The End of Windows

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Manostaxx – Industrial Management Consulting

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The story of Windows’ decline is relatively straightforward and a classic case of disruption:

  • The Internet dramatically reduced application lock-in
  • PCs became “good enough”, elongating the upgrade cycle
  • Smartphones first addressed needs the PC couldn’t, then over time started taking over PC functionality directly

What is more interesting, though, is the story of Windows’ decline in Redmond, culminating with last week’s reorganization that, for the first time since 1980, left the company without a division devoted to personal computer operating systems (Windows was split, with the core engineering group placed under Azure, and the rest of the organization effectively under Office 365; there will still be Windows releases, but it is no longer a standalone business). Such a move didn’t seem possible a mere five years ago, when, in the context of another reorganization, former-CEO Steve Ballmerwrote a memo insisting that Windows was the future (emphasis mine):

In the critical choice today of digital ecosystems, Microsoft has an unmatched advantage in work and productivity experiences, and has a unique ability to drive unified services for everything from tasks and documents to entertainment, games and communications. I am convinced that by deploying our smart-cloud assets across a range of devices, we can make Windows devices once again the devices to own. Other companies provide strong experiences, but in their own way they are each fragmented and limited. Microsoft is best positioned to take advantage of the power of one, and bring it to our over 1 billion users.

That memo prompted me to write a post entitled Services, Not Devices that argued that Ballmer’s strategic priorities were exactly backwards: Microsoft’s services should be businesses in their own right, not Windows’ differentiators. Ballmer, though, followed-through on his memo by buying Nokia; it speaks to Microsoft’s dysfunction that he was allowed to spend billions on a deal that allegedly played a large role in his ouster.

That dysfunction was The Curse of Culture:

Culture is not something that begets success, rather, it is a product of it. All companies start with the espoused beliefs and values of their founder(s), but until those beliefs and values are proven correct and successful they are open to debate and change. If, though, they lead to real sustained success, then those values and beliefs slip from the conscious to the unconscious, and it is this transformation that allows companies to maintain the “secret sauce” that drove their initial success even as they scale. The founder no longer needs to espouse his or her beliefs and values to the 10,000th employee; every single person already in the company will do just that, in every decision they make, big or small.

As with most such things, culture is one of a company’s most powerful assets right until it isn’t: the same underlying assumptions that permit an organization to scale massively constrain the ability of that same organization to change direction. More distressingly, culture prevents organizations from even knowing they need to do so.

Thus my assertion at the top, that the story of how Microsoft came to accept the reality of Windows’ decline is more interesting than the fact of Windows’ decline; this is how CEO Satya Nadella convinced the company to accept the obvious.

The Easy Win: Office on iPad

A month after taking over as CEO, Nadella introduced Office for iPad. Quite obviously, given the timing, the work had been done under Ballmer; some reports suggest the initiative in fact started years previously. Ballmer, though, wouldn’t release it until there was a touch version for Windows 8; some wonder if he would have ever released it at all.

It’s all a bit of a moot point; in the end Ballmer’s delay gave Nadella an easy win that symbolized the exact shift in mindset Microsoft needed: non-Windows platforms would be targets for Microsoft services, not competitors for Windows.

That wasn’t the only news that week: Microsoft also renamed its cloud service from Windows Azure to Microsoft Azure. The name change was an obvious one — by then customers could already run a whole host of non-Windows related software, including Linux — but the symbolism tied in perfectly with the Office on iPad announcement: Windows wouldn’t be forced onto Microsoft’s future.

The Demotion: Nadella’s First Strategy Memo

It was another three months before Nadella wrote his first company-wide strategy memo explicitly departing from his predecessor:

More recently, we have described ourselves as a “devices and services” company. While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy. At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

What is striking about this articulation of “productivity and platforms” is that it is exactly how Nadella reorganized the company last week; the “Experiences & Devices” team is focused on end-user productivity, while the “Cloud + AI” team is all about building the platform of the future. The reason it took so long is the point of this article — Nadella had a Windows problem.

To that end, the most important aspect of Nadella’s memo was not what he said about Windows, but where he said it. I wrote in a Daily Update breaking down the memo:

Trust me when I say demoting Windows all the way to this point in the letter is a dramatic shift. Remember, it wasn’t that long ago that Steve Ballmer said “Nothing is More Important at Microsoft than Windows”; Nadella not even mentioning the OS for the first 2,000 words sends a very different message. Similarly, spending nothing more than a sentence on Surface and Nokia — in the entire email, the word “Surface” appears twice and “Nokia” once — makes it as clear as can be that neither is the future.

This was the next step after the initial symbolism of Office on iPad and the Azure name change: actually articulating a future where Windows didn’t matter.

The Retreat: Love Windows

Nadella, though, had a short-term problem: Microsoft’s most important customers — enterprises — hated Windows 8. The operating system may not have been Microsoft’s future, but it was still a massive cash cow, and the linchpin for all of Microsoft’s legacy products. To that end the company needed Windows 10 to get out the door sooner-rather-than-later.

This, I think, is the context for Nadella’s presentation at a January, 2015 event about Windows 10; Nadella said:

We absolutely believe that Windows is home for the very best of Microsoft experiences. There’s nothing subtle about this strategy. It’s a practical approach which is customer first. We want to give ourselves the best opportunity to serve our customers everywhere and give ourselves the best chance to help customers find Windows as their home. That’s what we plan to do…We need to move from people needing Windows to choosing Windows to loving Windows…We want to make Windows 10 the most loved release of Windows.

