Microsoft – Naofumi Kagami

Who Will Win The Next Big Thing?

Many people seem to think that the next big thing in tech will be artificial intelligence, and that Google is much better positioned to win than Apple. Other people think that VR/AR is the next big thing, and again, at least one of the companies that is currently announcing hot new VR/AR gadgets is going to win (and not Apple).

However, history has clearly shown that this discussion is without merit. In fact, when a next big thing does come along, the most unexpected company or a company that simply did not exist before, is the one that actually wins. Very rarely if ever, does the company that invests tons of money on the early stage research emerge as the victor.

Google did not exist yet when Yahoo, Lycos, Altavista and many others were first battling to become the telephone directory of the web. Apple was just a failed PC company that was finding success in music when Blackberry, Palm, Microsoft and Nokia were battling to bring smartphones to the masses. Again Apple was a company that was fighting a losing war against IBM when Steve Jobs visited Xerox PARC which had invested heavily in next generation computing research. Compaq did not exist when IBM introduced the IBM Personal Computer. Microsoft was not even in the OS market when IBM knocked on the door looking for an OS for the x86 CPU.

Time and time again, history has shown that when something really new comes along, the companies that seem to have the strongest position from both market and technical standpoints, are rarely the ones that win in the end. The companies that do win are those that we would not even think about, or the ones that didn’t exist. This is what Clayton Christensen’s Disruption Theory is all about.

Therefore from a historical standpoint, if AI or VR/AR succeeds in disrupting tech, it is actually very unlikely that Google, Microsoft of Facebook would win in the end. These companies are in the exact same positions regarding AI and VR/AR as were Blackberry and Palm prior to iPhone, or as were Yahoo, Lycos and others were prior to Google Search. They have invested heavily into research and also into developing the early market. However, they have not yet discovered the formula that would propel them into the mass market.

No matter how unlikely it may seem today, history is actually quite unequivocal on this. The large and established companies that pioneer an early market, do not reap the rewards when disruption happens and the market goes mainstream. The odds are against Google for winning in AI, and the odds are against Microsoft and Facebook for winning in AR/VR (assuming though that AI and AR/VR do end up being disruptive technologies and not simply sustaining).

Although it is almost impossible to predict what will happen, I will just end this post highlighting a couple scenarios under which the Google might find itself vulnerable for illustrative purposes only.

What if privacy became a block for AI penetrating the mainstream? What if consumers started to feel uneasy with the suggestions that Google’s AI made. What if a data breach at a major internet advertising company made it clear to mainstream customers that far more information was being collected about them than they had ever imagined? What if the technology emerged that made machine learning possible without compromising privacy? Would Google invest in this technology, or would it try to improve the AI results with its current privacy compromising methods? It is likely that Google will invest in the latter, which might be a bet on the wrong horse.
AI could actually become the biggest threat to Google’s business model. What would happen if somebody came along with a good enough AI service which made web search obsolete, and which was combined with a monetisation scheme that was far less profitable than Google’s search advertising? Would Google copy that scheme, or would it wait until it found something that was at least as lucrative as the search business that it was cannibalising? What if this service took off, while Google was still looking for ways to maintain profits?

Why Do Companies Outsource?

Last week, news broke out of Apple’s “McQueen” project; a plan to move Apple’s iCloud data away from Amazon’s AWS, Microsoft’s Azure, etc. and into its own data centres.

This isn’t really a surprise or an insidious plan by Apple to damage its competitors. It’s obvious if you think about what the benefit of outsourcing is for any company.

Companies outsource if;
1. The technology is not a core strength of the company.
2. The technology will not be a key differentiator going forward.
3. There are cost benefits (mostly due to scale) of outsourcing.

In the case of Apple, cloud infrastructure was not a core strength of the company so it made sense to outsource at the onset. However, it became clear that the cloud would be a key differentiator going forward. Additionally, the scale of Apple’s cloud operations became huge, and hence the cost benefits of outsourcing became negative.

The only thing that was surprising to me was the fact that Apple was outsourcing at all. I would have thought that Apple had had everything in house years ago.

Office 365 Adoption

Very interesting statistic from Okta regarding adoption of Office 365 relative to other cloud services. This is for businesses.

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In particular;

Office 365 is used across companies of all sizes. Workday, Clorox, Seton Hall University and DocuSign – all very different organizations in terms of age, size and industry – connect their Okta tenants to Office 365.

