Has Microsoft Gone Nuts?

The rumors floating out of Microsoft these days are remarkable:

—Microsoft’s Nokia business is working on an Android phone, and Microsoft might let them sell it (link).

—Contrary to its entire business history, Microsoft may give away Windows phone and Windows RT for free (link)

—The Start menu will be restored in at least some versions of Windows 8.1, and it will be possible to run Metro apps in floating windows inside the traditional Windows interface (link)

Those are just rumors, of course, but they’re coming from multiple reporters who have strong ties to Microsoft, which means they’re probably genuine plans or at least serious trial balloons. Taken together, the reports give a picture of a company that’s laudably willing to revisit its assumptions, but that also seems to have lost track of what it’s trying to accomplish. Specifically:

—Making Windows Phone free is a nice idea and would have been a clever response to Android six years ago. Back then, the idea of a free mobile OS was appealing to handset companies, which are at heart surpassingly cheap. Faced with rampant iPhone sales and no good alternative, the phone companies were very willing at that time to give a try to the low-cost Google-backed approach.

But today, Android has huge market momentum, so a phone vendor switching off it would be abandoning most of the available customers, something they are extremely reluctant to do. Besides, getting a free OS is not currently the main concern for most handset companies – the big worry is finding a way not to be crushed by the dominant Android vendor, Samsung. Windows Phone has its own dominant vendor, Nokia, so it has all the negative aspects of Android without the customer base.

Nice idea, Microsoft, but you’re closing the barn door not only after the horses left, but after the barn burned down.

—I think a more interesting licensing strategy for Microsoft would be forking Android: Take an open source version of it and add your own services on top. That’s apparently the idea behind Nokia’s OS plan, in which Nokia would supposedly replace its low-end phone OS, Series 40, with a modified version of Android. Those phones could then tap into the Android app base, making them more attractive to low-end customers. (Heck, they might even be more attractive to high-end customers as well.)

But if that’s the right strategy for the Nokia business unit, it’s also the right strategy for Microsoft’s OS licensing. If you’re giving away Windows Phone for free, the only way you’ll make money from it is through bundled services. You could just as easily bundle those services on a forked version of Android, save the expense of creating and maintaining all the low-level OS plumbing, and get access to the Android customer and app base. That sounds like a much more appealing licensed OS than Windows Phone, even though you still have the problem of Nokia competing with your other licensees.

But that’s not the roadmap we’re hearing from the Microsoft OS team. Instead, they’re talking about creating a single Windows code base that runs across all types of devices, something that’s technically appealing if you’re a Microsoft engineer but thoroughly uninteresting to customers.

So the various parts of Microsoft appear to be working at cross-purposes. The Nokia unit has a nicer mobile OS plan but no intent to license it, and the OS group has a licensed mobile OS with almost no customers. Something’s got to give.

Meanwhile, the rumored changes to Windows 8 are, to me, a mix of sensible ideas and bizarre improvisation. The word is that Microsoft’s going to offer three versions of Windows (link):

A phone/tablet version that runs Metro-style apps. Although I’m sure Microsoft will save money by unifying development, customers don’t care about that. They care about features. Unless there’s some dramatic change in functionality that we haven’t been told about, I think this new product will have as much appeal to licensees and customers as the current version of Windows Phone. So you can think of this as the version of Windows that no one wants.

A “consumer PC” version, which may or may not be able to run existing Windows 32 applications. If it can’t, I think it will sell as well as Windows RT did.

An “enterprise PC” version, which would run today’s Windows 32 applications in addition to “modern” (Metro-style) touch apps. The Start menu would apparently be restored in Win32 compatibility mode, and you’d be able to run Metro-style touch apps in windows inside the Win32 interface.

The only configurations likely to sell in volume are the ones that let customers run their familiar Win32 apps. I think reviving the Start menu in these configurations is smart; it makes it easier for current Windows users to move up to the new OS. That’s such a no-brainer that Microsoft should have done it in the first version of Windows 8. The question is not why they’re doing it but what took them so long.

On the other hand, running Metro apps in a traditional Windows frame is...I don’t even know what word to use. Bizarre? Crazy? I’d even say frightening, because it implies that Microsoft has lost track of why it did Windows 8 in the first place. The idea behind Windows 8 was to build a full-function PC that could also switch to work as a no-compromises tablet. I don’t think a lot of customers actually want that, but at least it’s a clear direction.

Mixing the two metaphors on the same screen completely undercuts Microsoft’s basic idea. Instead of switching between tablet and PC mode, you’re mixing two totally different usage paradigms on the same screen. How does the user know when to touch and when to click? It’s like driving a car that has both a steering wheel and a joystick. Instead of giving users a tablet and a PC that you can jump between, Microsoft is at risk of giving users an awkward combination of the worst of both worlds.

It feels like the people who were responsible for the original Windows 8 vision and strategy have left the scene, replaced by folks who are tactically tweaking the products they inherited, with no sense of where they’re going long term. 

The focus on rationalizing code bases feels symptomatic of this. It’s a sensible thing to do and will cut Microsoft’s costs, but it does nothing to increase demand. In the tech industry we overuse the phrase “rearranging deck chairs on the Titanic,” but in this case it really seems to fit.

What it means

New CEO needed. It’s important to remember that Microsoft is in the middle of its biggest business transition ever. It’s simultaneously getting ready to merge with an enormous Finnish phone company, and hiring its first CEO who wasn’t a cofounder. That sort of situation typically encourages bizarre behavior. For example, groups will try to lobby for their favorite projects by leaking information about them, trying to build up public support that will influence the new CEO.

Think about it, why would Nokia possibly want to leak the news that it’s replacing the OS in its low-end phones? That’s very likely to stall sales of the current phones, driving down revenues. Nokia just made that mistake with Symbian, and now it’s repeating it? Somebody in the Nokia business apparently feels it’s more important to lobby for its OS vision than to protect current sales. It’s a triumph of business politics over short-term business sense.

Another behavior we should expect to see is business managers pushing forward aggressively with their plans, looking to prove that they’re dynamic leaders who don’t need to be replaced. It doesn’t matter if those plans contradict company strategy; the point is to look dynamic. The strategy’s going to change anyway. And what’s Ballmer going to do, fire you?

We should expect to see more odd behavior until MS picks a new CEO. Then it’ll be several months of strategic reviews, followed by ritual bloodletting and reorganization. So Microsoft is likely to continue to be confused for at least the first half of 2014, and that’s assuming they can choose a new CEO quickly, something they may not be able to do to do (link).

Windows Metro = OS/2. The big bet in Windows 8 was that Microsoft could re-ignite sales growth for Windows by tapping into the tablet market. A PC that could also work as a tablet, Microsoft reasoned, would be more attractive to customers than either product alone. I think it’s pretty clear that the Windows 8 bet is failing. Windows 8 is being pre-installed on a lot of PCs, but that’s because Microsoft is pushing it through the OEMs. Microsoft could ship a hamster wrapped in duct tape, label it Windows, and a lot of OEMs would bundle it. What hasn’t happened is Microsoft’s promised explosion in user demand for convertible Windows computers, followed by an explosion in developer activity that might drive future demand.

I think it’s increasingly likely that the tablet interface formerly known as Metro will be more or less stillborn as a development platform. It will linger for a long time as Microsoft’s software for touchscreen devices, but I don’t see it being embraced by the leading-edge developers who can drive new demand to a platform. Instead, it’s kind of the third option for developers who have already built for iOS and Android.

I think most PC users will stick with the traditional Windows interface, most Windows developers will follow them, and most people who want tablets will get iPad or Android or Kindle.

So the challenge for Microsoft’s new CEO is the same one Steve Ballmer has tried and failed to answer for years: Demand for Windows is declining because the platform hasn’t done anything new for a decade, while Microsoft doesn’t control the fast-growing segments in tablets and smartphones. Microsoft tried to use Windows 8 to take over tablets. That failed. What do you do now?

The traditional answer would be to break up the company and try to salvage parts of the business that can grow on their own. It’s the kind of big deal that consulting companies love to recommend and investment firms love to broker. Besides, it looks bold, even though it’s actually the path of least resistance. So I wouldn’t be at all surprised if the new CEO chose that path.

The alternative to a breakup is to actually fix the product problem: to offer new functionality for Windows that’s more attractive than the competition. That would mean new mobile software that’s substantially better than iOS and Android, and/or new PC features that will give people a compelling reason to recommit to personal computing. There are plenty of opportunities to create that sort of innovation (link), but Microsoft doesn’t have a great record as that kind of product leader.

So if Microsoft is to stay together, the new CEO needs to be either a product visionary or know where to find one. I wish them luck.

Microsoft + Nokia: Now We’re All Like Apple

Ten years ago, everybody in the tech industry — and I mean everybody — was convinced that the best way to dominate a technology market was to create an operating system and license it to a bunch of other companies. “The key to success is creating a standard,” said the experts. “If you write software for only your own hardware, you’ll never achieve the economies of scale of a licensed OS, and you’ll never be able to dominate the market without a wide range of licensees selling your hardware.”

The case for licensing seemed obvious because of the success of Windows. Apple had kept MacOS to itself, while Microsoft had licensed Windows. Microsoft won. Therefore licensing was the best way to go.

But then Apple transformed the phone market with the iPhone, and created the tablet mass market from scratch with the iPad. Suddenly the proprietary approach started to look a lot better.

Ten years later, the idea of an independent operating system licensed to all comers is a fading ideal. The two leading operating system licensors in mobile have now bought major hardware companies: Google with Motorola and Microsoft with Nokia. Both companies continue to license their software, of course, but clearly they don’t feel that’s enough. They need to also create hardware.

