Poor Microsoft. In acquiring Nokia's Devices and Services business, the company has signaled its intent to double-down on a vertically oriented product strategy that now seems passé. More poignantly, Microsoft may be turning its back on a horizontal product strategy for mobile at the very moment that Google has proven such a strategy to be successful.
Microsoft's Mobile Catch-22
It's not surprising that Microsoft is confused. Microsoft made billions licensing its Windows operating system (OS) to server and desktop hardware companies, outpacing a control-freak Apple that insisted on a vertically integrated product approach, building its own hardware and software, even as it hemorrhaged market share. When mobile emerged as a serious market, Microsoft tried to replicate its desktop and server success with a horizontal approach to the market, licensing its Windows OS broadly.
It didn't work.
As Clayton Christensen, author of The Innovator's Dilemma, could have predicted, in a new market an integrated approach works best. Apple's vertically integrated approach, a poor fit for the mature desktop market, almost immediately took off to rave reviews and billions of dollars in quarterly profits in mobile space. Microsoft's horizontal approach? Well, it led to Microsoft becoming increasingly irrelevant as mobile devices took center stage, as a graphic from Wells Fargo illustrates:
In response, Microsoft is now going 'all in' on vertical integration, buying Nokia's phone business so that it can offer a complete hardware+software+services integrated solution.
There's just one problem: It no longer seems to be the right strategy.
Google: The New Microsoft
Wells Fargo senior technology analyst Jason Maynard captures this best in a recent research note, arguing that the market has moved back to a horizontally oriented approach:
[T]he PC era is over. It has been replaced by a heterogeneous device world in which Microsoft must contend with other large players like Google, Apple, Amazon, and Samsung. In addition there are a number of cloud players like Dropbox, Box, Spotify, Pandora, Evernote and others that are eroding away at core utility, productivity, and entertainment layers of the PC ecosystem. In our view, users increasingly look for technology solutions that work across platforms and applications. Personal clouds, social networks and a myriad of computing devices all reflect a growing trend that puts the user at the center of the technology universe.
In other words, few really want any particular vendor to completely own their entire computing experience in some perverse reincarnation of CompuServe. Yes, some people use Apple end-to-end, including hardware, software (including iWork—shudder) and cloud services.
But they're the exceptions, not the rule.
Far more people may use an Apple device (though increasingly market share goes to Android) with Google for calendar, email and other services.
Indeed, Google is really the team to emulate and beat. Google succeeds because even though it ostensibly offers an integrated experience, it doesn't fixate on this experience. Google happily builds its services and software to run on others' platforms, and quite often that software and those services run better on rival platforms than on Android.
While Microsoft has always privileged its software running on its platform, Google's "software anywhere" approach, to borrow Maynard's term, looks like the winning strategy going forward, because it puts the user first, not the vendor.
It's The Data, Stupid
Actually, that's not quite right. The Google approach is really about putting data first. Intriguingly, there's no reason that Microsoft can't do this, too. While Microsoft gets a fair amount of abuse for its Internet business, it has a range of services like Hotmail, XBox Live and more that run at dramatic scales and understand the importance of running beyond any single device.
Microsoft's new mantra is "devices and services," which leaves room for embracing services that live above the level of any single device. But with the purchase of Nokia's phone business, there's a real risk that Microsoft will stitch together software, hardware and services in a tightly integrated way, developing an exceptional experience... that virtually no one will ever see. It may also prove to be a way to protect the Windows business, as Maynard argues, which locks Microsoft into an old way of thinking.
Not that Google doesn't do similar things. As one inside observer reminded me, to use Android under the Android brand, you must sign the Open Handset Alliance contract that binds you to Google's services. This is why Amazon took the Android code but not the brand name for their Kindle devices.
The path forward for Microsoft, according to Maynard, "should be built on making information work for the people," with "information accessible, actionable, and relevant for both consumer and enterprise users (for in fact most people are both)." That last part is critical: Microsoft still owns the enterprise, and also has significant traction in consumer.
If Microsoft could build services that span a person's work and personal lives, without robust preferences for any particular hardware (or OS), Microsoft could win. And win big.