Banking, food & beverage and manufacturing favor Office 365 over Google Apps.

Consulting and law firms, as well as general technology companies, are more divided with pretty even adoption of Office 365 and Google Apps.

Google Apps is the clear choice among advertising firms, educational institutions and software companies.

Misguided Expectations for Replacements Cycles

Many people have blamed the slowdown of iPad sales on the fact that the replacement cycle of iPads is quite slow. In fact, we don’t really know what the replacement cycle is yet because the device is still very new (even the first replacement cycle hasn’t yet kicked in) and the second generation device, the iPad 2 (introduced March, 2011) is still used quite a lot.

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My question is, is the replacement cycle too long and should we be blaming Apple (as quite a few analysts are) for the lack of reasons to upgrade? Should we blame Apple for not introducing compelling improvements to the iPad that would drive users to buy new devices? Should we blame Apple for mismanaging the App Store to the effect that not enough exciting titles are being released for iPad?

This hinges on what the natural replacement cycle for a tablet device should look like. If the natural cycle should be something like two years, then yes we can blame Apple. If it is however something like 4 years, then we cannot conclude that Apple is doing a bad job.

Therefore, I think we should give some thought on to what the natural replacement cycle for a tablet device should actually look like.

Smartphones

The replacement cycle for the phone market varies from less than 2 years to over 10 years (interestingly, Android phones seem to have a much faster cycle).

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Recon Analytics sums up the reason for differences in replacement cycles as follows;

Based on the data and analysis outlined in the report, it is conclusive that over the last four years, handset subsidization is the dominant factor influencing the handset replacement cycle. The percentage of subscribers on postpaid and prepaid plans, as well as the relative income level in the countries, had a negligible impact on the handset replacement cycle.

Considering that the majority of iPads are WiFi-only and that these are not subsidized, we can expect iPad replacement cycles to be significantly longer that phones. There is very little reason to expect iPad replacements every two years.

PCs

The replacement cycle for business PCs in the US was a bit longer than 3 years. Why do they replace them so often?

Increased productivity: If the old PC is much slower than the most recent models, then a new one would increase productivity.
Escalating support costs: If the old PC tends to break down a lot, then buying a new computer may become cheaper than the maintenance costs.
Software requirements: If the old PC cannot run new software, then it’s time to upgrade to a new PC.

Now how much of this would apply to tablets?

The amazing thing about the iPad, even the original model, is how fast it was on the limited hardware. Apple went to great lengths to achieve this, even sacrificing features that have been found on PCs since 2000 like multitasking in the background. Apple has kept third party software under strict restrictions, and this has helped keep software from bogging down the system. Apple itself has worked hard not to make iOS bloated.

As a result, the iPad 2 from 2011 still has enough performance to run the most recent iOS (iOS 8) with OK speed. Hence “increased productivity” does not apply very much to iPads and neither do “software requirements”. We also have to understand that iPads are mostly used by consumers, and so less emphasis is places on “increased productivity”.

Another amazing thing about the iPad is how durable it is. Without almost any moving parts, not even a keyboard, there is very little that can break. The build quality of the device was also superb from the onset. Also, unlike phones which you carry about you all day, you are much less likely to drop and shatter an iPad on concrete. Simply put, the cost of maintenance for an iPad is remarkable low.

Since none of the reasons for a 3 year PC replacement cycle apply to iPads, there is no justification for expecting similar cycles for iPads. It is very possible that the replacement cycle for an iPad is much longer than 3 years.

The one thing to note is that the iOS 8 is bearable on iPad 2, but stutters quite a bit. This is probably due to the fact that it only has 512 Mbytes of RAM and I think that it is unlikely that the next iOS version will support it. If so, then “software requirements” will demand a replacement next year.

Other consumer electronics devices

For most consumer electronics devices, we generally only replace them if they break down or our family gets larger (and we need a larger refrigerator or washing machine). Unless you buy them from a manufacturer that is seriously skimping on important components, they should last at least 5 years.

Summary

As we can see, the 2 year replacement cycle that many analysts were initially expecting for tablets was completely misguided, and hence we cannot blame Apple for a cycle that may be 3 years or longer.

