1 Thing Microsoft's New CEO Needs to Get Right

New CEOs almost always bring a jolt of optimism. They're like the New Year's resolutions that point to a future that could be, and bring retrospective insight of what's already been. Microsoft (NASDAQ: MSFT  ) investors may especially feel this way right now, considering that the company chose its new CEO, longtime insider Satya Nadella, so close to the start of 2014.

But like any worthy New Year's resolution, optimism about the future must turn into action. Though Microsoft is a strong company, there are some serious moves the company must make under Nadella in order for it to continue down that path.

The first move is to improve the essence of what Microsoft is: its software.

Source: Microsoft.

A software-powered world
In his first letter to Microsoft staff, Nadella made it clear that software was and remains the company's focus: "This is a software-powered world."

But while Microsoft has been focused on software since its inception, its allure has certainly lost its way.

Launched in October 2012, Windows 8 was supposed to be the transformative operating software that would blur the lines between a mobile and desktop operating system. Then-CEO Steve Ballmer called the launch of Windows 8 a "bet-the-company" moment. But early on it was clear Windows 8 had disappointed consumers.

Numerous reports said Windows 8 was a disappointment. Nielsen Norman Group co-founder and usability tester Jakob Nielsen went so far as to say that "Windows 8 on mobile devices and tablets is akin to Dr. Jekyll: a tortured soul hoping for redemption. On a regular PC, Windows 8 is Mr. Hyde: a monster that terrorizes poor office workers and strangles their productivity." Nielsen's November 2012 article called the software "weak on tablets, terrible for PCs."

Months after the Windows 8 launch, International Data Corporation released its PC shipment numbers, which showed their deepest decline ever in a quarter. IDC left no doubt what it thought the problem was: "At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market." 

So why bring up these old software wounds?

Mainly because we're two years into Windows 8 and Microsoft has done little more than place a bandage over its flagship software. Windows 8.1 brought back the beloved start button, in a way, and tried to fix a handful of usability issues. Ultimately though, Windows 8 is still in need of major usability improvements. While some of those changes may come this April, when Microsoft releases a Windows 8.1 update, for many users the damage from Windows 8 has already been done.  

Source: Microsoft.

Mobile missteps
Unfortunately for Nadella, Microsoft's software problems spill into its Windows RT and Windows Phone platforms as well, albeit for different reasons.

Windows RT, the tablet-centric version of the Windows platform, has been a failure of a different kind for Microsoft. After initially having Samsung, Lenovo, Asus, and Dell all on board to build Windows RT tablets, only Microsoft and Nokia are left running the OS. All the others have dropped off, noting the lack of demand from consumers. This has stung Microsoft, not only because it was another blow to its software, but because it cost the company more than $900 million in unsold inventory this past summer.

Microsoft has admitted that initial branding for RT confused consumers, yet when it launched the new Surface 2 tablet in September, it kept the platform around. Windows RT by nearly all examples has been a mistake, and launching the new Surface running RT hasn't fixed that.

To Microsoft's credit, there does seem to be a glimmer of hope in its mobile software ambitions, but it's a dim one right now. Windows Phone is a decent smartphone operating system and its reach is growing. The three months ending in November saw the Windows Phone market share grow to 5.7% of the U.S. smartphone OS market, up from 1.9% year over year. While market share is nowhere near a perfect measurement, it does help gauge how the burgeoning smartphone OS is doing.

But there's still a long way to go. Google's Android and Apple's iOS have a much larger app footprint than Windows Phone, and getting developers to create apps for a third-string OS can be difficult. Not only that, but so far the company has relied almost entirely on Nokia to grow its mobile phone platform. As Microsoft completes its purchase of Nokia's devices division this year, the Finnish brand is still Microsoft's best hope for further Windows Phone growth.

Fixable problems
As Nadella takes the reins at Microsoft, it's important to remember that most of the company's software problems are fixable. Window 8 can be revamped and its user experience improved. Consumers and investors will have to wait until April to see how that pans out. Windows Phone needs to gain more partners to push the software to consumers. The phone platform also needs to give developers a reason to keep building, and adding more OEM partnerships would be a start.

