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Kill Windows Phone or risk dying, analyst tells Microsoft

Gregg Keizer | Sept. 10, 2013
That won't happen after Nokia acquisition, but Ben Thompson argues a focus on devices will weaken Redmond where it's strongest, in services

"The issue for Microsoft is that a services strategy and a devices strategy are fundamentally opposed to each other," he said [emphasis in original]. "Your services will be forever paying a strategy tax to support your devices, which won't even be fully differentiated."

The most prominent example of that "strategy tax" has been Microsoft's refusal to offer Office on Apple's iPad or Android tablets. Most experts believe that Microsoft has withheld Office from rivals' tablets as a strategic move to protect Windows and the tablets that it and its OEM partners sell. Microsoft also gives preferential treatment to Windows Phones, bundling Office Mobile, a subset of Office on the desktop, free with handsets running the operating system. But Android and iOS users must, if they want the same functionality, subscribe to Office 365.

In other words, Thompson sees Microsoft continuing to withhold services from rival platforms or making customers with Android or iOS phones pay for something Windows Phone owners get for free, missing out on the revenue the services would generate if the company wasn't using them as a carrot for its own hardware.

And the temptation to continue the practice will be enormous. Not only will Microsoft have reason to sacrifice service ubiquity — it will naturally want its $7.2 billion investment to pay off — but the revenue per unit from sales of a device will always be higher than the revenue per user from sales of services. It will be simply too tempting to drive devices at the expense of services.

Long before Microsoft bought Nokia, or even announced its corporate restructuring this summer, clues abounded that the company would try to mimic Apple — with its high margins on hardware — rather than Google, which relies on a service-based business model, in its case, advertising, to generate revenue.

"It's incredibly telling," said Thompson, "that [Steven] Sinofsky was not allowed to go to Apple or Google, but was allowed to go to Box, which could threaten [Microsoft] five years down the road.

As part of an agreement he struck with his former employer, Sinofsky — who led Windows 7 and Windows 8 development — was barred from working for Apple, Google, Amazon, EMC, Facebook, Oracle or VMware. Last month he signed up as an advisor to Box, a cloud storage vendor that has aggressively courted enterprise clients, the same customers Microsoft's after for its cloud-based services like SkyDrive and SharePoint Online.

Thompson obliquely blamed Microsoft's culture and history for what he saw as its shortsightedness. "The OS layer was a great place to be [because] it has high prices and high margins, but that layer doesn't exist in mobile. It's been eliminated in mobile, where things are much lower-cost [than PCs].


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