We could even argue that having compelling new features is only rarely a reason why people ever upgrade their devices. This is for the most part irrelevant to the upgrade cycle. In fact, the main pain points cited for upgrading PCs are mitigated by stricter control of third-partly applications, better hardware build quality and simpler hardware design on iPads.

MS-Office in the Workplace

Just for the record.

I’m working with a company that made headlines in 2012 with the announcement that it will be moving close to a hundred thousand employees to Google Apps.

Guess what format they send stuff to me in now.

Pure MS-Word and MS-Excel.

It’s not even in .docx or .xlsx but in the classical .doc or .xls formats which Google Apps no longer supports.

I suppose that even as they moved to Google Apps, they kept MS-Office around to communicate with the outside world.

Making Office Dramatically Better: Bill Gates

In an interview with Erik Schatzker of Bloomberg TV, Bill Gates gave his idea of what Microsoft’s priorities should be;

Certainly, Microsoft should do as well or better, but of all the things Microsoft needs to do in terms of making people more productive in their work, helping them communicate in new ways. It’s a long list of opportunities Microsoft has to innovate, and taking Office and making it dramatically better would be really high on the list, that’s the kind of thing that I’m trying to make sure they move fast on. I’m very happy with what he’s doing. I see a new sense of energy. There’s a lot of opportunity there. Some things the company isn’t the leader on, and he sees he needs to change that.

So Bill Gates is prioritizing MS-Office.

Why?

Jan Dawson has been giving us quite a few good posts on Microsoft, and had this to say in his post on Techpinions.

In short, if Microsoft is to compete effectively on a third party basis, its services on competing platforms have to be so good they can overcome the price/business model disadvantage, the lack of integration, and its far smaller mobile device installed base. As of right now, Microsoft simply doesn’t seem to have any products or services that can do that successfully and this should be a key area of investment. In the meantime, it’s being successful largely with products it’s unable to monetize from most users, such as OneNote and Skype.

Jan’s discussion is that Microsoft can no longer rely on it’s own platform (Windows), but must now win by providing software and services for third party platforms. That is iOS and Android. Whereas both Apple and Google can and do provide software and services for free due to their different business models, Microsoft’s business necessitates that they charge for MS-Office. Hence MS-Office must be well worth the price.

I think Jan Dawson and Bill Gates are in complete agreement here.

Windows is Cheaper Than Android

I have written quite a few posts on the topic of how Android hardware OEMs are losing their position inside the value chain.

What we are currently witnessing is a macroscopic trend that is working out almost exactly as Clayton Christensen’s disruption theory would predict. The way that Samsung is losing both market share and profits is typical disruption. However at this point, it is still not clear where the attractive profits will shift to.

As I discussed in the second article (What Happens When Hardware Makers Can Make No Profit), hardware OEMs tend to do funny things (crapware) when they can no longer make direct profits. You can’t blame them because they are fighting for their survival. What Google is doing with Android One is quite extreme because they are effectively preventing OEMs from doing crapware. They are basically saying that we’re not letting you pull the tricks that you need to survive.

What makes this situation even more convoluted is the fact that although Google does not make any direct profit from Android, Microsoft makes huge amounts of money. In fact, Samsung paid Microsoft 1 billion USD last year for using Microsoft’s patents in their Android phones (based on the number of Android devices sold). This amounts to 1% of total handset revenues. It is well known that Microsoft has similar patent agreements in place with many other major smartphone manufacturers. This is almost all pure profits and hence it is almost certain that Microsoft is making more profit from Android than Google itself.

Adding a further twist, Microsoft is now handing out Windows for free for devices with a display that is smaller than 9-inches. This will no doubt include the right to use Microsoft’s patents as they are included in Windows. Hence compared to Android, Windows will be 1 billion USD cheaper for Samsung. For OEMs, using Windows is much much cheaper than using Android.

Now let’s look at this from a hardware OEMs viewpoint.

They cannot make money through hardware differentiation and are now scrounging for pennies.
In the PC-era, they would have added crapware and bloatware because of the pennies that it would bring in. This was more important than any sales lost due to a worse customer experience (customer experience wasn’t the main concern).
In the smartphone-era, Google is stopping them from placing their crapware in prominent locations on Android. OEMs will be more desperate for pennies.
If OEMs decide to use Windows instead of Android, then they can save pennies. Microsoft might also be less strict with crapware. Windows might be significantly cheaper for OEMs compared to using Android.

