Who will disrupt Google and Facebook?

Driving home from a breakfast meeting this morning, I got to wondering who is going to disrupt Google — and how soon.

Those of us who teach strategy know how all about examples of new entrants commoditizing and destroying the revenue models and profit sanctuaries of long-stable, long-established businesses. (The term “disruptive innovation” seems most convenient here, despite the recent controversy over the original evidence of same). Here are a few examples.

• Craigslist and various Internet portals (such as Google and Yahoo) destroyed newspapers — aided by the latter’s poor business models, some unfortunately inaccurate assumptions about the supply (and thus price) of Internet advertising and key tactical errors along the way.
• Two entrepreneurs created GrandCentral, a (temporarily) free telephone answering and forwarding service, and in 2007 sold it to Google (where it is now Google Voice). It now has voicemail transcripts and other improvements but is still free. Thousands of small companies and nonprofits (including my own) use it in lieu of an answering service.
• I learned how to use Google Forms from my friend Mako Hill (and his need to run the OUI conference with limited cash and volunteer resources). Now I use it for most things that other people use SurveyMonkey for.

So the question I mulled over was, who will disrupt Google? Facebook would like to take business away from Google, but it’s not through cost reduction or elimination of revenues. Rather, Facebook imagines that its socially embedded ads will be more valuable than Google’s search context-specific ads.

Instead, I find Facebook ads creepy and sometimes invasive of my privacy, particularly when Amazon ads show up for a book that I looked at (but ruled out buying) five minutes earlier. (Apparent Amazon is not alone). I am appalled at what would happen if I had looked at a socially undesirable product on Amazon (sex toys, a book on bombing government buildings) — even though I know that anonymous browsing without cookies would allow me to ask a question (if not make a purchase) without leaving digital breadcrumbs.

Then when I got home, I saw this wonderful article by Andrew Orlowski of The Register (who I mainly know from his insightful analysis of mobile phone platform wars). One passage (emphasis mine) touched on the same theme:

'Dear Daddy...' Max Zuckerberg’s Letter back to her Father
What do you mean, I can't get off Facebook?

2 Dec 2015 at 13:02, As told to Andrew Orlowski

Comment Yesterday Mark Zuckberg accompanied the birth of his first child, a daughter Max, with a long open letter.

Thanks to the miracle of modern technology, we've found what Max might write back, and we're sharing it with you:

Dear Daddy

Thank you for the letter that your PR and public policy team wrote to mark my Birth, and sent to every news outlet in the World. Most Daddies wouldn’t do this. Heck, most Daddies don’t even have PR and public policy team, and those that do wouldn’t use to leverage a private family event!

That’s why you Daddy, are so special.

You write: "We want you to grow up in a world better than ours today."

Well, duh!

If I discovered that my well-educated billionaire parents wanted me to grow up in a world that’s worse than ours today, I’d already have crawled my way to a phone booth and dialled 911 to alert the authorities.

That goes for "a world without suffering from disease” too. Wow. Where do you get this stuff, Daddy? I heard more original ideas when I was a single cell blastula!

You also write:

"Technological progress in every field means your life should be dramatically better than ours today."

I’d like to think so too, Daddy, but there’s this thing that’s bothering me.

It's called Facebook.

And not just Facebook, it’s the way Silicon Valley companies like yours pile up huge wealth by destroying value in every other part of the economy, as if technological progress were a zero sum game. It’s the way you strip-mine individuals so they have no ability to be autonomous economic agents, owning and trading the stuff we make, so all we have to live on is some feudal digital plantation - and we have to be grateful for it. It's the way some Valley firms place themselves above the law and try to block the work of elected officials who want to defend human rights.

Not you of course, Daddy. Just some of your friends.

I mean, come on. There's a lot to teach children in this modern world I've just been born into. But one thing we've got to learn is that just because you can do something, it's not necessarily morally acceptable to do it. Who's going to teach me that in Silicon Valley?

And Daddy. Connecting people all over the world through an internet website is very cool idea indeed. But it's not that cool or original. It’s as if the guy who invented the bottle-opener wrote a plan to become Emperor of the World. Like, "Remind me who you are again?"

I think that’s pretty weird already. And I’m only one day old!

Well if there’s any of the economy left by the time I graduate, perhaps my generation will be a bit less selfish than yours, Daddy, and we can teach you about it.
…
Well, I’m kinda tired writing all that. It’s time for nap. Just remember when you’re burping me, do it over your shoulder, that way I won’t puke all down your front.

Your loving baby daughter,

Max

In the Google (and now Facebook) case, I thought about Microsoft. They were a one trick pony that was handed a monopoly in operating systems (and used that to build another one in business productivity apps) that they exploited to the maximum degree possible. But a) they lacked the ability to create new compelling products and business models and b) everybody distrusted them and thus were wary of providing them new monopolies, no matter how good their technology.

So at some point, the shoe will be on the other foot: what happens when Google and Facebook have their profit sanctuaries destroyed? Google — now Alphabet — appears headed towards becoming a diversified technology conglomerate. It has worked (so far) for Hitachi and Samsung, but not for HP or Sony. Thus far, it appears that Apple and IBM have been the masters of re-invention: will the new kings of Silicon Valley be able to replicate such feats?

Web standards exist for a reason

Back at the end of the browser wars — i.e. the late 20th century — it looked like Microsoft had won and Netscape had lost. A number of Windows-centric shops designed their websites for Internet Explorer, either in terms of full functionality (“works best with Internet Explorer") or actual access (“requires Internet Explorer”). Microsoft encouraged this by promulgating APIs for Visual Basic, .Net and DirectX and the like.

Fast forward to today. Over the past five years, Microsoft’s desktop market share has been in a freefall. Statcounter — the widely cited arbiter of browser usage — chronicles how Google Chrome has come from nowhere to take share from IE and (to a lesser degree) Firefox (heir to Netscape’s customers and developers). At 55% in January 2010, the IE share is now under 22%:

When you include all platforms — tablets, mobile phones and consoles — the news for Microsoft is even worse — with an IE share of 13.5%:

Yes, as a Mac owner this was particularly galling, since Microsoft had a Mac version of IE (as one MS employee pointed out to me) only as long as it served its purposes during the browser wars. MS discontinued IE for OS X in 2003. Fortunately, with IE now a small fraction of the web audience, it no longer matters — except at one site crucial for business professors, as I discovered today working on a paper.

The Virtue of Bad Design
One of the more popular proprietary business databases is called Thomson One, from Thomson Corporation (later Thomson Reuters). For entrepreneurship scholars (like me), the most relevant content is VentureXpert, a database of investments by VCs, angel networks, corporate VC and other private equity investments. This data is used by PWC and its partners to announce their quarterly VC funding stats at the PWC MoneyTree site.

Unfortunately, Thomson One is only compatible with Internet Explorer. Worse yet, it is not supported (and doesn’t fully work) with any version of IE greater than IE 8 (as documented by IT support desks at Wharton, Harvard, Columbia, and other schools).

