Friday, September 25, 2009

Ballmer as inverse barometer for the new Apple?

Microsoft's longtime marketing officer and now-CEO Steve Ballmer has made a number of statements about Apple's future in recent years. His latest, that Apple is a niche-only player with no prospect for significant control in the phone market, is sufficiently interesting to warrant a little historical overview of Ballmer analysis of Apple, with an eye on how his spin has been borne out (or not) by marketplace performance. In particular, I'd like to investigate a little whether there's a case to be made that Steve Ballmer, like Dustin Hoffman's character Jack Crabb is accused by General Armstrong Custer in the 1970 fictionalization of the Battle of Little Big Horn Little Big Man, is in fact a reverse barometer of the truth.

Cell Phone Hardware: A Swing And A Miss
When Apple announced it would sell a cellular telephone, Steve Ballmer was quick to dismiss Apple's effort as "the most expensive phone in the world" and pointed out that Apple had an annual phone sales of zero units. He echoed Motorola's official line that making good phones was too hard for an upstart, and pointed out that Apple had never been more than a niche player in anything but music players – a market much less mature than the market for telephones. After the phone's release, Ballmer affirmed his position that "there is no chance" that Apple's iPhone would get much market share. When admitting in 2007 that Apple's iPhone product makes Apple "a lot of money", Ballmer nevertheless dismissed the iPhone as irrelevant to the larger market because Apple was doomed to be a little niche player. By the beginning of 2009, after Apple became the world's third-leading smartphone vendor ("enough to put Apple ahead of all Windows Mobile device vendors combined"), the manufacturer of the number-one-selling cell phone, and the vendor whose phones were responsible for more mobile web requests than Windows Mobile and Blackberry combined, Ballmer conceded that Apple's product was a significant competitor. Ballmer's effort to cast Apple's success in terms of sales share of a 1.3 billion-unit cell phone market hid the fact that in the smartphone market – where software offers the most significant differentiating opportunity for a platform venor – Apple has not the 4% Ballmer suggests but over 13% of unit sales share (and 32% of the profit share) in a high-margin market whose size is about 40 million units per quarter. (Moreover, Ballmer's claims of 60%+ share in mobile devices generally seems to have been pure fantasy.) The migration of commodity phone vendors to royalty-free alternatives (such as Android, Google's royalty-free smartphone-capable platform, and Linux, versions of which now power half of all phones, including future Palm smartphones after Palm dumped Windows-mobile last week in favor of its own WebOS, which involves a Linux kernel plus – like Google and NokiaWebKit) in the face of inevitable margins pressure suggests that Microsoft's opportunity in the low-margin segment of the market is shrinking, leaving it to fight RIMM and Nokia and Apple (all non-Microsoft platform vendors) for share in the smaller smartphone market. Ballmer apparently hopes to reboot Microsoft's mobile platform with new blood, which isn't a capitulation but is certainly an admission Microsoft doesn't believe it's been on the right track. ("This will not happen again" smacks also of apology; Ballmer knows he has a turkey to turn around.)

Digital Music Formats And Retail Strategy: A Swing And A Miss
On the sale of digitial music, Ballmer came down strongly against users' freedom to play what they wanted on their digital players, calling Apple reckless for shipping a player that permitted non-DRM content to be played at all. His pitch was squarely toward content suppliers: DRM, good; everything else, theft. (more on the genius of that here) After joking about his teenager's desire to put his bought music where he pleased in 2004, he announced in 2006 that he'd banned iPods (and Google) from his home to prevent user-friendly products tainting his children (or his employees, apparently). After creating a slew of music store partnerships with third-party licensees of Microsoft DRM, Microsoft opened a solely-operated music store to compete with Apple's music store. Ultimately, Microsoft killed its MSN-Music store; by contrast, Apple has passed vendor after vendor to become the number-one selling music retailer by volume in the United States and in the world. On the way up, Apple shucked DRM to allow customers to buy tracks that play anyplace that supports the AAC (MPEG-4) audio standard. With about two thirds of the digital sales and a quarter of all U.S. music sales, Apple's music distribution system has proven itself superior to extant competition. DRM seems to have lost as the wave of the future for music, and Apple seems to be winning as the place to buy digital tunes.