When you look at it in terms of tech history, this is a stunning change. I’m having trouble thinking of another industry that changed its basic assumptions so thoroughly in such a short period of time. I’m still trying to sort out what this all means for the rest of us, but here are some preliminary ideas:

Are they fighting the wrong war?  Since the experts were supposedly all wrong about licensed OS ten years ago, we should ask whether they might all be wrong again today. The standard assumption behind buying a hardware company is that by combining hardware and software you can produce the sort of fantastic user experiences (and fantastic margins) that Apple does. There are a couple of potential problems with that reasoning:

1. There already is an Apple. You can make a good argument that Cupertino has already used up most of the customers who are willing to pay extra for a value-added smartphone or tablet, and that the remaining customers are mostly buying on price. That creates the possibility that Microsoft (and the Motorola part of Google) will end up with the worst of both worlds: an Apple-like expense structure but with commodity margins. Google can afford that since it has the web advertising business to subsidize it. Microsoft, with restless shareholders and all of its cash cows under threat, has much less room to maneuver.

2. Does combining hardware and software really work? Other than Apple, how many integrated hardware-software companies have succeeded wildly in mobile? Let’s see, there’s Palm, BlackBerry, Danger... Apple starts to look like the exception rather than the rule. I start to think the real lesson is that no strategy will work if you execute it poorly. Perhaps Microsoft would have been better off fixing the flaws in its licensing model rather than totally changing strategy. But it’s too later for that, so we should ask why Apple succeeded where so many other companies failed.

Maybe it’s because Apple has a culture in which product managers, rather than engineers, take the lead in defining products. If that’s the case, Microsoft will need major cultural changes, and Google, well, forget about it.

Or maybe you just need to have a supernaturally brilliant CEO leading the whole thing. Which brings me to my next point...

Microsoft’s next CEO will need to be Superman. Here’s the mess Steve Ballmer will leave for his successor: 
–Windows 8 has failed to produce a turnaround in Microsoft’s gradual decline.
–The Surface tablets have more or less died in the market.
–The company’s just been through a massive top-level organizational change. Those things typically take a year to trickle down through the organization, as the lower levels of management get resorted and reassigned. That process will be disrupted while everyone waits to see if the new structure will stick with the new CEO (unlikely; new CEOs almost always want to change things).
–And now Microsoft needs to mesh the Nokia and Microsoft businesses. There’s a cultural challenge: Nokia’s is a collectivist Finnish hardware company while Microsoft is a dog-eat-dog hypercompetitive software business. There are also operational challenges. As I learned when I worked at Palm, it’s incredibly difficult to manage an operating system to please both your in-house hardware team and your licensees. They always want conflicting things. Microsoft claims it can both license Windows Phone and run Nokia. I hope that’s just bluster, because I don’t think it will work in practice.

It’s an almost ridiculously complex situation. Who could make all of it work? Who has an ego big enough to even try? To me, it feels like a job for a mad cartoon genius rather than a human being. Megamind would be perfect, or maybe Gru from Despicable Me.

Either one could do the job

I’m only joking a little bit. The CEO hire at Microsoft is going to be pivotal, and it’s difficult to imagine anyone who has the qualifications to make it all work.

Microsoft needs to find a new measure of success. In its presentation on the deal, Microsoft bragged about how it’s “outselling BlackBerry in 34 markets” (link). This is not the first time I’ve seen Microsoft use BlackBerry as its measure of success, and it needs to stop. It’s like bragging that you outran a dead guy in a marathon.

The conspiracy theorists will love this. Even before the purchase of Nokia’s phone assets, some Symbian die-hards had muttered that Nokia CEO Stephen Elop was a Trojan horse: a Microsoft exec sent to Finland with the hidden agenda of destroying the company’s value, so it could be snapped up by Microsoft. That’s certainly the outcome we got, so I’m sure the conspiracy buffs are boiling today. But for the record, I don’t think Elop was a Trojan horse — Nokia’s management was doing a very good job of destroying its value long before he arrived.

What happens next? There are some interesting shoes that might drop next. Now that we have three big hardware + software players, will the other mobile hardware makers feel pressure to copy them? In particular, will Samsung decide that it needs a different operating system? Samsung already has Bada OS, which it reportedly plans to merge with the Tizen project it's driving with Intel. Maybe it’ll feel that's enough. Will the Chinese vendors feel pressure to act? If they do, there aren’t many other operating systems they could buy. Maybe BlackBerry? Would the Canadian government allow that?

That’s my quick take, but it’s a complicated situation and there’s a lot more to think about. What do you think it means? I’d love to see your comments.

[Thanks to Adalbert for the correction on Bada.]

Google Logic: Why Google Does the Things it Does

“What does Google want?”

A favorite pastime among people who watch the tech industry is trying to figure out why Google does things. The Verge was downright plaintive about it the other day (link), and I get the question frequently from financial analysts and reporters. But the topic also comes up regularly in conversations with my Silicon Valley friends.

It’s a puzzle because Google doesn’t seem to respond to the rules and logic used by the rest of the business world. It passes up what look like obvious opportunities, invests heavily in things that look like black holes, and proudly announces product cancellations that the rest of us would view as an embarrassment. Google’s behavior drives customers and partners nuts, but is especially troubling to financial analysts who have to tell people whether or not to buy Google’s stock. Every time Google has a less than stellar quarter, the issue surges up again.

As I wrote recently when discussing Dell (link), it’s a mistake to assume there’s a logical reason for everything a company does. Sometimes managers act out of fear or ignorance or just plain stupidity, and trying to retrofit logic onto their actions is as pointless as a primitive shaman using goat entrails to explain a volcano.

But in Google’s case, I think its actions do make sense – even the deeply weird stuff like the purchase of Motorola. The issue, I believe, is that Google follows a different set of rules than most other companies. Apple uses “Think Different” as its slogan, but in many ways Google is the company that truly thinks differently. It’s not just marching to a different drummer; sometimes I think it hears an entirely different orchestra.

Google’s orchestra is unique because of three factors: corporate culture, governance, and personal politics. Let’s start with the culture.

Google culture: You are what you do

The strategic thinking of most companies is shaped by the way they do business. For example, a farmer thinks in terms of annual seasons and crops; everything revolves around that yearly cycle. Manufacturing companies, the traditional foundation of a 20th century economy, plan in terms of big projects that take a long time to implement and require a lot of preparation. If you’re building a car or a plane or even a smartphone, you have to plan its features well in advance, drive hardware and software to completion at the same time, and arrange manufacturing and distribution long before you actually build anything. The companies that build complex physical things naturally plan their products in terms of lifecycles lasting at least 12 to 24 months, and sometimes much longer.

That long planning cycle dominated big companies in the 20th century, and was driven into all our heads through generations of business books and business school classes. It’s how most of our brains were formatted.

An internet company, like Google, works at a fundamentally different pace. Web software changes continuously. You don’t plan it rigidly; you evolve it day by day in response to the behavior of customers. The faster and more flexibly you evolve, the more successful your products will be.

This evolutionary approach, and the Agile design processes that support it, is built into the fiber and psyche of web companies. They don’t think in terms of long-term detailed plans; they think in terms of stimulus and response.

This is a dramatic change in the history of business. In the past, the nimble companies were always the little ones. The larger your company, the more it valued planning and the long-term view. Google is one of the first very large tech companies ever to pride itself on rapid response rather than rigid planning.

On top of this quick-turn bias there’s the cultural training of Google’s senior management. Most big companies end up being run by professional managers who came up through business school or finance, where they get trained in the rhythms and personality of traditional big business. They learn a shared vocabulary and set of values that are very familiar and comfortable to investors. By contrast, Google is completely controlled by engineering PhDs. They speak the language of science rather than business, and they’re contemptuous of the vague directional platitudes and reassuring noises made by modern finance and marketing.

I think most reporters and analysts don’t understand how fundamentally different the engineering mindset is from traditional business thinking. It’s a very distinct paradigm, unfamiliar to most people who haven’t studied science (link).

One key element of the engineering mindset is the use of scientific method: you encourage a Darwinian marketplace of ideas, you test those ideas through controlled experiments, and you make decisions based on experimental data.

In its behavior and vocabulary, Google oozes scientific method. A couple of times recently I’ve heard Google executives say in public, “if you can’t measure it, you can’t improve it” (link). It's an old quote, dating back at least to Lord Kelvin in the 1800s. It's also a subtle twist on the traditional mantra used in web design: “that which you measure, you can improve.” The web design version says you should measure everything you can; the Google executive version implies that nothing really matters unless you can measure it.

That’s a very scientific, rational point of view, but I couldn’t help thinking that if you had said something like that to Steve Jobs, he would have taken your head off with a dull knife. The whole idea of vision at a place like Apple is that you pursue things you can’t fully quantify or measure; that great product design is an art, and the most important changes are the ones you intuit rather than prove in advance.

But engineers are trained not to act on intuition. You are allowed to have intuition, of course, but you use it to make hypotheses, which you then test. You act on the results of those tests.

There have been other big companies run by engineers, of course. HP in its glory days was a great example. But those companies were almost always wedded to traditional long-term planning cycles. What makes Google unusual is its combination of an engineer’s love of scientific method with the web’s rapid iterative development. Put those two characteristics together, and Google often behaves like a big bundle of short-term science experiments.

Why did you kill my favorite product? Take Google’s bizarre practice of publicly killing products. To most companies, killing a product is a shameful thing. It disappoints customers, and it hurts your own ego because it’s an admission that you failed. Most companies hide their product cancellations: they try to disguise them as a “reallocation” or “new focus” or some other doublespeak.

Google does the exact opposite – a couple of times a year it trumpets to the world that it’s terminating products and services that millions of people love and rely on. Google isn’t merely up front about these cancellations; it’s downright cheerful, as if turning off Google Reader or Google Desktop is an accomplishment to be proud of.