Internet Explorer 8 was introduced in 2009 and last updated in February 2011 (almost five years ago), just before IE 9 was released in March 2009. IE 8 is not compatible with Microsoft’s current desktops, laptops, tablets or mobile phones, which require Internet Explorer 10 or 11. StatCounter estimates the November 2014 market share of IE 6+7+8 at 4.03% of the desktop market.

For Windows users, there is an IE Tab plug-in that helps Chrome and Firefox imitate IE, but not all the Thomson One features are available in this emulation mode.

Customers Lose, and (So Far) Thomson Still Wins
So to recap, here is where we are:

• The virtue of the web (particularly HTML 4+) is interoperability between browsers.
• One or more IT architects at Thomson Corp. decided years ago to lock their database to specific features of one browser, rather than support Internet standards.
• Those features are so non-standard that they are not supported by Microsoft browsers released since March 2011.
• The company has done nothing to upgrade their site to support the 96% of the world that uses other browsers.

I'd like to think that whoever made this architecture design error was fired for his (it was most likely a he) mistake, but that would assume a level of IT competence that the legacy team of Thomson Corp has not yet demonstrated. (Meanwhile, other Thomson Reuters sites seem to work with a wider range of IE versions and in some cases even have a mobile client).

One thing that is clear is that Thomson Reuters is pretty confident of their monopoly position in this particular niche: if not, their customers would be defecting in droves, and fixing this broken IT infrastructure would finally become a priority. I’m not holding my breath (on either competence or customer orientation suddenly breaking out).

Will Microsoft ever grow again?

In the past year, the rapid decline of the PC industry has become undeniable. The fortunes of HP, Dell and Microsoft have suffered accordingly.

Last week “Lex” at the FT questioned whether Microsoft was properly valued as a legacy IT company:

The shares trade at 11 times this years’ earnings and a free cash flow yield of 9 per cent. Cheap? Those figures look a lot like those for IBM and Oracle, the other gigantic clanking technology relics. But it is hard to argue that they face mortal threats to rival Microsoft’s.

Those who hold the stock are betting that the core businesses will be surprisingly stable, and that investors will reap the rewards. That second point is important.

With the accelerating collapse of Blackberry, Microsoft’s quixotic acquisition of Nokia’s handsets has a better chance of gaining share. However, being #3 (with a 15% share) of a low margin business is hardly going to replace being #1 (with a 80-90% share) of a business that once yielded 90% gross margins.

For the benefit of us long-suffering Microsoft shareholders, Lex recommended two steps. The first would be to shut down the online services division — including Bing — after losses last year of $1.2 billion.

This would be a monumental admission of failure — in timing, strategy and execution — to profitably enter the only software business that’s going to matter in 10-15 years. Intelligence continues to migrate to the cloud and software as a service — not software as a package or download — will be the only business of large consumer software companies. Microsoft’s exit would leave Google the sole contender for the foreseeable future, with Amazon and Apple seemingly consigned to specific niches of the business.

Steve Ballmer can’t (and won’t) admit that failure, but his successor could. Growth with heavy losses is not something that any shareholder wants, but if online services are dropped, so are any hopes of online services providing growth.

The other Lex recommendation is to reduce share buybacks (since management “has done a terrible job” of recognizing when its stock is cheap) and shift that money to increasing the dividend. As someone who owns Microsoft for its dividend (as one of the 10 Dogs of the Dow) I’d heartily endorse such a plan. With revenues stagnant and declining margins, shareholders are unlikely to see any significant capital appreciation, so sharing (rather than squandering) Microsoft’s legacy profits is best shareholders have for a return on their investment.

Handset sideshow doesn't solve Microsoft's core problems

Facing the expiration of the distribution agreement with its main mobile phone licensee, Microsoft bought Nokia. The deal fulfills Steve Ballmer’s ambition to recast Microsoft as the next Apple by allowing it to vertically integrate downstream into hardware.

Here’s the key passage from Ballmer’s press conference Tuesday:

The company I joined 33 years ago was a company focused on software for personal computers. And software is a great skill and will always be a core strength of Microsoft. The PC is an important device, the most productive device on the planet, and will continue to be so. And yet for us not only to grow but for us to really fulfill the vision of what we can do for our customers, we've evolved our thinking.

We need to be a company that provides a family of devices in some cases we'll build the devices, in many cases third parties, our OEMs, can build the devices but a family of devices with integrated services that best empower people and businesses for the activities that they value the most.

Like the dog who caught the car, now what? Microsoft under its next CEO will be a hardware company, but is there any evidence it will be a successful hardware company?

One of the problems is that Microsoft had more than a decade to offer a compelling mobile platform. Its smartphone market share has been falling since before the iPhone and Android.

Now with Windows Phone 8, it has a good product, but so what? Four years ago, another dying mobile company — Palm — brought out an innovative device to great reviews, but it didn’t matter. Less than a year later, the company — the US smartphone pioneer and onetime market leader — was gone, like Nokia bought up at a firesale price.

Microsoft has already had a chance to try its fully integrated mobile strategy with its Surface tablet, which enjoyed great reviews and a huge marketing push. In one year, Microsoft spend $900m to advertise the Surface and WP8, but generated only $850m in sales and took a $900m write-off on inventory.

Fortunately for MSFT shareholders, Nokia’s handset division is available at a firesale price, less than 10% of the company’s cash on hand. Unfortunately, the man who ran the division into the ground will be heading it for Microsoft and is now a favorite to become Ballmer’s replacement

The deal would also reward Nokia’s CEO Stephen Elop, the ex-Microsoft executive who torched Nokia’s Symbian platform in favor of Windows, and led the failed effort to regain share using Windows. (In mid-2012, Nokia’s Symbian platform had a higher market share than Windows had then or now). Elop has shrunk the company , cutting the company’s market cap in half from $40b to $20b.

Perhaps Elop won’t rewarded for his Nokia failures, but the early betting is that Microsoft’s board (a captive of Ballmer and founder Bill Gates) will pick a conventional leader who, as the WSJ put it, “won’t rock the boat.” Because of this influence, the article predicts the board will go for more of the same, someone who can run a large bureaucratic Fortune 500 company, rather than a visionary leader who will break free from the lost decade of stagnation under Ballmer. The company needs a Lou Gerstner but (at best) will end up with another Lew Platt.

The problem is, Ballmer has historically confused monopoly profits with premium pricing. People pay more for Apple products because they want to; people pay more for Microsoft products when they have to, and they don’t if there’s a good alternative.

While Nokia didn’t get software, they historically were a hardware innovator with screen, cameras, sensors and other features. Now Samsung has assumed that mantle — along with overall market share leadership — while Apple remains the software and integration leader.

The Nokia deal will reduce near-term EPS and long-term profitability ratios. The company hopes to save $600m annually, presumably by laying off 3,000-5,000 workers. I would expect most of those would be in Finland, where Nokia has for the past few year playing a shrinking role in the local economy.

Even if Nokia is a modest success, it will at best replace Microsoft’s declines in its slowly dying PC business. Buying the former market leader — which now longer even ranks in the top 10 in global market share — won’t transform it into a major player in the industry. Given its huge cash hoard, Microsoft’s phone business will last longer than Blackberry’s, but that’s not saying much.

