Microsoft will rise from the ashes of Windows and Surface failures

The move to mobile, perhaps better characterized as the move away from desktop PC computing, is happening faster than most expected. That is having major reverberations across a wide swathe of different industries:

  • Zygna recently announced layoffs of 18 percent as the former high-flying game company continues to lose customers from Farmville and other web-based games. CEO Mark Pincus wrote,

    “None of us ever expected to face a day like today, especially when so much of our culture has been about growth. But I think we all know this is necessary to move forward. The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played.”

  • Accenture posted quarterly earnings on June 28, and it missed its sales goals and cut its outlook for annual profits. This led to a sharp fall in stock price of 11 percent in the first day. But the trickledown led to a 2 percent drop in IBM — which has a large IT consulting business — and a drop of more than 3 percent for SAP.
  • Intel’s new CEO, Brian Krzanich, admitted that Intel actively fought the move to mobile:

    Vindu Goel, After Fighting Mobile Trend, Intel Now Embraces It

    “We stopped and we held off and we tried to keep everything” frozen at personal computers, he said Friday during a meeting with a small group of reporters in San Francisco. Mr. Krzanich was certainly in a position to know, since he has spent his entire career at Intel and was the company’s chief operating officer from 2002 until he was given the top job in May.

    The PCs-forever attitude was so pervasive that the people working on the company’s mobile-chip line, the Atom, were essentially second-class citizens, without access to Intel’s latest production technologies and the resources lavished on the Core line of PC chips and the Xeon line of server chips.

    Now Intel is not just trying to catch up in mobile but also trying to leapfrog the competition. As Mr. Krzanich put it, Intel’s strategy is: “Embrace this and embrace it fast and actually move quicker and try and go ahead of this.”

This whirlwind is changing everything, and it will upset the apple cart in enterprise IT. It’s unclear to me whether it will be anything like the past. The changes will be profound, at the personal, corporate, and market levels, all of which I have written about in detail. But in this update, I want to focus on the market, and I will use Microsoft as my example.

Microsoft and Intel were the two companies perhaps most central to the PC revolution (with Apple as the scrappy underdog). But both companies have been whipsawed by the movement into the post-PC world. Intel has the opportunity to turn its troubles around, since it is still selling a lot of chips for servers and needs only to convince the makers of proximal devices to try new chips. It doesn’t really need to convince end users or companies that its products are good, despite all that “Intel Inside” hoopla.

But Microsoft has to appeal to consumers to get them to buy Microsoft gear. And it isn’t working. At all.

Microsoft has made relatively ineffectual efforts with its smartphone and tablet hardware and software. It lost the iPod/Zune battle, and it is losing the iPad/Surface battle. While some analysts handicap the battle more favorably for Microsoft, arguing that this transition will be long in the making, I disagree. The critical time for getting a wedge into the proximal device market was a year or more ago (smartphones and tablets are proximal, the devices we always have with us). Sooner or later, Microsoft will abandon its efforts in proximal hardware and the Windows software that drives them.

This is something like the bet I made about IBM dropping the OS 2 operating system, after investing several billions into it. I expect that Microsoft will waste many billions chasing its tail but will ultimately fold.

And what will remain? Microsoft is well-positioned to remain a leader in enterprise software, and it has been making great moves with Office 365, Sharepoint, and Yammer. Microsoft’s dominance with the Office and Exchange franchises gives it a great opportunity to wrestle for the future with Google (see Microsoft hedges its bets on Office 365 and Surface).

Why do I single out Google as the competitor for Microsoft? Because Google has the capacity to completely commoditize the elements of Microsoft’s value for the enterprise. At present, Google has not filled in the whole picture, but I bet it will. Google Drive will (sooner or later) match the core functionality of SharePoint, and Gmail counters Exchange. Google+ could be a credible alternative for Yammer, and technology like Hangouts and Voice Google can counter Skype and other Microsoft communications tools like Lync.

Last fall Microsoft CEO Steve Ballmer outlined his new vision for Microsoft in a letter to shareholders, and rumor has it that this week he will be announcing a major reorganization of the company to try to make that vision a reality. Bottom line: I think much of that reorganization will fail because he is still gambling on Windows and Surface to break through, and they won’t.

But what might emerge from the ashes of that house on fire could be a credible player in the very different world of enterprise IT coming down the pike. Let me characterize it:

  • It’s 100 percent cloud. We are continuing to hear reasons why companies cannot move everything into the cloud, but in the final analysis they are quibbles disguised as prudence. Ultimately, anything that can be done on premise will be possible in the cloud, with the exception of physical onsite security (which is like pretending that your money is safer in the cookie jar under your bed than in a bank).
  • It’s 100 percent proximal. There will be functionally zero stationary computing devices in just a few years, and people will be always on, wherever they are.
  • It’s 100 percent IT-less. The downturn in Accenture’s fortunes is the start of a collapse in enterprise IT consulting, and that will rapidly cascade across the industry. Why? The use of cloud-based enterprise software and proximal hardware cuts a huge hole out of the middle of what those consultants configure for their clients. Note that this won’t stop with outsourced IT staff: It means the end of IT internally, too. (Yes, companies will still own computing devices — on the factory floor and in the hands of retail clerks. But increasingly they will be communicating with back office software running in the cloud.)

I am going to get a lot of flack for zooming ahead five years based on these trends, but I will stand by the prediction.

This is the deep background on the future of enterprise software in general and specifically the form factor of future co-work (collaborative and cooperative) tools.

The enterprise software companies that will weather this sea change will be the ones that drop their efforts to stop the tide. They will have to make the change that Brian Krzanich is making at Intel, betting on the future instead of fighting it.

One last prediction: Ballmer’s reorg this week — if it comes as expected — will be a hedge. The reorg that will indicate that Microsoft has turned the corner will be when Ballmer leaves the company and a new CEO joins, shuts down the company’s hardware efforts, and deadpools Windows. I give Ballmer another year at most before the shareholders demand his head.