The current situation is very complex, and it is hard to say whether Windows will manage to grow through its price benefit. It will no doubt be fascinating to watch as the knots get untied.

Chrome Browser Promotion Effectiveness

Chrome is definitely a popular browser for Windows (it is debatable how popular it actally is, because the web usage tracking reports tend to not agree with each other). However, it is not very clear why it is popular.

I have tried to explain part of the reason by showing a positive correlation between Windows XP usage and Chrome adoption. This correlation suggests that users with older and less powerful machines will tend to use Chrome, either because they use Windows XP which does not run IE9 and above, or because Chrome runs better on these machines. On newer and more powerful machines, you can use the latest versions of IE (on Windows 7 or 8), and the performance will be good enough for general use.

This correlation however was not enough in magnitude to explain the popularity of Chrome.

Here I would like to note some tactics that Google is using, which have probably been very effective (Windows users at least will be quite familiar with them).

Google Home Page

The top page for Google Search displays a banner that invites you to install Google Chrome. Since Google Search has dominant market share, this is obviously a very powerful way to promote Chrome. The problem is, most modern browsers have a search field somewhere in the UI controls which takes you directly to the search results. Hence most people will only rarely visit Google’s top page.

Adobe PDF Reader Download Page

If my memory serves my right, Microsoft was banned from bundling a PDF-viewer into Windows due to antitrust issues. As a result, users are generally required to separately install the Adobe PDF Reader to view PDF documents on the web.

When you go the Adobe’s web site to install the Adobe PDF Reader, this it the page you get.

Adobe does not simply show you a banner to install Google Chrome. It bundles Google Chrome (and the Google Toolbar) so that they are automatically installed together with the PDF Reader, unless you explicitly opt-out. This is tens or maybe hundreds of times more effective than a banner.

And in case if you’re wondering whether Adobe makes Chrome your default browser or not, well why not? It is the default browser unless you access a hidden screen and opt-out.

So to summarize, when normal users install Adobe PDF Reader onto their PCs, their default browser will now be Google Chrome, without their knowing it.

This is generally known as bundling, but in this case, it’s closer to a trojan horse.

Google has used this tactic with other browser plug-ins before, in particular to get users to install Google Toolbar. It is nothing new.

How much does this cost Google?

I have no information on how much Google might be paying Adobe to bundle Chrome with their PDF Viewer. We do know however how much Google is paying Mozilla to use Google as the default search engine. Google paid $300 million per year. The vast majority of Mozilla’s revenue is actually from this deal.

I wouldn’t be surprised at all if Google was paying Adobe in the tens of millions or even in the hundreds. It is not impossible that payments to Adobe exceed those to Mozilla. Keep in mind that Adobe’s PDF viewer has much higher market share than Firefox ever did.

Only Google

Google is the only browser manufacturer that is using these kinds of promotions. If fact, it is likely that Google is the only third-party browser vendor which has deep enough pockets to do this kind of thing. Mozilla is a non-profit organization, which relies on Google for most of its revenue. Opera is developed by a company that generated total revenue of 300 million USD in 2014. While this is a respectable amount of revenue, it is similar to the money that Google gives Mozilla. There is no way either Mozilla or Opera could fund promotion campaigns that would require bidding against Google. As expected, Google has a monopoly on these promotions. I have never seen similar ones from either Mozilla or Opera.

How effective are these promotions?

Without any data to go by, we can only speculate on the effectiveness of these promotions. However evidence suggests that at least the Adobe bundling promotion would be quite effective.

We know that Adobe PDF viewer is the defacto standard for viewing PDFs on Windows, and few people would not install it. We can also safely assume that most people would just use the default settings (install Chrome and make it your default browser) when downloading PDF viewer.

This is huge by any measure.

What can Microsoft do about this?

To prevent plug-in vendors from being a launchpad for bundled Chrome installs, Microsoft could rely on integrating plugins into IE itself. There may be problems related to antitrust however. It is interesting to note that Windows 8 does have a Metro-style Reader app that can display PDF files. There might be parts of the antitrust ruling which Microsoft could work around. However in general, I guess that it would be difficult for Microsoft to do enough integration to stop the leaks.

They could also make it more difficult for Chrome to be set up as the default browser behind your back. Adobe’s web site hides this setting so users won’t know that they are actually letting this happen. This however might also have antitrust issues.

