Category Archives: Microsoft

Android, AOSP, Cyanogen, Microsoft, Samsung, Smartphones

Samsung’s Microsoft deal and Cyanogen

February 13, 2015 Jan Dawson 1 Comment

SamMobile reported last night that Samsung was planning to pre-install a number of Microsoft applications on the Galaxy S6, which is to be announced in a few weeks at Mobile World Congress. I think this is a huge boost for Microsoft’s Android apps and for the services behind them – far bigger than the applications that come pre-installed with Microsoft’s own devices, obviously. To get on Samsung’s flagship device (presumably others will follow) is a huge coup for Microsoft. But it’s also a big deal for Samsung, which has until now been pre-installing ersatz versions of Microsoft apps on its devices for productivity.

But what I really wanted to talk about here was what this says about Microsoft’s broader strategy, and what it might mean for the rumored investment Microsoft is making in Cyanogen. Nokia, of course, forked Android itself using AOSP when it created the Nokia X line of smartphones shortly before the Microsoft acquisition was announced, but it was killed off right after Microsoft took control. So rumors of an investment in yet another Android fork seem funny – was Microsoft hedging its bets on Windows Phone and preparing another Android-based device line?

I think the much more likely explanation is that Cyanogen and Microsoft are planning something rather different, something much more along the lines of that Samsung deal. Cyanogen’s biggest weakness is that it’s missing all the Google apps and services that you sacrifice when you use AOSP. The challenge for any company doing this outside of China has always been what to replace them with. Inside China, it’s simple, because Google’s own services are largely irrelevant and local alternatives are actually better. But outside China, Amazon and others have struggled to provide really compelling replacements. The two companies that have comprehensive sets of services and applications that can replace Google’s today are, of course, Apple and Microsoft. Apple’s are (today) unique to its own products and platforms, but Microsoft is increasingly pursuing a cross-device strategy. Hence its investment in Cyanogen.

I wouldn’t be at all surprised if at least some flavor of Cyanogen devices in future come with Microsoft apps and services where the Google ones would normally be. We won’t see Microsoft launching another Android-based line of devices, but rather an Android-based line of devices that puts Microsoft’s services and apps front and center. That, after all, is the real goal here: getting Microsoft’s services in front of as many customers as possible, integrated into the platform in a way that makes them the default options for key tasks, and which provides benefits across the platform. Windows Phone has been the only platform where that’s been true, but Cyanogen could easily become a second. Quite what Cyanogen’s current customer base would make of that is unclear, but then Cyanogen’s future depends on broadening its appeal way beyond the hackers and tinkerers who flash alternative ROMs on their Android devices, and Microsoft could be a great fit there.

Both these deals – Samsung and Cyanogen – are good for both parties. Samsung and Cyanogen both need compelling apps to set their platforms apart, while Microsoft badly needs the broader exposure it will get from being pre-installed on these devices.

Amazon, AWS, Azure, Microsoft, Microsoft Earnings, Q4 2014, Quick Thoughts

Quick thoughts on Microsoft and Amazon in the cloud

January 28, 2015 Jan Dawson

At the end of last year, I wrote a piece for Techpinions Insiders about what to expect for Amazon in 2015, as part of a series on major tech companies. As part of that piece, I wrote the following about Amazon’s AWS business:

AWS has been one of Amazon’s big success stories over the last several years, generating higher margins than e-commerce and growing extremely fast. But growth faltered a little in 2014, as competition, from Google and Microsoft in particular, intensified. The basic storage and infrastructure services are becoming rapidly commoditized, with plummeting prices and little real differentiation. As such, both margins and differentiation will move to what these companies build on the basic services; hence Amazon’s launch of Zocalo and other enterprise tools that sit on top of AWS. But here it is going up against Microsoft’s traditional stronghold and Google’s increasingly capable offerings. End user software hasn’t been Amazon’s strong suit, but it’s Microsoft and Google’s bread and butter. I remain skeptical of Amazon’s ability to successfully compete in this area. Meanwhile, others not in the cloud storage business are also building their own competing platforms at this higher layer, including Box, Salesforce and others. If AWS is to become the highly profitable core Amazon has always lacked, it needs to successfully compete at this layer as well as the basic services it has provided historically. It’s not clear to me Amazon will be any more successful at this in 2015 than it was in 2014.

