Who’s running the ship over there in Redmond? The lurid tale of software hijinks, hardware foibles, and back-of-the-napkin business plans.
Holy cow. If there was ever a tale of how market share gained through monopolistic practices results in sub-standard products, Microsoft is it. Before you dive headlong down that slippery slope whereby you claim that Microsoft’s lack of vision somehow empowers others to have vision, stop. I’m not talking about the rest of the market place and the products that derive from it. I’m talking about the products Microsoft offers.
Microsoft’s history is replete with examples of a “Not Invented Here’ ethos. Better said, Microsoft has made a mint ripping off ideas from other companies and individuals, and then wedging the consumer into a place where they can only use Microsoft’s offering. Argue all you want, but the proof is in the pudding. How else can you explain a) the practice and b) Microsoft’s 1000-pound weight in a barrel of skinny chimps. Examples: Windows. Internet Explorer. Word. Excel.
In the past, Microsoft’s dismal track record for “creating” products that are both easy to use and reliable has been limited to software. Now, however, Microsoft is taking another approach. They are, my friends, in the hardware business.
Microsoft has (and will be) victimized by questionable business logic, born of the seemingly endless supply of cash that a monopoly like theirs provides (Windows creates $20 billion in yearly revenue…given their snail-like pace in updating that aged piece of hackery, we’re talking nearly 100% profit from that $20 billion). In a nutshell, it goes something like this. In order to dethrone the competition, Microsoft can flood the market with a low-cost version of a product even when it is highly unprofitable. Laws notwithstanding, there is a real anticompetitive stench there. Microsoft did it before (offering Internet Explorer as a free alternative to Netscape Navigator, brain child of Marc Andreesen, which was being sold as a commercial piece of software. Microsoft had to absorb a licensing fee on each copy distributed, losing millions in their bid to destroy up-start Netscape). Now, they’re in the hardware game doing roughly the same thing, though they can’t offer it for free because the devices cost far more than a software licensing fee.
Take XBox for example, Microsoft’s attempt to muscle into the gaming console market dominated by Sony and (to a lesser extent) Nintendo. The result, well, let’s let Steve Balmer, Microsoft CEO, explain:
“Generation one was lose moneyâ??gross margin loss on the console for the lifetime. You’ve got to take a lifetime view. We did have a lifetime view that said if you add all the revenue from selling consoles and all the costs of shipping consoles, it was negative. It was a model that made that back on royalties and third-party games and our own first-party games. We actually thought we could pencil it out.”
So, let’s get this straight. Microsoft’s business model for XBox is one that sacrifices profitability on hardware in exchange for the hopes of royalty revenue down the road. How’d that work for you, Stevo?
“We also didn’t think we would lose as much money as we did because we thought we could charge a premium for a device that had a hard disk in it.” â??Steve Balmer
Source: Business Week
Gotcha. Didn’t work so well. Which explains why XBox 2 is priced up there in the stratosphere.
So let’s take a look at Microsoft’s recent entry into another hardware category: the personal music player space. You know, the one currently dominated by Apple (but started by Creative). This is a market that appeals to a hip young crowd. Now, Microsoft (by anyone’s standard) wouldn’t know hip if it bit them in the ass. No matter. Let’s start that rocking chair a-creakin’, and get a Microsoft product on the market.
They’ve repackaged an already-released player (Toshiba Gigabeat) that has faired poorly on the marketplace. “While we have great respect for Microsoft, we are frankly underwhelmed by the much-hyped Zune device,” American Technology Research analyst Shaw Wu reported. Microsoft has added a few features, but they drastically reduce the already dismal battery performance of the device. As an added bonus, they’ve managed to match Apple’s pricing (even though the economies of scale don’t even come close). And they’ve launched the device in brown.
That big black round thing that one might think replicates the iPod experience? Well, it doesn’t. It’s a glorified grouping of up-down and left-right arrows PRETENDING to be the input device that is so critical to iPod’s ease of use.
Steve Ballmer, Microsoft’s CEO, said his company’s upcoming Zune player fits into the hardware model (you know, the model that gave us XBox), because (now get this): the value, if it’s successful, is all in the software. “It’s in community [the ability to share music and pictures with other Zune users],” he said. “I want to squirt you a picture of my kids. You want to squirt me back a video of your vacation. That’s a software experience.”
Given the color of the thing, I’m not sure “squirt” is going to elicit a positive response amongst the young and the restless.
And then, there’s the whole back-of-the-napkin approach to deal, that makes me shake my head in dismay. It’s XBox all over again:
“The truth is, if it makes money, it will be built into the gross margin on the hardware. We’ll figure out how to make money on the community perhaps later though advertising or other means.” â??Steve Balmer
Source: Business Week