As for Windows RT, Nadella will have to decide whether to ditch the OS, merge it with Windows Phone somehow, or rebuild it from the ground up. In any case, RT can't stay in its current form.

Microsoft investors should be hopeful Nadella can bring usability back to all of the company's platforms. As he said in his email to Microsoft employees: "Many companies aspire to change the world. But very few have all the elements required: talent, resources, and perseverance." Microsoft certainly has all three, but it's up to Nadella to put them altogether to make sure Microsoft's software can compete in the ever-evolving post-PC world.

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  • Report this Comment On February 09, 2014, at 12:15 AM, ronindaosohei wrote:

    Satya certainly has his job cut out for him and recovering from the mobile mis-steps and the Windows 8 disaster are two of them. The concern I have is it seems like the people at Microsoft don't "get it". This is true in two primary areas:

    1. They don't seem to understand the value of previous assets, this was a big deal under Bill Gates, he always said if you lost backwards compatibility you were giving up an asset. This is but one example of how Microsoft is throwing their assets away, which they are doing in 3 key areas:

    a) Windows Phone/RT - they were just getting a good start to the WP7 store when they decided to throw it all away with WP8 and Windows RT, a stupid move, they should have planned for compatibility of apps, this was one of their key advantages if they'd figured out how to do it well, it should have happened more on tablets in general finding ways to make it easy to port apps over from Windows 7 onto the tablet interfaces perhaps just requiring a redesign for touch, poor move

    b) The Partner Network - their largest asset was and still is the partner network but increasing they are competing with rather than supporting their own partners starting with cloud services all these former providers of Exchange, Sharepoint, Lync, etc. are suddenly competing with Office 365 rather than Microsoft making this an advantage for their partners. Likewise they are doing this in terms of getting into the hardware business and into the retail market, someone high up in Microsoft clearly had a hard on for trying to be Apple instead of being Microsoft. Again they are competing with their partners eroding loyalty and not leveraging a significant advantage they have.

    c) User interface - Microsoft has a tradition within the field of user interface and functionality, best practices developed over years yet with the latest versions of their software they are abandoning this tradition, giving up functionality and design for a "fun new look" that isn't serving them.

    2. Their iteration cycles are just way too slow. They needed to be coming out with a minor update to WP every 6 months and a major new release every 12 months since they needed to catch and ultimately surpass Apple and Google, they probably should have built their architecture of the platform to enable this rapid iteration, likewise for Windows 8. Instead they are evolving slower than their competitor platforms across the board, IE evolves much slower than Chrome and Firefox (and is much worse), WP evolves extremely slowly even though they should have a template to follow, the same goes for Skydrive, which was a case where all they needed to do was copy Dropbox and Drive and improve on it yet here we are years later and it's still an inferior product, the list goes on.

    3. They don't get what they were good at - Microsoft was always a successful software PLATFORM company, that's where they needed to focus, on enabling developers to create amazing software and enabling hardware makers to have such a platform, this should be a no brainer for them, they should dominate the space and yet they trail in most regards and get further behind all the time as they try to be Apple instead. Microsoft isn't Apple, isn't Dell, isn't Oracle, isn't Google, they are Microsoft once the world's greatest software platform maker and they are losing out fast at a moment when they could have been, should have been way ahead.

    4. They don't understand target marketing, heck they don't understand their market or the market in general by the looks of things it's like they are sitting inside planning in a vacuum rather than out in the world learning what people and businesses want. The best example of this is mobile where they didn't bring anything unique to the table, another were the pre-launch debackles with Xbox One, then there are decreases in functionality (with no improvements) in Outlook 2013, or IE where their market is leaving in hordes, the list goes on.

    Until they address those significant issues they are in big trouble, if they can turn those around and keep internal management, engineering, etc. tight they'll have a significant chance at triumph if only because their competition hasn't taken advantage of some of their main weaknesses.

  • Report this Comment On February 09, 2014, at 12:37 AM, jameskil wrote:

    So, I'm wondering, what is the big usability thingy that's contributing to the slow adoption of Windows 8? Is it because the average human has trouble clicking a big ole' square icon to launch an App? Is it because the big ole' square icons are not a picture? Is it because that no matter what device you use running a Microsoft Metro based OS, the interface behaves the same? Maybe its something specific that someone covering Tech and Telecom companies "since 2012" can point out to me ... After all, no less than the great Nolan-Norton points out that Windows 8 on a PC is "a monster that terrorizes poor office workers and strangles their productivity" ... really?