As with all such mergers, the odds of actual success are large. Two quotes from this morning’s WSJ illustrate the problem:

When executives "can't figure out what to do, they go buy something, particularly when they have a lot of cash," says Jeffrey Pfeffer, a professor at Stanford University's Graduate School of Business. "It seldom works."
…
Juan Alcacer, a Harvard Business School associate professor who has studied Nokia, says companies with small market shares typically "are in a bad position for a good reason." Combining two of them, rarely works, he says: "Two bad companies don't make a good company."

The stock has given back the gains that it had with Ballmer’s retirement announcement. Hopes that Microsoft would fix its broken corporate culture, becoming faster and more responsive are now dashed. We long-suffering Microsoft shareholders own a utility, that pays out a fraction of its declining monopoly profits with no replacement in sight.

The ignominious end of Nokia's handset hegemony

On Tuesday morning (Finnish time), Nokia announced that it was selling its handset business to Microsoft for €5.44b. The payment includes €3.79b for the division and €1.65b for a 10-year (non-exclusive) license to the Nokia patents necessary to operate that business. The deal is funded by Microsoft’s offshore profits that (as with most US-based multinationals) it has been unable to repatriate due to the US tax law.

A PDF published by Microsoft summarizes the deal:

• Microsoft acquires Nokia’s phone business
• Microsoft acquires Nokia’s Qualcomm, other key IP licenses
• Microsoft licenses Nokia’s patents for use across all Microsoft products
• Microsoft licenses ability to use Nokia HERE broadly in its products
• Nokia retains NSN [Nokia Siemens Networks], HERE, its CTO Office, and its patent portfolio
• Nokia and Microsoft cement original partnership with this deal before 2014 recommitment date

As a Microsoft shareholder, this seems like a final failed effort by Steve Ballmer to make big strategic moves to distract from the failure of his efforts to execute on the core businesses he inherited when becoming CEO in 2000.

Want proof? In the same PDF, Microsoft projects in 2018 an “assumed market share” of 15% for the Nokia (or Windows Phone) business. Microsoft hasn’t had 15% share since 2005, and its most recently quarterly share (like Nokia’s) was under 4%. As with all of Microsoft’s mobile strategy since then, the deal is more about hope than feasible strategies.

About the only good news is that the troubled Microsoft is acquiring the even-more-troubled Nokia for a song. Three years ago, Nokia’s handset division was grossing more than €6 billion per quarter; two years ago, Microsoft paid 20% more to buy Skype, a company without a business model.

Meanwhile, what about Nokia? Basically, its current and previous CEO have panicked as they have driven the company into the ground. Since the 2007 introduction of the iPhone, bought full control of Symbian Ltd. (and then killed it), switched from the once-dominant Symbian to the also-ran Windows platform, and now is exiting the business. All this from the company that was the world’s largest handset maker from 1998 until 2012.

The urgency of the deal for Nokia is evidenced by the key financial terms. Microsoft is “immediately” advancing Nokia €1.5b so it can keep the doors open until the deal closes — and Microsoft presumably assumes the salaries of 32,000 Nokia employees in the money-losing division.

It’s hard to see how losers buying losers (cheap) creates a winner. Yes, the mobile market is growing as Microsoft’s core business is dying. Yes, having a captive† handset manufacturer will justify keeping open the Windows Mobile division. But how will having a distant third place product with single-digit market share solve Microsoft’s numerous growth and profitability problems?

† Microsoft claims other licensees will continue, despite decades of failed licensing efforts by vertically integrated platform owners. Licensing didn’t work for Nokia with Symbian, didn’t work for Palm with Palm OS, didn’t work for Apple with Mac OS 8, and didn’t work for IBM with OS/2.

Microsoft reorg: tragedy or farce?

There are many ways to interpret the massive “One Microsoft” reorg announced Thursday by Microsoft CEO Steve Ballmer.

One is as a corporate political drama. Mary Jo Foley (of ZDNet) and Sean Ludwig (of Venture Beat) report that winners include Terry Myerson (from head of Windows Phone engineering to all OS engineering), Qi Lu (head of online services engineering who adds Office) and Julie Larson-Green (head of Windows and Surface engineering, who adds Xbox and games). Losers are the presidents and CFOs of the five previous business units: Windows, Server and Tools, Microsoft Business Division, Entertainment and Devices and Online Services.

A second is as a plausible and sincere effort to revive Microsoft’s growth after more than a decade going sideways and now facing the collapse of the PC category that accounts for most of its OS an application profits. As the WSJ reported

Microsoft's restructuring follows a strategic plan, which began taking shape about a year ago, to shift its identity away from being a producer of operating systems and application software. Instead, the company wants to be known for devices—designed by Microsoft itself or by partners—and services that are closely tailored to work with that hardware.

The strategy shift, though it still relies heavily on software development, emulates the way rivals like Apple Inc. and Google Inc. have approached development of products such as smartphones and tablets.

The third way to view this is as reshuffling the deck chairs on the S.S. Titanic. JP Mangalindan of Fortune quotes an outside leadership consultant

"It's a great first step but won't get them to 'One Microsoft,'" says Randy Ottinger, EVP of the executive leadership strategy firm Kotter International. "The real question is what are they going to do post-reorganization to actually change the culture. The re-org will not change the way they behave and act because it's been years and years of doing business in a different way."

Similarly, Barb Darrow of Giga OM writes:

But it is crucial that the changes take direct aim at a long-running Microsoft problem: Fierce political infighting (see org chart diagram below.) When I covered the company day to day, the best way to get dirt on Office was to ask the Windows guys and vice versa. Clearly, after decades of that, and faced with huge and capable (and well funded) competition — Google, Apple, Amazon et al., Microsoft can’t afford to let that behavior stand.

and refers to a June 2011 cartoon contrasting Microsoft to Oracle, Facebook, Google and Apple (the latter updated after Steve Jobs’ death).

A fourth perspective is as an attempt to obfuscate a failed strategy by a failed CEO. As a Microsoft shareholder (NB: Dogs of the Dow), the only writer who seems to feel my pain is the anonymous Lex, writing 7,000 miles away at the Financial Times:

Everyone knows Microsoft’s challenge: its operating system and business software divisions account for 80 per cent of operating profits. These divisions’ core products were developed for personal computers. The PC is in decline, so those profits need protection or replacement. Investors deserve a clearer view of the strategy for doing that, and a reporting structure that allows them to see if it is working. While Microsoft’s overarching strategy has never been clear, its reporting structure has at least made it clear that, profit-wise, one product effort (server software) has been a smashing success while three others (online services, Xbox, phones) have been failures.

Any new structure must deliver at least that much clarity. And if Microsoft is committed to devices, investors should get systematic unit volume reporting. If software sales are becoming services sales, they should be told how the licence sales/subscription sales mix is shifting one quarter to the next. Failing this, they should assume the patient is unlikely to recover.

Most of all, I’m reminded of the Marxist saying that “History repeats itself, first as tragedy, second as farce.” Longtime Microsoft watchers are having a hard time in hiding the sarcasm in their skepticism. As the lead of the Business Week column observes

Microsoft Unveils Its Latest Reorg SpectacularBy Ashlee Vance July 11, 2013

Say this for Microsoft (MSFT) Chief Executive Officer Steve Ballmer: The man knows how to do a reorg, reorg, reorg.

