How Microsoft Missed the Future of Computing

Back in 1981 there were practically no PC analysts. In fact, only four people were given that designation by the media as we were all covering larger computer systems for the four professional computer research firms of the time and all of us were asked to add PCs to our research portfolios. In this role I visited Microsoft's first real building, the 75-person red brick offices in Bellevue, Washington.

As a result I've had a ringside seat over the years, watching Microsoft jab, cross, and duck as it struggles to endure a changing market. Unfortunately, it has missed pretty much every major trend in mobile while protecting its PC franchise.

So how did Microsoft get into its current position? It started out as a PC company and rode that vision into the ground while the rest of the market charged into the post-PC era. More importantly, I personally witnessed two of the major strategic errors that sealed its fortunes as a distant competitor to Apple, Google, and Samsung, whose operating systems, devices, and services are now defining a new era of personalized computing.

In the early 1990s Microsoft's larger divisions were becoming more like silos within its management structure, which meant various products and services were each managed on their own. In most cases these silos had their own P&L goals and responsibilities. This was both good and bad. It was good because these groups were more focused on the development of their products, but bad because they operated as individual islands inside the company. People inside these groups would often use their prowess and success in managing these products to gain better positions inside the company.

This led to cutthroat competition and fiefdoms as groups became more powerful and their leaders less likely to work seamlessly with other groups. There was no such thing as unity until Ballmer recently embraced a concept he dubbed "One Microsoft."

In just one example, for many years the group behind Microsoft Office resisted moving its products to a service model, even though the trend was clearly moving in that direction as early as 2003. Various other Microsoft groups were grasping software as a service by 2005, but these groups were basically at odds with each other. The Office software group fought to protect its island and keep control of Office until late 2009 when it finally began working with the SaaS divisions.

Other groups, especially those tasked with CE products, were considered outcasts since all of the focus and money was on business- and PC-based consumer products. Interestingly, Microsoft actually had the first true consumer OS called Windows CE, which it developed back in 1996. Had it developed this fully without trying to make it PC-centric, Microsoft might have beaten Apple and Google to market with a consumer OS that could have been used across all types of devices, from tablets and TVs to mobile devices.

Microsoft's second serious strategic error was in how it approached the market for software and eventually services. The company placed its full confidence in the PC, disregarding the potential of other devices to become important consumer or business tools. This is why Ballmer confidently predicted the iPhone would flop when it was introduced in 2007.

Microsoft also had one of the first true mobile operating systems: Pocket PC, based on Windows CE. Released in 2000, it was aimed at next-generation PDAs. Unfortunately Microsoft's PC-centric thinking continued with the Pocket PC, whose UI tried to replicate Windows desktop on a tiny screen.

By 2003, after Handspring's evolved PDA, the Treo, essentially launched the smartphone era, Microsoft repositioned the Pocket PC OS as Windows Mobile. Still, it continued using the CE core OS, which remained PC-centric until 2010 when Windows Phone finally debuted the new OS made specifically for smartphones. But the need to work with the PC environment meant the new OS still had a lot of baggage. Because of this and its slow entry into the smartphone market, Microsoft's Windows Phone remains a distant third to Apple's iOS and Google's Android.

Recall Microsoft was actually also the first with a tablet. In 1999, Gates used his Comdex keynote to declare that eventually a tablet would be the main way people access information. But as in the past, its universe revolved around the PC because of having to deliver backward compatibility with existing PC applications, and any leadership position in tablets vanished. This put Microsoft behind Apple and Google, which developed separate mobile operating systems and user interfaces from scratch.

While you could argue it was noble of Microsoft to protect its PC franchise, its fatal error was in trying to make its mobile products work and act as PCs instead of giving them a clean OS and new mobile-optimized UI.

When Steve Ballmer became CEO, Microsoft's market cap was $600 billion. On the day he announced his retirement, its market cap was less than $270 billion. Although the PC market is likely to continue shrinking every year, PCs will not go away any time soon, so Microsoft will continue to be the top software player. But because of strategic errors it made and managed opportunities it missed, Microsoft will likely always be a distant player in mobile products. Meanwhile, the more nimble Apple, Google, and Samsung will be driving most of the profits in this next major phase of personal computing.