Microsoft stays in Eden with bite out of Apple

Microsoft’s CEO said Wednesday that his company hopes to steal a page from Apple’s playbook and change how it works with hardware makers in an attempt to duplicate its rival’s success.

In a Wednesday e-mail memo to employees that also outlined changes brought on by the departure of platforms and services chief Kevin Johnson, Ballmer cited several areas that Microsoft would focus on during the next year. Among his comments were some cryptic remarks about Apple.

“In the competition between PCs and Macs, we outsell Apple 30-to-1,” Ballmer said in the e-mail, which was obtained by the Seattle Post-Intelligencer, as well as other news outlets. “But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience.”

Ballmer went on to promise that Microsoft would change how it deals with hardware vendors, such as Dell and Hewlett-Packard, the world’s No. 1 and No. 2 computer sellers, respectively. “Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones — providing choice as we work to create great end-to-end experiences.”

Analysts struggled to interpret Ballmer’s comments, with some unsure exactly what he meant and others willing to read between the lines.

“If he’s serious, this would be a pretty fundamental change in how they work with hardware manufacturers,” said Rob Helm, an analyst with Directions on Microsoft, a Kirkland, Wash. research firm.

Historically, Microsoft’s role in deciding what goes into a PC, or how PCs are priced, has been minor. “Microsoft may have had a major role at times, the Tablet PC is one, but really it relies on forward-thinking partners like HP, who would take a change on Microsoft’s designs on software,” said Helm.

But the company clearly sees Apple as a threat, outnumbered sales notwithstanding. “Apple’s making inroads in the U.S., especially in the consumer market and at the high end,” Helms said as he speculated on what drove Ballmer to announce a major change in PC production. “Those are the same people that might pay for a premium version of Windows, so maybe that’s one reason.”

Allan Krans, an analyst with Technology Business Research, was less inclined to read Ballmer’s note as a major shift in Microsoft’s strategy. “I don’t think this is surprising. This is not anything new.”

Rather than see it as a call for Microsoft to become more involved in hardware design, Krans interpreted the memo to mean the company will try to market its software as competitive with Apple’s in the functionality and user experience areas. “He’s talking not only about the software experience, he’s also talking about how Microsoft plans to draw excitement to the platform and why they need to do that because of the shift toward the consumer,” Krans added.

During a previously-scheduled day-long meeting with Wall Street analysts at Microsoft’s Redmond, Wash. headquarters today, Ballmer did add that the company would boost spending on marketing in fiscal year 2009, noting that Microsoft currently spends much less on marketing PCs and smart phones than does Apple.

“My first reaction is that Microsoft may be willing to do more with contract hardware makers,” said Helm. “If I had to take a guess, I’d say [it would be] in the ultra-mini laptop market, which is currently hot and an area that Microsoft has deep concerns.”

The low-cost, lightweight notebook market, which Microsoft has touched on already this year as it made exceptions to the retirement of its aged Windows XP operating system, is important for other reasons, said Helm. “The current operating system [Windows Vista] doesn’t run on that, so Microsoft’s had to make allowances for crippled licenses of XP.

“It’s probably within Microsoft’s ability to produce an ultra-mini laptop,” he said.

But can Microsoft pull off such a dramatic shift in how it works with hardware partners? Can it really make itself more Apple-like? Helm was dubious.

“They’ll say, ‘How hard can it be?’ And we have the money to blow it a couple of times if that’s what it takes.’ That’s their thinking,” Helm said.

Changing of the guard at Microsoft

It normally isn’t news when IT people move from company to company, but there are times and circumstances when personnel movements do attract attention. Microsoft’s announcement that Kevin Johnson is leaving for a position with Juniper Networks is noteworthy.

Where this particular departure becomes interesting is in the role that Johnson held within Microsoft and the activities he was involved in prior to his departure. As the head of platforms and services within Microsoft, Johnson was responsible for some of the biggest assets managed by Microsoft, including the Windows operating system, the MSN Instant Messenger and associated network, and Windows Live email (previously Hotmail).

If this wasn’t enough, the division was also responsible for Microsoft’s online advertising and search endeavors. With the recent high profile focus from Microsoft on these latter two areas as well as significant coverage of Windows Vista and plans for Windows 7 it would seem that Johnson held one of the most important jobs within the company.

In addition to the above responsibilities, Johnson was reportedly one of the key individuals associated with Microsoft’s repeated bids for Yahoo, all of which were ultimately unsuccessful. Coupled with search and advertising performance that were falling short of company goals and Johnson’s departure suddenly looks very conveniently timed.

Correlation doesn’t imply causation and with Johnson heading off to take the top job at a major networking hardware company he is certainly continuing to move up the corporate ladder.
Random speculation can be fun but Johnson leaves behind a division that wears the brunt of what many consider to be a mangled Windows Vista, an online services department that has lost almost half a billion dollars in the most recent reporting quarter, an advertising services portfolio that is still significantly behind Google despite the 2007 US$6 billion acquisition of aQuantive, and multiple failed takeover bids for Yahoo.

Yahoo’s acceptance of Carl Icahn representatives on their board might be seen as a partial victory for Microsoft but it probably came after Johnson had made his decision to leave the company.

Post Johnson’s departure, the Platforms and Services division will be reformed as the Windows/Windows Live division and an online services division, with separate heads reporting directly to Steve Ballmer (three for the Windows/Windows Live division and one for online services).

This split represents a recognition of the key functional difference between online service offerings and operating system offerings, though the inclusion of Windows Live with the operating system division suggests that Microsoft is still trying to integrate online services tightly into the core operating system.

With so many recent changes within the senior ranks of Microsoft, the question is how long the old guard will remain in place and what sort of direction the company will take once they finally depart from active control of the company.

So long as Bill Gates retains some level of control over the company this will probably never happen, but just as Apple performed significantly differently without the hand of Jobs, Microsoft might very well be a completely different company after Gates and Ballmer.

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