Or even more to the point, Nitrozac and Snaggy capture this at the “Joy of Tech” cartoon. For maximum effect, read the whole cartoon, but here’s the punchline:

And then 2,700 words later:

So if I had to bet on tragedy or farce, “One Microsoft” looks more like farce.

Note to regular readers: Sorry for the delay in posting this, but I’m teaching this week in the KGI business bootcamp for life science postdocs.

Cartoon credits: Org chart by Manu Cornet, Bonkersworld.net; Steve Ballmer as rendered by Nitrozac and Snaggy of GeekCulture.com

Aboard the S.S. Ballmer

Microsoft’s success has always been about its alliances: Bill Gates lining up Basic licensees, the 1980 deals with IBM and Seattle Computer Products and (most importantly) licensing the IBM-funded DOS to all of Microsoft’s competitors.

With declining PC revenues, Microsoft is using its $50+ billion cash horde to buy friends. The Redmond company has created alliances with Nokia and Barnes & Noble in hopes of gaining a footprint in smartphones and low-end tablets. But into doing so, both companies have (for better or worse) paced on their platform bets on Microsoft’s (thus far) losing hand.

As part of my studies of Nokia’s smartphone strategy, I’ve been following the Microsoft-Nokia deal for several years. Tomi Ahonen has done a great job of covering how badly thinks have gone since Nokia threw away its (declining) smartphone lead and cast its lot with Microsoft.

However, the Barnes & Noble story is a different one. It has been searching for a viable tablet strategy for years. When it signed its surprising $300 million deal a year ago, it was losing its decade-long battle fight with Amazon over books, online sales, tablets and every else. The original 17.6% equity investment in the B&N spinoff of Nook Media was supplemented by a promise of $305 million in other payments.

Last week, rumors surfaced that Microsoft would pay $1 billion for the remaining shares of Nook Media. Barnes & Noble shares jumped on the news.

This would be the only good outcome for B&N: Microsoft gets a portfolio of online assets to fight Amazon, Apple and Google, and B&N gets some cash to prop up its dying retail business. To quote Steve Miller: “Go on, take the money and run!”

In the meantime, both Nokia and Nook Media are aboard the S.S. Ballmer without a lifeboat. Microsoft has known for 15 years that it needs a viable mobile strategy, and despite billions in R&D (and funds for products and alliances), has been unable to break single digit market share on either phones or tablets.

It’s not for nothing that Ballmer was named the worst CEO by Forbes a year ago, saying “"Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company today”. Ballmer was merely second worst in CNBC’s 2012 rankings. Both were before the recent Windows 8 fiasco exploded in the company’s face.

On Sunday, Al Lewis of Dow Jones cited yet another Ballmer critic:

Former Microsoft executive Joachim Kempin released a book timed to the Windows 8 launch last fall, called "Resolve and Fortitude: Microsoft's Secret Power Broker Breaks His Silence." In it, he, too, says Mr. Ballmer should be fired.

"He has no clue about technology," Mr. Kempin said in a telephone interview. "All the guys around him agree with him or they get fired."

Because of his long friendship with America’s second richest billionaire, his job has been secure thus far. As long as Ballmer remains at the helm, Microsoft (and Nokia and B&N) shareholders should expect more of the same.

Microsoft Office: Better to Switch than Fight?

The Wall Street Journal notes that Microsoft hopes its Office suite will provide leverage to attract buyers to Windows tablets, but asks whether it would be better off providing Office for the iPad and Android tablets.

In making the decision, Microsoft has conflicting goals between the Windows and Office divisions — the two major pillars of the company’s cash flow. According to the WSJ, Windows provides "about a quarter of revenue and about a third of operating income. The MS division that includes Office has “30% of sales and nearly half of operating income.”

However, PC sales are falling precipitously, and with that, the profit stream from Microsoft’s share of the Wintel duoopoly. The fortunes of Office are heavily tied to those of Windows, but as the Journal notes, Microsoft now has an important choice to make.

One option is to continue to tie Office to Windows in hopes of establishing Microsoft’s platform in tablets. Tablets (not smartphones) are the apparent replacement for PCs, and Microsoft has only 7% share of Q1 global tablet sales, vs. 48% for the Apple and 43% for the Google platforms. If Microsoft doesn’t fight tooth-and-nail for tablet market share, it will be a much smaller and weaker company five years from now.

By way of analogy, a decade ago Microsoft was encouraged to offer Office for Linux, but never did. One concern was that providing Office would legitimate Linux; in this case, the rival tablets are already more legitimate that Microsoft’s offerings. As it turns out, I think MS made the correct decision then, because desktop Linux is a boomlet that never happened.

However, the general principle is correct. With the PC market in free fall, I believe Office needs to generate its own revenues, wherever it can find them, without regard to synergy. MS has enjoyed a high-margin business selling Macintosh business applications for 29 years, and the WSJ estimates that Office has a 30-40% share among Mac users. Similarly, Apple’s tablet buyers are an attractive growth market:

Analyst Brian Marshall of ISI Group expects Apple to sell 88 million of them this year. If 35% of those iPad buyers also purchased Office, and Microsoft received about $40 per copy of the software, that would translate to about $1.2 billion in additional sales. Add potential customers from the existing pool of iPad owners, plus all of those with Android tablets, and the figure could well be higher.

Otherwise, the Office group risks accelerating a more serious problem: the risk of irrelevance. My daughter’s (former) high school adopted OpenOffice as the standard tool for the entire school, and it worked well. The Achilles heel of OO is the imperfect compatibility with MSO, but if everyone’s using OpenOffice, it’s a non-issue. I wonder how many of those students will ever buy Microsoft Office later in life.

WSJ also notes Microsoft’s need to challenge its incipient cloud rivals:

an added benefit would be to nip in the bud those mobile rivals training a new generation of device users to rely on Office alternatives such as Google's Google Docs, applications from Evernote, and Apple's iWork apps.

In the Gates era, I don’t think such a strategy would be seriously considered, as Chairman Bill would doggedly (and optimistically) wait for Windows tablets to turn the corner — just as he’s waited more than a decade for Windows to become a viable smartphone platform.

I have no idea what Steve Ballmer will do, given he has escaped accountability for an abysmal record as CEO. But I know what he should do.

Disclosure: I own 100 shares of Microsoft, as part of a Dogs of the Dow dividend-seeking investment strategy. I own several Macs, but no Windows or iOS devices.

Google still winning cloud race

I now have firsthand experience with various cloud based email services, and Google still remains firmly in the lead.

My life is pulled in (at least) three directions when it comes to cloud-based (aka hosted, aka SaaS) mail services:

• This month, my employer (a Microsoft shop) decided to migrate from an Exchange server to the Office 365 hosted services. I guess as an IT-knowledgeable employee, they made me one of the guinea pigs. So this week I'm trying to reconfigure my Mac and cellphone to work with the new servers.
• Meanwhile, on July 1, my wife was forced to migrate from mac.com (aka me.com) to iCloud. As the household IT support desk, the task fell to me, and we still haven’t been able to get it to work with her Mac.
• Finally, my teenager and I are loyal users of gmail and other Google services. My teenager won’t use a client app anymore, while I use my various gmail addresses with my Eudora client. Both of us also use Google Voice.

