Microsoft’s intertwined consumer and enterprise businesses

At the time Steve Ballmer’s retirement was announced, there were calls for Microsoft to be split up into two businesses, serving consumers and enterprises respectively. I believed then, and believe even more strongly now, that this is fundamentally flawed thinking, and the reason is that Microsoft’s consumer and enterprise businesses are deeply intertwined, to a great extent because Microsoft has wanted them to be.

Below is a slide from Microsoft’s 2013 Financial Analyst Day, which is intended to illustrate (in the diagram on the left) Microsoft’s three customer segments:

Microsoft's customer segments, from Financial Analyst Day 2013

Microsoft’s customer segments, from Financial Analyst Day 2013

The reality is that, while Microsoft does serve three audiences, they’re not the ones it shows in that chart, mostly because OEMs aren’t really customers, but channels to reaching either consumers or businesses. In reality, they are:

Beyond Devices

This post is intended to encapsulate the philosophy behind this site and its name. If you spend any amount of time working in or covering the consumer technology industry, you quickly find that it’s dominated by devices – principally, smartphones and tablets. At Ovum, our relatively small devices team dominated our press coverage, not because those analysts were better than the others, but simply because of the huge volume of stories written about the latest smartphone or tablet launch across the industry, business and popular press. It’s easy to see why this is so – devices are the most tangible aspect of the consumer technology market and also its status symbols.

And yet there are two key reasons why this fixation on devices is misguided. Firstly, devices serve no purpose of their own – they merely act as endpoints for the things consumers really care about: namely, content and communications. And secondly, the hardware itself is nothing without the software that runs on it – both the operating system and the individual apps. Apple isn’t successful merely because it makes great hardware – its success is predicated on its prior success as a purveyor of content (through the iTunes store) and on its tight integration of easy-to-use software with that hardware.

Samsung, by contrast, is successful largely as the default option for Android smartphones (and to a lesser extent tablets), with its marketing budget rather than particularly good software-hardware integration explaining its present dominance. And there is a reason why most other purveyors of smartphones and tablets aren’t making money: hardware by itself is not that compelling, and that results in commodity pricing and thin margins.

Five parts to the consumer digital lifestyle

There are essentially five pieces to the consumer digital lifestyle, and they’re shown in the diagram below. Two of these are paramount – communications and content. These are the two elements that create emotional experiences for consumers, and around which all their purchases in this space are driven, whether consciously or unconsciously. The other three elements are secondary, with two being conscious choices and the last – cloud services – being somewhat hidden from the user in many cases.

Beyond Devices 1Of course, without devices, consumers couldn’t engage in communications or consume (or create) content, and removing connectivity from the equation is equally fatal. But these are means to an end rather than ends in themselves – consumers spend hundreds of dollars on devices not because the devices have inherent value, but because they are endpoints for content and communications. Equally, connectivity is essential, but to many consumers a pretty fungible element of the equation, one that might easily be provided by a number of companies in a largely interchangeable way.

Why is all this important? Why does it matter which of these things are primary, and which secondary, in consumers’ minds? And why does the inter-relationship between these elements matter? Well, for two primary reasons:

  • The successful companies in this space are those that increasingly combine several of these elements, ideally in a tightly integrated fashion
  • Consumers are increasingly building meaningful and sticky relationships with the companies that provide the primary functionality, while their relationships with the companies providing the secondary functionality are loosening.

That’s good news for companies which are successfully combining these elements, among whom are Apple, Samsung, Google and others. But it’s bad news for those that aren’t, including many carriers but also players which own a number of the elements but haven’t yet combined them in compelling ways, notably Microsoft.

All of these ideas are worthy of further exploration, and that’s what this blog sets out to do. This is the framework through which I’ll be looking at this space and the set of players that competes in it, which is far more than just those companies that make devices, and where the keys to success are to be found in combining these elements of the consumer digital lifestyle in an integrated fashion.