The business model for charging for operating systems is going to go away thanks to patents. Why try to charge royalties for an OS when you can simply collect rent? Google give Android away because it's in their interest for handset makers to have an OS that isn't distributed by the people who own Bing. But why should Microsoft even bother with Windows 7?
Smartphones are disruptive to the PC industry. In fact they are a canonical example of disruptive innovation. A phone is nowhere near as good as a PC, but it's cheaper and more convenient. It fits in your pocket and gives you instant access to your data, no matter where you are.
The margins for smartphone software, thanks largely to Apple, are much smaller than the margins for desktop software. In fact, you could see the promotion of $0.99 software via the app store as a strategic move by Apple to coerce Microsoft into not pursuing mobile software.
That's a typical move by a disruptive innovator, to focus on low-margin low-end segments of the market, which a dominant incumbent is generally motivated to walk away from, preferring instead to focus on high-end high-margin products.
The 30% fee Apple charges push margins even lower.
In some ways, this is working. There is no version of Microsoft Office for the IPad or the IPhone, for example. Some of this is likely due to the fact that Microsoft's application software business is being disrupted from multiple sources (there is a web version of Office). Both Google and Apple are pushing desktop office in the same direction that Toyota pushed GM : toward SUVs.
Apple also has a strong motivation to commoditize mobile software because it has major positions in several complementary markets: Hardware Sales, Music sales, Video Sales, and Application Delivery (the app store).
If Microsoft doesn't compete, fiercely, in both mobile and web their fate will end up being very similar to both General Motors' and DEC. Windows Mobile 7 is a first step in this direction. It's not sufficient, they should be selling mobile versions of Office too, but it's a fist step.
I would say that Microsoft's efforts to collect Android patents are really an effort to reduce the margins handset makers can extract from sales of Android phones. It's not meant to serve as a profit center for the company.
In any case, Microsoft's introduction of Windows Mobile 7 serves several purposes:
1. It pushes a business model that commoditizes hardware, rather than software.
2. It makes it more difficult for their competitors to displace Microsoft's enterprise business. If they don't release their own mobile OS and mobile Apps, then it's only a matter of time until that happens.
I find your comment interesting, however I do not agree that "Pushing a business model that commoditizes hardware, rather than software" is compelling. Google is already doing that, so Microsoft doesn't need to sell Windows 7 to achieve this goal.
I also wonder if your statement that "If Microsoft doesn't compete, fiercely, in both mobile and web fate will end up being very similar to both General Motors' and DEC." I agree that it is in danger of irrelevance, but I am not convinced that Windows 7 is the right way to compete in mobile. I can't think of anything better, but that doesn't mean that Windows 7 is the right thing to do.
I am reminded of the politician's fallacy:
"We must do something. This is something. Therefore we must do it." But doing the wrong thing is worse than doing nothing at all.
The best thing to do would be for them to disrupt themselves. Apple does that. Historically Microsoft has shied away from "canabalizing its existing businesses". Netdocs is a famous example. It's much better to own the disruptions rather than allow your competitors to do it. If someone at Microsoft can invent disruptive technology then someone outside Microsoft can do the same thing. It's better for Microsoft to get that money then Apple or Google.
Accomplishing that, however, would require a cultural revolution within the company. I would argue that they should have groups inside Microsoft dedicated to continuously disrupting their existing businesses. That's the only way they can stay in front of people like Apple or Google. That would effectively convert "disruptive innovation" into "sustaining innovation".
Sustaining innovation favors the incumbent. You could also look at it as a form of "meta-disruption", as it would disrupt the act of disruption.
Is "Windows Mobile 7" the best response? Perhaps not. The ideal response would be to disrupt the smartphone market all together. You could see the purchase of Skype providing potential for this (whether or not that's their intention is a separate question). Producing a "carrier free smartphone" would be a good example. That's not easy to do. It requires ubiquitous access to free internet services. It would take a long time. There are high fixed costs. There may be better options.
I think Windows Mobile 7 makes sense as an interim step. It provides a battle ground to impeded progress while they gear up for the real fight. Think of it like the Allied North African campaign during WWII.