This week, Microsoft reported its earnings for the December quarter, and among other things Satya Nadella said this about Microsoft’s own cloud business in response to a question about cloud margins:

Overall, the shift to the higher layer services is the real driver here, which is obviously Office 365 and its various levels is one factor. The other one is what I talked about in the Enterprise Mobility Suite, that’s really got fantastic momentum in the marketplace because the solution has really come together and is fairly unique, as well as Dynamic CRM.

So these are all got a different profile in terms of margin and they are all now pretty high growth businesses for us. So when you think about our cloud, you got to think about the low-level infrastructure. Even there we now have premium offerings and then we have higher level services. So that aggregate portfolio is what helps us move up the margin curve.

I juxtapose these two quotes – one about Amazon and one about Microsoft – because I think today’s announcement by Amazon of new enterprise email services plays directly into the challenge I described, and which Microsoft seems to be managing much better. It continues to be critical for both companies (and Google) to migrate their way up the cloud stack to the higher-layer services (as both I and Nadella called them), but Microsoft is already there, while Amazon continues to try to compete in a space I’m really not sure they can. We’ll see what AWS results look like tomorrow, but I expect this to be something that comes up on the call.

Big picture, Earnings, Microsoft, Microsoft Earnings, Q4 2014

My thesis on Microsoft

January 27, 2015 Jan Dawson 11 Comments

It’s earnings season and I generally post a particular kind of post when that’s the case, including the Microsoft earnings post I did last night. Typically, I highlight a few key data points and analyze those, without stepping back to do a big-picture view on a company. But sometimes I worry that this leaves readers without a good sense of how I see the company in question and its prospects. So I wanted to do a follow-up post to yesterday’s in which I take a broader view and share my overall thoughts on Microsoft and its prospects. I’ll provide a list of links to previous pieces on Microsoft at the end of this post in case you’re interested in exploring any of this in more detail.

Windows PCs are in a long-term decline

A big part of how you see the future of Microsoft depends on what you think the underlying trend is and will be in Windows PCs, so let’s start there. I see two theories in the market at the moment, and which of these theories you subscribe to very much provides the lens through which you see Microsoft’s results each quarter. One theory is that Windows PCs are on either a stable or growing trajectory over time, and that any quarters in which there is negative growth are the exceptions to that rule. The other theory is that Windows PCs are on a downward trajectory over time, and that positive growth quarters are the exceptions rather than the rule.

For the following reasons, I subscribe to the second theory:

PCs as a form factor are now one of several that can be used for the purposes that once required a PC, with tablets and smartphones providing adequate computing power and capability for what many people need
PC hardware has reached the point where even those who see a need for a PC don’t perhaps see the need to upgrade it as frequently, because a PC from several years ago is still perfectly adequate, especially if relegated only to those tasks other devices can’t perform effectively
Competition is gaining ground, with Chromebooks taking significant share in education and Macs gaining share in the broader PC market, especially among college students and other key groups. As such Windows PCs will be an ever smaller share of total PCs
People are choosing platforms other than Windows in new device categories such as smartphones, tablets, wearables, smart TV devices, and so on. As these other platforms increase the degree of integration within their ecosystems, it will be harder for Microsoft to sell Windows PCs that don’t integrate as effectively with Android tablets or iPhones.

For all these reasons, I see a downward trajectory over time in sales of Windows in total, even accounting for the many different form factors Windows runs on. As such, last quarter’s poor performance in Windows sales is much more indicative of the longer-term trend than short-term headwinds. I see Windows 10 slowing the decline a little, but I actually think the free upgrades could stall or postpone new device purchases for some users, which may be counterproductive in the short term. I don’t see Windows 10 solving any of the fundamental challenges I just outlined. Continue reading →

Earnings, Microsoft, Microsoft Earnings, Q4 2014

Thoughts on Microsoft’s Q4 2014 earnings

January 26, 2015 Jan Dawson

Notes: this is part of a series on major tech companies’ Q4 2014 earnings. All past earnings posts can be seen here, and all earnings posts for Q4 2014 can be seen here. For the sake of easy comparisons and transparency, I always use calendar quarters in my analysis. Hence, Q4 2014 in this and every post on this blog means the quarter ending December 2014, even though some companies (Microsoft included) have fiscal years that end at other times of the year.

As usual, I’m going to run through a handful of charts and provide some analysis in this post. Subscribers to my quarterly company decks service will have received a slide deck with a much larger set of charts – this subscription is $10 per month for individual subscribers, and corporate subscriptions are also available.

