Not that long ago a headline like this would have been an obvious April fool’s joke.  To be honest only a real idiot would have fallen for it.  But in his recent letter to shareholders that is basically what Steve Ballmer said.   Sounds Odd. Worlds largest software provider fearing for its life turns to a company it could have killed but instead invested a ton of money into. The circle of life.  With that being said it is a very interesting and historical moment in Microsoft’s history.  With all the talk of Windows 8, tablets and smartphones, in my view this is the biggest gamble Microsoft has taken since it decided to part ways with IBM in the 80’s and ditch OS/2 in favor of something called Windows.

There was a time when the mantra at Microsoft driven by Bill Gates was “You are either a hardware company or a software company, but you cannot be successful at both”.  It held true for quite some time. That certainly seemed to be true up until the iPod.  The iPod was truly the first device I remember where Apple got it right and the Microsoft partner system seemed very weak.  It was literally the thumb wheel, but it was so much better than anything else on the market for music devices.  In addition Apple created the software  Eco system with iTunes around the iPod.  The second of course was the launch of the iPhone in 2007, which launched a device that had great software and great performance.  Even the battery life was much better than anything else on the market.  Not just its longevity but it seemed to charge very quickly as well.  Microsoft was dumbfounded when this happened and stuck to its old mantra of trusting partners to come up with the “iPhone killer”.  It has not happened, despite significant improvements in the software.  Apple is now valued more than twice of Microsoft’s market capitalization.  Microsoft needed to change something.

However pas quarter at the shareholders meeting that need for change has seemed to finally happened.  To be clear it first came to light earlier in the year as Microsoft announced it was creating its own line of hardware under the brand name Surface.  Steve talked extensively about possible missteps and the desire to bring hardware and software closer together.  He was quoted as follows:

“Bill did hold up a tablet a number of years ago,” Ballmer said. “And, not that we don’t have good hardware partners, but sometimes getting the innovation right across the seam of hardware and software is difficult unless you do both of them,” Ballmer said at the meeting, held Wednesday in Bellevue, Wash.

Referring to the company’s new strategy of building its ownWindows 8 tablets under the Surface brand, Ballmer said “maybe we should have done that earlier, maybe [Gates’] tablet would have shipped sooner.”

I think the sooner comment goes without saying.  However it does not come without significant risk to the Microsoft partner Eco-system.  Unlike in times past there are alternatives to the Windows paradise.  You have Google promoting Chrome Books as well as Android devices.  Apple continues to grow, not just in mobile devices but on the laptop as well.  However it has been apparent for some time that this was a route that Microsoft had to consider,now the question will be how committed are they?  We don’t want or need another Zune fiasco on our hands.  How far will Microsoft be willing to go?  Already the upcoming Surface Pro is not being called a tablet but an ultra book.  Is that what the market and shareholders want to hear?

Who are the partners?  They are not small players in their own right.  You have Dell, HP, Lenovo, Acer, Samsung, HTC and Nokia.  Some were literally created by Microsoft, like Dell.  HP is a legendary tech company going through some very significant challenges due to poor leadership.  Acer has been very vocal in their opposition to Microsoft’s change in its OEM strategy   Then there are mobile players like Samsung.  Samsung is like the IBM or GE of Korea, but unlike those two old stodgy companies, of late they have shown a great ability to innovate.  They are, depending on what report you read, the number one provider of smartphones globally and it is not with a Windows Phone but with the S3 built with Android.  Finally you have Nokia, who are cranking out some beautiful Windows Phones, but so far sales are still slow.  Would Microsoft consider creating its own phone?  Buying Nokia?  One thing is evident is that Microsoft is having to play a delicate balance with its partners.  One might say “Hey Microsoft is leaving the Desktop, Laptop and net book business to its partners”, true but what is the fastest growing segment?

This is without a doubt the biggest risk Microsoft has taken in thirty years.  Was it one they had to take?  I think most would argue they had to do this.  Will they succeed?  It is still way t0o early to tell and it is apparent this will take time, at least three years in my opinion.   That in of itself is frightening as the industry changes quickly.    One day a Windows Phone is successful and then an iPhone crushes it over night.  It begs the question can Microsoft hardware change the industry?  What if Microsoft decides to build its own phone?  That would destroy Nokia.  But probably the most important thing said here is about :risk:, not little risk but great risk.  The tech industry is driven by dramatic change and you cannot succeed unless you take those risks.  Right now when it comes to hardware and how far it is willing to go at the expense of its partner channel is in the realm of the unknown.

Bill Gates used to talk about competition a lot in the early days .  The fear that a younger and hungrier company would come along and clean Microsoft’s clock.  Today that is more evident than ever.  There are a lot of sharks in the water.  What is clearer now is that the reason every large company should be afraid of these younger companies is that they have no track record of revenues.  While large companies fear them, smaller companies have no fear.  They are forced to take risks.  They throw caution to the wind as they have no choice in the search for steady cash flows.  Microsoft is finding itself being pushed into a corner.  Despite their revenues they are viewed as old school and not relevant.  Steve i spitting himself and Microsoft on the line, he may not be around to see its conclusion.  Microsoft is being forced to do the one thing they have yearned for and that is a necessary ingredient to succeed, they are taking risks and what ever the outcome we will all be better for it.  Good luck Microsoft.

Good Night and Good Luck,

Hans Henrik Hoffmann Dec 2, 2012