The best thing to do would be for them to disrupt themselves. Apple does that.
When has Apple done that? Apple has never had a market until the iPod that was large enough to be cannibalized. But they've never actually cannibalized the iPod/iPhone/iPad market.
Now pushing webapps over their appstore would be cannibalizing iOS. But simply shipping improved products isn't cannibalizing.
The iPhone doesn't disrupt the iPod. It's a more expensive, more powerful item with broader reach. It would be like saying the PS3 disrupts the PS2.
One might argue that the iPad disrupts the Mac business, but to be disrupted you must command a market. The Mac doesn't. The iPad in its second quarter outsold the Mac (while the Mac sales grew). The iPad may disrupt the Windows or PC market, but not the Mac market.
In general what you're describing is not how disruptive products work. Disruptive products cannibalize profits in the medium-term with cheaper alternatives, but in the long-term win out. The iPhone and iPad don't qualify.
But the iPad is disruptive.
You don't have to dominate a market to be disrupted. You only need to be upset by a "not as good, but more convenient" low margin alternative. That is the iPad.
No,the market share is important. Why? Because what's key in a disruptive technology is that it creates a situation where you have a hard decision to make. The reason it is the innovator's DILEMMA is that the company realizes that if this disruptive product suceeds they probably, in the medium-term, lose a lot of money. But its necessary for long-term survival, but doesn't guarantee it.
The iPad is a no-brainer. If it does well then Apple does really well. There's no dilemma. It has good margins and out the gate better sales than the Mac. No one at Apple stomped their fist on a table and said, "If the iPad does well, that may spell the end of this company! We can't afford to do this ipad Steve, it's not in our best interest." No one can make that argument.
With disruptive technologies you can make that argument. In fact the argument is typically so compelling that it wins.
1) The iPad is not a no-brainer. Far from it. Apple is a public company, with billions of dollars of revenue and many short-term focused investors it needs to satisfy. The same pressures of "profit maximizing resource allocation" apply to Apple that apply to Microsoft. If apple sells iPads entirely at the expense of Macs, it could go out of business. Someone very well could have made the argument that it would destroy the company.
2) Disruption is about building "more convenient" but "not as good" innovations that target low margin segments of the market. It's not about the % of the market that the largest incumbent holds. You can disrupt an industry with 9 players with 10% of the market just as easily as you can disrupt an industry with 1 player with 90% of the market. For Google to sell netbooks is a no-brainer (they don't disrupt any of Google's existing businesses). For Apple to sell iPads is gutsy.
Your point (1) is wrong. From 2010, before the iPad:
"A report in the Wall Street Journal notes that in the 2010 Apple fiscal first quarter, which ended Dec. 26, iPhone and related product revenues came to $5.6 billion, 36 percent of Apple’s revenue total. That compares with $4.45 billion for total computers and $3.39 billion for iPods. The iPhone, clearly, is largely responsible for doubling Apple’s sales over the past three years. Even though computer sales are up sharply at Apple, iPod sales have been roughly flat over the same period.
The associated increase in gross profit margin is even more impressive. The iPhone carries higher margins than do other Apple products, so the gross revenue of the company has increased from 31 percent to 48 percent over that same three-year period. "
Apple only made 33% of their revenue from their computers. And even moreso, as noted in that article, the iPhone carried much higher margins than their other products. I don't think its any stretch to believe that margins on the iPad are similarly large.
IOW, even if the iPad cannibalized all of their Mac sales, they were on solid ground, because its clear their revenue and margin growth was not the Mac, but the iPhone and eventually the iPad. It was obvious that iOS was their key platform, not OSX. Nothing is a sure shot in business, but this was about as easy a call as it gets.
On (2) we were explicitly not talking about disrupting an industry. We were talking about Apple disrupting itself.
I don't think it was at all gutsy for Apple to sell iPads. The market math just made too much sense. WebApps are gutsy for Apple now, since it undermines their huge app ecosystem. New devices that build on their iOS platform are not gutsy nor disruptive (unless they do something like give iOS away for free and make money just from the appstore).