The hardware business – some progress, some slippage

One of the themes last quarter was how the hardware business at Microsoft had progressed, and that’s a theme again this quarter. Surface revenues were the highest they’ve ever been in a quarter, crossing the $1 billion mark for the first time, and in addition the gross margins were not only positive for the second time, but significantly so if my calculations are correct:

I suspect that, on an operating basis, the Surface line still loses money because of all the marketing spend involved, but I would guess it’s not a million miles away from producing a positive contribution margin at this point, which is enormous progress from the early quarters. I suspect, with almost all the revenue this quarter coming from Surface Pro 3 sales, that ASPs were around $1,000, and that this represents around a million unit shipments, with some accessory spending rounding out the rest. Chances are that’s not much higher than previous quarters.

Lumia sales also hit a milestone this quarter, crossing 10 million for the first time:

Microsoft also reports non-Lumia phone sales, which dipped below 40 million for the first time in almost 10 years (including the former Nokia devices business). That business is now dropping fast. It’s hard to tell because Microsoft doesn’t provide ASPs for these two product lines, but based on my calculations, I suspect Lumia ASPs dropped from about $140 to closer to $120, reflecting the company’s focus on the low-end market. I continue to question the rationale for pursuing this end of the market, however. Microsoft’s thinking is that if it can capture these users, it can slowly migrate them up to more expensive devices along with Microsoft services, but I suspect that only a very small proportion of the users it’s capturing here will do so. They’re largely attracted by the low price and are also overwhelmingly in low-income demographics, making future revenue prospects poor.

Insight into Windows Phone financials

The “Windows Phone” reporting line has always been a fascinating one at Microsoft, and one I’ve dug into quite a bit in the past in search of nuggets of data. Two new nuggets came this time around, highlighting a couple of interesting points. Here’s my best estimate of the Windows Phone revenue line for the past two years or so, based on various statements in Microsoft’s SEC filings:

What’s interesting here is the extent to which this revenue dropped when Microsoft folded Nokia’s devices unit into the company. Q4 last year saw over $1 billion in revenue reported in this line, but this quarter it was under $400 million. The vast majority of that drop – around 60% – was said to be related to the Nokia acquisition. That, in turn, suggests that Android licensing revenue was less than half of total revenues in this reporting line, contrary to many people’s belief that Microsoft derived more revenue from Android licensing than Windows Phone licensing.

The other interesting tidbit was that Microsoft reported a fall in cost of revenue for the Devices & Consumer Licensing business related to the Nokia acquisition as follows:

D&C Licensing cost of revenue decreased, mainly due to a $224 million decline in traffic acquisition costs, primarily driven by prior year costs associated with our joint strategic initiatives with Nokia.

The only thing I can think of here is that this relates to some combination of Windows Phone and online advertising, since TAC is a metric usually associated with online advertising businesses, and D&C Licensing houses those Windows Phone revenues we just looked at. It seems as though Microsoft may have paid Nokia a fee for the traffic it sent to Bing and other Microsoft online properties, and this was somehow reported in D&C Licensing as a cost related to the Windows Phone revenues. The scale of that fee is pretty significant – $224 million in a single quarter, or almost $1 billion per year, which should improve the margins for the online advertising business significantly.

Online advertising continues to diverge

Speaking of online advertising, the trends there continue to diverge, as they do at other major online advertising companies, between search and display revenues. I’m presenting below the percentage of online advertising revenues that comes from each of these sources, according to my calculations:

As you can see, search advertising is now well over 75%, while display advertising is rapidly approaching 15%. I’ve talked before about these businesses, and my conviction that at this point Microsoft should simply pull out of the display advertising business, sacrificing a small amount of revenue but in the process bolstering its claim to be more sensitive to users’ data privacy concerns than Google, and this just reinforces the case. Bing is, at any rate, far more strategically important to Microsoft, especially given the integration with Cortana that’s critical to Windows Phone today and Windows 10 going forward.