And to Google, maybe it is. If you look at the world through the eyes of the scientific method, every Google project is an experiment, and experiments must be periodically reviewed. When an experiment is completed, you either choose to follow up on it, or you terminate it and move on to something else. A scientist doesn’t get emotional about this; it’s the way the system works, and everyone knows that it’s all for the best.

By announcing its terminated experiments, I think Google isn’t admitting failure, it’s proudly demonstrating that scientific principles are in use. I think Google’s management views the cancellations as proof that it’s being focused and logical.

Google management: Who’s in charge here?

The second unusual aspect of Google is its ownership structure. Never forget: Google is not really a public company. Sure, it has stock and all the other attributes of a normal public company, but 56.7% of Google’s voting shares are held by cofounders Sergey Brin and Larry Page (link). As long as they remain friends, they can do whatever they want with the company, and they cannot be fired.

I don’t have a problem with that. Google has always been up front about it, and besides I’ve seen many large public companies manage themselves into ruin in pursuit of quarterly returns. It’s refreshing to see a big company that doesn’t enslave itself to the quarterly report. As Page put it in 2004, “by investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me” (link).

How long term is that bet? I’m not sure Google’s senior management even thinks in terms of annual returns, let alone quarterly. Brin and Page are both about 40 years old as of 2013. They have a life expectancy of about 38 more years, to about 2050, and I have no reason to think that they plan to work anywhere else in their lives. So I think Google’s planning horizon goes to at least the year 2050. Page himself likes to talk about his 50-year planning horizon, so he may well be thinking out to the 2060s.

To put that in context, some scientists predict that we’ll achieve superhuman machine intelligence well before 2050 (link). I’m not endorsing that timeline, by the way; I think it may be optimistic. But my point is, Google could be planning almost anything.

Combine the first two unique things about Google and you get an interesting picture. Most companies have a long, detailed planning cycle in pursuit of quarterly goals. That often makes them very predictable. It also makes it hard for them to get anything done – when your planning cycle is longer than your goal cycle, you’ll often change goals faster than you can achieve any of them.

Google does just the opposite. It has a short, unpredictable planning cycle in pursuit of very long-term objectives. It’s likely to pursue those objectives relentlessly, but its near term actions will look random, because they’re just Darwinian experiments along the way.

In other words, there is probably a method to Google’s madness, but they’re not going to tell you what it is.

But there’s one more factor about Google that we need to consider: it’s run by human beings. Larry Page is not Spock. No matter how logical and dispassionate he tries to be, he and the rest of Google’s managers have psychological needs and reactions that they cannot transcend. That means Google has corporate politics.

Google politics: The coming-out party of Larry Page

I don’t think you can fully explain Google’s behavior over the last several years without looking at the relationship between its CEOs during that time, Eric Schmidt and Larry Page. Google’s first CEO, in its very early days, was Page. Investors convinced Page and Brin that they needed to bring in professional management to organize the company. Reluctantly they agreed, and supposedly Steve Jobs was at the top of their wish list. That raises some fascinating what-if scenarios, but Jobs was already occupied, and eventually they settled on Eric Schmidt, formerly of Sun.

A video of Page from 2000 gives an interesting insight into his thinking at the time. It was recorded a year before Schmidt joined Google. A nonprofit called the Academy of Achievement recorded video interviews with Page and Brin. The videos are a fascinating window into the early thinking of both men. In one clip, Page is asked about the challenges of being a CEO at age 27 (link). He replies:

"If you manage people for 20 years, or something like that, you pick up things. So I certainly lack experience there, and that's an issue. But I sort of make up for that, I think, in terms of understanding where things are going to go, having a vision about the future, and really understanding the industry I am in, and what the company does."

So Page acknowledged his need for tutoring in management, but at the same time he went out of his way to call himself a visionary. I haven’t met Larry Page, but there’s one thing I know for sure: anyone who calls himself a visionary at age 27 does not lack for confidence.

Schmidt arrived soon after, and for the next ten years Page served a kind of management apprenticeship under him. I don’t want to overstate Schmidt’s role; even then, Page and Brin had control of the company, and could have ousted Schmidt if they really wanted to. But even if Page agreed that working for Schmidt was necessary, it can’t have been easy.
Early in Schmidt’s tenure, he and Page appeared together to address students at Stanford. The session was recorded on video, and Stanford posted it online here (link). The whole video is worth watching, but the segment I’ve embedded below is especially interesting because it shows the sometimes awkward interaction between Schmidt and Page.

Schmidt is the more articulate of the two. He interrupts to preface things before Page can make a comment, and sometimes comes back afterward to put a different spin on something Page said. In this clip, watch Page’s face when Schmidt interrupts him to deliver the punchline at the end. You should judge it for yourself, but to me Schmidt and Page look like one of those married couples who value each other but also get on each-other’s nerves.

No matter how much Page appreciated Schmidt’s wisdom, no matter how fruitful their collaboration, it can’t have been easy for Page to be mentored like this for ten years. If I were in his shoes, I’d have compiled a long list of things I wanted to change as soon as I was in charge.

That time came in 2011, when Page returned as CEO and Schmidt was kicked upstairs to be Google’s Chairman and chief explainer (link).

Page acted quickly, reorganizing the company and accelerating the termination of projects (link). I think that helped reinforce the use of the scientific method. It also helped Page assert his authority.

Then Page bought Motorola Mobility for over $12 billion. I don’t think you can understand the Motorola deal without taking into account the management change at Google. It was Page’s first major business deal as CEO, a chance to finally spread his wings and put his distinctive stamp on the company. Any human being with Page’s experience and ego would want to do something like that. So I believe ego played a role in the Motorola deal. But I don’t think that was the only motivation.

My take on why Google bought Motorola

Remember Google’s business situation in 2011. It still had huge economic resources, but it was no longer the dynamic new kid in the industry. That crown had fallen to Facebook, which was growing like a weed and which was not Google’s friend. At the time, Google was kicking itself for failing to recognize the threat earlier, and for responding to it so ineptly. I’m sure Page was adamant that he didn’t want to repeat that mistake.

Like social networking, mobile was a critical growth area for Google. The threat in mobile was Apple, which was doing a great job of integrating hardware and software to produce superior products. Many people at the time felt Google was destined to play second fiddle to Apple in mobile forever.

Then the opportunity came along to buy Motorola. Here’s how I think that parsed to Google:

—If people are right about Apple’s power in system design, we may need to move much more aggressively into mobile hardware than we have to date. If that happens, owning Motorola gives us a head start.
—Even if we don’t end up needing Motorola’s hardware business, we’ll learn an enormous amount from managing the company. Those skills and insights will help us manage our other hardware licensees.
—We’re going to pay a bunch of money for the patents anyway, so why not buy the whole thing? We might end up writing off most of the purchase, but who cares about annual returns? It’s better to have a bad year than take the risk of being blind-sided the way we were by Facebook.
I think the Motorola deal wasn’t just about the patents or about making a profit in device sales. It was about buying insurance against a surprise from mobile device manufacturers, especially Apple. If you think of Google as a company that sets long-term objectives and then runs experiments in pursuit of them, the Motorola deal is just an unusually large experiment along the road to mobile.

Add to that chain of logic Page’s natural desire to exercise his new powers, and the Motorola deal starts to look very understandable to me.

So was the deal worth the money? It’s too early to tell, but I doubt Larry Page is even asking that question. As long as Google learns from the purchase and doesn’t get blindsided in hardware, the deal served its purpose.

What happens next?

If you’re an investor, you should expect more off-the-wall acquisitions and product cancellations from Google. They’re built into the system. But I think Google’s unusual culture and management structure give it some other fairly predictable weaknesses. Those are potential opportunities for competitors, vulnerabilities for Google to guard against, and issues for investors to consider.

Weakness #1: Wandering vision. Google’s iterative development approach is very effective for pursuing a long-term goal when the company has a clear idea of its destination. The company’s development of self-driving cars is a good example: by relentlessly testing and tweaking the design, they’ve made much more progress than I believed was possible. Like most people in Silicon Valley, I’ve had the experience of driving on the freeway alongside those Google cars, and it’s very impressive (except for the fact that they adhere rigidly to the speed limit, but that’s a subject for a different post).

Google is much less effective when its original goal in a market changes. Because of its quick-reaction nature, Google frequently launches projects that seem very important at the time, but later turn out to be not so critical after all. The market evolves, priorities change, maybe a competitor becomes less prominent. When that happens, the Google projects are in danger of cancellation, and nobody likes working on a canceled project. So the teams frequently start iterating on their goals the same way they would on their features. Usually they end up chasing the latest trendy issue in search of a revenue stream and continued existence.

That’s usually the road to hell. Once a project starts changing goals, it’s almost impossible to diagnose the cause of any problems it has with market acceptance. Did we choose the wrong goal, or did we execute poorly?  It’s usually impossible to tell.

To put it in scientific terms, it’s like running an experiment in which you have several independent variables. Good luck interpreting your results.

Google Docs is a great example. It was launched to undercut Microsoft’s Office franchise. Over time as Microsoft became weaker, that was no longer a compelling reason for existence, and Docs was merged into Drive and repurposed as a competitor to the newly-trendy Dropbox. Feature evolution in the core applications moved at a crawl.

Now there are two new challenges to Drive/Docs: Apple is turning iWork into a cross-platform web app, and Flickr has upped the stakes in the free storage race to a terabyte (yes, I know Flickr is photos only, but you don’t really think Yahoo will stop there, do you?) Which threat will the Drive team respond to? I don’t know, but because of the way they’ve been wandering there’s a very good chance they’ll end up below critical mass against all of their chosen competitors.

Weakness #2: Poor external communication. Scientists aren’t generally knows as great public communicators, and there’s a reason for that. PR is the art of telling a story in a way that people are open to hearing. To the scientific mindset, that comes across like dishonesty and manipulation. A scientist wants people to believe things because they make logical sense, not because their emotions are engaged.

