MSFTextrememakeover

Saturday, June 30, 2007

What will Microsoft learn from the iPhone?

Before you groan, I too want to hear more on the iPhone about as much as something new regarding Paris Hilton. The media-saturation has been insane. On the other hand, I am interested in what lessons MSFT will take away from this current phenom. Will there by any?

Microsoft has been in the mobile business for over a decade. They've been in the specific phone sub-segment since 2002. In fact, Windows Mobile is now on its 6th generation. MSFT also spends an order of magnitude more on R&D than AAPL. So how come MSFT has never once had a phone product, during that entire time frame, that has come even distantly close to matching the consumer and media interest generated by the iPhone - which only just shipped? Indeed, across all of MSFT, the only product that has come close is Windows 95. Let me add a couple of caveats before proceeding further: First, I don't know if the actual iPhone will live up to the likely overdone promise of the iPhone. Second (and related), I don't know how well it will do in the market, though I think they will easily make their unit guidance for the year. Regardless, the iPhone has already had a massive impact. From media, to consumers, and the market (where AAPL stock has recently tacked on another $30B of marketcap based largely on iPhone anticipation and interest), everyone is talking iPhone.

I have my own thoughts on why/how AAPL managed this engineering and marketing triumph. The more important question is does MSFT? Have they even bothered to put together a senior cross-discipline team to study the situation, including how AAPL managed to come out of left field and accomplish it? This isn't just about a new phone. The iPhone highlights issues in R&D, customer needs understanding, UI design, software development, go-to-market strategies (e.g. partner or direct), marketing, etc. These are areas that aren't peripheral for MSFT, they're core - or should be. And MSFT should be the undisputed world leader. They aren't.

MSFT needs to look across the company and answer the question "why can't we do this?". What is so broken that Windows 95 is the most recent example of similar [MSFT] success? Why did Vista, a product that took 3-5X longer to develop than the iPhone, greater than five times as much R&D, and touches several orders of magnitude more people, fall largely flat? MSFT is even having to simplify the downgrade rights from Vista to XP. That's hardly a bullish indicator for adoption. And here is Ed Bott -one of the most knowledgeable Windows writer out there - defending (?) Vista by saying it's like Win95 not WinME (as others are charging), while acknowledging that it will likely require the Win98 equivalent before fulfilling the original promise. Wow, what a ringing endorsement. And it's not just Vista; Similar could be said for Zune, Windows Mobile 6.0, Internet Explorer 7.0, etc., etc., etc..

My guess is that current leadership hasn't bothered with that review. I bet they have already rationalized (to their own satisfaction) why their approach is still the best one, and why the iPhone phenom is of only marginal importance. As a result, nothing will change. MSFT will continue to ship often mediocre products (at least on revs 1 and 2) to lukewarm reviews. They'll keep ramping up marketing launch budgets in the asinine hope that these same products will do well if only they get pushed hard enough. When that fails, as it consistently does, they'll spend their time crafting ridiculously misleading "momentum" press releases in the vain hope that it will turn the tide. Finally, they will cycle through the litany of handy excuses that have become their trademark this decade, including "market saturation", "not every product is a growth opportunity", the "notorious risk-adversity of enterprises", or the multi-purpose catch all: "it's still early innings". MSFT, under current leadership, should be renamed Excusesoft.

I'm not alone in doing the comparison and asking these questions. If you've been following the stock's major YTD underperformance (NAS up ~8%, MSFT down ~2%), and current meltdown, there's good evidence to suggest that many investors are:



FYI, the green line that I've added to the bottom chart highlights money flowing out, along with the impact on the stock in the top chart. FWIW, that long-term uptrend line that I've drawn (purple) had better hold, otherwise it's BOHICA for shareholders. That's somewhere around $28.69 or so, if you're interested. But look for a range between $28.40-$28.80. If it fails, technical analysis suggests that MSFT could eventually crash back to around $22.40. In other words, the Ballmer-led MSFT elevator is headed either to the Mezzanine level, or all the way to the parkade basement again. Getting tired of this yet? If so, when the proxy rolls around this year, send a message once and for all.