Office Consumer transition continues

Another data point I’ve picked up on in the past is the performance of Consumer Office, which comes in two parts: the legacy Office model, and Office 365 Home and Personal. The two continue to move in opposite directions, but with the overall impact of falling revenues from this business:

The red line shows total revenues from these two, which continues to fall year on year as Microsoft goes through this transition. As Microsoft gives away more and more of the core functionality of Office for free in the consumer market, however, this trend will accelerate. One bright point in this area, however, was the bump in Office 365 users this past quarter. I’m not yet sure what to attribute that too, but it’s likely that a combination of Office on the iPad and the new, slightly cheaper, Personal option (launched in Q3 but available for the whole of Q4) both had an impact:

As the previous chart shows, the revenue stream associated with these subscribers is still small, but this is the future of Office in the Consumer market, so it’ll be well worth watching what happens to both the subscriber numbers and the revenue associated with them as Microsoft’s changing business model for Office kicks in (especially with the launch of Windows 10 later this year).

Lots more slides in the deck

Again, this is just a sampling of the data I collect and analyze on Microsoft on an ongoing basis. The deck that’s part of the subscription service has the full set, and is available now to subscribers. Sign up here if you’re interested (Paypal and credit card payment options available). A screenshot of the slides in the deck is below:

App stores, Apps, Microsoft, Windows, Windows 10, Windows Phone

Why Windows 10 can’t fix Windows Phone

January 19, 2015 Jan Dawson 28 Comments

Ahead of Microsoft’s next reveal of Windows 10 later this week, lots of blogs and news outlets are talking up the promise of the new operating system to unify the PC and mobile versions and in the process “solve the app gap”. Most of what I’ve read, though, seems to look straight past a huge flaw in this whole concept, one that I’ve talked about several times in other places (notably in my in-depth Windows Phone report from a few weeks back – available here for free). As such, I wanted to just quickly lay it out here for simplicity and clarity.

First, the theory: in Windows 10, Microsoft is creating a single operating system which will run across different form factors, with much of the underlying code shared and the rest tweaked by device type and size. This will allow developers to create apps which run 90% of the same code, with just some customizations for different device types and sizes. This, in turn, will allow Microsoft to tap into the vast number of Windows PC developers, who will now be able to port their apps to Windows Phone will very little additional work, which will drive a large number of new apps to the mobile platform, reducing the app gap relative to iOS and Android.

However, there’s a fundamental flaw in this argument, which is that the apps Windows Phone is missing simply don’t exist as desktop apps on Windows. Just think about it for a moment, and you’ll realize it’s empirically obvious: almost all the apps which are most popular on mobile are in one of these categories:

Games, which dominate the app stores, and tend to be mobile-only in many cases
Properties which exist as websites on the desktop and only exist as apps on the mobile side
Properties which are mobile-first and/or mobile-only, such as Instagram, Vine, Viber and so on.

But we don’t need to rely on gut feel here – it’s very easy to do the analysis. I’ve pasted below two small thumbnails which you can click on to expand to full size. They show tables for the top free iOS and Android apps as of today, according to App Annie. Against each of the apps I’ve completed several more columns to reflect the following data:

Is the app already in the Windows Phone store?
Is there a desktop app on Windows (any version, not just Windows 8)?
Is this an app which is actually a website rather than an app on the desktop?

I’ve then done some filters in the following columns to answer each of the following questions:

Of those apps which are not on Windows Phone today, are these available for Windows PCs today?
Of those apps which are not on Windows Phone today, are these available as a website on desktop?
Of those apps for which there is a desktop app on Windows today, are these also available on Windows Phone?

You can go ahead and have a look at the tables to see the results for yourself (they should open in a new window or tab by default):

But here’s the summary:

Among the top 50 free iOS and Android apps, there is not one which is not on Windows Phone but exists as a desktop app on Windows
Among the top 50 free iOS and Android apps, there are a handful which exist as websites but not as desktop apps (almost all owned by either Google or Apple)
All of the top 50 free iOS and Android apps for which there is a Windows desktop app already exist as Windows Phone apps today.

In other words, if the theory is that sharing a code base across desktop and mobile will lead to desktop apps being ported to the mobile environment in greater numbers, within this sample at least this has no applicability at all. All the apps available on Windows PCs are already available on Windows Phone. A handful of the rest exist as websites on the desktop, but the vast majority simply don’t exist today on any flavor of Windows.

There are two important caveats here. Firstly, this analysis only looks at the top 50 apps, and a different pattern could theoretically emerge if one were to examine a longer list of apps. However, from what I’ve seen the patterns are broadly similar, and the same conclusions would apply. Secondly, this analysis focuses on the most popular apps, which are naturally dominated by consumer-facing applications and not those used in the enterprise. I do believe that there are cases where desktop apps exist for enterprises but not yet for Windows Phone, and in this case the theory behind Windows 10 may well have at least some applicability. But that’s a far cry from saying that Windows 10 will help to solve the app gap, which is fundamentally a consumer problem, not an enterprise one.