Adding to that challenge, Google is very bad at anticipating how people and companies will react to its initiatives. Time and again, Google has taken actions that it tried earnestly to explain logically, and been surprised and hurt when people didn’t understand. I think Google views itself as a highly principled company pursuing the good of humanity; it expects people to give it the benefit of the doubt when there’s confusion, and to understand the good intent behind its actions.  Google’s management doesn’t seem to understand that a hyper-rich company whose founders have private jumbo jets is automatically an object of jealousy and suspicion. Or if they do understand it, they aren’t willing to take the steps necessary to counter it.
One prominent example of Google’s communication problem was book digitization. Google was trying to make out-of-print books more available to the public, a noble goal by almost anyone’s standards. But Google handled the process so clumsily and arrogantly that it frightened authors into allying with publishers, an outcome equivalent to getting wild cats and dogs to sit down together for tea.

A second example was the backlash from the purchase of Motorola. It’s hard to overstate what a profound shock the Motorola deal was to Google’s Android licensees. Before the deal, the handset companies and operators viewed Google as a benign giant who could be trusted to champion mobile data without preying on its licensees. After the deal, they viewed Google as a villain little different from Microsoft.

The irony of the deal is that the threat from Apple has receded somewhat, so the Motorola experiment probably wasn’t needed. The rising challenge to Google now is that an increasingly feisty Samsung has too much market power in the Android space, and there’s a rising Amazon-inspired movement to fork Android and take control of it away from Google. The Motorola acquisition made companies like Samsung much more likely to cooperate with a non-Google OS. In trying to prevent a Facebook-style breakout in mobile, Google actually weakened its position in the mobile market.

Even casual public comments can create trouble for Google. In response to a question at the Google IO conference in 2013, Larry Page said of Oracle: “We’ve had a difficult relationship with Oracle.... money is probably more important to them than having any kind of collaboration.” (link)

There are several problems with this statement. First, if you want a cooperative relationship with Oracle, calling them a bunch of greedy bastards isn’t the way to get it. Second, public companies are supposed to put making money ahead of collaboration. That’s what their shareholders expect. This is a good example of how Google’s thinking is out of step with typical corporate governance.

The third problem is that Page’s comments came across to some people as hypocrisy:

Om Malik: “I think Larry (and all other technology industry leaders) should actually practice what they preach.” (link)

Slate: “Page criticized Microsoft for treating Google as a rival, blasted Oracle for caring too much about money, and then whined about everyone being so negative. Heck, if it weren’t for those other companies standing in the way, Google would have probably already solved world hunger. Well, except for all the laws and bureaucrats and journalists who are also standing in the way.” (link)

John Gruber: “Google is a hyper-competitive company, and they repeatedly enter markets that already exist and crush competitors. Nothing wrong with that. That’s how capitalism is supposed to work, and Google’s successes are admirable. But there’s nothing stupid about seeing Google being pitted “versus” other companies. They want everything; their ambition is boundless.” (link)

Gruber’s comments show the trouble that Google gets itself into when poor communication combines with its wandering product goals. Google doesn’t see itself as a predator eating tech startups, but when its internal projects start iterating on their goals, they inevitably target successful startups because that seems like the logical thing to do. The behavior is a natural outcome of the way the company works. Larry Page says he’s all about cooperation and I think he means it, but his product teams relentlessly stalk the latest hot startup. The result is a company that talks like a charitable foundation but acts like a pack of wolves.

No wonder he gets labeled a hypocrite.

Google’s trouble communicating its own intentions, and the mismatch between its words and behavior, becomes a serious problem whenever the company has to deal with big political or PR battles. Google’s competitors are often better at courting public opinion, and that opinion often drives the outcome of political processes. If you want an example, watch Google struggle with European Union regulators.

Weakness #3: Science vs. art in product management. Google’s strength in science and quick response makes it very fast at incrementally improving the performance and reliability of its products. But that same process makes it almost impossible for Google to lead in features or product ideas that can’t be proved or verified through research. That’s why Google struggles in user experience, creating new product categories, and fitting its products to the latent needs of users: all of those are intuition-led activities in which it’s very hard to prove ahead of time what’s right or wrong. Even if there are people within Google who have extraordinary taste and vision, it’s very hard for them to drive action because their ideas can’t pass the science-style review process that Google uses for decision-making.

That puts Google at a disadvantage when competing with vision-led companies. The most obvious example of this is Google vs. Apple. When Apple is implementing its strategy properly, it comes up with new product categories faster than Google can co-opt them, and executes them with more taste and usability. As long as Apple can keep moving the bar, Google is forced to play catch-up to Apple’s leadership.

(The big question post-Steve is whether Apple can continue to move the bar. But that’s another topic for a separate article.)

The exception to normal Google decision-making is the special projects run by Sergey Brin. In those projects, Google chooses a few long-term product goals that can’t necessarily be justified logically, but that look possible and would have a big impact if they succeeded. It’s a logical way for an analytical company to try to inject some vision into its business.

What we don’t know yet about those special projects is whether Google can apply the smaller dashes of intuition that are needed throughout the development process to pioneer a new product category. The iPod wasn’t just a good idea, it was a long series of clever decisions that Apple made in the design of the device, software, store, and ecosystem. They all fit together to make a great music management system. Can Google make a similar series of great, coordinated decisions to create a compelling user need for Glass, or will its glasses just be a technophile toy? I don’t think we’ve seen the answer yet. Until we do, there’s a strong danger that Google is just doing the advanced R&D that some other company will use to make a successful wearable computing device.

Should Google try to change?

Every successful company has weaknesses. The strengths that make it powerful always create corresponding blind spots and vulnerabilities. Google’s strengths are unusually well suited to its core business of search advertising. The Internet is so big that you have to use some sort of algorithmic process to organize it, and it takes a vast series of logical experiments to gradually tune search results and the delivery of advertising around them.

The question for investors is if or when Google will run out of room to grow in the search advertising market. At that time, to maintain its growth (and stock value), it’ll need other substantial sources of profit. Can Google find other businesses in which its analytical, experimental culture will produce winners? Or can it adapt its culture to the needs of other markets?

So far, the signs aren’t promising. Google is very good at giving away technology (Android, for example), but not very effective at making large amounts of money from it. Google’s product experiments have produced many failures and a few popular services, but very little in terms of major incremental profit. In fact, some financial analysts refer to two Googles – the search engine company that makes all the profit, and the other Google that sucks away some of that profit.

It’s easy for someone like me to say that Google should change its culture to give it a better chance of success in other markets, but in the real world those culture-changing experiments often fail catastrophically. You end up destroying the source of your previous success, without successfully transitioning to a new winning culture. In that vein, I worry that even the Motorola deal is a risk for Google, as it brought into the company a huge number of employees trained in a very different, famously dysfunctional culture.

For now, the search business is so strong that I don’t think Google is likely to make major changes in the way it works. Companies rarely change until they have to. Until and unless that happens, Google is likely to continue its scientific management, and competitors are likely to continue countering it through vision, public communication, and product management.

If you’re a Google investor, I think the situation is still the same as it was at Google's IPO: You’ve made an unusual long-term bet on Page and Brin and their scientific approach to running a tech company. It’s quirky and it’s different from the way most other companies operate, but it does make its own logical sense, if you look at the world through the eyes of an engineer.

Style vs. Substance in Mobile Software

Although we’ve all been talking about mobile computing for years, the smartphone and tablet markets are still very young, and changing rapidly. Many app and web companies are struggling to figure out how mobile works and what makes it different from the more familiar world of websites and personal computers.

The depth of the confusion became clear to me recently when, as part of a research project, I had the chance to watch a huge archive of videos of users trying out mobile-specific apps and websites. The results were surprising. Many users struggled to figure out even basic tasks, and I saw the same design mistakes repeated over and over by different developers.

I’ve written a whitepaper on the findings, with many details and examples (you can download it here).* In this post, I want to highlight the biggest problem I saw in the tests, and what I think it means for all of us.

The most common problem I saw in the tests was users struggling with mobile apps and websites that prioritized beauty over usability. Too often, we as an industry equate an app that looks simple with an app that’s easy to use. Those are two entirely different things. Stripping all the text out of an app and hiding all of the buttons makes for a beautiful demo at TechCrunch, but a horrible user experience for people who are trying to get something done with an app.

We tell ourselves that this is OK, relabeling confusion as “intrigue.”  How many times have you see an expert online say something like this: “Users enjoy the process of discovering new functions in your app as they gradually explore its interface and learn its hidden features”?  From watching real people use apps, I can tell you that’s lunacy. What delights most mobile users is getting things done. The only time they want to explore an app’s hidden nuances is if they’re playing. In a game or other entertainment app, cryptic Myst-like interfaces make for an engaging puzzle. In all other apps, puzzlement is a sign of bad design.

Here are three examples of the trouble we're creating for ourselves:

Low contrast. A trend in modern graphic design is the use of low-contrast graphics and text: light gray or blue text on a white background, or dark gray text on a black background. It looks sexy in print and on the web, but causes problems in mobile. Smartphones are often used outdoors, in situations where any screen image is hard to see. Low-contrast items can completely disappear in direct sunlight. Often companies don’t realize that this will be a problem because they test their apps indoors, or do design reviews by projecting screen images in a darkened room.

If you think this is just an isolated problem, check out the weather app in iOS 7. I love the look of that white text that Apple superimposed over a pale blue sky with puffy white clouds. But can you read it? How will it look in the sun?

Cryptic icons. There are a few icons that mean the same thing on all mobile platforms. For example, the magnifying glass means “search” everywhere. But in most cases, the mobile OS players have used icon designs as a point of differentiation. The table below shows some conflicting icon designs in Android and iOS:

The last two examples in the table show similar icons in iOS and Android that have different meanings.

