Microsoft’s Earth-shaking News – What It All Means

July 8, 2017

 

I am not an insider at Microsoft (MSFT). But I have been getting peppered with questions by friends and business associates about the latest announcements from Microsoft that sent shivers down the spines of the technology world – most notably, their just-announced re-org decision to eliminate thousands of jobs.

 

People are a bit rattled, and justifiably so. And being one who has been swept up in all the worst kinds of ways during tech mergers, acquisitions, and re-orgs over my career, I have nothing but deep empathy for those who will lose their jobs over the near term.

 

But I see the coming changes as important steps in building a stronger Microsoft.

 

All in all, I really think that Microsoft CEO Satya Nadella has a good vision of what Microsoft needs to be over the next five to ten years. Note that I said, “next five to ten years.” That’s because I foresee another tectonic shift coming to the tech market, but we’ll get to that in a minute.

 

We all know that Microsoft has been making some huge changes. These include new licensing models for core products like Office (365), building apps that really work on Apple Macs and iOS devices, lots of cloud offerings, and their heavy investments in the Azure public cloud (up an astounding 93%). They are spending literally billions of dollars building out datacenters around the world to support this model.

 

A Big Brand With A HUGE Problem

Another thing that is REALLY significant is something that I predicted six or seven years ago – the power of the cloud to obviate the Operating System (OS). By this I mean that back in the 1990's and 2000's, the "brand" Windows had a lot of intrinsic value. More recently, so did Linux, etc. But not anymore.

 

In the age of the cloud, no one cares about the "brand" of an OS anymore. Don’t get me wrong.

Computers still “need” an operating system and it needs to be secure and fast. But we do not care if our web services or cloud apps are on Windows, Unix, Linux (or Ubuntu, or RedHat, or ... name it). In fact, the collection of apps we use every day on our smartphones, tablets, and pcs likely run on some combination of all these things over the cloud.

 

Just ask anyone what operating system their Shopify store sits on … or their SalesForce dashboard … or their Intuit Quickbooks … or their Wix.com website … or Facebook ... or that powers their Canva design app ... or Hubspot … or MailChimp … or WordsWithFriends …. If you do, watch as their eyes glaze over in abject incomprehension. It just … doesn’t … matter.

 

Nadella seems to understand that. That's why Microsoft’s MVC core development technology is cross platform. That's why their Azure public cloud is making a big push with Linux, etc. That's why Microsoft changed the licensing model for all of their enterprise and service provider Windows Server licenses last year to subscription services at a much lower net annual rate (it lowers cap-costs, threshold of entry, and perceived risk as Microsoft attempts to get a few more eggs out of that particular golden goose).

 

Going WAY Out On Limb – Economics

My personal sense of it – again, with no insider knowledge – is that not only is Windows Server embracing open source software and platforms to run on its technology stack, but I will go WAY out on a limb here and predict that Microsoft Windows Server is destined to become a "free" offering in a few years – if not all the way to open source.

 

If you are an “old hat” in the tech industry like I am, this sounds absolutely CRAZY. But it’s not as crazy as it may seem.

 

The Windows brand is rapidly losing value – seriously … so fast it makes your head spin. This is because of the cloud itself, but also because of advances in the quality of open-source alternatives. At some point in time, Windows Server will have no perceived value advantage over free offerings.

 

This is the point at which the irrefutable and inexorable march of market forces and social economics will take over. Because as soon as the perceived added value of Windows Server is less than the cost premium paid, sales of Windows Server will collapse into a pile of rubble. The only way for them to maintain – or increase – market share will be to keep lowering price to maintain a perceived value advantage for the product.

 

There is a mathematical limit to this march of lower price ... free. At least "free" in the marginal sense of the word accounting for elasticities [*the author steps deeply into the economic weeds*].

 

Ultimately, Microsoft has recognized – correctly – that they no longer compete with Apple for pcs and Linux for operating systems. They need to compete with Amazon and Google for the platform. They need to be the “place” in the cloud where you build wantever you want to build, run whatever you want to run, and store whatever you want to store whenever you want to build, run, and store it there.

 

Remember Your History

In case you forgot, in addition to being a tech-infused content ninja-monkey, I'm a trained economist [I wonder if all that will fit on a business card?]. I understand the model. And this is a core advantage in recognizing what's going on here.

 

Satya Nadella was hired as CEO of Microsoft in February of 2014. His first major hire had nothing to do with development or coding or infrastructure or anything "cloudy" at all. Instead, he created a brand-new C-level position at the company. Less than four months into his tenure – he hired Preston McAfee as Chief Economist. To hire a C-level executive that fast in a major corporation means it was literally one of the very first things he worked on ... maybe even before he ordered office furniture.

 

When I read the news I stormed around the office where I worked and made a big deal of it to anyone who would listen at the time because I instantly understood the implications [*as the author shameless toots his own horn*]. The staff looked at me like I was crazy – which seems to happen far too often – but they had to listen since I was a senior manager.

 

Everything that Microsoft is doing and all the decisions that they are making are being influenced by economic principles and policies. Windows is not “doomed” in the technology sense. But I firmly believe that it is destined to be free or nearly so – offered for $10 per month or something else remarkably cheap – at some point in the future.

 

What the Business Model for Windows Server Might Look Like

All this is not to say that Windows "the product" will have no value. And calling it "free" might be an overstretch. It might be that different versions of Windows will remain paid-for subscriptions with serious enterprise features.

 

Microsoft may also do something similar to the RedHat model by providing support and services for certain versions at a fee. And a good friend pointed out to me that Microsoft could make an "included" version available with an Azure instance to incentivize more cloud platform adoption.

 

But all of that – to my mind – just confirms the larger points. You will be "buying" the platform and/or services and "getting" the OS added-on like frequent flyer miles.

 

Which Brings Us to the Current News

 

Just a few days ago – smartly, during a holiday week when the news would be a bit muted – Microsoft announced that they will be laying off between 3k and 5K employees ... eliminating those positions entirely. And it is suspected that nearly ALL of those projected layoffs will be in business and enterprise sales positions.

 

If you have been in this game for a while, you likely know someone in the Microsoft organization who will be impacted. I get it … really. I have been there. But now you understand the “why” of it all. It's something every compnay has had to learn in the age of the cloud: You cannot pay a salesman to sell something that you are planning to eventually give away for free – or nearly so.

 

What I see is a company responding rapidly to market forces and taking big (reasonable) chances while having their economic and communications house in order.

 

This Is Not My Big “Next Thing” Prediction

If you are a regular reader or get my newsletter, you know that I have been teasing about making a “Next Big Thing” prediction regarding what I believe will be a coming HUGE shift in the technology market – something that I think that is on the scale of the cloud itself.

 

This is NOT it. That’s still coming. But this tectonic shifting of the sands at Microsoft is DEFINITELY a part of it.

 

In case you missed it, this is the blog I posted a few weeks ago (before the recent announcement) discussing my previous and forthcoming predictions.

 

Thanks for reading ... seriously. I appreciate your attention. 

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