Having said all this, I’m very curious to see what Microsoft has to say this week with regard to the mobile flavor of Windows 10 in particular. I think it’s getting a lot right in Windows 10 more generally, but the real solution to fixing Windows Phone lies in making the platform more compelling to consumers, and not just at the low end where it’s currently so focused.

For further reading on Windows and Windows Phone:

The State of Windows Phone – summary of the in-depth report linked to above
The Windows Phone app gap – an excerpt from the report, examining not just the much-ballyhooed “app gap” versus iOS and Android, but as importantly the “app lag”
Windows 10 – Fixing the Windows 8 Mistake – my broader take on Windows 10 and its potential.

An archive of all my previous posts from this site on Microsoft is here.

Apple, Developers, Devices & Services, Google, Microsoft

Visualizing cross-platform development

December 16, 2014 Jan Dawson 8 Comments

Much has been made recently of Microsoft’s shift from a Windows-centric worldview to a cross-platform approach to the development of applications and services. Sometimes, efforts like this are difficult to visualize, so I wanted to take some time to analyze the actual numbers around all this in an attempt to provide a visualization of the degree to which Microsoft has transformed itself. In the process, I’ll highlight a few other points too.

First, the overall numbers

Let’s start with some numbers. These numbers represent the number of apps each of the three major platform companies makes for each of the three main platforms. Specifically, I’m looking here at installable apps, not those that come pre-installed on phones (there is a slight issue here with the fact that Google offers many of its pre-installed apps in the Play store too, but for the sake of simplicity I’ve ignored that). The table below summarizes the current state of affairs (I’ve broken out the mobile and PC operating systems to provide additional granularity):

Now, let’s drill into some specific companies.

Apple – still living by Steve Jobs’ maxim

There’s room for debate about the extent to which Apple still reflects Steve Jobs’ values and policies, and how far it has moved beyond those. One area where it seems to have stuck pretty closely to Steve Jobs’ philosophy is cross-platform development. One of my favorite quotes on this topic comes from Walter Isaacson’s biography of Steve Jobs, in which Jobs described his attitude towards developing an iTunes app for Android thus:

We put iTunes on Windows in order to sell more iPods. But I don’t see an advantage of putting our music app on Android, except to make Android users happy. And I don’t want to make Android users happy.

That perfectly encapsulates Steve Jobs’ philosophy, and Apple’s approach in general, towards cross-platform development: do it when you have to, to enable you to sell devices to people not using Macs, but don’t do it for its own sake. Apple has remained true to that maxim so far under Tim Cook – the chart below has the relevant cells highlighted:

Apple cross platform development The key conclusion here is that Apple has focused very much on its own platforms, developing a little over a dozen apps for both iOS and OS X beyond those pre-installed on devices, but barely touching the other platforms at all. Where it does so, it’s exclusively to support major Apple services for iPhone and iPad users who also use Windows: iCloud Drive and iTunes are two of the three apps, while QuickTime – necessary for playing Apple-generated video files – is the third. Development of Safari on Windows – arguably a departure from Apple’s usual rules for a time – has been discontinued. It’s also worth noting that, even on its own platforms, Apple isn’t developing dozens of apps – there’s a small, focused number, which reflects another key Apple principle: keeping things simple, and focusing on what it does best.

The one thing I’ve left out of the chart above is the Beats Music app. I left it out because it was acquired by Apple, rather than developed in-house, and because I suspect that at some point it will be replaced by something integrated with iTunes in the coming months. When that happens, it will be extremely interesting to watch what Apple does from a cross-platform perspective. Will it merely strictly honor its promises at the time of the acquisition and keep the old Beats app around for whoever wants to use it on Android, while developing an iTunes-branded alternative that’s more exclusive in its reach? Or will it use this as an opportunity to reinvent both Beats and iTunes while launching an Apple app on Android for the first time?