Some developers respond to this diversity by creating separate versions of their mobile app for each OS, with different icons in each version. But users are not as easily segmented. In the tests, I saw cases in which iOS users assumed the Android icon definitions, and vice-versa. The situation is even worse for a mobile web developer, who must use the same UI on all platforms. Which icon set should they use?

When icon designs conflict, they cancel each other out and mean nothing. Many apps are studded with icons that the developers think make sense, but that actually are just tiny meaningless pictures in the eyes of many users.

Missing help. I used to think the ideal mobile app would be so simple that everyone could figure out how to use it intuitively. I now realize that’s a fantasy. The tiny screen and other restrictions of a mobile device make it almost certain that people will sometimes be confused by your app.

When mobile app users get confused, the first thing they do is search in the app for a help function. If help is available and properly structured, the user can usually resolve the problem and get back on task.  Unfortunately, in most mobile apps and websites, help is minimal or totally absent. I don’t know why that is. Maybe developers feel adding help would be an admission that their app is hard to use. But that’s like saying you shouldn’t put seat belts in a car because it implies the car might crash. Plan for trouble and your users will be happier.

What it means. The fixes to these specific problems are straightforward:

—Use high-contrast text (black on white, white on black, or pretty close to it). And test your mobile app or website outdoors, in bright sunlight.
—Label all buttons with text in addition to (or instead of) icons.
—Add context-sensitive help to every screen in your app (the help can be as simple as an overlay saying what you’re supposed to do on this screen and what the buttons do).

The harder part is dealing with the underlying design attitude that created these problems in the first place. I don’t know exactly when we went astray on design. Early websites were horribly cluttered, and in reaction to that we started to see a welcome move toward cleaner and simpler designs online (think of Mint.com, which took a complex subject like personal finance and made it feel accessible). The rise of the iPhone, with Apple’s strong emphasis on design elegance, reinforced this trend. But somewhere along the way, we lost track of the user’s needs. Instead of making things simple, we made them simplistic. We hid features for the sake of hiding them, rather than because the user didn’t need them. And we started designing software that would look beautiful to VCs and other designers, rather than being helpful to our users.

If we’re going to permanently solve the usability problems in mobile, we need to readjust our attitude toward mobile design. The most beautiful app is not the one that looks most striking; it’s the one people can actually use. You should design your app to be usable first, and then make it as pretty as you can.

The highest form of beauty is functionality.


*Full disclosure: In addition to my startup role at zekira.com, I’m working on mobile strategy for UserTesting.com. They’re the leading “talk aloud” user testing service, and they gave me access to their test archive for the whitepaper. I controlled the content of the research and the conclusions. And the company had nothing to do with this blog post; I wrote it because I thought you’d be interested in the findings.

Announcing "Map the Future," a Better Way to Create Business Strategy

I wanted to let you know that my book on business strategy, Map the Future, is now available. Map the Future is a how-to book for business strategy. It teaches you how to combine information about competitors, customers, and technology trends to spot future opportunities and problems before they're obvious. That lets you grab opportunities before anyone else, and get ready for your competitors' responses before they happen.

This is not a theory or case-study book. It’s a practical how-to manual, summarizing the things I learned in a couple of decades of doing this stuff in Silicon Valley. The book is designed to help anyone who works on strategy, from individual contributor to senior manager. That’s a broad audience, so different parts of the book will be relevant to different readers. To help you find what you need, I organized it like a cookbook. It starts with an overview that's written for everyone, and then dives into very detailed how-to instructions on strategy-related subjects, ranging from how to manage a competitive analysis team to how to assemble a long-term road map.

The central idea behind Map the Future is that most companies think about the future the wrong way. Visionary companies (like Apple) try to impose their will on the future, like a military drill sergeant; analytical companies (like General Electric) try to predict the future in detail, like a weather report. Both approaches fail when there are changes we didn't anticipate. The reality is that you can neither fully predict nor fully control the future, because it hasn’t happened yet. But you can anticipate what could happen. What you need is a realistic map of the possibilities, like a highway map for the future, so you can see where you can and can't go, and then nudge events toward the future you want to create. Map the Future teaches you how to create the building blocks of that future roadmap (using competitive, customer, and technology information), and how to bring them together to drive strategy.

Topics covered include:
—How to segment the market for a new product
—How to create and use technology forecasts
—How to analyze competitors and test competitive products
—How to use market growth forecasts
—How to recruit and manage competitive analysis and market research teams
—How to manage third party researchers and analysts
—How to do competitive analysis and market research if you’re in a small company with no budget
—How to influence in a large company
—How to guide Agile product development through strategy
—How to read the adoption curve and tell when you’ve crossed the chasm

One comment I’ve received from early readers is that the book has a lot of information on what works and doesn't work in large companies. That’s true; steering strategy at a big company is an especially tough task because of the politics involved. But I did my best to also highlight information and techniques relevant to small companies and startups. The sections relevant to small companies are labeled and hyperlinked, so you can jump straight to them if you want to.

For more information on the book, and sample content, click here.

At this time, Map the Future is only available electronically, at the e-bookstores below and through my website. I didn’t want to wait nine months for a print publisher, and besides I’ve spent years preaching the benefits of electronic publishing, so it’s time to eat my own dog food.

PDF & ebook bundle $14.99

(Includes the .mobi file for Kindle; .epub file for Apple, Android, Nook, and most other e-readers; and PDF files formatted for 8.5 x 11-inch pages, 10-inch tablets, and 7-inch mini-tablets.)  

Buy the ebook for $9.99

(Includes .mobi file for Kindle and .epub file for Apple, Android, Nook, and most other e-readers. About 340 pages.)  

PDF version $9.99

(For those who prefer to read PDF files. Includes PDF files formatted for 8.5 x 11-inch pages, 10-inch tablets, and 7-inch mini-tablets.)  

Buy the ebook on Amazon:
Map the Future

Buy the ebook on the Apple iBookstore:

Click here to buy the ebook on Barnes & Noble (Nook)  

Click here to buy the ebook on Kobo  

If you have problems ordering, contact me at the e-mail address here.

If you have questions or comments on the book, feel free to contact me directly, or post them below. Meanwhile, here are a few comments from people who reviewed pre-release copies of the book:

“Even before finishing the book, I had written a stream of emails to my professional colleagues, making suggestions for new approaches in our projects, based on the examples I had just read.”
—David W. Wood, Technology Planning Lead, Accenture Mobility

 “I wish all the business guidebooks I’ve read were as good as this one. Hell, I wish ANY of them were.”
—Matt Bacon, Deputy Director, Device Strategy and Communication, Orange-France Telecom Group

Map the Future will sit on my desk for years to come as an invaluable guide to help me make good decisions about the future.”
—Tom Powledge, VP and General Manager, Symantec Corporation

Map the Future is a landmark guidebook for forward-thinking executives and strategy consultants.”
—Martin Geddes, Founder & Principal, Martin Geddes Consulting Ltd.

Map the Future is your cookbook for developing a strong roadmap and strategy. I wish I'd had a guide like Map the Future when I started my career. ”
—Gina Clark, Vice President & General Manager, Integrated Collaboration Group, Cisco Systems, Inc.

A big thank-you to the many Mobile Opportunity readers who offered advice and encouragement as I wrote the book. You helped a lot!

It’s Time to Reinvent the Personal Computer

“In chaos, there is opportunity.”
—Tony Curtis,
Operation Petticoat (and also Sun Tzu)

“Chaos” is a pretty good word to describe the personal computer market in 2013. Microsoft is trying to tweak Windows 8 to make it acceptable to PC users (link), its Surface computers continue to crawl off the shelf (link), PC licensees are reconsidering their OS plans and business models (link), and Apple’s Macintosh business continues a genteel slide into obscurity (link, link).

No wonder many people say the personal computer is obsolete, kaput, a fading figment of the past destined to become as irrelevant as the rotary telephone and steam-powered automobile (link).

I beg to differ. Although Windows and Macintosh are both showing their age, I think there is enormous opportunity for a renaissance in personal computing. (By personal computing, I mean the use of purpose-built computers for productivity tasks including the creation and management of information.) I’m not saying there will be a renaissance, because someone has to invest in making it happen. But there could be a renaissance, and I think it would be insanely great for everyone who depends on a computer for productivity.

In this post I’ll describe the next-generation personal computing opportunity, and what could make it happen.

What drives generational change in computing?

Let’s start with a bit of background. A generational change in computing is when something new comes along that makes the current computing paradigm obsolete. The capabilities of the new computers are so superior that previous generations of apps and hardware are instantly outdated and need replacement. Most people would agree that the transition from command line computers to graphical interface (Macintosh and Windows) was a great example of generational change.

What isn’t as well understood is what triggered the graphical interface transition. It wasn’t just the invention of a new user interface. The rise of the Mac and Windows was driven by a combination of factors, including:

A new pointing device (the mouse) that made it easier to create high-quality graphics and documents on a computer.
Bitmapped, full-color displays that made it easy for computers to display those graphics, pictures, and eventually video. Those displays also made it easier to manage file systems and launch apps visually.
New printing technology (dot matrix and laser printers) that made it easy to share all of those wonderful new documents and illustrations we were creating.
A new operating system built from the ground up to support these new capabilities.
An open applications market that enabled developers to turn all of these capabilities into compelling new apps.

All of those pieces had been around for years before graphical computing took off, but it wasn’t until Apple integrated all of them well, at an affordable price, that the new paradigm took off. The new interface and new hardware, linked by a new or rebuilt OS, let us work with new types of data. That revolutionized old apps and created whole new categories of software.

Windows and Mac took off not because they were new, but because they let us do new things.