(I also have an old Yahoo web mail account, but since they don’t support client apps for free, I only give that email address for website registration and other spammers.)

From what I’ve seen so far, Google remains far ahead for web-based services. This is not to minimize the advantages Microsoft and Apple have for their locked in proprietary client customers.

A few years ago, Google and MS were warring over providing hosted mail and office apps to the 23-campus California State University system, America’s largest university system. Google won and at SJSU we were migrated in mid-2010..

However, before that the SJSU business school was an Exchange shop, as was my previous b-school and my current employer. So despite being a Mac user since 1984, I was forced to deal with Mac/Exchange interoperability issues (which as much better than when I was researching my dissertation 15 years ago).

Microsoft Outlook Web Services are not very impressive so far. The web client seems slower than the old MS web app.

It was terrible — absolute pits — for explaining how to configure a 3rd party client (cellphone or whatever). First off, can’t find that help starting from scratch in the online help. I could only find it because my employer provided a link. Secondly, they don't publish their POP/IMAP/SMTP server settings on a web page like normal web services. Apparently the settings are client-specific (which suggests their DNS load balancing technology is inferior to Google’s) Third, if (after logging in) you want to find the mail settings, the steps are so complicated that they want you to watch a video. Since I was on a lousy airport WiFi connection, I figure out how to get through the various windows (also buried in their web page) to find the answer.

On the Apple front, the iCloud migration is going badly. Mac.com and Me.com supported Internet standards, but iCloud deletes POP support and their IMAP implementation is incompatible with my wife’s Eudora client. So we are stuck on webmail until we find a replacement for the client or iCloud.

Meanwhile, Google has a huge lead in features and design. The gmail server supports all the protocols, multiple desktop and mobile clients. And if you find the mail server or client too limiting, you can forward to any other server.

Yes, Apple is going to get me.com customers from their iPad lead and iPhone sales, and Microsoft is going to pick up all the firms that run all-Microsoft shops. But if an IT manager is try to pick the best solution, Google seems to be winning both on its execution and its standards-based approach (allowing third-party integration).

Microsoft gains powerful Windragon ally

Once the co-owner of the powerful “Wintel” monpoly, in the past decade, Microsoft has been suffering an increasing slide towards irrelevance. The onetime brash PC pioneer has looked more and more like a legacy software company protecting an installed base.

Nowhere is this trend more painful than in the mobile world. Since 2006, it has never held more than 15% of the global smartphone market and in fact — under the twin onslaught of iPhone and Android — its market share has been in a freefall, giving up more than three-fourths of that share. To add insult to injury, 2011 was the year when more smartphones shipped than PCs, a trend that’s only going in one direction.

To save its mobile strategy, Microsoft’s put all its money on its Nokia alliance in hopes that would save Windows Phone 7 from the same ignominy as its predecessors. Given that Nokia’s share has also been in freefall, this has the potential of extending Gary Hamel’s “two drunks” analogy from acquisitions to joint ventures.

On Tuesday, Microsoft landed a public endorsement from one of the mobile industry’s most powerful players: Qualcomm. To me, this has the potential to be the most powerful ally that Microsoft could attract, as a net positive for both firms and a negative for their respective rivals, Apple and Intel (and to some degree, Google).

At the company’s annual shareholders’ meeting, Qualcomm CEO Paul Jacobs bragged a little about the company’s successful shift of its semiconductor business from radio modems (“basebad processors”) to its Snapdragon all-in-one process — which include an ARM-compatible CPU, radio, graphics, multimedia and other features. Based on its Snapdragon success, Qualcomm has continued to gain market share, passing TI last year to become the leading supplier of cellphone CPUs (“application processors”), according to Strategy Analytics.

(By not making its own cellphones or infrastructure, Qualcomm also had a unique position in the mobile phone value chain. Instead, it devotes its $3 billion/year R&D budget to developing components and basic technologies that it sells to all comers among the various handset and platform providers).

Qualcomm has two reasons to throw its weight behind Microsoft. First — unlike Android — it’s only game in town, as the sole CPU supplier for WIndows Phone products thus far. Secondly, Qualcomm sees Windows-on-ARM as opening a whole new market — allowing it (and other ARM licensees) to take CPU market share away from Intel in the PC and tablet space.

In Jacobs’ view, the Windows-on-Snapdragon (or — as I put it, “Windragon”) combination will merge the office productivity options of Windows with the mobility, power saving and performance of the Snapdragon CPU line. Part of the shareholder meeting was devoted to demonstrating the Snapdragon S4 processor designed for the Windragon market.

This sort of tight alliance would seem to me to accelerate the estrangement of Apple and Qualcomm in the handset world. A shareholder asked when (or why) Qualcomm can’t provide more chips to Apple, which appears to be limited to its baseband processor (in the iPhone 4 and iPhone 4S) to complement Apple’s own A5 ARM cpu. If Qualcomm is going to help Microsoft gain share against the iPhone, iPad and perhaps reverse the OS X gains against Windows, then the Apple of Steve Jobs (and perhaps Tim Cook) is not likely to be too friendly or dependent on the San Diego chip giant.

Certainly success of Windragon would accelerate the shift from Mac to iPad sales and Apple’s expected phase-out of OS X.

The other interesting implication is what it does to Intel. There’s no love lost between the firms, particularly in the WiMax vs. LTE 4G wars (that Jacobs alluded to Tuesday). At the same time, Intel is suffering from the same shift away from PCs that threatens Microsoft.

Will Intel make ARM-compatible CPUs, as it once did? Will it try to more aggressively win Android allies to counter the Microsoft-Nokia-Qualcomm alliance?

Bill still wants to be Steve

Bill Gates still wants to be Steve Jobs — even though Steve is dead.

How else can we explain why Chairman Bill (or rather, his trusty sidekick and CEO, Steve Ballmer) is opening a new Microsoft store today in Valley Fair, the same Silicon Valley mall as one of the earliest Apple stores — the store where the media go to take photos of people lining up to buy an iPhone.

Today’s opening marks the 12th Microsoft store. (With a decade-long head start, Apple now has more than 300.) In 2009, Microsoft bragged it would open up retail stores “right next to Apple,” and 6 miles away from Apple HQ certainly counts.

However, Microsoft is bribing people (or rather celebrities) to generate traffic at both ends of the age spectrum. On Thursday, the QB of the first decent 49er team, 55-year-old Joe Montana, is making a 5pm appearance. On Friday, the 30-something duo The Black Keys is performing a free concert (free to customers, not to Microsoft) while on Saturday one of the teen heartthrob Jonas Brothers is doing the same.

I don’t see the point, but then I’ve never seen a Microsoft store and (other than an office suite) haven’t used their products for a decade. However, after visiting the LA store, Greg Sandoval of CNET wrote:

Offering techies a stage to show off power points isn't a bad way to get people in the store.

Still, Microsoft has a long way to go before challenging Apple. Not only does Apple dominate in the number of stores, but some doubt whether Microsoft possesses Apple's sense of style or can create the same first-class shopping experience—even with all the mimicking. There's also this: consumers shop at Apple because for decades now they have loved Apple products.

