that it can adjust to the new ways – the interesting questions for 2015 will be how far, and how fast, it adjusts the core Windows model in that direction; how successful W10 proves to be in the mobile world; and how effectively Microsoft hedges its bets, creating multiplatform revenue streams in the event that it has to face a future without Windows at all.