At the time I was very disappointed; suggesting that Microsoft experiences needed to be “best” on Windows suggested that Windows was dictating the direction of Microsoft services. A few months later, though, once Windows 10 shipped, Nadella made clear this was only a temporary retreat.

The Quarantine: Nadella’s First Reorganization

That summer Nadella undertook his first reorganization, separating the company into three divisions: Cloud and Enterprise, Applications and Services, and Windows and Devices. I wrote in a Daily Update:

This explicitly undoes Ballmer’s ill-considered reorganization from a divisional company to an allegedly functional organization. At the time Ballmer wrote:

We are rallying behind a single strategy as one company — not a collection of divisional strategies…

This was exactly wrong: by that point Microsoft had already lost the devices war and needed to focus on services that worked on iOS and Android. A “One Microsoft” strategy, on the other hand, kept all of those services subservient to Windows. However, with this new reorganization, Windows is off in the corner where it belongs, leaving the Cloud and Enterprise team and Applications and Services Group free to focus on building their businesses on top of all platforms.

I believe this reorganization was the turning point: not only were the two teams Nadella announced last week basically formed at this time, but more importantly, Windows was left to fend for itself.

The Inception: The Death of Windows Phone

Nadella’s most impressive bit of jujitsu was how he killed Windows Phone; while the platform had obviously been dead in the water for years, Nadella didn’t imperiously axe the program. Instead, by isolating Windows, he let the division’s leadership come to that conclusion on their own.

Naturally, departing Windows-head Terry Myerson blamed the rest of the company, stating, “When I look back on our journey in mobility, we’ve done hard work and had great ideas, but have not always had the alignment needed across the company to make an impact.” I wrote at the time:

This is such an utterly clueless explanation of why Windows Phone failed that it’s kind of stunning. Until, of course, you remember the culture-induced myopia I described yesterday: Myerson still has the Ballmer-esque presumption that Microsoft controlled its own destiny and could have leveraged its assets (like Office) to win the smartphone market, ignoring that by virtue of being late Windows Phone was a product competing against ecosystems, which meant no consumer demand, which meant no developers, topped off by the arrogance to dictate to OEMs and carriers what they could and could not do to the phone, destroying any chance at leveraging distribution to get critical mass…

Interestingly, though, Myerson’s ridiculous assertion in a roundabout way shows how you change culture…In this case, Nadella effectively shunted Windows to its own division with all of the company’s other non-strategic assets, leaving Myerson and team to come to yesterday’s decision on their own. Remember, Nadella opposed the Nokia acquisition, but instead of simply dropping the axe on day one, thus wasting precious political capital, he hung the Windows team out to dry let Windows give it their best shot and come to that conclusion on their own.

Nadella did the same thing with Windows proper: when Windows 10 launched Myerson claimed that the operating system would be on 1 billion devices by mid-2018; the company had to walk that back a year later, not because Nadella said so, but because the market did.

The Division: The End of Windows

And so we reach last week’s announcements: the Windows division is no more. It is an incredibly meaningful milestone, yet anticlimactic at the same time, thanks to Nadella’s careful management. It is worth noting, though, that Nadella had one critical ally in this journey: Wall Street.

Microsoft's stock price since Nadella became CEO.
Microsoft’s stock price since Satya Nadella became CEO.

If culture flows from success, then it follows that an attempt to change culture is far easier to accomplish when the most obvious indicator of success — one that has a direct impact on employee pocket-books — is moving up-and-to-the-right. What is fascinating to consider, though, is that Microsoft’s stock is up not only because the company has a vision that it is delivering on quarter-after-quarter, but also because the stock was depressed in the first place.

To put it another way, Nadella’s shift to a post-Windows Microsoft is the right one; to have done the same a decade sooner would have been better. It also, though, may have been impossible, simply because Windows was still the biggest part of the business, and it’s not clear the markets would have tolerated an explicit shift before it was painfully obvious it was necessary; without a rising stock price, Nadella’s mission would have been much more challenging if not impossible.

The Future: Why Microsoft?

It’s important to note that Windows persisted as the linchpin of Microsoft’s strategy for over three decades for a very good reason: it made everything the company did possible. Windows had the ecosystem and the lock-in, and provided the foundation for Office and Windows Server, both of which were built with the assumption of Windows at the center.

Office 365 and Azure are comparatively weaker strategically: Office 365 has document lock-in, but the exact same forces that weakened Windows in the first place weaken the idea of documents as well. It’s not clear why new companies in particular would even care. Azure, meanwhile, is chasing AWS, with a huge amount of business coming from Linux VMs that could run anywhere.

Unsurprisingly, both are still benefiting from Windows: Office 365 really does, as Nadella noted in his retreat, work better on Windows, and vice versa; it is seamless for organizations that have been using Office for years to move to Office 365. Azure’s biggest advantage, meanwhile, is that it allows for hybrid deployments, where workloads are split between legacy on-premise Windows servers and Azure’s public cloud; that legacy was built on Windows.

This, then, is Nadella’s next challenge: to understand that Windows is not and will not drive future growth is one thing; identifying future drivers of said growth is another. Even in its division Windows remains the best thing Microsoft has going — it had such a powerful hold on Microsoft’s culture precisely because it was so successful.

Continue at: https://stratechery.com/2018/the-end-of-windows/

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