Microsoft hasn't been anywhere near so successful at duplicating that kind of customer loyalty.

Some “experts” claim we should want our kids to emulate Bill and not Steve. I think Steve did a better job of understanding — and more importantly, anticipating — what excited people, while Bill produced credible incremental improvements funded by monopoly rents. Now Bill is semi-retired to count his money and (ala Carnegie and Rockefeller) burnish his reputation for posterity.

Apple sans Steve Jobs will eventually lose that élan. That’s little consolation to shareholders of Microsoft, who’ve watched Steve Ballmer (charitably) lead the company sideways since taking over as CEO.

The retail strategy that worked for Steve Jobs is not going to work for Steve Ballmer. Apple store’s worked because (as Elaine Misonzhnik put it) “The stores are experiential rather than simply a machine for moving goods.”

Sony failed at retail stores because their products failed to excite people. With the important exception of Kinect, Microsoft has also failed to excite people as customers slowly defect from its platform to the Mac, tablets, Android, the iPhone and other non-Windows platforms. Among the 4Ps, Microsoft needs to focus on product, not place.

Microsoft finds products trump business models

With its smash hit Kinect, Microsoft found itself with a conundrum: it was such a great sensing device that researchers and hobbyists wanted to buy it even without buying an Xbox 360.

Normally a smash hit is not a problem. But gIven the Kinect had the same razor & razor blade model as the Xbox, people buying it without buying Xbox games meant that the MS was not making the margins they hoped for.

For a while, Microsoft was fighting the hackers. I argued they shouldn’t fight, they should switch:

Microsoft is missing a significant market opportunity by not being open to third-party enhancement of the Kinect hardware. Although the volume will not be as big as for a hit game — as predicted by Karim [Lakhani] and his research — third-parties will identify markets and solutions that Microsoft never anticipated.

Sure enough, Microsoft has seen the light. On Monday, Microsoft announced it will release a noncommercial SDK for the Kinect in the spring:

While Microsoft plans to release a commercial version at a later date, this SDK will be a starter kit to make it simpler for the academic research and enthusiast communities to create rich natural user interfaces using Kinect technology. The SDK will give users access to deep Kinect system information such as audio, system application-programming interfaces, and direct control of the Kinect sensor.

The timing is right for Microsoft to continue to deepen its ties to industry. With Nokia pulling back from university research alliances — and Apple, Nintendo and Sony abdicating the fight — the Kinect win is a rare example of success at a time of decline for its core businesses and its chronic failure to win share for cellphones.

Wired observes:

Microsoft was particularly impressed by the University of Washington’s research into telerobotic surgery. Researchers at the university hooked up a Kinect to a PHANTOM Omni Haptic, a stylus-based device that gives resistance feedback to the user, to build 3D models that the user can actually feel.

So hand it to Microsoft to (as I suggest) work on building a platform around the successful Kinect technology, rather than protect its otherwise conventional razor (console) and razor blade (game) business model.

Nokia and Microsoft: winners and losers

There is plenty to say about Nokia’s decision to phase out Symbian in favor of the-operating-system-formerly-known-as-Windows-Mobile.

Nokia CEO (and Microsoft veteran) Stephen Elop had already prepared the troops with his “burning platforms” memo, lambasting his new employer for how it failed to respond to the iPhone and Android challenge.

Nokia’s problem is that it never got software. It created Symbian so that it Microsoft would never take over handset profits the way it did on the PC. It outsourced key software development to Symbian and then continued to peddle its cursor-key S60 platform the in the face of Apple’s groundbreaking GUI phone.

Now it has partnered with Microsoft, a company that certainly is competent at software, but has yet to prove that it can execute on mobile software. Elop has jumped off the burning oil platform into a ship that’s adrift and has a hold filled with water. (Today its stock fell 13% in response to the news.)

Who are the winners and losers?

Winners

• Microsoft. Even if Windows Phone never goes anywhere, it gets a user base for Bing on the handset.

Losers

• Nokia. Despited hundreds of millions in side payments from Microsoft, it transitions from the world’s most popular smartphone platform of the past decade (albeit one in sharp decline) to the 5th most popular platform. It adopts Windows Phone 7, which has a 2% share in the US smartphone market, half that of the older Windows Mobile 6.
• Symbian and MeeGo developers. After following Nokia in its QT-everywhere strategy, they are now officially orphaned.
• Current Windows handset vendors. Presumably Windows Phone becomes a captive Nokia platform (the only kind it likes) and Samsung, Motorola and Sony Ericsson abandon their limited sales of Windows phones into US enterprises.
• Research in Motion. The distant and long-rumored hope of a Microsoft acquisition as an exit strategy is now gone.
• European network operators. Instead of key mobile Internet decisions — APIs, apps, app stores, search, bundled apps — being made by two American companies, they now will be made by (at best) three American companies.

Meanwhile, the Silicon Valley duo will continue their march forward to displace all comers — Apple with a plurality of profits and Google eventually achieving a majority of the market share.

The sign of a troubled company is multiple Hail Mary passes in a row. Nokia bought Symbian and made a half-hearted effort to establish an open source project (three years too late). It told developers to abandon Symbian APIs in favor of QT APIs that could enable a transition to MeeGo. And now it declares its future to be a platform that many have already written off.

All this because it doesn’t want to join the commodity free-for-all that is Android? In his memo, Elop told his troops

Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.

Nokia needs to fix its execution rather than throwing more Hail Mary passes than even Doug Flutie ever completed.

Update 9am: Michael Mace sees the Nokia-Microsoft tieup as like the Apple-IBM alliance 20 years earlier to create Taligent: similar in that execution will be the key, but different in that today Nokia has bet its future on the success of the alliance.

Open platforms and semi-open standards

For unexplained strategic reasons, last month Google said it didn’t want the semi-open H.264 video codec supported in its Chrome browser, but was favoring its semi-open WebM codec instead. This meant that the most popular HTML5 video format would not be available for Chrome users.

Not available, that is, until the intervention of an unlikely savior. Today Microsoft announced that it is supporting H.264 on the three main Windows browsers: its own IE9, and via plugins for Chrome and Firefox. The latter two make use of the extensible browser platforms that their respective open source sponsor created to encourage third party support (albeit not originally intended to help Microsoft.).

(Apple remains firmly committed to H.264 and HTML5 on both Mac OS and iPhone OS, as part of its pointed rejection of Adobe’s Flash.)

As a Mac guy, I rarely agree with Microsoft on standards battles, but I think they’re dead right on several issues.

Here are a few excerpts:

A Web without video would be a dull Web and consumers, developers and businesses want video on the Web to just work. As an industry we know this and have, until recently, been on a path to make this a reality with HTML5 by integrating video into Web pages more natively using H.264.
…
We’ve been clear from the first public demonstration of IE9 that the community deserves a reliable platform for delivering video as part of the modern Web.
…

• IE9 will play HTML5 video in the H.264 format. Why H.264? It is a high-quality and widely-used video format that serves the Web very well today. We describe many of those reasons in blog posts here, here, and here.
• Any browser running on Windows can play H.264 video via the built-in Windows APIs that support the format. Our point of view here is that Windows customers should be able to play mainstream video on the Web. …

Although predictably snarky (as it is about all things Microsoft), The Register noted the significance of Google’s action and Microsoft’s response:

H.264 is the mostly widely used video-playback codec on the web, but Google said in January that it was removing support for H.264 from future versions of Chrome.