Update: An upgrade by Pacific Crest is worth a read and helped generate some buying interest during a pre-holiday shortened session. That lifted the stock back above $30, eventually hitting a high of $30.22 and closing the previously open upper gap in the daily chart (see red lines below). The stock then immediately reversed course (green circle). For now, it managed to hold $30 (with two cents to spare). However, there are several lower gaps still open (red circles) and unfilled gaps that stay unfilled are exceedingly rare for MSFT.


Update #2: July 6th, 2007. Latest Xbox disaster has provided the catalyst to close the first lower gap. Next up, lower gap number two (~$29.47) ...

Update #3: July 10th, 2007. Stock takes out lower gap number two as expected. Next up, $28's.

Update #4: August 10th, 2007. It took longer than expected, but today we are trading in the $28.40-$28.80 range that I called for in the post. In fact, we took out the low end by trading down to $28.31. The stock is currently at $28.54. As I said then, a failure to hold here risks another trip to the basement. The fact that we so easily undercut that range doesn't bode well.

13 Comments:

  • When Steve Jobs returned to Apple, he criticized the company for being stuck in the rut of 'in order for Apple to win, Microsoft had to lose'. I think this mentality is what's afflicting Microsoft today—in order for Microsoft to win, other companies have to lose.

    An interesting point Steve Jobs made during the 'All Things Digital' discussion was that Apple is too small to do everything on its own—he mentioned how Apple needs to collaborate with other companies, more expert in certain areas, in order to achieve its goals.

    If you're wondering what Microsoft can learn about the iPhone, you really need to look at the whole transformation Apple has undergone since 1997. Apple isn't in a contest any longer with anyone else but itself. That's a very fundamental truth which everyone should apply in their lives.

    By Blogger halesgarcia, at 1:39 PM  

  • Amen.

    I don't believe we do, but if we have a team looking into the comparative success of Apple where we've badly failed, the exact people who are responsible for our failure would have heavy representation.

    We should behead our mobile division three layers down from the top.

    By Anonymous Anonymous, at 8:47 PM  

  • Let's add more to the mix. How long have we had an Automotive group doing things for in the car...and where is that? How is it that we could have let companies like XM and Sirius enter the market without forming a partnership with Windows Mobile for content downloads, etc. Bottomline is that there is nobody at the company thinking outside the box, looking at partnerships or really caring about making a difference here.

    By Anonymous Anonymous, at 10:21 PM  

  • My wife and I picked up iPhones on launch day. The experience has been unbelievably good.

    From box to full activation (including sync'ing all of our contacts, e-mail accounts, photos, music, browser bookmarks, etc.) was less than 10 minutes for our two phones, and that included transferring our existing numbers from T-Mobile.

    You heard right. We were making phone calls in less than ten minutes from having the device out of the box.

    The iPhone interface is better than the hype. The intelligent keyboard really is intelligent. I'm already typing much faster than I ever was on my old Ericsson T610. I've learned to trust the keyboard's predictive nature. It actually works.

    The screen is gorgeous. Ubelievably crisp and clear, and super bright. Very readable even in sunlight.

    All of the functionality works as advertised, and is surprisingly fast. Google Maps is sharp!

    All told, this device at least matches the insane amount of hype, if not actually beating it a bit.

    I'm completely amazed with what Apple has accomplished here. As people start getting some hands-on time with friends' iPhones, and reading reviews, expect to see this thing sell like crazy. As people drop off of existing contracts, I'm sure many will seriously consider the iPhone as an alternative.

    Apple's got another winner here, folks.

    What will Microsoft learn? Probably nothing. At first, they will pass the success of the iPhone off as a temporary fad, much like what happened with the iPod. Then, as it becomes more clear that the iPhone is a lasting success, they will try to better partner with other existing phone manufacturers. (a la Playsforsure) When it is clear that's failing, they'll abandon their partners and try to develop their own serious competitor. And it will fall flat, like the Zune.

    By Anonymous Anonymous, at 7:52 AM  

  • MSFT will learn nothing from the iPhone b/c the culture is shielded from the normal pressures of the market (i.e. billions in the bank is a huge air bag for all sorts of stupid car wrecks here). I seriously believe if we had only 1Billion in cash, we would be doing loads of different products with superior features, but alas, we don't need to...we are like the former all-star player who knows he'll make the hall of fame, so he dogs it in practice and in the games, yet he gets the big contract every year despite younger smarter players contributing more to the game.