Google – developing for the platforms that matter most

Google’s incentives when it comes to cross-platform development are quite different, because its revenue and profits are driven by having the broadest possible audience and not by preferring its own platform. It also has a much more diverse and diffuse set of apps and services it makes available on all platforms though the web. Another favorite quote is this one from Andy Rubin (as quoted by Steven Levy in his book In the Plex), which somewhat summarizes Google’s philosophy:

We don’t monetize the thing we create… We monetize the people that use it. The more people that use our products, the more opportunity we have to advertise to them.

As such, Google develops apps very broadly, not just for its own platforms, but for Apple’s too:

Google cross platform development

Google actually offers more installable apps for iOS than Apple itself does. In fact, it’s likely that Google is among the most prolific developers for iOS around. All of Google’s core services are now available in some form on iOS, though it hasn’t made the same investment in apps on OS X, largely because these services run perfectly fine in a web browser. Google does make a handful of native apps – such as Picasa, Google Drive and Google Earth – available on both OS X and Windows, but neither platform has been a significant source of investment for Google. Meanwhile, its own Chrome OS has almost 40 apps available, largely because these are simply packaged websites.

Microsoft – broadest cross-platform development

To return to the point that sparked this post, Microsoft clearly has the broadest approach to cross-platform development of the three, developing significant numbers of apps for its own platforms but also those of Google and Apple. Within the last few weeks, Microsoft has announced its intention to add the full version of Office to the list of apps it offers on Android, and last week it released a slew of new MSN branded apps on iOS. The Microsoft column highlighted below really brings out quite how pervasive the company’s presence is on the other two companies’ platforms:

Microsoft’s count of apps for its own platforms is skewed quite a bit by the large number of Xbox-branded games on Windows and Windows Phone, but there are also huge numbers of legacy enterprise apps on Windows in particular. But it also has almost 50 apps on iOS and over 50 on Android already, and the number looks set to grow even further. It’s worth noting that this hasn’t all happened in the past year: Microsoft has, in fact, been doing a lot of this for quite some time, so it doesn’t just reflect some Nadella epiphany. But the number and nature of those apps available on Apple and Google’s platforms has begun to increase under Nadella, and I think this will continue.

Windows – the platform only a mother could love

All of which brings us to the lonely last rows in the table, those representing Microsoft’s two platforms. While Microsoft develops for all three platforms, Google develops only for iOS and its own platforms, and Apple keeps to itself. Windows and Windows Phone are the platforms that get the least love from the other two, with hardly any apps from either Google or Apple:

This is particularly remarkable because Google’s objective, as stated above, is to get its services in as many users’ hands as possible. It is likely that the calculus behind Google’s absence from Windows Phone in particular is twofold:

First, the investment needed to bring key services to Windows Phone is such that the current user base doesn’t justify the time and expense
Second, there may be a strategic element to withholding Google’s services from its traditional rival, even if Apple seems a more direct threat in many ways.

There may also be an element of leaving Windows Phone to the Microsoft-centric users, though it’s clear from the number of ersatz apps in the Windows Phone store that there’s strong demand for Google apps on the platform. More broadly, though, it’s likely that the first of those two bullet points is the real answer: it simply isn’t worth Google’s time and money to develop for a platform with very small market share and an increasing tendency towards low-end devices. This, of course, mirrors my recent piece on the Windows Phone app gap, and the broader challenge for Windows Phone. And all of this reinforces the need for Microsoft to embrace cross-platform development in the first place: as long as smartphone and tablet users continue to choose platforms owned by the other two companies, users aren’t coming to Microsoft, so Microsoft will have to go where they are, and that’s increasingly on iOS and Android.

Developers, Devices & Services, Microsoft, Nokia, Platforms, Smartphones, Windows, Windows Phone

The Windows Phone app gap

December 5, 2014 Jan Dawson

Much has been written in the past about Windows Phone’s lack of apps compared with iOS and Android. Both Nokia and Microsoft have responded in the past with claims that quality and not quantity is what matters in an app store. Both arguments represent over-simplifications, and neither accurately captures the reality of what’s going on with the Windows Phone app store and its competitiveness with Android and iOS. This post is a summary of one of the major sections of a new report on the state of Windows Phone published by Jackdaw Research this week, which examines this question among others in depth. The report is available for free here, and I encourage interested readers to download it and read the whole thing.