Although later innovations, such as the Internet, added even more power to personal computing, it’s amazing how little its fundamental features and capabilities have changed since the mid-1990s. Take a computer user from 1979 and show them a PC from 1995, and they’ll be completely lost in all the change. Take a computer user from 1995 and show them a PC from 2012 and they’ll admire the improved specs but otherwise be feel very much at home.
Maybe this slowdown in qualitative change is a natural maturation of the market. After an early burst of innovation, automobiles settled down to a fairly standard design that has changed only incrementally in decades. Same thing for jetliners.

But I think it’s a mistake to look at personal computers that way. There are pending changes in interface, hardware, and software that could be just as revolutionary as graphical computing was in the 1980s. In my opinion, this would be a huge opportunity for a company that pulls them all together and makes them work.

Introducing the Sensory Computer

I call the new platform sensory computing because it makes much richer use of vision and gestures and 3D technology than anything we have today. Compared to a sensory computer, today’s PCs and even tablets look flat and uninteresting.

There are four big changes needed to implement sensory computing.

The first big change is 3D. Like desktop publishing in the 1980s, 3D computing requires a different sort of pointing device, new screen technology, and a new kind of printer. All of those components are available right now. Leap Motion is well into the development of gesture-based 3D control. 3D printers are gradually moving down to smaller sizes and more affordable price points. And 3D screens that don’t require glasses are practical, but have a limited market today because we keep trying to use them for televisions, a usage that doesn’t work with the screen’s narrow viewing angle.

But guess what sort of screen we all use with a very narrow viewing angle, our heads perched right in front of it at a fixed distance? The screen on a notebook computer.

Today we could easily create a computer that has 3D built in throughout, but we lack the OS and integrated hardware design that would glue those parts together into a solution that everyone can easily use.

You might ask what the average person would do with a 3D computer. Isn’t that just something for gamers and CAD engineers? The same sort of question was asked about desktop publishing in the 1980s. “Who needs all those fonts and fancy graphics?” many people said. “For the average person Courier is just fine, and if I need to send someone an image I’ll fax it to them.”

Like that skeptical computer user in the 1980s, we don’t know what we’ll do when everyone can use 3D. I don’t expect us to send a lot of 3D business letters, but it sure would be nice to be able to create and share 3D visualizations of business data and financial trends. I’d also like to be able to save and watch family photos and videos in 3D. How about 3D walkthroughs of hotels and tourist attractions on Trip Advisor? The camera technology for 3D photography exists; we just need an installed base of devices to edit and display those images. And although I don’t know what I’d create with a 3D printer, I’m pretty sure I’d cook up something interesting.

Every time we’ve added a major new data type to computing, we’ve found compelling mainstream uses for it. I’m confident that 3D would be the same.

The second big change is modernizing the UI. User interface is ultimately about increasing the information and command bandwidth between a person and a computer. The more easily you can get information in and out of the computer, the more work you can get done. The mouse-keyboard interface of PCs, and the touch-swipe interface of tablets, were great in their time, but dramatically constrain what we can do with computers. We can do much better.

The first step in next-generation UI is to fully integrate speech. This doesn’t mean having everything controlled by speech, but using speech technology where it’s most effective.

Think about it: What’s the fastest way to get information in and out of your head? For most of us, we can talk faster than we can type, and we can read faster than we can listen to a spoken conversation. So the most efficient UI would let us absorb information by reading text on the screen, but enter information into the computer by talking. Specifically, we should:
—Dictate text to the computer by via speech, with an option to use a keyboard if you’re in public where talking out loud would be rude.
—Have the computer present information to us as printed text on screen, even if that information came over the network as something else. For example, the computer should convert incoming voice messages to text so you can sort through them faster.

We can do all of these things through today’s computers, of course, but the apps are piecemeal, bolted on, and forced through the funnel of an old-style interface. They’re as awkward as trying to do desktop publishing on a DOS computer (something that people did try to do for years, by the way).

Combine speech with 3D gestures and you’ll start to have a computer that you can control very richly by having a conversation with it, complete with head nods and waves of the hand. Next we’ll add the emerging science of eye tracking. I’m very impressed by how much progress computer scientists are making in this area. It’s now possible to build interfaces that respond to the things we look at, to facial expressions, and even to our emotional response to the things we see. This creates an incredibly rich (and slightly creepy) opportunity to build a computer that responds to your needs almost as soon as you realize them.

Once we have fully integrated speech, gesture recognition, and eye tracking, I’m not sure how much we’ll need other input technologies. But I’d still like to have the option to use a touchscreen or stylus when I need precision control or when a task is easier to do manually (for example, selecting a cell in a spreadsheet or drawing something). And as I mentioned, you’ll need a keyboard option for text entry in public places. But these are backups, and a goal of our design should be to make them options rather than a part of the daily usage experience.

The third change is a new paradigm for user interaction In a word, it’s time to ship cyberspace. The desktop metaphor (files and folders) was driven by the capabilities of the mouse and bitmapped graphics. The icons and panels we use on tablets are an adaptation to the touchscreen. Once we have 3D and gesture recognition on a computer, we can rethink how we manage it. In the real world, we remember things spatially. For example, I remember that I put my keys on my desk, next to the sunglasses. We can tap into that mental skill by creating 3D information spaces that we move through, with recognizable landmarks that help to orient us. Those spaces can zoom or morph interactively depending on what we look at or how we gesture. Today’s interface mainstays such as start screens and desktops will be about as relevant as the flowered wallpaper in grandma’s dining room. Computer scientists and science fiction authors have played with these ideas for decades (link); now is the time to brush off the best concepts and make them real.

The fourth change is to modernize the computing ecosystem. The personal computer software ecosystem we have today combines 20-year-old operating system technology with a ten-year-old online store model created by Apple to sell music. There’s far more we could do to make software easy to develop, find, and manage. The key changes we need to make are:

—The operating system should seamlessly integrate local and networked resources. Dropbox has the right idea: you shouldn’t have to worry about where your information is, it should just be available all the time. But we should apply that idea to both storage and computer processing. We shouldn’t have web apps and native apps, we should just have apps that take advantage of both local computing power and the vast computational resources of the web. An app should be able to run some code locally and some on a server, with some data stored locally and some on the network, without the user even being aware of it. The OS should enable all of that as a matter of course.

In this sense, the advocates of the netbook have it all wrong. The future is not moving your computing onto the network; it’s melding the network and local computer to produce the best of both worlds.

Discovery needs work. App stores are great for making apps available, but it’s very hard to find the apps that are right for you. Our next generation app store should learn your interests and usage patterns and automatically suggest applications that might fit your needs. If we do this right, the whole concept of an app store becomes less important. Rather than you going to shop for apps, information about apps will come to you naturally. I think we’ll still have app stores in the future because people like to shop, but they should become much less important: a destination you can visit rather than a bottleneck you must pass through.

Security should be built in. The smartphone operating systems have this one right: each app should run in a separate virtual sandbox where malicious code can’t corrupt the system. No security system can be foolproof, but we can make personal computers far more secure than they are today.

Payment should be built in as well. This is the other part of the software and content ecosystem that’s broken today. Although the app and content stores have made progress, we’re still limited to a small number of transaction types and fixed price bands. You can’t easily sell an app for half a cent per use. You can’t easily sell a software subscription with variable pricing based on usage. As an author, you can’t easily sell an ebook for more than $10 or less than 99 cents without giving up 70% of your revenue. And you can’t easily sell a subscription to your next ten short stories. Why? Because the store owners are manipulating their terms in order to micro-manage the market. They mean well, but the effect is like the worst dead-hand socialist market planning of the 1970s. The horrible irony is that it’s being practiced by tech companies that loudly preach the benefits of a free market.

It’s time for us to practice what we preach. The payment system should verify and pass through payments, period. Take a flat cut to cover your costs and otherwise get out of the way. The terms and conditions of the deal are between the buyer and the creator of the app or content. Apple or Google or Amazon has no more business controlling what you buy online than Visa has controlling what you buy in the grocery store. The free market system has been proven to produce the most efficiency and fastest innovation in the real world; let’s put it to work in the virtual world as well.

Adding it up. Let’s sum up all of these changes. Our next-generation computer now has:
—A 3D screen and 3D printing support built in, with APIs that make it easy for developers to take advantage of them.
—Speech recognition, gesture recognition, and eye tracking built in, with a new user interface that makes use of them.
—A modernized OS architecture that seamlessly blends your computer and the network, while making you more secure against malware.
—An app and content management system that makes it easy for you to find the things you like, and to pay for them in any way you and the developer agree to.

I think this adds up to a new paradigm for computing. It’s at least as revolutionary as the graphical computing revolution of the 1980s. We’ve opened up new usages for your computer, we’ve enabled developers to revolutionize today’s apps through a new interface paradigm, and we’ve made it much easier for you to find apps and content you like.

Why can’t you just do all this with a tablet? You could. Heck, you could do it with a smartphone or a television set. But by the time you finished adding all these new features and reworking the software to make full use of them, you would have completely rebuilt the whole device and operating system. You’ll no longer have a cost-efficient tablet, but you’ll still have all the flaws and limitations of the old system, jury-rigged and still adding cost and inefficiency. Windows 8, anyone?

It’ll be faster and cheaper just to design our new system from scratch.

When will we get a sensory computer?

If you agree that we’re overdue for a new computing paradigm, the next question is when it’ll arrive. Unfortunately, the answer is that it may not happen for decades. Major paradigm changes in technology tend to creep forward at a snail’s pace unless some company takes on the very substantial task of integrating and marketing them. Do you think ebooks would be taking off now if Amazon hadn’t done Kindle? Do you think the tablet market would be exploding now if Apple hadn’t done the iPad? I don’t think so, and the proof is that you could have built either product five years earlier, but no one did it.

So the real question is not when we’ll get it, but who might build it. And that’s where I get stuck.