Disrupt Office with what? A cheaper, but significantly higher margin version of Office that has broader appeal? That's not disruptive. That's a smart business move.
Or is it a free web version of Office that has no current revenue model? Also, what is the trajectory of Office revenue? Is it a growth area or stable? In the case of OSX it is a MUCH lower percentage of revenue as compared to 3 years earlier.
Disruption requires the cannibalizing product to impact the bottom line negatively. The iPad has had the complete opposite effect from the first day.
If MS shipped a product that on day 1 resulted in higher earnings than Office, that's not disruptive.
But I think we can agree to disagree about if the iPad was a bold gutsy move. I think it was a natural progression from the iPhone and cannibalizing a product that couldn't really grow even during the Vista years wasn't really a concern. You think otherwise.
According to Clayton Christensen's model of disruptive innovation, once disruptors push all incumbents out of a low margin market segment, the prices in the lower market segment plummet, and margins drop toward zero. The only way for the disruptor to continue profiting is to follow the incumbent up the market, applying their disruptive invocation to more profitable market segments. The cycle continues until the incumbent is pushed out of the market entirely.
Detroit's moves away from low-margin compact cars is what enabled Toyota to make Lexus.
Microsoft moving away from mobile phones would have a similar effect. It's essential for their survival.
Also, Google's business model doesn't commoditize hardware, it commoditizes software. Google's business model is to monetize data, not software. They are trying to do to Microsoft and Apple what Microsoft did to hardware manufactures.
I follow the structure of your argument. Going with autos, Detroit's move away from low-margin compact cars enabled Toyota to make Lexus. Let's grant this as true. But does it imply that sticking with low-margin compact cars would have protected their market for luxury cars? What if--like Windows 7 so far--they failed to make significant headway with the low-margin compact cars? What if they lost time and management attention trying to do so much?
Or what if someone else--Hyundai or Kia, for example--beat them hollow on low-margin cars while Toyota moved upmarket and beat them on luxury cars anyways?
This is why I'm not sure that Windows 7 is the right move. I can see they are in trouble in mobile, but I can't see that Windows 7 is the right thing to do. It would be nice if they could gain a dominant position, but a lot of things would be nice.
Andy Grove understood this idea very well, I think before Clayton even wrote this book, but they later became very good friends. Andy Grove once that that "if we lose the low-end today, we lose the high-end tomorrow."
That's actually how disruptive innovation works. The disruptor comes from the low-end and it slowly moves into higher levels, up market. That's why ARM is so dangerous to Intel for example, but Paul Otellini doesn't seem to understand this theory as well as Andy Grove.
Grove wrote a book on this called "Only the Paranoid Survive". Terrible title. Good book.
He points out that if you own the low end, you gain huge economies of scale. You pay for your foundries and R&D with cheap low-end parts, but only barely. Nobody can compete, because they don't want your rubbish margins. But then you can put huge margins on your high-end products by using cost-cutting technology and your huge efficient factories to lower your costs.
It doesn't work in all industries. But it's great in technology, as efficiences of scale do exist (what's the maringal cost of 1 more chip, or one more CD-ROM?)
> I am not convinced that Windows 7 is the right way to compete in mobile. I can't think of anything better, but that doesn't mean that Windows 7 is the right thing to do.
How about paying a dividend in excess of earnings, so that the investors can take the money earned at Microsoft over the years and invest it in Google or HTC instead?
I still think Inovator's Dilemma is the most insightful business book ever written. If you truly understand what he's talking about in that book you'll get insights in technology that it's hard otherwise to understand because they feel very counter-intuitive in the beginning. This book should be on the desk of every CEO, especially in large corporations, but it's also very useful for startups to shape their products into something with a high potential for success.
Blue Ocean Strategy is also a similar and great book, and the Chasm books series (Crossing the Chasm, Inside the Tornado, Chasm Companion) are very good complementary books to Innovator's Dilemma (and Innovator's Solution).
Microsoft bothers with Windows 7 because rent collected from IP, while lucrative, is limited compared to the revenue potential of controlling a dominant platform.
Also, I can't imagine Balmer's ego or Microsoft's investors allowing Microsoft to ignore an OS niche.
