Wednesday, 21 March 2012

Microsoft is now a niche player

If you're about to purchase a smartphone, a tablet, or even a PC, you probably have already noticed it: Microsoft now has become a niche player.

It is all about how the balance of producers and consumers of content has evolved. When the PC revolution started, PCs were used to create content that was consumed by other means. PCs were, and they are still, used to create music, graphics, movies, books or movies. They were used to enter data. But the content was primarily consumed in non electronic forms. Magazines, theatres, records. Paper, film or vinyl. Computers helped to create content that was consumed in other mediums.

The only exception of this rule was, and still is, data processing applications. Data is entered in an application, and then transformed and retrieved in many ways, but the results rarely go out of the application, perhaps they are interfaced with other applications and is transformed. But the ratio between the amount of transactions entered and the volume of information that is extracted is increasingly smaller. Data is condensed in tiny amounts of information for dashboards, account statements or check balances.

Then things started to go digital. Content created on computers is increasingly consumed only on electronic devices. And the PC was the main device used to consume content. Databases, on the other hand, increased in size and complexity, with each evolution of the technology, each iteration generating bigger and bigger amounts of data. A significant trend is that the most of today's data is directly entered by the end user, be it plane reservations, shopping carts or generated based on clickstreams from web sites. There are less and less data entry clerks, for each iteration of process optimisation attempts to reduce or eliminate the need for human intervention. Warehouses and store shelves are full of bar code labels that reduce or eliminate data entry to its minimal expression.

Ten years ago, if you wanted to do anything useful with a PC, there was little choice but use Windows. It was the result of a three pronged approach: the tight control Microsoft exerted over the hardware manufacturers ensured that Windows was a popular, even cost effective choice, for PC hardware. Their product portfolio covering such a wide surface of applications allowed them to offer very seductive deals to their customers. In the database area, for example, it was not uncommon years ago to hear someone going to standardise in SQL Server, and learning from insiders that the product was throw in the box close to free as part of a much larger deal involving workstation, office and server software. And finally, their lock in in the proprietary formats and protocols kept everyone else from making competing products.

When the PC was the only device capable of running applications for content creation, there was little choice but use Windows. When the mainframe terminal died, the PC was the only alternative for data entry.

The world of today is different. The balance of content creators versus content consumers has shifted. Content can be created and consumed in many different ways, all of them completely digital. There are now orders of magnitude more devices in the world capable of running applications than personal computers running Windows. New classes of devices (phones, tablets, settop boxes, book readers) have separated clearly the roles of creator and consumer. You no longer need to use the same device for creating and consuming content. Data entry happens by means of bar code scanners or users entering the information themselves, and behaviour data is collected automatically by web logs or TV settop boxes.

And almost none, if not all, of those devices run Windows. Windows and windows applications have failed to move to these scenarios, except when they have managed to hide an embedded PC inside the devices (think of ATMs). At this point, I can only see three Windows use cases, and each is getting weaker and weaker.

  • Enterprise applications and office productivity: that is a now niche that is restricted only to people needing five year old applications that depend on Windows being compatible to run them. That plus people at home that want to have a home computing environment similar to the one in the office. This segment is being attacked very effectively by cloud services and apps, but the inertia here is huge, so it's going to last them a few years. It is also the most profitable, so expect Microsoft to fight to death to preserve it.
  • Content creators: people that still need the full power and ergonomy of a desktop or laptop computer to create content. Note that even with the empowerment of the digital technology to create, the ratio of content creators vs. content consumers is still like 1 to 1000. This is not very profitable for Microsoft, but is a key segment because this channel in the past has served to promote content in propietary formats (VB, C#, SliverLight, Office formats, WMA, .AVI, DRM music, .avi,....)  that were essential to increase the desirability of their products for the consumer segment. Unfortunately for them, open standards and/or reverse engineering of formats and aversion to DRM are destroying the virtuous cycle of created content that can only be consumed on the Windows platform.
  • People that simply want a computer for basic tasks (browsing, mail, light content creation) and make a cost conscious purchase. It is actually true that Windows PCs are cheaper than Macs. While this is likely Microsoft's safest niche for now, it is so for a reason: this segment is the bottom of the barrel in terms of profitability. And both Mac and open source based alternatives are eroding market share from both the long and short ends of the profitability spectrum.

Microsoft Windows can now be considered a niche player in these three segments. It is a huge niche, and most anyone else would be happy to own these niches, but still a niche nonetheless. Either because of self complacency, protection of their cash cows, or lack of vision, Microsoft has failed to make any significant presence in any new technology since the year 2000 or so. The cruel irony is that protecting those niches is also what has lead them to losing in other segments. Disruptive players do not care about preserving their legacy because they don't have one to preserve.

Some of you may point to the XBox as a counter example. Check the financials of the Microsoft console division and see how long, if ever, they will recover all the money thrown to make XBox fight for number two or three in the console market before progressing the discussion.

In the database arena, things have been very similar. SQL Server has always been limited in scale by the underlying Windows platform. SQL Server could only grow as far as the type and number of CPUs (Intel or Alpha in the early days) word and RAM size of the Windows OS, and this prevented it being used for big loads, or even small or medium loads if there were plans to make them bigger. Since the definition of "big load" keeps changing with Moore's law, SQL Server has never made any serious inroads beyond the medium sized or departmental database, facing competition from above (Oracle, DB2) and below (open source) Could Microsoft have made SQL Server cross platform and have it running on big iron? Probably, at an enormous expense yes. But that would also miss the nice integration features that made it such a good fit to run under Windows. And also the reason to buy a Windows Server license.

And when SQL Server was seemingly ready for the enterprise, a number of competitors arrived that made unnecessary to host your database on your own server (Amazon). Or to have a relational database at all (NoSQL). Could Microsoft have moved earlier to prevent that? Probably, but that would have required first to foresee it, and it would have happened at the expense of those lucrative Windows licenses sold for each SQL Server instance.

So the genie is now out of the bottle, and Microsoft can't do anything to put him back in. They are now niche players. Get used to it. The next point of sale terminal may not be a PC with a connected cash drawer .