Microsoft could do it, and probably should. But I doubt it will. Microsoft is so tangled up now in tablet computing and Windows 8 that I find it almost impossible to believe that it could take on another “replace the computer” initiative. I think there’s a very good argument that Microsoft should have done a sensory computer instead of Windows 8, but now that the decision’s made, I don’t think it can change course.

Google could do it, but I don’t think it will. Google is heavily invested in the Chrome netbook idea. It’s almost a religious issue for Google: as a web software company, the idea of a computer that executes apps on the web seems incredibly logical, and is emotionally attractive. Google also seems to be hypnotized by the idea that reducing the cost of a PC to $200 will somehow convert hundreds of millions of computer users to netbooks. I doubt it; PC users have been turning up their noses for decades at inexpensive computers that force them to compromise on features. The thing they will consider is something at the same price as a PC but much more capable. But I don’t think Google wants to build that.

One of the PC companies might take a stab at it. Several PC companies have tried from time to time to sell computers with 3D screens. Theoretically, one of those companies could put together all the features of a sensory computer. I think HP is the best candidate. It already plans to build the Leap Motion controller into some of its computers, and I can imagine a beautiful scenario in which HP creates a new ecosystem of sensory computers, low-cost home 3D printers that render in plastic, and service bureaus where you can get your kid’s science fair design converted to aluminum (titanium if you’re rich). It would be glorious.

But it’s not likely. To work right, a sensory computer requires a prodigious amount of new software, very careful integration of hardware and software features, and the courage to spend years kick-starting the ecosystem. I don’t think HP has the focus and patience to do it, not to mention the technical chops, alas. Same thing for the other PC companies.

Meg, please prove me wrong.

Apple is the company that ought to do it, but does it have the will? Apple has the expertise and the market presence to execute a paradigm change, and its history is studded with market-changing products. I love the idea of Apple putting a big 3D printer at the back of every Apple store. Maybe you could let Sensory Mac users sell their designs online, with pickup of the finished goods at any Apple store, and Apple (naturally) taking a 30% cut...

But I’m not sure if today’s Apple has the vision to carry out something like that. The company is heavily invested in smartphone and tablet computing, with an ongoing hobby around reinventing television. There’s not much executive bandwidth left for personal computing. The company’s evolution has taken it steadily toward mobile devices and entertainment, and away from productivity.

Think of it this way: If Apple were really focused on personal computing innovation, would it be letting HP take the lead in integrating the Leap Motion controller? Wouldn’t it have bought Leap Motion a year ago to keep it away from other companies?

I think personal computing is a legacy market to Apple, an aging cash cow it’ll gently milk but won’t lead. I hope I’m wrong.

We’re out of champions, unless...  At this point we’ve disposed of most of the companies that have the expertise and clout to drive sensory computing. I could make up scenarios in which an outlier like Amazon would lead, but they’re not very credible. I think the other realistic question is whether a startup could do it.

It’s hard. Conventional wisdom says that you need $50 million to fund a computer system startup, and that sort of capital is absolutely positively not available for a company making hardware. But I think the $50 million figure is outdated. The cost of hardware development has been dropping rapidly, driven by flexible manufacturing processes and the ability to rapidly make prototypes. You could theoretically create a sensory computer and build it in small lots, responding to demand as orders come in. This would help you avoid the inventory carrying costs that make hardware startups so deadly.

The other big barrier to hardware startups has been the need to get into the retail channel, which requires huge investments in marketing, sales support, and even more inventory. Here too the situation has been changing. People today are more willing to buy hardware online, without touching it in a store first. And crowdfunding is making it more possible for a company to build up a market before it ships, including taking orders. That business model actually works pretty well today for a $100 gizmo, but will it work for a $2,000 productivity tool?

Maybe. I’m hopeful that some way or another we’ll get a sensory computer built in this decade. At this point, the best chance of making it happen is to talk up the idea so one or more companies will make it happen. Which is the point of this post.

[Thanks to Chris Dunphy for reviewing an early draft of this post. He fixed several glaring errors. Any errors that remain are my fault, not his.]

What do you think?  Is there an opening for a sensory computer? Would you buy one? What features would you want to see in it? Who do you think could build it? Please post a comment and share your thoughts.

The Dell Buyout: Storm Warning for the Tech Industry

Michael Dell is engaged in a lengthy struggle to take his company private, and if you’re focused on the smartphone and tablet markets, you probably don’t care. It’s hard to picture an old PC company like Dell pushing the envelope in tech, so from one perspective it doesn’t really matter who runs the company or whether it stays public or private. But I think Dell’s situation is important because it shows how the decline of Windows is changing the tech industry, and hints at much more dramatic changes that could affect all of us in the future.  In this post I’ll talk about what’s happening to Dell, why it matters, and what may happen next.

Why is Dell going private?

I should start with a quick recap of Dell’s situation: Michael Dell and tech investment firm Silver Lake Partners have proposed to take Dell private in a transaction funded in part by a $2 billion loan from Microsoft. The proposal has angered shareholders who believe the company is worth more than what was offered, and two competing proposals have emerged from Carl Ichan and Blackstone Group. Dell now apparently faces an extended period of limbo while the competing proposals are evaluated.

Given how messy this process could be, it’s reasonable to ask why Michael Dell started it in the first place. I’m surprised at how many conflicting explanations have surfaced:

—The deal is largely a tax avoidance scheme, according to Slate (link). Like many tech companies, Dell has accumulated a large pool of profit overseas which it can’t bring back into the United States without paying 35% income tax on it. If Dell takes itself private, it can use that money to pay off the interest from the buyout without paying tax on it.

—It’s a financial shell game according to some financial analysts, including Richard Windsor, formerly of Nomura. His scenario is that after Dell takes the company private, it will sell or spin out the PC half of the company to pay off the buyout. That will leave Michael Dell and his partners owning Dell’s IT services business at low cost (link).

—It’s a way for Michael Dell to get some peace. In this scenario, Michael Dell is a sensitive man who’s grown tired of taking criticism from investors. The buyout is a way to get away from them. This explanation showed up in a large number of press reports immediately after the proposal. For example, here’s PC World: “Michael Dell apparently grew tired of running his company to the whims of a stock market that often favors immediate return over long-term investment.” (link)

—It’s a necessary prelude to broad organizational changes at Dell. The Economist put it this way: “Making the kind of wrenching operational changes Silver Lake typically prescribes would be tricky for a public company anxious not to panic shareholders.” (link)

—Michael Dell did it to save his job. According to BusinessWeek, Michael Dell was afraid that an activist shareholder might take over the company and force him out as CEO. So he proposed the deal as a pre-emptive strike. (link).

The problem with analyzing a company’s motivations is that you tend to assume there’s a logical explanation for the things it did. Often there’s not. Company managers are frequently fearful or misinformed, and sometimes they just make dumb mistakes. It’s possible that’s happening with Dell. But if we assume a basic level of rationality, then we can probably discount some of the proposed explanations. For example, I personally doubt Dell can pay off the deal by selling the PC business, because I don’t think anyone would buy it. It’s not like there’s another Lenovo out there hungry to get into PCs, and Google already bought one floundering hardware company; I doubt it has the appetite for another.

I’m also skeptical that after a lifetime in business Michael Dell is so thin-skinned that he can’t stand shareholder criticism. If you have the ego and drive to build up a company from scratch to the size of Dell, you usually don’t care much about complaints from puny mundane humans.

And I find it hard to believe that Dell had to take the company private in order to reorganize it. If Dell took a machete to the PC business, I think most investors would cheer rather than panicking.

The explanation I lean toward is that Michael Dell was afraid he wouldn’t be left in charge long enough to finish transforming the company. You can make a case that as 15% owner and with a base of investors focused on long-term gains, his position was secure from takeover threats. But after I looked in more detail at the company’s finances, and some market trends, I started to suspect that he felt a lot less secure than you’d expect. There are big storm clouds on the horizon for Dell, and they’re darkening rapidly. Those trends also threaten the rest of the PC industry.

A storm’s a-brewin’

Dell’s problems have been developing for years. The company’s power probably hit its peak in about 2005, when it was the world’s #1 PC vendor with about 17% of the market. Dell was the upstart beast that had dethroned the PC powers like Compaq, HP, and IBM. But after 2005, the PC industry adapted many of the flexible manufacturing practices that had made Dell so powerful. PC sales also shifted toward notebooks, which are much less customizable than the desktop computers that made Dell successful. The company’s market share started to erode. Dell tried for several years to turn around the PC business through innovation and new product categories, with no effect. Then in late 2008 it changed strategy and started evolving itself into an IT services company (like IBM, but supposedly aimed more at small and medium businesses). Starting with Perot Systems, Dell made a long series of IT services acquisitions, a process that has continued to this day.

Throughout this process, Dell gradually lost PC share, dropping to 12% by 2011. But because the PC market was growing, Dell’s actual PC shipments were more or less flat, giving the company a financial cushion to fund its transition to services.

Then in 2012, the situation changed. For the first time in years, overall PC unit sales shrank. What’s more, Lenovo (the new upstart beast in the PC market) was taking share from the other leaders. The combination of a shrinking market and a growing Lenovo caused a big drop in Dell’s PC sales.

