The One Thing Microsoft Should Do Next
Here’s what Microsoft needs to do to regain relevance.
Microsoft’s departing CEO Steve Ballmer has presided over a tumultuous time in the company’s history. While revenue increased to the tune of $77 billion last year, Microsoft’s product offerings have been less than stellar. From Bing, which has a lowly 17.9% share of the search-engine market,to Windows 8, which has reportedly confused most consumers, it seem that the company is constantly trying to catch up with a quickly evolving technology market. So what can Microsoft do to get back on track?
What’s been good
Microsoft’s increased revenue numbers year-over-year speak to its continued growth. But the company has been able to mask losses in certain divisions with great numbers in others. So what’s been good? Well, the company’s server and tools division posted a 22% increase in revenue over the past two calendar years.
The same goes for Microsoft’s business division, which has posted a 27% revenue gain in the previous two years. And the entertainment and devices division has been up a whopping 55% over 2011 and 2012.
Collectively, these three units made up $52 billion in revenue last year, which is 67% of Microsoft’s $77 billion in revenue. And while the entertainment and devices division saw a 71% decrease in income from 2011 to 2012, that number is inflated by the fact that it saw a 143% increase from 2010 to 2011.
What’s been bad
Going from a $1.2 billion profit in 2011 to $364 million in 2012 in entertainment and devices is a concern. But that’s less of a worry when one considers the company’s flagging online-services division. Online services posted an $8 billion loss on $2.8 billion in revenue as Microsoft tries to build an Internet search and online ad contender to compete with Google.
This problem appears to be getting worse: while in 2010 and 2011 the losses were about even with revenue, it’s clear that something is wrong when you lose $8 billion. It’s no wonder Microsoft used part of its $13.8 billion sales and marketing budget to create advertising campaigns designed to portray Google in a negative light: it has to do something to try to taper the losses.
What needs to be done
It’s been reported that Ballmer was likely pushed out by Microsoft’s board of directors; the company had to write off $900 million on its Surface RT tablets. Losing $900 million is reason enough to fire a CEO, but the significance of Surface should not be discounted here. Microsoft has not been able to compete with the likes of Apple and Amazon.com in tablets and to a lesser extent content on said devices.
In 2012, Apple made $32.4 billion on iPads and related products and services, a 59% increase from 2011. It generated $80.4 billion from iPhones and related products and services, a 71% increase from 2011. Those two product lines alone make up over $100 billion in revenue, which is higher than Microsoft’s total revenue.
In fact, at $157 billion, Apple’s total net sales are much, much higher than Microsoft’s. Total revenue for Microsoft only represents 49% of Apple’s $157 billion take in 2012. And that’s mostly in consumer products and services!
Amazon has surprisingly figured out how to get tablets into customers’ hands via the Kindle. Its $199 Kindle Fire, released in 2011, is a product that handily beats Apple’s tablets in terms of price. The price has been dropped even lower, to $159 of late. There’s no doubt that the Kindle lineup of e-Readers and tablets have helped Amazon see a 27% increase in its revenue numbers, to $61 billion in 2012.
And while the company is spending a lot of money on operating costs ($60 billion in 2012), that’s just a reflection of its desire to expand faster than its retail rivals, a strategy that the traditionally conservative Microsoft may never embark upon.
Microsoft needs to figure out the mobile business
Can the company do it? It will require a visionary CEO that at the onset may seem like a risky hire. But it can be done. Microsoft needs to recognize that the line between businesses and consumers is blurring as more people bring their mobile phones and tablets everywhere. This includes into the workplace, where the company once dominated its competitors.
Microsoft needs to realize that getting well-designed, easy-to-use mobile products into people’s hands is imperative going forward.