The quantity gap

Windows Phone does suffer from a quantity gap versus both Android and iOS, which are essentially neck and neck in the app store stakes. On the one hand, Microsoft has done well to get out of the gate quickly and get a good number of apps on the platform in a short space of time – the chart below shows the number of apps on each of the three major platforms within the first 15 quarters following launch:

The problem, of course, is that Windows Phone isn’t competing against those platforms 15 quarters from their launch – they launched considerably earlier, and the current situation is much less favorable:

Windows Phone continues to lag the other two major app stores (and even Apple’s iPad-specific list of apps) considerably, and the gap is widening rather than narrowing.

The quality gap

The frequent response from Nokia (before its acquisition by Microsoft) and from Microsoft itself has been that Android and iOS have thousands of apps no-one needs or uses, and that the real question is one of quality rather than quantity. But the problem is that Windows Phone suffers from a lack of quality as well as a quantity problem. There are several ways to look at that, so I’ll run through a few of them. Continue reading →

Business models, Microsoft, Office, Quick Thoughts

Quick Thoughts: Microsoft’s Office moves

November 6, 2014 Jan Dawson

Microsoft today made a series of announcements relating to Office running on platforms other than Windows:

Individual Office apps for iPhone are now available, mirroring those launched on the iPad earlier this year
Office will be coming to Android, starting with a limited beta/preview next week and full versions next year
All the versions of Office on iOS and Android will shift the dividing line between free and paid-for functionality significantly.

My initial reaction to the news was summarized in 140 characters in this tweet:

Office for Android illuminating. Preview for Android vs. full launch for iOS telling about Android. Testing new biz model telling about MS

— Jan Dawson (@jandawson) November 6, 2014

I wanted to expand on those ideas just a bit.

What the announcement says about Android

The announcement is most telling about Microsoft and its evolving strategy for Office, but it’s also illuminating about Android. Note that Microsoft announced Office for iPad in March and it became available essentially immediately for anyone running the latest version of the operating system. No delay, no beta label, just instant availability. But for Android, Microsoft is adopting a very different model, with a preview period with a limited number of beta testers and general availability coming months later. Why? Well, this is the same old story we’ve heard for years now: the fragmentation of the Android base, although we’re not even talking about Android smartphones. Go to the signup page for the Office for Android tablet preview and you’ll see that you have to specify the make and model of the tablet you want to try it on, and that’s the key here: developing complex software such as Office for Android is enormously more complex than on iOS, and especially if you want to achieve full feature parity across devices and platforms.

What the announcement says about Microsoft

The rest of the announcement is incredibly important in what it says about Microsoft and its strategy for Office. First, the context: Microsoft launched Office for iPad in March and says it’s seen 40 million downloads of the three apps since then. But the full functionality of the apps has only been available to Office 365 subscribers, and it’s added less than three million Home and Personal subscribers since then, at roughly the same pace as it added subscribers earlier. People have been very interested in the apps, but most haven’t been willing to pay for the full functionality (or already had access to it through existing Home or Business subscriptions).

Why is that? Well, think about the kind of Office-related work you might want to do on an iPad. It likely isn’t writing the next great American novel, preparing the slides for your TED talk or working with pivot tables in Excel. It’s fixing a typo in a Word document, updating a cell in an Excel spreadsheet or inserting an extra slide in PowerPoint. Is that functionality worth $70-100 a year for most users? Likely not. Arguably, Microsoft drew the line between what was free and what wasn’t in the wrong place here, for obvious reasons: full Office functionality has always cost a lot, and there’s never been a version of Office available for free, so it was just following its long-standing pattern. But the way people use Office on tablets will be different from the way they use it on PCs, and Microsoft seems to be recognizing that. As such, it’s shifting the dividing line between free and not-free in favor of providing more functionality for free.

But I think there may be at least two other reasons for this move to provide more functionality for free. Firstly, Microsoft’s Consumer Office business is dwarfed by its Commercial Office business: last financial year, total Office System revenue was just over $24 billion according to Microsoft’s 10-K, but Consumer Office revenue was only around $3 billion over the same period. The vast majority of Office comes from businesses, who can now buy per-user licenses for their employees allowing them to use Office across multiple devices. At some point, Microsoft may decide that allowing consumers (whether acting in their personal lives or as employees) to use at least some functionality for free on some devices is a price worth paying to cement the position of Office as the productivity tool of choice for businesses, who pay most of the bills.