I agree there's an irony here (Microsoft getting paid for each handset while Google doesn't get anything). But in the end Google still has the more lucrative position.
Because Google is still pretty well embedded into Android. So Google's still serving ads and getting all kinds of information on an ongoing basis. That's worth way more than $5 per phone
(I realize people can use other search engines with Android but it falls under the IE6 rule of "most people won't change the defaults")
So the reason Microsoft should still bother with Windows Phone 7 is that ongoing revenue stream.
The idea that Microsoft should imitate Google and go wholesale into a revenue model based on advertising sales ignores Microsoft's fundamental strength - the trust upon which its B2B relationships (the crown jewels) rely. Microsoft has a customer base which is likely to be stable over the next five to ten years - Google's customers would abandon it in a heartbeat if consumer habits change and Google's platform becomes less cost effective than a competitor's (Google has the same sort of vulnerabilities that newspapers had to Craigslist).
As this article points out, the price of Android for handset makers is free - the cost is somewhat more. If Google charged for Android they those costs might in fact cause Google to lose money on Android.
On the flip side, the Android ecosystem is so vulnerable in regards to intellectual property claims (don't forget Oracle and Apple are in the price/cost equation, too) that Microsoft's WP7 makes a great deal of sense. Particularly in light of Google's ability to just walk away from Android, it would be foolish to count on it as a consistent source of revenue.
While I agree with most of your post, I disagree with the last sentence.
I don't think you can count the "cost of Google walking away from Android" unless you also count the "cost of Microsoft walking away from WP7", unless you think there's a significant risk differential between the two events (which you have not justified in your post).
In fact, given that Android is open source, the "shit-hits-the-fan because we bet our entire company on the stack" risk-cost for Android is _lower_ because if the penalty was in fact that high, you could continue development in house.
And you can't argue that Microsoft is more vested in the WP7 stack than Android, because
1. Android has multiple users and manufacturers who would collaborate on the source if Google abandoned it.
2. Microsoft has walked away from platforms that sucked in the past (Zune).
There is a significant risk differential and your post points it out. Google can walk away from Android more easily because their core IP is not present in the codebase and therefore providing it to the open source community does not create competitors to their primary revenue stream. WP7 on the other hand, has a code base which almost certainly incorporates significant trade secrets upon which their core business (operating systems) relies.
In addition, Microsoft has not walked away from Zune - they have simply abandoned the manufacture of proprietary hardware under the brand. Zune as software is alive and well (and a component of WP7).
The business model for charging for operating systems is going to go away thanks to patents.
Sorry, Reg. I can't disagree more. The top 2 tech companies by market cap have Billions of dollars in cash on hand because they sell OS's (among other things). Apple would be a maker of very shiny hardware if it weren't for OSX and iOS. It's the OS that's the "special sauce" of Apple products.
And, last I checked, Microsoft was still making Billions per quarter selling OS's.
Ubuntu and all flavors of Linux are free, and have been for years. Yet, they've never really reached decent market share, because people generally feel like the user experience with an OS like OSX or Windows is generally better than the user experience with Linux. People are generally willing to pay a hundred bucks for a nice OS.
Android is free-ish. You don't pay for it, but you do pay in kind by giving Google access to your location data, your email data, your voice data, etc...
Renting OS's... Who's doing that now? Who's making money on that?
You seem to think that I was saying that operating systems don't have value and/or that it is not possible to make money developing operating systems.
What I was actually saying was that the business model of charging for the operating system (You give me $100 and I'll give you a copy of RaganwaldOS) is going away.
Making money by using a proprietary OS to extract a higher margin from selling hardware is what Apple does, and giving the OS away so they can extract "pay in kind" is what Google does.
Microsoft's model is going away as well. Maybe not today, but it is going away. We already have a situation where their biggest customers--the PC makers--make more money from JunkWare than they do from their so-called margins. Given that the PC makers are actually JunkWare distributors, they are all actively and aggressively looking for ways to extract themselves from Microsoft's rent-seeking position.