    The entire culture is propped up by an odd codependency among employees and crappy products. What I mean is, take Zune, how many MSFT's rushed out and got one simply because it was the right thing to do? OR use Hotmail or IE all b/c it's the right thing to do. I even hear people blase each other for searching with Google and not MSN. But you know what? ALl of this is so unhealthy, it's actually bad. new rule. MSFT should ONLY use competitors products to learn, steal, ignite whatever, but stop the incest.

    Ballmer gets false sense of security by looking around campus and seeing 'wow, zune (IE, Hotmail, etc) must be awesome, look how many hardcore MS people use it? And we are a tough company so it must be good'.

    By Anonymous Anonymous, at 9:17 AM  

  • As long as the internal dialogue in Microsoft accepts that it is ok for v1 products to be half-baked, Microsoft will continue to follow its usual course. Steve Jobs is the approval stamp at Apple on everything. In Microsoft, get in line. Once an idea gets filtered through the Microsoft masses, anything revolutionary has been cut to drive consensus.

    By Anonymous Anonymous, at 10:18 PM  

  • I think this is a clear example of how MS approaches new markets. They look at the leader and start from there. All their phones look like variations of key sizing and spacing that allow for different screen sizes. Basically, the Treo was very successful, let's do what they did. Apple seems to approached this from a totally different angle: how can we turn the iPod into a phone and maintain it's elegance. There seemed to be no desire to make sure it looked or behaved like OS X or an iPod.

    And like anonymous 10:18 PM wrote, the masses at MS trying to make sure their stamp and name is on the product it would end up a regular phone. Look at all the iPhone "flaws" being written about now. The process at MS would have weeded them all out for mass appeal and subsequently would squeeze the coolness out of the product. I could see comments like, "People need to dial, etc while driving", leading to a keyboard and a plethora of buttons along the sides. "It needs more storage", leading to a significantly bulkier device. "Where's the START menu?", leading to a rather conventional UI. On paper the specs would very good, but specs don't lead to coolness. The next thing you know the iPhone would end up looking like the Treo, which has been out for a long time.

    By Anonymous Anonymous, at 3:24 PM  

  • Wow. Over $1 billion charge for XBox 360 repairs and warranty extensions. Ouch. Still think XBox will be profitable in 2008?

    By Anonymous Anonymous, at 7:31 PM  

  • Meh - what will Microsoft learn about the XBOX 360 fiasco?

    Microsoft to extend Xbox 360 warranty, take $1 billion hit

    http://news.com.com/Microsoft+to+extend+Xbox+360+warranty%2C+take+1+billion+hit/2100-1014_3-6195058.html?tag=nefd.lede

    Moral of the story: focus on what you know best to do: Software. Leave the hardware to the real boys :)

    By Anonymous Anonymous, at 8:00 PM  

  • Apple has always had unbeatable industrial design. Their products always have had brilliant UI (hardware and software).
    Microsoft, on the other hand, has never produced hardware that stood out. I remember seeing the Xbox 360 breakfast session where they unveiled their UI and coming away impressed. Then what happens ? The PS3 comes along. In terms of interface, they are like google and hotmail. One's clean, sparse and the other is cluttered and busy.The exterior's are similarly different. One looks like one of those Dell workstations from a few years ago that MSFT was full of, and the other looks like a device you could put in your living room and not look like a basement-dwelling WoW addict.
    not debating the relative merits of either product. Just making the point that MSFT can't design a pleasing interface to save its life.

    For too long, the excuse that Microsoft makes software, not hardware has been a fig leaf to hide behind. The 360 proved that there is something in the water. This company can't make stuff for end users even though it's life does depend on that.

    By Blogger 64, at 11:09 PM  

  • Ca-ching, another $1B down the drain for XBox. What do you think MSFTextrememakeover, sounds like we're configured to finally win in '08.

    By Anonymous Anonymous, at 11:33 PM  

  • You call the Xbox 360 hardware something to be proud of and blame the UI instead?

    Puh-leaze

    By Anonymous Anonymous, at 7:33 PM  

  • I am sorry, when did I ever say the 360 hardware was something to be proud of ?

    I said I came away impressed with the UI when they first demo'd it (probably because it was better than the first xbox), but Sony came out with something that's many times better, on the PS3. The obvious conclusion being that neither I nor Microsoft know anything about designing interfaces.

    By Blogger 64, at 9:43 AM  

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