Lastly, Office has long suffered from the fact that it over-serves most users’ needs considerably, and the price charged for Office reflects 100% of the features whereas many users only use a small percentage. One of the attractions of Google Docs and other Office alternatives both for consumers and for businesses is that they allow users to accomplish many of the more basic tasks for free or for a much lower price. Microsoft should be considering a bifurcation of the Office product into at least two alternative versions: a more basic one with limited functionality offered for free or at least a lower cost, and a fully-featured one offered at the traditional price points. Perhaps it sees the new tablet and smartphone apps as an opportunity to experiment with just such a model.

What’s in and what’s out with the free version?

One other interesting thing to look at is what’s in and out of the free version. According to Microsoft’s blog post, these are some of the features that will be exclusive to the paid version:

advanced editing and collaboration capabilities, unlimited OneDrive storage, Dropbox integration and a number of other benefits.

It’s interesting that both of the recently-announced storage enhancements are exclusive to the paid version: Dropbox integration and unlimited OneDrive storage. The latter has a real cost associated with it, so it makes sense that it’s reserved for the paid version, but it’s intriguing to see a partner feature exclusive to the paid version too. I’ve pasted a screenshot from the iPad app that summarizes the premium features. I think there’s a risk that the dividing line feels arbitrary, but this list looks like it makes sense. It’s also interesting to see that Microsoft still requires the user to log in with a Microsoft account for the new functionality, even though a paid Office 365 subscription is no longer necessary.

Earnings, Microsoft, Microsoft Earnings, Q3 2014

Thoughts on Microsoft’s Q3 2014 earnings

October 23, 2014 Jan Dawson

Note to new readers: I use calendar rather than fiscal quarters for easier comparability between companies’ results. As such, I use Q3 2014 universally to refer to the period ending September 2014, even though some companies (in this case Microsoft) use a different reporting calendar). All the charts and analysis below use calendar rather than Microsoft fiscal quarters. This is part of a series on major tech companies’ Q3 2014 earnings. Prior analysis on Microsoft can be seen here.

There are four sections in this post – click below to jump to each of them:

Consumer hardware performing surprisingly well
Cloud run-rates and actuals
Office in transition
Online advertising divergence continues

Consumer hardware performing surprisingly well

One of the most surprising things about today’s earnings was that the consumer hardware businesses, which are important to Microsoft’s strategy but have performed poorly, all got a bit of a boost this quarter. Xbox, Surface and Lumia devices all had strong year on year growth:

All three device categories saw record results, in fact – Lumia sales and Surface revenue were both the highest they’ve ever been, while Xbox unit sales were the highest they’ve ever been outside the seasonally much higher fourth calendar quarter. Now, we have to put all this in context: both Lumia and Surface sales are dwarfed by the respective markets in which they compete. But on a relative basis, the company continues to see growth in both categories, and the Xbox year on year growth was solid too.

Now, much has been made of the fact that Microsoft reported a positive gross margin for the first time for the Surface as well. Long-time readers will now that I have teased estimated gross margin numbers out of Microsoft’s SEC filings for the past few quarters, so I thought I’d provide an update on the same basis. Here’s the chart including this quarter’s numbers:

As you can see, the number does indeed seem to be positive this quarter on the basis of my analysis, at a little under $100 million. That’s a gross margin of around 9%, which is not earth-shattering and in fact about half the gross margin of the phone business at Microsoft. But it’s progress, as with the growth numbers above. There’s a long way to go to get to the kind of gross margins that would lead to true profitability once marketing and other costs are factored in. How many Surface devices did Microsoft sell in the quarter? Well, they won’t say, but given the new version starts at $800, it’s entirely possible that the company sold a million or fewer Surface tablets in total, and likely well under a million Surface Pro 3s in their first full quarter on sale. It sold about ten times as many Lumia devices, and about 40-50 times as many mobile phones, just for comparison’s sake. Continue reading →

Google, Microsoft, Platforms, Techpinions

Techpinions post: Google and Microsoft’s platform problems

September 18, 2014 Jan Dawson

My post on Techpinions today is about Google and Microsoft’s platform challenges, which appear very different on the face of it, but actually have a lot in common. Microsoft increasingly wants its third-party services to succeed on platforms owned by (arguably) its two main competitors, Google and Apple. While Google is struggling to compete on a platform it theoretically owns (Android), which has been increasingly co-opted by both official Android licensees and users of the AOSP version of Android such as Chinese OEMs and Amazon. Microsoft’s challenges are particularly stark, and stem in part from the business models it and its competitors employ for key services:

Head over to Techpinions to read the full post.

Beyond Devices