Microsoft collects patent rent from other companies (such as Amazon) solely because they run Linux. This is another major defect with our patent system. It is cheaper to pay licensing fees than to challenge bogus patent threats.
As far as I can tell, Microsoft claims they have patents that cover technologies/algorithms in the Linux kernel. I've never heard them get more specific than that. They approach companies and request them to pay a licensing agreement (or come to a cross-licensing agreement if the company has patents they can use against MS). TomTom disregarded the threats and got sued over Fat32. I imagine Microsoft's patent portfolio is vast enough to find something that will stick most of the time so the threats aren't completely unfounded.
Here's a brief article on the Amazon licensing agreement:
While I'm unsure of the details, I recall that Microsoft claims that Linux infringes upon many of their patents (don't remember the exact number). Therefor it is not unlikely that they would license out those patents to other companies who are known to be large users of Linux. If the cost of licensing were less than the expected cost of litigation (to have the patents declared invalid or demonstrate non-infringement) or if the companies believe that the patents are valid and that Linux would be found to be infringing if it went to court[1], it would make economic sense to license them.
[1] Which could be unimaginably costly for Amazon, considering their cloud offerings. If Linux were found to be infringing upon Microsoft's patents and they managed to get an injunction to prevent Amazon from using products shown to infringe[2], that would completely shut down most of Amazon and most of the web that runs on S3 or AWS.
[2] I'm not a lawyer, just extrapolating from cases where companies have been forbidden to sell infringing products. I'm not sure if this could actually happen, but it's a scary thing to think about.
So if you refuse to play ball and pay the license fees, what's Microsoft going to do to stop you? They obviously won't want to take things to court, as that'll mean exposing exactly which patents of theirs are supposedly being infringed upon.
1) It is impossible to know all of the patents you might violate when you develop a software product
2) Companies don't explain what they are infringing until they want a settlement or lawsuit (e.g. Microsoft never said precisely what patents Linux infringed on)
What are software developers supposed to do? How is this not completely and utterly broken?
This is a short-sighted analysis. Microsoft doesn't only make money from the Windows Phone licenses it sells. It makes money from advertising in apps, people using Bing, etc. Unfortunately an outside-in analysis of that is more difficult.
I wonder what the actual profit is? It cost MS a fair amount of money to sue HTC, but not nearly as much as it cost them to develop WP7 I would guess. So the profit margin is probably even wider.
Suing other manufacturers rather than making your own? It's scary. It's also like in F1, not bothering with qualifying isn't a stupid strategy any more, but it's not something any viewer wants to see.
It also shows that Microsoft didn't feel they could price their phones high enough to give themselves profit.
One would think that pretty much every company that puts out even remotely decent products in the market has some sort of patent loyalties to pay? I mean there is just no way for one entity to own all IP shipping in moderately complex goods.
In this case may be HTC pays Microsoft AND Google (for shipping Google properties and accessing their services) - but at the end of the day Android enables them to sell in volumes and the $5 they pay to Microsoft would still be substantially less than if they were to license a full OS and application stack from Microsoft. So win-win I think.
Unless HTC made a incredibly stupid deal to cover countries where Microsoft's patents don't apply - it is likely US users only that are paying for the US patent system's wrong doing.
HTC does make WP7 phones (HD7 comes to mind), but I doubt even Microsoft has enough leverage to pry HTC from Android... HTC is a rising star there and it's a big market.
MS definitely has the leverage for sure. If they can think of buying Nokia, they are surely capable of making HTC go exclusively WP. They just have to make an offer they can't refuse, right.
The first comment in the article brings up a vaild question. Is this nr of shipped phones based on the US sales or global sales? Because I don't think they have to pay fees of the global sales, or do they?
What's funny is to see someone in their first paragraph nit-pick the use of a single word ("so") from the article, and then in their second paragraph go on to grossly misuse a phrase ("patent troll").
It is not patent trolling to ask for licensing for patents that you developed and that cover technology that you use. It is in fact how patents were designed and meant to be used.
You make a good point. The guy "estimates" $15 per license and then uses this estimate to draw conclusions, without providing any basis for his estimate. It seems to amount to nothing more than speculation.