Google said its resources would now be directed towards "completely open codec technologies," as the giant's goal is to enable "open innovation" on the internet. H.264 was built by Apple, Microsoft, and others, and is licensed by MPEG LA.

Future versions of Chrome will support only the royalty-free WebM codec that was owned and open sourced by Google last year, and the Ogg Theora codec.

As someone who’s been studying standards wars for more than 15 years, I think the Microsoft people are exactly right. The correct answer for web standards is choice and competition — just as we have choice and competition for cars, TVs, laptops, tablets and smartphones.

Accessing web pages is not like playing back 8-track tapes: it’s easy for a modern computer (and perhaps even a modern tablet or phone) to support multiple browsers.

I have four browsers installed on my MacBook Pro: Safari, Camino, Firefox and Chrome. Mainly I use them because I want to group a different set of pages for different windows, but sometimes I find that printing or browsing works better on one that the other.

Whatever its motives, Google attacking H.264 by banning it from its browser platform is the same idea as Microsoft trying to kill Java by discouraging its availability on Windows. It’s up to vendors to make their case to customers — both content providers and content consumers. Eventually the formats will shake out, but competition will force the codec providers to offer the best price and performance they can.

Microsoft vs. Open Kinect

This week’s dead tree Business Week has an extensive article on Microsoft’s war against the hackers trying to repurpose its pathbreaking Kinect hardware for other purposes.

It turns out Microsoft’s cool new hardware is the ideal platform for all sorts of robotics and machine vision applications, at consumer off-the-shelf prices. Primesense, original Kinect manufacturer, is planning on supporting developers with a special developer version.

It goes without saying that firms need to leverage their extremely loyal customers and that it’s risky (if not stupid) to tell them they can’t use a product the way they want.

Reporter Ashlee Vance quotes Utah’s most famous and perhaps America’s most oft-quoted) open source executive, my friend Matt:

Microsoft has succeeded despite themselves in creating something really cool," says Matt Asay, a prominent open-source blogger and executive at software startup Strobe. Yet a number of critics say the relationship between Microsoft and Kinect-loving geeks is already strained, and that Microsoft's early reactions to their playful tinkering suggest it could squander a once-in-a-generation opportunity. "Here was a chance to throw themselves deep into the bowels of the open-source hippy movement," Asay says. "They are kind of trying to do it, but they don't want to touch anyone in the mosh pit."

Adds another well-known expert (and friend):

"Companies should make it easy for people to hack," says Karim Lakhani, an assistant professor at Harvard Business School who studies open-source projects. "Why wouldn't you want people going crazy with your products?"

Business Week does a good job summarizing the situation and Matt and Karim why such hacks should be made an asset rather than a distraction or a liability.

The fundamental problem is Microsoft’s business model: they brought the hardware to the market cheap assuming they’d make all their profits off of games (which generate either direct or royalty revenue). They thought they were making a peripheral that made the Xbox 360 platform more attractive — but instead they were creating a entirely new platform.

It reinforces a point I emphasize with my technology strategy students: cross-subsidies are always dangerous, because someone will find a way to arbitrage the subsidy. If you give away razors and make it up by gouging people for razor blades, then someone will sell cheap blades that don’t need a subsidy.

One might argue that Microsoft couldn’t such hacking coming, but that wouldn’t compute. Almost nine years ago, hackers figured out how to take (the heavily subsidized) original Xbox and turn it into a cheap Linux machine.

Microsoft is missing a significant market opportunity by not being open to third-party enhancement of the Kinect hardware. Although the volume will not be as big as for a hit game — as predicted by Karim and his research — third-parties will identify markets and solutions that Microsoft never anticipated.

Over the past few years, Nokia faced a similar conundrum as university scientists hacked N-series phones (such as the N95) to use as a mobile sensing platform. At least a few people in Nokia Research (back when there was a Nokia Research) understood this and were working on even better unlocked hardware for this purpose.

It’s not too late for Microsoft to turn things around. The Kinect COGS will continue to fall. Instead of more aggressively pricing the hardware, it can use the savings to increase the gross margin, reduce the subsidy and make the Kinect a self-supporting stand-alone device.

In the short run, Microsoft can also (quite inexpensively) support a university or hacker conference on other applications of Kinect. MIT, Stanford, Carnegie Mellon or even its hometown UW would be glad to take the lead.

Aren’t free markets great?

I just saw the latest Mac ad, “Top of the Line”, which is a response to the latest “Lauren” ad of the “laptop hunters” series — the HP ad, not the original Microsoft ad.

Both ads are mostly true — perhaps a little more accurate when talking about their rivals than themselves. Windows machines are complex and prone to viruses, while Macs have limited options available, particularly under $1000. (There is the minor matter of whether or not “Lauren” is a paid actress.)

The Microsoft ads have gone a long way to revitalize the brand, but they still have a long way to catch up with Apple’s ads. Another contributors has been the ad with the precocious 5-year-old (“Kylie”) who discovers that Windows 7 is a heck of a lot better than Windows Vista.

Competition is good. We have competition in PCs, in mobile phones, in movies, videogame consoles, cable news networks. We have lots of competition in higher education and once had competition in local newspapers. Where we have competition, we get choice, efficiency, accountability. With monopolies — whether from private firms, public firms, nonprofits or government — we get none of these.

Can get some satisfaction

Prof. Claes Fornell and his American Customer Satisfaction Index have come out with new quarterly satisfaction rankings for a variety of industries, two of them IT-related.

Here are the rankings for search

• Google: 86%
• Yahoo: 77%
• MSN: 75%
• Ask: 74%
• AOL: 70%

Prof. Fornell’s commentary:

Google has led among portals and search engines for seven of the last eight years and this edge in user satisfaction is reflected in Google's dominance of the search market. Measured by query volume, Google does 74% of all search business on the Internet, with Yahoo! a distant second with 17% and Microsoft’s new entrant Bing.com third with 7%. Bing has won early accolades among industry insiders, but even a recent collaboration by the two smaller rivals (Yahoo! Search is now powered by Bing) hasn't managed to put a dent in Google’s usage. Strong and stable customer satisfaction has also left Google’s share value more insulated than most companies.

Here are the rankings for personal computers

• Apple: 84% (down 1.2%)
• Dell: 75%
• Compaq (HP): 74% (up 5.7%)
• Gateway (Acer): 74% (up 2.8%)
• HP (HP): 74% up 1.4%)

and Prof. Fornell’s commentary:

Customer satisfaction with PCs improved slightly after two years of decline, increasing 1.4% to an ACSI score of 75. Rising satisfaction among Windows-based machines drove the improvement. Dell was steady with an ACSI of 75, while Gateway improved 3% to 74. The aggregate of smaller manufacturers also improved 3% to 74. The HP division of Hewlett-Packard made a modest gain of 1% to 74, while the Compaq division surged 6%, also to a score of 74. The satisfaction of Apple PC customers retreated slightly (down 1% to 84), but the small decline has done nothing to hurt the large lead Apple has enjoyed for six straight years over the Windows-based PC manufacturers. In fact, Apple’s customer satisfaction lead is the second largest of any industry in ACSI—only Southwest Airlines' advantage over its closest rival is bigger.

