Does Microsoft Still Matter? 2013 Will Decide

2013 will be a make-or-break year for Microsoft. Not so much from a financial standpoint, but for how the company is perceived.

Traditionally, Microsoft has built itself around the PC, anchoring itself by its core operating systems: Windows XP, Windows Vista, Windows 7 and now Windows 8. But in the last few years, Microsoft’s Server and Tools division has generated the highest revenue and profits in the company, followed by the traditional pillars of the company, Windows and Business Tools, or Office.

How will Microsoft fare in 2013? Financially and overall, just fine. But be on the lookout for softness in the company's traditional businesses as Microsoft evolves into a services company.

Windows 8: A Mild Flop

Any Microsoft predictions need to start with Windows 8. So let’s get this out of the way: Windows 8 will flop in 2013.

Not hard - the new operating system probably shouldn’t be compared to the catastrophe that was Windows Vista. But Windows 8 will likely be seen as overly ambitious, a risk that many potential customers won't be willing to take. In all, though, Windows 8 will sell slightly fewer copies than Windows 7 during 2013.

That’s not because Windows 8 is bad. It isn’t. To its credit, the new OS hasn’t been plagued with the sort of slowdowns and crashes and user interface mistakes that afflicted Vista. 

But the break from previous version is sharp. Windows 8 doesn’t launch to the desktop, the most familiar interface (and - perhaps to speed the transition to the new user interface - Microsoft is refusing to let users configure it to go direct to the old-style desktop). Years of interacting with smartphones and tablets have taught users how to navigate the Metro interface, and swiping left and right along the main Start screen is easily understood. But most consumers don’t quite seem to get what they need to do when they want to “work,” i.e. use the desktop. The back-and-forth between the desktop and the Start menu, the navigation between apps, the lack of a traditional Start button and other interface changes will frustrate users. Unlike Michael Dell, I see a significant chunk of enterprises still choosing to standardize on Windows 7. 

Typically, Microsoft halts sales of the previous operating system two years after the new version goes on sale, which would mean that Windows 7 would fade away in Oct. 2014. (Windows 7 mainstream support will expire in January 2015.) I think we might see a “toned-down,” more transitional edition/service pack of either Windows 8 (or 9?) that will help consumers shift over to the new OS. 

Basically, what consumers will accept is a Windows 8 tablet interface on top of a Windows 7 desktop environment. They don't have it. Yet.

Surface: A Nice Idea, But...

If Microsoft could deliver a full-fledged Windows 8 experience at the $500 price point of the Surface RT, the company would sell a ton of its new tablets. So far, it's not even trying - the Surface Pro starts at $900.

Windows tablets - from Microsoft or others - will be lumped together with Windows Phone: lovely experience, but without the variety of apps that users are used to on the leading platforms. Sorry, but developers are going to support Android and iOS first, and then maybe Windows and BlackBerry. That leaves Web apps as the saving grace.

In that environment, Surface will survive, but not thrive. Windows tablets from other manufacturers will barely survive. Expect some hardware makers to try a consumption-oriented “Surface Mini” form factor, though, with modest success.

Traditional clamshell laptop form factors will still be the most popular for business, with convertible/detachable hybrid tablet/laptops making headway among consumers. That means it's hard to see a sweet spot for the Surface Pro to catch on.

Finally, Touchscreens will become a standard necessity very quickly. Logitech and other peripheral manufacturers are in trouble. 

Server Tools and Office: Under Pressure, But Still Dominant

At this point, most people use Office because they use Office. It’s a habit. Most consumers don’t really need Office for basic Word processing, but there’s always just a bit of formatting that the free alternatives can’t manage. Businesses, meanwhile, have made Word, Excel and PowerPoint into staples of everyday business life.

There’s no reason any of that will change in 2013. Office for Windows RT and Surface remains one of the compelling selling points for the platform. And, revenue concerns or not, it makes perfect sense for Microsoft to ship Office for the iPad and the Mac. So it no doubt will do just that. It’s in Microsoft’s best interest to keep its .DOC, .PPT, and .XLS formats (and their XML equivalents) front of mind for most of the Web’s population.

It’s also difficult to see Microsoft’s Server and Tools business disintegrating. This has been one of the company’s most stable businesses, and should continue to be so for years to come.

Xbox: The Top Dog’s Getting Long In The Tooth

Will there be an “Xbox 720” by Christmas 2013? Hard to say. But with each passing year (the Xbox turns seven in 2013) the possibility becomes more and more likely. 

Either way, the Xbox is becoming even more important to Microsoft. The Xbox’s function (as a games console) has evolved into an entertainment console. I think we’ll probably see that recognized as a rebranded “Arcade” version, reimagined as a sort of beefed-up Roku. Cloud services remove much of the need for local storage, but the Kinect provides a compelling user interface as well a gaming controller. Microsoft could strip out cost from Kinect, possibly making it audio-only. I think a stripped-down Kinect Arcade bundle is likely.

Kinect for Windows, though a fascinating idea, probably doesn’t as make as much sense, given Windows 8's a touchscreen interface. In general, however, Microsoft will have to stumble badly to allow Sony, Nintendo or others back into the console game. 

Windows Phone: We’re Number Three!

Great product, nice interface, solid hardware. Count me in the camp of people who admire what Microsoft’s done in the smartphone arena. But there’s no way Microsoft unseats either Android or iOS. Instead, Microsoft should hope to become the third option - outpacing RIM's upcoming BlackBerry 10.

Will it? Probably, over time. In the United States, BlackBerry and Symbian are dead ducks.

Microsoft Online: Bing, IE Gain Respectability

It’s probably fairer to say that Microsoft’s online services have already gained respectability, and will continue driving forward in 2013. Bing’s home page is still one of the most attractive sites on the Web, and if people were forced to visit it for every search it would do even better. They're not forced to do that, of course, and Bing continues to trail Google by a large margin.

If that's going to change in 2013, the boost will come from Windows 8. In the new operating system, Mozilla’s Firefox and Google’s Chrome are unwelcome guests, rather than a fundamental part of the OS. And integrating Bing - which has diverged into its own ecosystem, rather than follow Google - will help Microsoft gain share in search. Whether or not Internet Explorer is truly the most popular browser varies by which analyst firm you ask, but IE10 will definitely help grow Microsoft’s presence online.

The tougher question is whether Microsoft’s online division turn a profit in 2013? The answer is No. It will come closer, but that milestone will have to wait.

All the changes should work together to benefit Microsoft’s online ecosystem. The company has brought together a suite of products, from Skype to Microsoft’s Office Web Apps, that can all be tied together. How well Microsoft can monetize them, however, is anyone’s guess.

Put it all together, and 2013 is the year Microsoft doubles down on its pivot away from being a software supplier to being a services provider.

Expect some softness in Windows sales, but continued strength in back-end tools and services. How this all plays out will determine whether 2013 ends with a very different Microsoft perceived as a newly revitalized dominant player or a reeling giant struggling to regain relevance.