Microsoft’s Crisis of Perception (Part 1)

Microsoft faces a growing crisis. The company is increasingly perceived as an under performing 'Consumer' products company which lacks the ideas, innovation and strategy to drive long term growth. The crisis is of the company’s own making and one that is getting worse particularly as performance is held up to the mirror of Apple, Google and FaceBook’s success. There is only one small problem with this situation; its a crisis of 'Perception' not of reality.

Microsoft never has been a consumer products company; it is not one today, and though it might become one, at some point in the future, that will require a gross mutation in the company’s core DNA. The brutal reality is that until the executive mindset, the internal focus, and billions of marketing dollars and R&D dollars are spent in a way which deals with this reality, perceptions of the company will continue to deteriorate along with the stock price.

You may be shocked by the assertion that Microsoft is not a consumer products company. What about all those cute TV commercials with kids telling you «I'm a PC» or all the consumer focused Windows 7 commercials? What about Frank X. Shaw’s 'Microsoft By The Numbers'?Microsoft sold 150,000,000 copies of Windows in eight months. That’s seven copies, every second of every day since launch. Is this not the epitome of a volume consumer products business?

To draw that conclusion you would need to know more about the 150 Million number than Microsoft discloses publicly. For example what percentage of the 150 Million came preloaded on new PCs, what percentage were attached to a volume license agreement with a corporate customer and finally what percentage were packaged goods sales where a customer picked a box off a shelf or bought a digital copy on-line making a competitive choice between Windows and an alternative. In my view, only the latter category qualifies as consumer product sale? One might object to that definition by claiming that the preloaded copies of Windows 7 sold with new PCs should also be counted as consumer sales but should they?

True consumer products companies retain complete control of the end-to-end brand identity, value proposition, and other attributes which anchor their relationship with the consumer and define their competitive position in the market place. In modern parlance the very best companies deliver a consistent, high quality 'Experience' which consumers 'Trust' and 'Value'. It does not matter whether you are selling Sony Bravia TVs, Pringles Chips or Apple iPods; the focus on quality and consistency of brand experience remains central to those company’s success with their customers and against their competitors.

When a consumer buys a PC, preloaded with Windows 7, who defines the brand experience? The answer, unfortunately, is everyone and no one. The manufacturer of the PC has a big influence through their industrial design choices, the machine’s value vs. performance positioning and the quality of their support services. Microsoft defines a large part of the experience through the ease of use, functionality, reliability, security etc. of Windows. Then there are the thousands of software and peripheral companies who impact the consumer’s experience every time they download a new piece of software, buy a new printer, scanner or blue tooth headset. Of course the quality of the drivers, utilities and software packages is highly variable, and is often buggy or insecure (Adobe Flash) which over time degrades the performance of Windows, opens the consumers machine to malware attacks and ultimately undermines the initial brand experience.

In light of the the issues Microsoft faces controlling the consumer experience with Windows its easy to see why Apple has become the very definition of a successful consumer products company. You may have a fundamental disagreement with Steve Jobs about the 'Openness' of the Apple ecosystem, the curated (Closed) nature of Apple’s Apps store or the lack of support for Adobe Flash on the iPad but he truly does not care about your opinion. Jobs understands that maniacal control of the complete end-to-end consumer 'Experience' is his competitive advantage in a very competitive market. Ninety nine percent of the consumers who buy an apple product don’t give a fig about, open protocols and standards, they paid a premium for a brand 'Experience' defined by simplicity, elegance and consistently high performance; an 'Experience' which is almost impossible to find in the Windows ecosystem. How did a PC hardware manufacturer with less than 10% market share become the dominant player in the digital content business? By delivering a consistent, high quality, 'it-just-works' consumer experience.

The iPad is a very challenging problem for Microsoft. The price point squarely positions it as a consumer device with the brand experience to match the functionality matches, and in many respects, exceeds that of low end NetBooks. There is a raging debate about whether iPad sales are cannibalizing the NetBook market. My guess is they are but I’d also bet that Apple is more than willing to cannibalize it’s own low end Mac sales in pursuit of establishing the iPad as De facto standard consumption device for digital content.

What is interesting is that in the few markets where Microsoft can completely control the brand experience they have been successful. The standout case is XBox. Its worth considering that the brand 'Values' of the XBox experience are so high that even when the company screwed up in execution by delivering machines with a high failure rate they were able to overcome this with great customer support and replacement services. Despite these manufacturing challenges they were able to control the brand experience; keeping their customers happy. There’s only one small problem with this success. The most valuable 18−35 (Male) demographic consumers are loyal to the Xbox brand and not the Microsoft brand. It would be interesting to know what percentage of this young, affluent and influential audience are also loyal to the Apple brand and use a Mac as their primary computer? I would bet that it would be a far higher share than in the broader market. If correct that should be a very scary concern for Microsoft’s leadership team.

In reality XBox might as well be a separate company. Over time, Microsoft’s leadership will be tempted to drive a strategy with builds deeper links and dependencies between the XBox, Windows and Web, platform. Some of this will make sense but only to the degree that it enhances the XBox brand. Share holders should be very concerned if it looks like the XBox brand is being 'Milked' to enhance Microsoft’s other core brands. Leaders like Robbie Bach and Jay Allard acted as a bulwark against these tendencies. With their departure Microsoft’s most successful consumer business faces an interesting future.

A hint at how Microsoft might start to reposition itself as a true consumer products company can be seen in the evolution of the company’s search strategy. Once the company gave up trying to play poor imitator to Google and decided to set itself apart with Bing the business started to turn around. You may think the Bing name is lame but you cannot argue about the differentiated brand identity. Bing’s consumer positioning as a 'Decision Engine' clearly sets it apart from Google and the functionality supports that brand promise in the two most important search categories; shopping and travel. One indicator of a true innovator is the degree to which incumbents are forced to respond. One only has to see the recent improvements and changes in Google search functionality to know that Bing is viewed as an innovative threat to their business.

The Bing team do an amazing job of delivering a consistent brand experience no matter what platform and browser the consumer is using. I’m authoring this post on my Mac and the Bing shopping sites have identical functionality when viewed with either Chrome or FireFox which in turn are identical to the experience when using Internet Explorer 8 on Windows 7. This sort of cross-platform agnosticism is expected and required when building on-line consumer experiences today. Even so, Microsoft should be applauded for the huge progress they have made in this area since the days when Microsoft’s on-line properties only worked well with the company’s own browser technology running the Windows platform.

This commitment to delivering a consistent experience no matter how or through what channel the consumer chooses to access your brand is critical. It will be interesting to see whether the on-line team receive pressure from Windows management to deliver a differentiated experience for consumers choosing future versions of Internet Explorer. It may be telling that the IE team is using demos of an Amazon shopping experience to highlight the GPU acceleration functionality in the next version of IE. If all Microsoft’s on-line properties are standards based and deliver equivalent experience across platforms then what will make consumers choose Internet Explorer over the competition? For a true consumer products company that would be an easy decision to make for the business that sits at Microsoft’s core the answer is not so obvious.

In Part 2 I explain what business I believe Microsoft is really in and what implications that has for the future direction and strategy of the company.

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