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Windows 8 is only the beginning of Microsoft s problems
May 11th 2013 |From the print edition
IT IS always fun to watch the mighty fall. It is even better when they try to
break their fall with corporate waffle. This week Microsoft said it was
rethinking key aspects of its new operating system, Windows 8. But then it
began to obfuscate. A Microsoft executive insisted that customer satisfaction
with the new offering is strong while also conceding that the learning curve
is definitely real . (Translation: customers are tearing out their hair and
scattering it on the keyboard.)
The company is attempting a U-turn. Windows 8 was Microsoft s biggest bid so
far to adjust its flagship product to the new world of touch-screen devices.
Out went the start button that had controlled access to the computer s menu
since 1995. In came giant multicoloured tiles that respond to the touch. Steve
Ballmer, Microsoft s boss, described the introduction of the new system as a
bet-the-company moment. But the bet proved so ill-judged that an app which
lets users reintroduce the familiar start button is now one of the bestsellers
for Windows 8.
What does Microsoft s U-turn mean? Is it a sensible manoeuvre or a humiliation?
The Financial Times described it as one of the most prominent admissions of
failure for a new mass-market consumer product since Coca-Cola s New Coke
fiasco nearly 30 years ago. Various analysts speculated that this is the
beginning of the end for Mr Ballmer, who has been running the company since
Bill Gates stepped aside in 2000. Others argue that the whole thing is
overblown. Microsoft is simply doing something that is routine in the computer
business fixing glitches in an enormously complicated operating system and then
launching a better product. The reality is more nuanced: Microsoft s problems
are smaller in the short run than its critics imagine, but bigger in the long
run.
That Microsoft has admitted to having a problem is encouraging. Few firms are
good at recognising their own flaws (which helps to explain why only one
company from the original Dow Jones Industrial Average of 1896 is still on that
list: General Electric). Henry Ford was so allergic to evidence that America
was falling out of love with the Model T that he dismissed sales statistics as
fakes and fired an executive who warned him of disaster. Sears started to build
its giant headquarters the 110-storey Sears tower at exactly the moment, in
1970, when its fortunes began to go south. IBM allowed Microsoft to take over
the PC operating-software business because it thought that the money was in
hardware. Nokia allowed a substandard boss, Olli-Pekka Kallasvuo, to run the
company for four years before finally getting rid of him. In contrast,
Microsoft is hard at work on a new version (code name: Windows Blue ) that
tries to fix people s complaints.
Failure has a different meaning for Microsoft than for other companies. Over
90% of the world s PCs run a version of Windows (this column is being written
on one of them, albeit a version with a comforting start button rather than a
confusing set of tiles). Some 76m PCs were shipped in the first three months of
this year. Microsoft has sold 100m copies of Windows 8, which means that it has
sold as well as Windows 7 at this stage in the cycle. The company s revenues
have nearly tripled under Mr Ballmer, from $25.3 billion in 2001 to $73.7
billion in 2012. This suggests that he will not be leaving any time soon.
Yet it is Microsoft s success that is the cause of its long-term problems. In
The Innovator s Dilemma , Clayton Christensen of Harvard Business School argues
that companies are often doomed not by their failures but by their triumphs.
They may realise that the world is changing. But they are so good at doing what
they have always done making mainframe computers in IBM s case that they make a
hash of embracing the new.
Microsoft knows only too well that the PC market is stagnating as people
migrate to hand-held devices. Sales of PCs have shrunk for the past four
quarters they were 13.9% lower in the first three months of this year than in
the first quarter of last year. But sales of licences for Windows still provide
the firm with about half of its profits. The company s dominant position in
operating systems meant that it was slow to enter the internet-search market in
the 1990s. It has been equally slow to enter the hand-held market: Windows has
less than 5% of the global smartphone market, compared with Google Android s
70% and Apple s 20%. It has less than 8% of the tablet market. The longer it
dithers on the sidelines, the harder it will be to attract first-rate
developers or establish customer loyalty.
New Coke was easy to fix
This is why Windows 8 s poor performance matters. It was an attempt to solve
the innovator s dilemma by creating an operating system and a user interface
for both PCs and mobiles. Mr Ballmer hoped that consumers would want to move
effortlessly from PCs to tablets to smartphones and that Microsoft would be
able to invade the mobile markets while simultaneously reigniting demand for
its core PC products. But so far the reverse has happened: Microsoft has
reinforced suspicions that it does not understand hand-held devices while
simultaneously alienating its core PC users. It is possible that Microsoft will
be able to solve this problem with future iterations of Windows 8. But it is
looking likely that the two types of device need different operating systems.
Microsoft s biggest rival, Apple, has kept the two devices separate. That bodes
ill for Mr Ballmer s strategy.
The comparison with New Coke actually understates Microsoft s problem. Nothing
forced Coca-Cola to introduce New Coke: tongues and throats do not change much.
And all the firm had to do to rectify its error was to bring back the old
version. Technology firms, in contrast, must innovate to survive. Restoring the
start button will not restore Microsoft to its former glory.