Worldwide PC (desktop and notebook) unit sales

This chart shows worldwide PC revenue for calendar 2006-12. Until 2012, PC sales were growing fairly steadily, and I'm sure the management of Microsoft and the big PC companies found that reassuring. But in 2012, total PC unit sales dropped while Lenovo (the green wedge) continued to grow. This combination put huge pressure on sales of the other PC leaders, including Dell. (Source: Gartner Group)

Dell revenue (fiscal years)
This chart shows what that did to Dell’s revenue. The new parts of the company -- storage, services, and software -- were flat to slightly up last year. Servers grew as well. But they couldn’t grow quickly enough to offset the major declines in desktop and notebook computers. Dell’s total revenue dropped substantially. (The chart shows Dell’s financial years, which are about a year ahead of the calendar. So FY 2013 in this chart is roughly calendar 2012. Note that Dell did not break out its revenue by product line in FY 2010.) (Source: Dell financial reports)

I think the most disturbing thing for Dell about this revenue drop is that it happened in the face of the launch of Windows 8. Traditionally, new Windows launches have usually led to a nice uptick in PC sales as customers buy new hardware to go with the new software. Even the unpopular Windows Vista didn’t reduce PC sales. I’m sure Dell was expecting some sort of Windows 8 bounce, or at least a flattening in any decline. Instead, as we learned from the latest PC shipment reports, PC shipments dropped after the launch of Windows 8 (link). That indicates that the channel was probably stuffed with new Windows 8 PCs that have not yet sold through.

People who live in the world of smartphones and tablets are probably saying “so what?” But I doubt that was the reaction at Dell.

If you haven’t worked at a PC company, you’ll have trouble understanding how profoundly disturbing the current sales situation is for Windows licensees. The PC companies married themselves to the Microsoft-Intel growth engine years ago. In exchange for riding the Wintel wave, they long ago gave up on independent innovation and market-building. In many ways, they outsourced their product development brains to Microsoft so they could focus on operations and cost control. They trusted Microsoft to grow the market. Microsoft is now failing to deliver on its side of the bargain. Unless there's a stunning turnaround in Windows 8 demand, I think it’s now looking increasingly likely that we’ll see a sustained year over year drop in PC sales for at least several more quarters.

This is an existential shock for the PC companies. It’s like discovering that your house was built over a vast, crumbling sinkhole.

Prior to the PC sales decline, I think Michael Dell probably assumed that his PC business could continue to fund its growth in services for the foreseeable future. He has probably now reconsidered that assumption. If Lenovo continues to grow and the market continues to shrink, Dell’s revenue will drop further, and the company could be in a world of financial trouble a year from now. It’s the sort of trouble that can get a CEO fired even if he does own 15% of the company.

So here’s the sequence of events: By fall of last year, the troubles with Windows 8 were already becoming clear to the PC companies (remember, the Windows licensees have much better information on customer purchase plans than we get from the analysts). Michael Dell must have realized that he was headed for a significant decline in revenue. At the same time, we now know, one of the company’s major shareholders approached Michael Dell to float the idea of a buyout. That was apparently the trigger that started the whole buyout process.

Put yourself in Michael Dell’s shoes: the shareholders are getting restless already, and you know the situation is likely to get worse in the next year. Proposing a buyout now would be a pre-emptive strike to keep control over the company you founded. That’s what I think happened.

What happens next? After more confusion, someone will eventually win the bidding Dell. All of the bidders seem to agree that Dell should continue to invest in services, so the real debate is over what happens to the PC business. Michael Dell says if he wins, Dell will re-engage with the PC market (link):

“While Dell's strategy in the PC business has been to maximize gross margins, following the transaction, we expect to focus instead on maximizing revenue and cash flow growth.”

In other words, Dell will cut its PC prices.

It seems strange that Dell would want to refocus on PCs after treating them like a cash cow for years. If the business was unattractive when PC sales were growing, why would it be attractive now? Maybe Dell decided that it needs strong PC sales to get its foot in the door to sell services. That seems like a reasonable idea. But shouldn’t the company have known that years ago?

Or maybe Dell feels that the interest and principal payments on its buyout will be smaller than the profits required of a public company. That might allow Dell to compete more aggressively in PCs while it still invests in services.

Maybe that’s the purpose of Microsoft’s $2 billion loan, to let Dell stay in PCs while it also grows services. It says something sad (and alarming) about Microsoft’s business if it now needs to pay companies to stay in the PC market.

What it means to the rest of us

I think the Dell deal is just the beginning of the Windows 8 fallout. There are several other, bigger, shoes waiting to drop.

What will the other major PC licensees do? If you’re working at a company like HP or Acer, everything about this situation feels ugly. Your faith in Windows has been broken, you’re losing share to Lenovo, and now Microsoft is subsidizing one of your biggest competitors. I’d be tempted to fly out to Redmond and demand my own handout. And I’d also be willing to look at more radical options. There are several possibilities:

—Exit the PC market. HP considered this in 2011, but backed away after a change in CEO. I wonder if the company will think about it again. Meg Whitman says no, that the PC business is important to HP’s other businesses, such as servers, because they buy many of the same parts. Exit PCs and you costs will go up because you won’t have the same purchase volumes. That’s a pretty backward endorsement of the PC business, but I guess it’s possible.

Acer doesn’t really have the option of dumping PCs. They make up most of its business, so it has to stay in computing hardware, one way or another.

—Find a new plough horse. In this option, you replace Windows with a platform that has better growth prospects. That lets you continue to use your clone vendor skills, but in a market that’s growing. Acer and HP are both dabbling in Chrome netbooks (link) and Android tablets. I wouldn’t be surprised to see many more experiments along these lines. But it’s not clear how much market momentum Google can generate for its tablets and netbooks. HP and Acer could easily spend a lot of money for very few sales, and in the meantime create a rift with Microsoft that would be hard to return from if Windows 8 does eventually take off.

—Reinvest in creating differentiated devices. This is the other option: get off the clone treadmill and be more like Apple, a device innovator. The trouble with this is that many years ago, the PC licensees laid off the people who knew how to build new markets and new categories of computing device. Recovering those skills is like trying to grow a new brain – very slow, and hard to do when your head is stuffed with other things. You need to be incredibly patient during the learning process, and accept that there will be failures along the way. It’s hard for public companies to show that sort of patience.

So maybe you buy a company that knows how to make new-category devices. For example, you could have bought Palm. As time goes on, HP’s handling of that transaction looks more and more like a business Waterloo.

There aren’t many other hardware innovators that you could buy. RIM, maybe? Or HTC? But then you’re in a meatgrinder smartphone market dominated by Samsung and Apple. The PC market, even if it’s shrinking, might look more inviting.

Personally, I’d look at buying Nook. Not necessarily because I want to be in the ebook business, but to get a team that knows how to design good mobile devices and is familiar with working on a forked version of Android.

I don’t think any of these three options look very attractive, but the slower the takeoff for Windows 8, the more desperate the Windows licensees will get, and the more likely that they’ll try one or more radical “strategic initiatives” in the next year.

What if Microsoft gave a party and nobody came?  The situation for Microsoft is becoming more and more complicated. Windows is not dead. It has an enormous installed base of users who are hooked on Windows applications and won’t go away in the near future. However, Microsoft faces some huge short-term and long-term challenges, and many of its possible responses could make the situation worse rather than better.

I think it’s pretty clear that we’ve entered a period of extended decline in Windows usage, as customers use tablets to replace notebooks in some situations and for some tasks. The tablet erosion may be self-limiting; I don’t think you can use today’s tablets to replace everything a PC does. If that’s the case, Windows sales may eventually stabilize and even resume growing once the tablet devices have taken their pound of flesh.

On the other hand, it’s equally possible that tablets and netbooks will continue to improve, gradually consuming more and more of the Windows market. That’s certainly what Google is hoping to do with Chrome. What would happen if Apple made a netbook and did it right?

Microsoft had hoped to head off all these problems with Windows 8. By combining the best of PCs and tablets, Windows 8 was supposed to stop the tablet cannibalization and also set off a lucrative Windows upgrade cycle. Unfortunately, at least for the moment, Windows 8 is looking like the worst of both worlds – not a good enough tablet to displace the iPad, but different enough to scare away many Windows users.

This puts Microsoft in a nasty dilemma. If it believes that Windows 8 sales will eventually rebound, then Microsoft should invest heavily in keeping its PC partners engaged. In that context, the $2 billion loan to Dell is a reasonable stopgap to prevent the loss of a major licensee.

On the other hand, if Windows sales are entering a long-term period of gradual decline, Microsoft should be doing the exact opposite. Rather than spending money to keep licensees, it should be allowing one or more of them to leave the business, so the vendors that remain will still be profitable and willing to invest. It’s better for Microsoft to have seven licensees who are making money than ten licensees who all want to leave and are investing heavily in Chrome or Android or other crazy schemes.

Microsoft also faces a difficult challenge with Lenovo. Even if Windows sales turn up, Lenovo has been taking share so fast that it will be hard for other Windows licensees to grow. At current course and speed, Lenovo is likely to end up the largest Windows licensee. In the past, Microsoft didn’t care if one licensee replaced another; they were interchangeable. But Lenovo has close ties to the Chinese government, which has repeatedly shown that it’s willing to lean on foreign tech companies. That has to make Microsoft uncomfortable.

In that case, the $2 billion investment in Dell starts to look like a defensive measure to get someone to compete against Lenovo on price. But if Microsoft subsidizes a price war in PCs, that might give the other licensees more reason to disinvest, enabling Lenovo to gain share even faster.

This is the true ugliness of Microsoft’s situation. It is in danger of falling into a series of self-defeating actions:
—To combat tablets, it creates a version of Windows that accelerates the Windows sales decline.
—To keep its licensees loyal, it makes Windows overdistributed, which increases licensees’ incentive to leave.

The situation is becoming more and more fragile. As I said above, I don’t expect Windows to collapse instantly. But many companies are reconsidering their investments in it, a process that is likely to eventually give customers second thoughts as well. We could end up with an unexpected series of events that combine to break the loyalty of Windows users and start a migration away from it that Microsoft couldn’t stop.

The key question is whether Google, Apple, or some other vendor can give Windows customers and licensees an attractive place to run away to. So far they haven’t, but the year is still young. I’ll talk more about the possibilities next time.