Yesterday, Microsoft issued a change in two key elements in the forthcoming XBox One. The first was to go back to a traditional “disc-based games can be resold and shared” and the second was to remove the need to “call home” every 24 hours to validate licences and such. These two pieces (along with the “always on” camera) sparked an outcry in the gaming community. It was big enough that mainstream news outlets reported on the original features, and the “backtrack” has received an enormous amount of coverage. Was this merely a temporary retreat, or was it a sign of something bigger at Microsoft?
Company Under Pressure
While I would hesitate to say that Microsoft is in trouble, they are certainly under a large amount of pressure. Without some changes, Microsoft could find itself in trouble. Consider their current situation. First, the Windows PC market is shrinking, giving ground to the Mac and to tablets. The decline was small in 2012, but estimates indicate that it will increase in 2013 and beyond. Fewer Windows PCs means fewer OEM licences and OS upgrades, and fewer sales of other Microsoft properties such as Office. Microsoft is still making healthy revenue and profits, but when the core of the business appears to be waning, that is not a good sign for the long term.
Office itself is under pressure, primarily from free services like Google Docs. Microsoft does offer Office 365, and recently released a version of Office for iPhone (but not iPad). As with Windows, Office is still the overwhelming platform of choice, but it isn’t necessarily the defacto for everuone any more. There are small businesses (and even some larger organizations) that have decided to go with something other than Office, even if it means giving up some features and risking some degree of incompatibility.
Windows Phone has gone nowhere. It took over the 5-6% of the smartphone market that Windows Mobile had, and hasn’t budged since then. Their app store is growing, but at a far slower pace. App sales and downloads for Windows Phone are a fraction of Google Play, and almost statistical noise when compared to the iTunes App Store. Microsoft has a smaller base of developers, and has paid out far less to developers in a similar timeframe when compared to Apple. The Nokia partnership, touted by many as proof that Windows Phone will be a top platform, came to nothing. It was, in some ways, a desperation move. Microsoft needed a hardware partner with a strong brand, and Nokia had to get back into the smartphone game after squandering an overwhelming global lead. It didn’t work out. Windows Phone is moribund, and Nokia may be for sale (or they may not be).
The Windows operating system itself is having difficulties. Windows 8 has not turned out to be the blockbuster “change the world” hit Microsoft was hoping it would be. It was hoped to be another “Windows 95” moment, where Microsoft could transform the landscape, add tablets to the Windows mix, and keep the PC relevant. Instead, it is starting to feel like Windows Vista Part 2: The Stumbling. Existing Windows users appear, by and large, to be confused and bewildered by the new interface. New users are showing less resistance. The OS can’t decide if it is meant to be a touch-enabled tablet OS, or a traditional PC operating system. Even Microsoft’s own apps, such as Word and Excel, haven’t been touch optimized for Windows 8 on tablets. The situation is bad enough that Microsoft is issuing an update sometime later this summer to bring back some familiar elements, and allow people to turn off most of the new UI features. Microsoft has to, because uptake of the new operating system has been slow. The fact that OEMs are still offering Windows 7 by default on many machines is not a good sign.
Their Lone Bright Spot, Tarnished
Prior to 2013, Microsoft had one, lone bright spot in their portfolio: the XBox 360. The platform has gained a huge audience, to the point where they are now on a virtually even footing with the Wii and PS3 when it comes to installed base, and leads in recent monthly unit sales. The Kinect has received rave reviews, and has become an exciting platform for more than just game designers. The XBox 360 is seen by some as the first true “PC in the living room”, after nearly 2 decades of companies like Microsoft trying to get a place in that room of the house. The XBox 360 appears to be positioned to be a personal computer (of sorts) in the living room, which is a huge beachhead.
The excitement leading up to what became the XBox One announcement was palpable, because we all knew that it, along with the Playstation, was due for a refresh. The so-called “eighth generation” consoles are lead by the Wii U, which has failed to sell in the numbers that it’s predecessor, the Wii, had upon its release. The Wii has slowed dramatically (selling in 30% less volume than the XBox 360 and about half of the Playstation 3). From being the home game platform, the Wii has shrunk to almost an afterthought in the game industry. Apparently all the casual gamers now own one (or or sure seems that way). But the Wii U hasn’t matched the numbers for the Wii in 2013. The strongest competitor to the XBox? The Playstation 3, which continues to see robust unit sales of over 3.5 million units per year.
So Microsoft, like Sony, is announcing new product from a position of strength. The XBox 360 is a very good, and some could say great, platform. Not just for games, but for personal entertainment in general. It sets a high bar, but it also is exciting starting point. Then Microsoft announced the XBox One, and their world started to collapse around them. The industrial design has been called into question by some. The fact that the box is nearly all vents is a bit disturbing. But the biggest problems, and biggest outcry, came from 3 “features”: an always-on camera, the need to connect to Microsoft servers every 24 hours, and the potential for game developers to lock down and prevent sharing, lending or re-selling games, even disc-based ones. The backlash for all 3 was considerable. Reviewers and top gamers said they refused to have an “electronic spy” in their house. The fact that they couldn’t resell games they “own” (which shows just how little people know about current intellectual property law), let alone lend them to friends or play them on a friend’s machine, was unacceptable. That the machine wouldn’t let you play games you had a valid licence for because the console hadn’t been in touch with a server within the last 24 hours was a backbreaker. Many prominent celebrities in the game industry made it clear: they weren’t going to buy the XBox One.
