19 Jan 2004
Mad props to Steve Jobs. This is a big step toward, of all things, the next wave of Microsoft getting its ass kicked.
You may recall that the most recent wave of Microsoft getting its ass kicked was the internet. Microsoft pretended the internet didn't exist for about 4 years. They currently have undue influence over the way the web works because of IE's huge market share, but they have not been able to leverage the internet to create more lock-in for their products. In fact, because the web is ubiquitous and fairly standardized, it has been reducing microsoft lock-in. This will continue.
The next wave of Microsoft getting its ass kicked will come from the convergence of consumer electronics and personal computing. Of course, Microsoft has some feelers out in this realm— in particular, their operating systems for phones and PDAs, and their console entertainment system, the Xbox.
At present, neither of these systems has the kind of overwhelming market share Microsoft needs in order to dictate the evolution of the industry. They were late entrants to both of these. And consumer electronics is a rather different beast from computer software. Firstly, there is less lock-in. You don't expect to be making a heavy intellectual investment in operating your phone or mp3 player. You don't expect it to last for many years. And most importantly, you expect that a large variety of devices will be available for you to choose from when you walk into Best Buy. And if you come back two weeks later, something totally new from a company you've never heard of will be there doing something cool.
Compare Microsoft with the companies that produce these devices. Microsoft is not and never has been visionary. Can they keep up with the pace of innovation the consumer electronics industry requires? Can they beat small, engineering-focused, aesthetically conscious, agile companies from every corner of the planet? Not a chance. They know this, so they will try to win by creating software lock-in and using huge acquisitions to buy market share.
Will that work? It won't work as well as it did in software, where Microsoft was uniquely positioned to own the PC software industry by historical accident. The PC software industry was small, technologically advanced but amateurish in business, and mostly contained within the US. The consumer electronics industry is vast, tremendously sophisticated, and its powerhouses are Japan and Southeast Asia as well as the US. Could Microsoft acquire Nokia? Possibly. Could it acquire Sony, Matsushita, Mitsubishi, and Daewoo? Perhaps one of them. But not many. Daimler-Benz can have Chrysler, but we'd be pretty shocked if they started asking around about Ford and GM.
So: consumers will want choice, which means they will also want interoperability. Microsoft might very successfully market its software but the sheer number of players they will have to market toward will demand that they publish standards to reduce lock-in. Microsoft could in fact have a very profitable business, but it will be hard to maintain the kind of monopoly they enjoy on the desktop. Worst of all for Microsoft, the burgeoning portable computing trend will demand interop with desktop computing. This will further erode Microsoft's monopoly.
How can Microsoft win? Primarily through failure by its competitors. Competitors could underestimate Microsoft's seriousness once it begins to pursue an acquisitions-or-crushing strategy. But I don't think this is likely for two reasons. Firstly, this market is not wholly unlike the online services market, which Microsoft entered with MSN. With MSN they were able to take away considerable market share from entrenched players (notably AOL), but they do not own online services. We owe the freedom to choose our online services to two things: FCC regulations and Steve Case's resolve to not let AOL be bought by Microsoft— a resolve that went so far as to create a poison pill provision for AOL, which meant that the company would cease to exist in the event of a hostile takeover. I would expect Sony to have at least this much resolve. On top of being a big powerful company, after all, they are Japanese. Secondly, it is not clear how Microsoft can leverage its desktop dominance into mobile-device dominance. Unlike online services and web browsers, Microsoft can't give you a phone and service automatically when you buy a computer. Not only does the product bundling become rather blatantly illegal, but this would cost real money. Still, if Microsoft decides to burn through a ton of its capital by giving away hundreds of dollars' worth of electronics and network services, it will not only be nice for consumers but attractive to competition.
Be on the lookout for Microsoft to:
- Acquire a second-tier wireless service provider such as Cingular or AT&T's wireless division. (Losing that division would be death to AT&T but they were never a very smart company anyway.) Vast regulation in these industries will make this experience quite painful for MS.
- Embark on a marketing blitz for corporate customers on linking their SmartPhones and corporate groupware (Exchange).
- Extend joint ventures with mobile phone makers, and possibly take up the cause of an ailing manufacturer once there is such a manufacturer. Sony has the lead here thanks to the SonyEricsson partnership. If motorola begins to eat dirt for some reason, they would probably be a good candidate.
- Lose another fortune attempting to outwit Sony in the next generation of game consoles. (In the Xbox, Microsoft could not compete with the experienced Sony designers' Playstation 2, so they crammed the machines with so much hardware that they lost oodles of money to keep the Xbox's price the same as Sony's.)