Mobile Devlopment API High Ground: A Swing And A Miss
On applications, Steve Ballmer seemed to argue that Apple's application distribution model was flawed, and suggested that developing iPhone applications with Microsoft's Flash-lookalike "Silverlight" was "interesting" though admitting that he "can't say there's been extensive discussion" about making Silverlight available on iPhones in the first place. The fact is that developing applications on Apple's mobile platform excites mobile platform developers in a way Ballmer's famous screams haven't. The iPhone application distribution (and removal) system is simple and elegant, making it easy for users to discover (read find) and try (read purchase) software – and easy for vendors to get paid. Developer interest in non-iTunes application distribution is limited; one of the primary reasons to develop for the iPhone (other than its slick API) is that getting the product to market is easy. Despite Ballmer's assurances that Microsoft's mobile platform will be the one on which to make real money, Apple has been supporting significant revenue for developers for some time. Apple's revenue from the App Store might not eclipse iPhone revenue any time soon, but it's clear the system isn't a loss-generator for Apple: it's a ten-figure business with strong reasons to expect significant future growth.

Platform Independence: A Swing And A Miss
When asked about Apple's switch to Intel processors, Ballmer suggested first that this would make no difference in Apple's competitiveness and might pose difficulties for Apple moving forward. Ballmer's marketing folks have echoed Ballmer's own price/value claims attacking Apple, with a series of (misleading?) ads suggesting that price is value. It's no secret that market segmentation creates opportunities for vendors with differentiated products, and that Apple competes in the high-margin segments. As a comparison of GM and Toyota shows, price isn't everything.

After predicting that the platform switch would cost Apple share (can't find the link just now, but he commented that Apple's switch from Motorola's prior chip to the PowerPC cost Apple significant share and predicted more of the same), Ballmer named Apple in an internal memo to reassure Microsoft's employees that Microsoft had a competitive strategy for addressing what Ballmer admitted was a thriving Apple. (Other copy, with comments, here.) What did Ballmer miss? Ballmer's "what changed?" response showed that Ballmer failed to grasp the competitive advantage of platform independence, which allows Apple (like NetBSD users, but not any of Microsoft's OEMs) to nimbly pick whatever hardware will offer the best medium-term price/performance mix, without threat to Apple's installed base or application availability. The Intel switch's migration of developers to Universal code -- that is, platform-independent code -- meant that developers were able to leverage MacOS projects for use in iPhones, for example, and means that Apple's future products can enjoy hardware advantages unavailable to Microsoft's platform customers. (By contrast, low-budget Chinese Apple-knockoff netbook hardware designed with ARM chips to save power can run either Linux or Microsoft's Windows Mobile, but cannot run Windows 7 because the machine is not x86-compatible and Microsoft's operating system and applications have for years supported only x86 and its derivatives; desktop applications can't run on the device, only Win-Mobile-specific applications. Were Apple to roll out an ARM tablet, it would need only offer a "click to compile for ARM" checkbox next to the "PowerPC" and "Intel" checkboxes in the developer tools Apple ships free for its operating systems, and customers would get all the hardware benefit of ARM without the software headaches one would expect migrating a Windows application to a mobile device or a new architecture.)

Ballmer's Real Motives?
Maybe Ballmer isn't as dumb as he pretends. Ballmer's effort to sow doubt into the public mind about Apple's future in the phone business is likely related to Microsoft's latest effort to boost the company's largely immobile market share numbers for its mobile phone operating system. Having bought Danger, Microsoft is apparently using Danger's hardware maker Sharp to launch a Microsoft-branded phone that is hoped to do better than it did when branded as a Danger device. Good luck with that. If you spout enough BS, perhaps people will – as if receiving it from Soviet newsrooms – assume it must be true. Microsoft's leaders don't seem to have a clue about what it will take to provide a differentiated product in the future, and that makes me doubt its long-term viability for any purpose other than milking existing products for run-on revenues. Growth? Hm. Even when Microsoft is handed the answer from a trusted source, it can't perform at present.