As if the situation weren’t bad enough, after XBox One we get Playstation 4. It won’t have an always-on camera, doesn’t require server authentication periodically and will let you do what you will with disc-based games. It has a somewhat nicer design as a cherry on top. The industry’s reaction? That’s our console now. It wasn’t just that gamers won’t buy XBox One, they have made it clear that they will buy the Playstation 4 instead. Popular media latched on to this, with people like Jimmy Fallon jumping on the Playstation bandwagon (and misunderstanding some of the new XBox features). Microsoft has lost any semblance of control over the conversation.
Fixing The Problem
Yesterday, Microsoft attempted to fix the situation by doing what most see as the right thing. They had already indicated they will let users turn off the camera back in May. The original always-on you-can’t-turn-it-off nature had the potential to be illegal in some countries. But now Microsoft has indicated that the console won’t need to contact servers every day, and that disc-based games will work they way they do now. That means you can re-sell old games, borrow and lend them, and play them on anyone’s machine.
Just how big a deal was the announcement? It was essentially front page news on almost every news web site. The original announcement for the platform got some notice, but the “backtracking” was big news. Everyone covered it, and pundits and “experts” outside of the gaming industry are weighing in on the change. This change from Microsoft was not going to be made quietly.
But the announcement came with some “grumbling” from Microsoft. It means the game disc has to be in the machine during game play, and you won’t be able to use your game data and settings on other people’s machines. These so-called “advancements” apparently weren’t an advancement that people wanted, or didn’t want enough to give up features they see as more important. Basically, Microsoft tried to create a feature that no one was asking for, and nobody said they wanted. And that’s okay, because we have plenty of products around us that started out as something people hadn’t asked for, or had said they wanted. That’s how most product and technology advancements are made. But, as Microsoft learned, there are risks attached to that, and it doesn’t always go the way you hope. Kudos to Microsoft for trying, and a hat-tip for recognizing that it wasn’t going to fly.
The past 2 years should have been humbling for Microsoft, but we are only just starting to see them wake up to this fact. Sure, Microsoft is still a big company. They make lots of money, Windows is still far-and-away the biggest PC operating system, Office still dominates the office suite landscape, and they still have a hit with the XBox 360. Their recent actions, though, show that maybe, just maybe, they are realizing that their dominant positions aren’t unassailable, and they certainly aren’t permanent. I suspect that the problem for them is that their struggles to build this dominant position are so far back in the rearview mirror that few truly remember what it took to get there.
If Microsoft is to slow the decline, and perhaps even halt it, they will need to rethink their current position. They are no longer the vendor who gets to dictate what happens and how it happens. That place is now held by Google and Apple. Microsoft have been relegated to being followers, and not leaders. Sure, they have tried to lead by doing things differently. Creating their own hardware (the Surface), and trying to set a different direction for Windows is part of that. What is crucial, though, is that they learn from mistakes rapidly, and correct them quickly. Apple’s ascent under Steve wasn’t a nice, smooth path. They stumbled around for a while, and they had their missteps. Apple also took risks. Selling the most expensive MP3 player in a commodity space was a risk, but it paid off. The iPhone could have been a flop, had consumers decided they either didn’t want an iPhone, or wanted a more “traditional” device for the time, like a Blackberry. The iPad had a real chance at being a flash in the pan. No product is guaranteed success, but when it happens, you build on it. But you also have to learn from your mistakes, and correct course as quickly as possible.
Will the upcoming Windows changes slow or stop the decline of the PC? Probably not. But at least it may help get Windows 8 into a better position. Taking on the iPad is proving to be a challenge, and only Samsung appears to have made any real headway, albeit in small amounts. Microsoft may have to face the music, and realize that their presence in tablets may have to be through Office and other software properties, not Windows. The release of Office for iPhone, even with its limitations, is a start, but an iPad version may also be necessary. Sure, it may cut into the paltry sales of the Surface, but better to cannibalize your own sales, than have someone else do it for you.
Will the change in direction for XBox One help keep XBox’s place in the game console pantheon? It certainly should. The combination of a feature-rich game console and tablets may be the future of personal computing at home, and Microsoft needs to make sure they are there. If they can provide at least one of those platforms, specifically the game console, and have some kind of presence on the other, then they can remain relevant.
But If They Backslide Again…
If Microsoft backslides again, and reverts to their old “we’re Microsoft, and we don’t make mistakes” approach, then there is a real risk that Microsoft won’t be here a decade from now. Don’t believe me? Take a look at the landscape of lost technology companies. DEC was the dominant player in minicomputers. They went away a long time ago, and their final legacy, VMS, is about to disappear. Fault tolerant computers were the only way to build some kinds of systems. But Tandem is gone, and Stratus is a shadow of its former self. Sun Microsystems and Apollo Computer together ruled the UNIX server and workstation market. Apollo was taken out of the picture in the 1990’s. Sun is now part of Oracle, and in serious decline.
IBM almost didn’t survive the 1990’s. This is IBM, the world’s largest computer manufacturer through the 1970’s and 1980’s. The focus of antitrust investigations, and a potential target for break up like AT&T. The company whose products were a household word, where “you couldn’t lose your job by picking IBM”. The company whose brand essentially created the PC market we know today. And they were weeks away from restructuring because the world had changed and they refused to acknowledge it.
Could Microsoft be seeing that same fate? Quite possibly, but the fact that they have adapted to some adverse conditions is an encouraging sign for them. I still believe that the company needs some changes at the top, and probably needs to rebuild the culture a bit from within. But just acknowledging that things they’ve done, or wanted to do, need to be changed is a good, first step to continued longevity. Learning from mistakes is important, not repeating them critical. Let’s see if this trend continues for them.