    Here is what I think ...

    After the tech media lemmings fawned all over the hype of the "Post PC era" and became enslaved to the "hip-ness" of Apple and grudgingly Googles Android, they set out to protect that market from the evil Microsoft. It did not matter whether or not Windows 8 worked, didn't work, looked great, did not look great, ran every Windows app available, or not, it was just going to suck. SO, the big reason put up there was "the number of apps was less than our beloved iPad" and "well, if we must, Android too". So, does anybody realize that iPad does not run any apps built for the Mac? That Android doesn't run any apps built for ... oh right, Android is brand new in OS terms. So ... doesn't this "terrorize office workers" as well? Nope. That's because THERE IS NO "OFFICE APPS" existing for IOS or Android! And, offices don't run their business on iPads, iPhones or Android "devices". So, scratch that one. Sure, you can run browser based "OFFICE APPS" off of these devices, so can XBOX for that matter. So, does this not say that these devices run the front end parts of these applications, not because the hardware package they run on is exemplary doing this, but solely because they have browsers (proprietary mind you, contrary to what the EU held up to decouple IE from Windows, but that was yester-year) built into their OS?

    Mobile devices, both large (tablet) and small (smartphone) will not replace PC's, are pretty much a companion device to PCs, but became prevalent because a) there is a group of consumers that do quit well with them because their computing needs are simple (email, browser, calendar, personal apps and cute games), and packaged with a digital camera, phone and TXT services kinda does it for them, and b) like to root for Apple and like to be a Fan of something, similar to loyalty to professional sports teams. Google is grudgingly rooted for, as it has a "Darth Vader" taste similar to Microsoft because it is a yet to be dealt with monopoly in the search business. Apple IOS and the 4,500 forked versions of Android only successfully run on devices that run equal to or greater than the cost of a laptop PC, and so value for the buck gets trumped when hype is involved (witness the roll-out videos starring any Apple executive describing in fetish like style the beautiful curves of the latest iPad).

    So, sooner or later two things will hit the "Post PC Era" market ... a) devices are way overpriced and a price war awaits thereby shaving what are now obese margins, and b) as consumers get more savvy with their computing expectations (which Apple and Google are quite happy to let them carry on with because no one is demanding they meet them), the form factors (visual and the never going to shrink finger real estate), flexibility (in accessory devices supported), scalability of manufacturing (Apple cant find enough reliable outsourcers which limits number of units, and has to compete for bandwidth along with other device manufacturers) plus the rational thought that we are decades away from a direct brain to computer input and output interface that will eliminate the need for an eyeball to deal with an interface smaller than a credit card, and a finger that taps out sentences, rather than a keyboard that allows typist speed input of the same.

    So, the "Post PC Era" deals with those tasks that the PC allowed, that can reasonably be accomplished on smaller form factor devices. This coupled with providing a phone and TXT capability (i.e., the smartphones), or with digital books, magazines, note taking (i.e. the tablet) made this market. With it goes the percentage of PC's that were bought and used just for that. What remains is still a robust industry that will continue to innovate and grow, but is not going away in proportions like those experienced by the antiquated Blackberry. Hence "failure", with the implied belief that Microsoft will crash and burn is a misleading fantasy. And because Microsoft created a tablet and smartphone market to go along with their PC and Server platform that has a ton of synergies, spooks the crap out of the vendors pontificating the "Post PC Era" as if the need for anything beyond a mobile device will be rendered extinct. This is why The Fool needs to be taken with a grain of salt, because they have become a cheerleader for hype, and are not delivering the real story of where this all may wind up.

  • Report this Comment On February 10, 2014, at 9:22 AM, whsteffan wrote:

    one thing the Fool needs to get right is that the IT markets arent made by the

    Fool- and Microsoft dosnt take orders from a pack of clowns who just recently managed to graduate from their used car lot for an IT media propaganda post

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Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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