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Valve’s Newell Explains Exactly Where Microsoft Went Wrong

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Gabe Newell knows a thing or two about the PC business. As of one of Microsoft's (NASDAQ: MSFT  ) earliest employees and the managing director of Valve (a stalwart of the PC gaming industry), Newell's opinions about the future of the PC deserve consideration.

Unfortunately for his former employer, Newell doesn't think too highly of Microsoft's current strategy. In fact, he suggests that the PC's problems are largely the by-product of the Redmond tech giant's own flawed decision making.

Linux is the future
The very survival of Newell's company, Valve, depends on the health of Microsoft's Windows business. Steam, the company's digital marketplace, exists mostly on computers running some version of Microsoft's Windows.

Perhaps not for much longer. At LinuxCon on Monday, Newell declared that Linux -- the open-source operating system -- was the "future of gaming." Valve has been working hard at porting Steam over to PCs running Linux, and has been steadily adding Linux compatibility to a growing, although still small, base of Steam games.

Microsoft embraces a closed system
Newell is trying to move on from Windows, because as he sees it, Microsoft has made a terrible mistake.

The rise of mobile computing platforms has led to the creation of closed systems, or walled gardens. Unless you jailbreak your iPhone, you can install only apps from the iTunes store. In Apple's (NASDAQ: AAPL  ) opinion, this allows it to offer a better user experience. It can monitor the quality of apps and keep malware in check.

But as Newell notes, it has some interesting consequences from an innovation and competitive standpoint:

Several years ago we got very concerned about directions that the PC industry was going...there were these new platforms that were starting to emerge...they had this nice characteristic that you could control access to those platforms. If you didn't like competing with Google (NASDAQ: GOOGL  ) , you just didn't let them ship on your could have a lot of control over things like pricing...that was a very seductive opportunity, which I think led to some poor decision making by some of the key actors in the PC space.

Although Newell didn't mention Microsoft by name, he is almost assuredly referring to the Windows maker. Windows 8, the most radical redesign of the Windows operating system since 1995, embraced a far more closed system than its competitors. Full Windows 8 is still capable of running traditional PC applications, but the new side of Windows -- the touchscreen-optimized part built around the Metro interface -- is tightly controlled. Here, Microsoft runs its own app store, and has taken steps to block its competitors' products. Last year, a Mozilla chief lashed out at Microsoft for the restrictions it placed on rival browsers like Firefox and Chrome.

Microsoft is becoming more like Apple
Based on Microsoft's recent reorganization and purchase of Nokia's handset business, that decision to embrace a closed system is starting to play out.

Microsoft's reorganization aims to orient the company around "devices and services." Until Windows 8, Microsoft was simply a software company that sold operating systems and applications that ran on other companies' hardware; nowadays, Microsoft is actively involved in the hardware-creation process, with its lineup of Surface tablets. With Nokia, Microsoft will be producing its own Windows Phones. Could there come a day when Microsoft is also making its own laptops and desktops? Such an idea doesn't seem far-fetched.

With control over hardware and control over software, Microsoft is becoming more like Apple. Of course, Apple has emphasized closed systems from its earliest days. Steve Jobs was perhaps the biggest proponent of the closed-system ideology, once declaring that "open systems don't always win."

Except it seems they do, at least in the long run. When Apple shares were skyrocketing and the King of Cupertino was taking over the world, the notion that a closed system can win out over an open one seemed plausible. Today, that's a much more difficult argument to make.

Apple's share of the global smartphone market has dwindled in recent years, and now sits at just 14% of the market. At the same time, Google's Android has emerged to dominate the planet, and presently accounts for about 79% of the smartphones sold worldwide.

Google owes its success with Android to its embrace of an open model. Like traditional Windows, Android is open in the sense that all developers are free to code for it. Although Google has its own app store, it doesn't make many attempts at policing it, and Android apps can be easily loaded onto devices outside of Google's app store, or by using third-party app stores, and nearly all hardware manufacturers can use it. Google takes this idea to the next level, giving Android away for free.

Research firm Gartner expects Android to become the world's dominant operating system by 2017. Certainly, it's hard to compete against free.

Microsoft's bad bet
Fundamentally, Newell believes Microsoft went astray when it decided to copy Apple's closed-system model. Closed systems, though they can offer superior user experiences, inevitably lose out to open systems in the long run. Google's Android may offer a lesser user experience when compared to Apple's iPhone, but Google has been able to crush Apple in market share largely because it gives its operating system away for free, and allows hardware manufacturers to compete against one another.

Although Microsoft benefited from an open model in the 1990s, the company appears focused on converting to a closed system, with its reorganization around devices and services and its purchase of Nokia serving as proof.