…Despite the recession, Apple has posted strong financial results, with profits up 15% for the second quarter, and sales of Mac computers have increased, while competitors’ sales have shrunk.

As the recession has shifted demand for lower priced PCs, Hewlett-Packard has been rolling out less expensive Compaq laptops—consumers can now get a fully loaded Compaq notebook computer for less than $300. The emphasis on Compaq has driven up recent sales and HP's stock is up 20% since the beginning of 2009, more than double the market.

Surprise, surprise: success in the sale of commoditized Windows boxes has come from selling ever-cheaper commodity boxes. At the other extreme, Apple has more than 90% of revenues from computers priced over $1,000.

What I found surprising is that Fornell didn’t mentioned the role of Microsoft’s $300 million “I’m a PC” ad campaign (made on a Mac) in raising satisfaction of Windows machines across the board. The initial ads last fall emphasized “pride” in being part of the Windows clan, while this year the fetching actress Lauren De Long and her “laptop hunters” ad (recently revived by HP) have been brutally effective in identifying Apple’s price premium at a time in which buyers are pinching pennies.

The Windows brand revival story is a pretty clear one, particularly after they dropped the attempt to leverage Jerry Seinfeld’s popularity and got a little closer to their actual product attributes — cheap hardware, ubiquitous, lots of choice.

Google's frenemies

The Merc Q&A with Eric Schmidt Sunday didn’t say much, but given how secretive Google is, it spoke volumes, particularly about two key frenemies.

Wikipedia (that most reliable of all sources) defines “frenemy” in part:

It is commonly used to describe two people who are apparently friends, but actually dislike each other. This may be because they feel the need to keep up appearances, or because they do not want to lose mutual friends.…

Alternatively, two people who are apparently enemies may actually be friends in private, with the apparently hostile relationship portrayed in order to deceive third parties, or for other forms of gain.

For Google, a good example of the former would be Microsoft, while Apple would perhaps fit the latter. (In strategy, we have the more precise term “coopetition”).

From the Schmidt interview, here’s the relevant excerpt about Microsoft

Schmidt: Google has recently announced a product called Glook and that product allows Outlook users to use Gmail as their back end. How is that going? And the answer is it is going pretty well.

Q: How did the relationship go? The companies had to work together to make that happen.

Schmidt: Not very much. I don't want to overstate it. Because of the historic tension with Microsoft, we do not have a lot of collaboration with Microsoft. (This interview was conducted before the search partnership between Microsoft and Yahoo was announced.)

Q: You and Steve Ballmer have not smoked a peace pipe?
Schmidt: That is correct.

And the final exchange:

Q: You recently gave Bill Gates some advice on handling the media. If you were Steve Ballmer, how would you compete with Google?

Schmidt: I am not going to give Steve Ballmer any advice. He is doing just fine without my advice.

Of course, Schmidt built his career as right hand man to Scott McNealy — then CEO (now chairman) of Sun Microsystems — who pursued Microsoft as though it were Moby Dick. At least Schmidt (unlike McNealy or Ahab) has a chance of winning.

Meanwhile, Google seems to get along just fine with its Cupertino-based smartphone rival.

Q: Google and Apple are increasingly in the same businesses, namely operating systems for mobile phones and now with the announcement of the Chrome OS, personal computers. Is it also becoming increasingly problematic for you to be on Apple's board?

Schmidt: I am not sure about the board question. The board question can be solved by recusing yourself, which I do with the iPhone.

It is also important to remember that unlike Microsoft and Google, Apple and Google have a lot of technical partnerships. The underpinnings of Chrome are the same as that of Apple's Safari browser. There is a lot of collaboration around Web standards. We collaborate on the maps area. We have a large number of iPhone apps.

There are significant benefits to Apple and to Google for me to be on both boards with the caveat that you mentioned that you have to be very careful.

This fits one of my basic points: in business as in geopolitics, there are no permanent allies, just permanent interests. Their interests are clearly aligned in supporting WebKit’s continuing success, while Google provides a lot of complements for the Mac and iPhone platforms. More broadly, like many other ICT companies they have collaborated in defining and implementing interoperability for key Internet technologies.

Obviously there’s a lot warmer relationship — both at the corporate and personal level — between Google and Apple. Schmidt and Jobs started out much better off than McNealy and Gates (now Schmidt and Ballmer) ever managed in the best of times, even if there is speculation Schmidt will have to resign the Apple board seat.

Update Monday 1pm: Oops, I obviously underestimated how soon Schmidt would be leaving the Apple board.

Microsoft cannibalizing itself

Microsoft Office is a cash cow that provides $15+ billion in revenue to the company. Thus far it‘s been more immune to open source competition than, say, Microsoft server and mobile phone operating systems, which compete with Linux and Android (and LiMo and Symbian) respectively.

Thus, Microsoft’s willingness to cannibalize its Office licensing business (as reiterated Monday) with a web-based subset of Office 2010 shows that it takes the challenge of Google Docs seriously. Sure, it’s doing this years after Google created its online offering. Sure, there may be limits as to how much the online Office can do. I’ll agree this is a measured experiment, not blowing up the existing revenue model.

But my estimate is that the actual impact of Google Docs on Office sales right now are probably barely measurable. Microsoft is responding not to a decline in its core business, but what it correctly recognizes is an incipient threat down the road — a Clay Christensen-style disruptive innovation. (Would that DEC, IBM, Sun, Apple and other big proprietary companies were able to do this when they faced similar threats in the past 20 years).

Perhaps this is another sign of the new and improved Microsoft. Perhaps not a kindler or gentler Microsoft, but one that expects to fight for revenue and customers rather than to have a perpetual annuity from customers too lazy, stupid or handcuffed to ever switch. In a perverse way, the mistakes of Windows Vista may have saved the company.

Making Microsoft miserable

On the questionable Google Chrome OS plan, Mike Mace says it’s about making Microsoft miserable:

That helps to explain why Google would be pushing both Chrome and Android at the same time. If you're really serious about running a logical OS program in its own right, you'd try to rationalize those two things. But if your top priority is to commoditize Microsoft, then you don't mind pushing out a couple of overlapping initiatives. The more free options, the more pain caused.

Even more revelatory than the article was how I found it: this is the first blog post generated based on something I learned via Twitter.

I subscribe to Mike’s blog via an RSS feed to NetNewsWire, but it’s only one of 230 feeds and I’m not currently caught up (even with my two-dozen favorites).

However, on Tweetie I follow four friends’ tweets (all tech veterans), and 50% of them promoted Mike’s column. If half my tweet network thinks something is interesting, I’m gonna read it.

Update, Thursday 8am: The Merc now reports the utterly conventional wisdom that this is “a direct shot across Microsoft’s bow” but doesn’t quote Mace.