Preliminary hypothesis: Microsoft's new phone will either be a loss-leader in the tradition of XBox (and a net loss), or will experience a sales share commensurate with its modest price-to-value ratio. (The presumed modesty of the price-to-value ratio assumes it's not a loss-leader, and is priced to profit. If a loss-leader, Microsoft might offer customers (though not simultaneously its shareholders) significant value with a new phone launch.)

The reverse barometer hypothesis finds significant evidence in Microsoft officials' success in predicting Apple's success in non-PC markets -- music sales, music players, music formats, cell phones, cell phone applications -- and in their recent success competing with Apple in such markets (share of WebKit (Safari, iPhone, Android, WebOS, Nokia, Gnome/Epiphany, and RIMM) and share of Internet Explorer (whatever that might really be) haven't had the same curve while both have existed, and Microsoft's share of high-end laptops' operating systems hasn't exactly stood up to Ballmer's predictions in the MacIntel era).

Microsoft must launch a phone to protect its interest in providing the back-ends to corporate mobile support and protecting its other market areas. Providing a soup-to-nuts plug-in system for end-to-end servers, clients (mobile and not), and software is Microsoft's apparent bid to maintain the status quo. What Microsoft has best going for it in the status quo may be Apple's apparent utter lack of interest in pursuing the enterprise market. In preserving Microsoft back-end support and server sales, Microsoft may be successful for years.

Pity Microsoft can't dream up a more noble and exhilirating ambition than more of the same. This apparent lack of vision makes self-serving predictions of competitors' doom seriously hard to credit. In the absence of compelling information to the contrary, the Jaded Consumer will be seriously tempted to consider Steve Ballmer's specific predictions of Microsoft's major competitors' performance as endorsements of the competitors' prospects.


Turley Muller said...

Terrific Article!!

I used to love MSFT and its products, but lately they make me cringe. I mean how terrible is Ballmer??? Why is he still running the company??? It seems to me, he just doesn't get it.

There is a huge shift to the mobile platform and MSFT has already lost. Windows Mobile sucks so bad, and I don't think it will be able to catch up to iPhone OS, Android, and WebOS.

The new Zune may be really cool and an enormous improvement, but it's a little way way too late. And X-Box does well, but really, how big is that market? I know it's large but competition is intense and iPhone gaming is now encroaching, as will other mobile platforms.

How does MSFT tie-in X-Box, Zune, Mobile, Office, Online, and Desktop OS? So that each leverages the power of the others, creating synergies that result in a halo effect. Seems to me, each MSFT prd/svc group all head in separate directions that convolute the entire brand and overall solution.

I don't know, just my observations. But anyway, terrific post!

Jaded Consumer said...

Microsoft has tried to tie some of these together using a similar online marketplace that uses the same not-really-currency points system, in the apparent hope that the shopping community will see value in spending spare "points" (they are sold in bundles designed to make it impossible to not have spare change) on some other Microsoft-vended service or license. Like a carnival that sells tickets at 7 per $10 and sells all products in increments of 5 tickets, Microsoft apparently hopes both to baffle people's math and persuade them to buy just a few more points. Microsoft's points pricing is so odd, though, that it takes more than $50 to make sure you won't have spare change.

Microsoft will continue to enjoy outstanding, high-margin software business from its installed base as those customers buy new hardware and make incremental expansions. Many of those customers have substantial investments in Microsoft-product-driven solutions, a fact Microsoft exploits and drives into the future with its consulting division's work to solve all problems with Microsoft products. In most businesses, the consulting income would be the gravy (e.g., at HP it's higher-margin than the hardware), but at Microsoft the services cost Microsoft so much to deliver that it actually drags margins down. However, it's both profitable and a strategic move to ensure future enterprise business. Shelling out for all that custom work buys a lot of lock-in.

However, Microsoft's days of being guaranteed to surprise onlookers with unexpectedly high profits may be behind it. I just don't see much innovation there, and the business of milking an installed base works against serious revolution.