If Newell is correct in his assessment, investors shouldn't expect much from Microsoft's Windows division.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 18, 2013, at 8:59 PM, CraigNotGreg wrote:

    "Google's Android may offer a lesser user experience when compared to Apple's iPhone, but Google has been able to crush Apple in market share largely because it gives its operating system away for free, and allows hardware manufacturers to compete against one another."

    Really? Must you perpetuate this ridiculous notion that Google is crushing Apple because of market share figures? Sure, your global market share numbers are accurate, but the US smartphone figures look more like 52% Android vs 44% iOS (with iOS gaining share in the last quarter). Think about what an achievement it is that Apple's market share in the US is almost equivalent to all Android OEM's combined.

    Phones are very different entities from computers. The vast majority of people don't care about the openness of their smartphone platform, they just want a polished product that has a rich ecosystem. Apple makes more money selling iPhones than Google makes across its entire line of business. I would love to get "crushed" the way Apple is in the smartphone business.

    On another note, I completely understand why someone like Newell dislikes the closed ecosystem model. Valve produces many software titles (Half Life, Portal, Left 4 Dead, etc) and has a powerful brand, so it doesn't benefit in any way from a model that forces it to hand over 30% of its profits to the likes of an Apple or a Microsoft (Metro), if it uses those companies platforms. Those companies should address this.

  • Report this Comment On September 18, 2013, at 9:57 PM, JoeLemon wrote:

    Apple stock has dropped 40% in the last year and a half. That is getting crunched.

  • Report this Comment On September 18, 2013, at 11:26 PM, auggybendoggy wrote:

    Valve has some great games no doubt. Half-life and Portal are among the best games made. However, I recall somone big-wig at valve saying how bad W8 was for gaming. I still can't figure out why. W8 does everything 7 does. It's not like your forced into the metro only? If he meant RT then he should have stated so but he didn't. He was referring to W8 on the PC.

    "Until Windows 8, Microsoft was simply a software company that sold operating systems and applications that ran on other companies' hardware" - yea and lets not forget how much money they made on "applications" like Office. EVERY BUSINESS uses it. And how deep their OS Is regarding every business computer. And there aint NO WAY IN HELL companies are going to suddenly switch to android that can barely print.

    Newell may be working for a good company but he needs to get real. Why can't a company be both open and closed in different respects? Why not?

  • Report this Comment On September 19, 2013, at 12:56 AM, NoWindows8LockIn wrote:

    First, this has to be one of the most well-articulated articles I have seen in a while. Sometimes writers tend to avoid telling the uncomfortable truth, but this author did not. Thank you.

    It is absolute true that Microsoft is intending to move to a closed model. They took a look at what Apple was doing, and, being Microsoft, undoubtedly debated whether they should follow suit. They decided to wall-the-garden too, but there is a huge problem with that strategy.

    First, Microsoft is a monopoly. It is quasi-illegal at best, to run the industry, always one smack away from the hand of the US Department of Justice due to certain practices, and then, all of a sudden, decide that you are going to go the vendor lock-in approach, but unlike Apple, where all the piglets LIKE being in the pen, you decide that you are going to force all of your customers, of 20+ years. to get in the pen that you created. I frustrated me enormously when people got Windows 8, and started to complain about relatively trivial things, like having to swipe a certain way, or not having themes..that was 97% of people complaining. Only about 3% said, "Wait a minute...something is not right here...why is my DVD playback *really* being removed?..why is it that Metro is forced as the default?" Only a few people realized that the forcing of Metro was so much because Microsoft just wanted you to "try it". It was because Microsoft hoped (and still hopes) to collect 20-30% of all Metro apps sold, and you cannot collect if the apps are not written, and they will not be written if developers do not write them, and developers will not write them if users do not use Metro, and user will not use Metro because...well, it sucks. So Microsoft tried to force it.

    Microsoft all tried to kill the most portable objected-oriented programming language on the planet, C++, by infecting it with all kinds of proprietary Microsoft keywords. Dim-witted Americans on the C++ Standards Committee was about to let them until the Germans and the French blocked Microsoft.

    I could give you numerous examples where Microsoft has been pulling lock-in stunts like these over the last 12 years.

    It will never work. Not everyone is able to articulate exactly what it is that they hate about this new direction that Microsoft is taking. But they know that hate it. And that is enough to kill Microsoft.

    Some company is going to come along and liberate us from these walled-gardens, and history will repeat itself.

  • Report this Comment On September 19, 2013, at 4:31 AM, H3D wrote:

    The Mac is as open as Windows. And commercially, Android is as closed as either of them.

    Google. Are busy closing their app market, as fast as they can.

    Gabe Newell has made his decision to jump to Linux, for whatever reasons, and now he is simply building a public argument to justify it and to promote the route he is taking.

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