I tend to think that it will be very difficult for Microsoft to stop this. Improving the performance of IE alone will not help. They have to include their own PDF plugin.

What does this mean?

As Chrome’s popularity has risen, many people have assumed that it was due to Chrome’s performance advantages. Although this may have been a factor, knowing that most users do not actively change default settings, I was doubtful if this could have been the most significant reason.

In my previous post, I had postulated that maybe Windows XP (which only runs up to IE8) was the reason. However the statistics, although inconclusive, suggested that it was not the major factor.

In this post, I looked at the promotions that Google was doing. Although the amount that Google is actually spending has not been disclosed, it is likely that they are spending very large amounts of money which none of their competitors could afford. Given the breadth and stealthiness of these promotions, I think it is safe to assume that these have contributed significantly. These promotions might even have been more important than any real performance improvements.

If this is the case, then no amount of performance improvements on the IE side will help IE’s market share. Chrome will continue to gain regardless.

The one bright side is that Microsoft might be able to include a simple PDF viewer plugin. A further understanding of the antitrust issues is required to see if this will be possible or not.

Update

After a bit of research on the web, it seems that Adobe was threatening Microsoft with an antitrust lawsuit over the inclusion of PDF-export features in MS-Office. I could not find any articles that suggested that this expanded to a Microsoft-developed PDF-viewer plugin in IE (it could be a confidential agreement between the two parties), but it is not unreasonable to guess that it was.

Are Chromebooks Losing Market Share in the Sub-$300 Notebook Segment?

Yesterday I wrote about an NPD report that came out for back-to-school PC sales in 2014.

In that report, Chromebook sales were reported to account for 18 percent of all sales of notebooks under $300.

This sounds like good news if you don’t remember what NPD was telling us a year ago. Stephen Baker, NPD’s Vice President of Industry Analysis for Consumer Technology, said the following;

In the last eight months Chromebooks have snagged 20 percent to 25 percent of the U.S. market for laptops that cost less than $300.

If Chromebooks sales have truly fallen from 20-25% market share to 18% market share in the sub-$300 laptop segment, that’s pretty bad news for them. Not that it’s particularly good news for Microsoft either.

Back-to-School PC Sales 2014

NPD published their report for US consumer retail PC sales during the 10 week back-to-school period yesterday.

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U.S. consumer retail PC sales grew almost 3 percent during the 10 week Back-to-School period (week of July 4th through Labor Day week) after declining by 2.5 percent in the previous year.

So it seems like PC sales aren’t falling too badly and have actually risen a bit. Mac sales are continuing to be quite strong. Chrome OS has made some gains but not nearly as impressive as compared to 2012-13.

As I have repeatedly said in this blog, what I find interesting is how Microsoft is retaliating to Chromebooks.

Chromebook sales were up 32 percent in 2014 and accounted for more than 5 percent of notebook sales, and 18 percent of all sales of notebooks under $300. Windows notebook ASPs fell over the last three weeks to just $441, which was 8 percent lower than last year, but the price cuts lifted units by 4 percent. Entry-level Windows Notebooks priced under $300 increased by 37 percent as prices dropped from $271 to $242. 2-in-One Windows devices accounted for 13 percent of Windows sales as volume increased 6x over 2013.

What we see is that low-cost Windows notebooks that are price-competitive with Chromebooks are increasing sales in line with the rise in Chromebook sales (37 percent vs. 32 percent). Hence it appears that although Chromebooks sales are up 32 percent, the market share of Chromebooks within the notebooks-under-$300 segment is not increasing. What is happening is that the notebooks-under-$300 segment expanded 30%, and both Chrome OS and Windows machines increased their sales at the same rate within this segment.

Simply put, Chromebooks are not gaining market share relative to Windows notebooks in the sub-$300 segment. What’s happening is that the sub-$300 segment is rising 30%.

Within this segment, Chromebooks have 18% market share whereas Windows has the remainder. To eventually win over Windows, Chromebooks has to be growing much more rapidly. The possibility that Chromebook share is not rising at all in this segment is a huge red flag.

Looking at the big picture, Microsoft has simply made the typical response that an incumbent would make when faced with low-end disruption. Microsoft’s software business is very much fixed-cost, and hence they tend to fiercely guard market share at the expense of margins. They have also made similar responses in the past.

Nothing new here, but still interesting to see this play out according to theory.