Microsoft Strategy Update: Consumer Products and Services

At this week's Financial Analysts Meeting, Microsoft executives made a compelling case for its continued focus on both consumers and business customers. The explanation comes amidst increased pressure for Microsoft to forego the more finicky and image-conscious consumer market for the more stable business market. But the firm says that would be a mistake.

Calls for Microsoft to abandon consumers are so intense that some are even calling for Microsoft to split into several companies, each based around a major product line. I've recommended that the firm shed its money-losing Xbox and Bing businesses, which together have brought several tens of billions of dollars of losses to Microsoft over the past decade.

But the company has shown no interest in either strategy. Instead, it has repeatedly argued that the synergies created between its many diverse businesses far outweigh the disadvantages of its size and complexity. And this week, it tried to explain why.

First up, Microsoft COO Kevin Turner dispelled the myth that the firm already makes all of its money from businesses. In fiscal year 2013, 61 percent of Microsoft's revenues came directly from businesses—55 percent from the enterprise and 6 percent from small and medium-sized businesses—while 39 percent came from consumers and OEM (the latter meaning "PC makers," which is really a combination of both consumer and business sales, but is mostly consumer).

The point? "[Microsoft is] a very balanced and diverse business," Turner explained. "Not only from a customer segment standpoint, but from a geographic and the theaters of operations where we operate, and also our products and services."

But with regards to the mix of customer types, it's important to remember that Microsoft is very successfully transitioning its products to the cloud. This includes pure cloud plays—on-premises servers like Exchange transitioning into cloud services like Exchange Online in Office 365—and hybrid offerings, like Office 2013, which is still installed on end user PCs but is now distributed and serviced like an online service, over the Internet. This move also includes licensing changes that are more akin to enterprise volume licensing than the old, traditional way of customers purchasing a single software version outright.

"We're bullish on how fast customers are moving to the cloud," Turner said, noting that Microsoft expects this market to exceed Gartner's prediction of being a $180 billion opportunity by 2015. And Microsoft's consumer cloud services—SkyDrive, Office 365 Home Premium, Xbox Live, Bing, and so on—experienced 13 percent user growth in FY 2013. 5.6 billion queries per month at Bing. 460 million MSN users. 48 million subscribers to Xbox Live. Over 300 million people using Skype for over 2 billion minutes per day. 400 million people on Outlook.com. 250 million on SkyDrive. And so on.

These are big and popular services. And they help Microsoft reach across to the business side of the fence. Apparently.

"These consumer services are all multi-tenant, at-scale, gigantic services that allow us to do a very, very good job on the enterprise services," Turner said. "And we've learned a ton about how to do these services at scale, how to manage the bandwidth, how to make sure that we have the right cost-effective solution that we would have never been able to do had we only concentrated on enterprise services first."

New OS lead Terry Myerson reiterated this view. "We're looking at consumer apps, we're looking at enterprise apps," he said. "We're looking at how the virtuous cycle works on other platforms, how it should work on our platform.  And it really is a top priority for me and my team, and we're working it ... so many things, whether it be the applications or the devices, [are] common between the consumer and the enterprise environment."

And so did Julie Larson-Green (who otherwise didn't have much to say at this year's FAM). "We do believe that consumers drive a lot of what's coming into the enterprise," she said. "When I was in Office, Excel was brought into the enterprise because consumers liked Excel and brought it in over Lotus Notes.  We've seen the same thing with the iPad. Consumers have the iPad and bring it into the business."

"We make products for people," Larson-Green added in what may actually have been the best line of the day.

"Yeah, it's really the key thing," Myerson agreed. "I think that so much applies to both [consumer and business], whether the user experience, the reliability. There's just a lot common across there. And so I think we're fortunate to be able to apply both domains across. And certainly for Windows, Windows is very much an enterprise product I would say, and it is very much an end-user product. There's so much of our effort, you know, the Windows we build is used on the client, it's used in the cloud, it's used in datacenters.  And so having that diversity is essential to delivering the Windows franchise for Microsoft."

That said, I've argued recently that Microsoft doesn't actually realize a lot of real-world synergies between its consumer and business offerings. The key example is the dichotomy of Outlook.com and Outlook Web App in Office 365; these ostensibly similar products share almost zero commonality in user interface or infrastructure and underlying technologies. Microsoft is in effect developing both in isolation and doubling its efforts as a result.

They promise to do better.

"We want to be a family of devices with a family of services," Myerson noted. "When we think about delivering that family of services, the road is we approach that bottoms up and top down.  Bottoms up we're embracing Azure in everything we do, and Azure broadly defined.  That brings with it a number of capabilities which actually project all the way out to the end user.  Likewise coming out top down, adopting common design language, adopting common navigation, adopting common taxonomy, we're absolutely committed to that and are making great progress across all the applications and services we build."

Microsoft is also moving into devices, of course, and much of that is consumer focused, though a better term may be "individual focused," in that they're products aimed at people, not companies. It has 12 years of experience with Xbox, a solid PC peripheral business, and now makes PCs under the Surface brand. It's recent purchase of Nokia moves Microsoft ever-closer to its dream of being a vertical solution provider, like Apple, that directly interacts with end users on the hardware side now as well, and not just on the software/services side. And, like Apple, Microsoft sees most of its big growth opportunities in devices as coming from mobility (though of course traditional PC use and the living room are in the mix as well).

I don't know. So far, this is just a lot of talk, and there are far more examples of an overly complex Microsoft remaking the same types of products over and over again than there are of any real synergies, especially those that cross the consumer/business divide. This needs to change.

Out in the real world, Outlook.com and Outlook Web App/Office 365 share virtually no commonalities despite being essentially the same offering. Ditto for SkyDrive and SharePoint Online/SkyDrive Pro. Skype and Lync. Even Windows and Windows Phone, despite recent changes, remain far apart in many ways. Why can't we run Windows Phone apps—especially games—on Windows—especially Windows RT—right now? It makes no sense.