Microsoft isn't losing its consumer edge, it was game over long ago

I disagree with Mark Anderson, writer of the Strategic News Service, about Microsoft's future. Last night, at his 10th annual "Predictions Dinner," Anderson asserted that in 2010 Microsoft would lose "its consumer play. Specifically, "except for gaming, it is game over for [Microsoft] in consumer. This will make consumer the place to be, where the most robust and exciting change artists will work." His prediction isn't the future. It's the past.

Microsoft has been retreating from the consumer market for some time, following a deliberate strategy that is creating a circa-1980s IBM. Two days ago, I blogged about how Apple applies what I call "David Thinking" to challenge the status quo. Apple plays off its strengths to change the rules. By comparison, Microsoft is using its strengths to preserve the status quo, isolating the company to the enterprise. I've written about this IBM-transformation many times. In context of Anderson's prediction, it's good time to again explain Microsoft's consumer-losing strategy.

He Who Controls the Standards

Microsoft has abandoned the fundamental principles that made it the most successful software company of the last two decades and ensured its software would be the most widely used everywhere. The company established Windows as a technology platform that became the standard around which developers and other partners supported products. In the early days, Microsoft's approach was one of necessity: Maintaining standards compatibility with the IBM PC.

Microsoft cofounder Bill Gates understood early on the importance of controlling standards and also file formats. In the early 1980s, Gates put Charles Simonyi in charge of productivity applications development. Early work done by the father of Microsoft Office achieved two important goals by the mid 1990s:

• Established format standards that resolved problems sharing documents created by disparate products.
• Ensured that Microsoft file formats would become the adopted desktop productivity standards.

Format lock-in helped drive Office sales throughout the late 1990s and early 2000s -- and Windows along with it. Businesses needed Office to share documents and to maintain backwards compatibility with a growing amount of their valuable information being stored in Microsoft file formats. But even as Microsoft standards drove sales, a new standards threat had developed.

In May 1995, Gates penned the "Internet Tidal Wave" memo that warned about the extended network's threats to Microsoft. In the memo, he specifically identified HTML, HTTP and TCP/IP. "Browsing the Web, you find almost no Microsoft file formats," Gates wrote. He observed not seeing a single Microsoft file format "after 10 hours of browsing," but plenty of Apple QuickTime videos and Adobe PDF documents.

Microsoft's visionary founder warned: "The Internet is the most important single development to come along since the IBM PC was introduced in 1981. It is even more important than the arrival of the graphical user interface (GUI)."

Today, that "most important single development" looms over Microsoft, which in response is becoming the definitive, stodgy computer company of the 2010s, like IBM was in the 1990s.

Microsoft tried to exert control over or influence developing Web standards in the late 1990s and early 2000s. But in response to antitrust actions in Europe and the United States and to business customer demands, Microsoft also pursued a strategy of increased openness. For example, Microsoft's Interoperability Principles contribute to its weakened support of standards it controls.

Microsoft is Lost in the Cloud

In a surprisingly short span of time, Microsoft has lost control of standards and formats outside the enterprise. The company has reached a critical juncture that executives seem unable to comprehend.

Part of Microsoft's problem is corporate cultural. Executives spend too much time focused on competitors. That's how the Internet crept up on the company in the early 1990s; Gates and most key managers were obsessed with AOL and CompuServe. They were looking the wrong way. Now there is the Google obsession, which in the early 2000s has made Microsoft blind to its rapidly eroding control over technology standards and the importance of the next-generating computing platform. While Microsoft frittered away corporate energies chasing Google search, startups and Apple released cloud and mobile computing products that are outside the software giant's control. Meanwhile, Microsoft's Windows Mobile has run aground, as the company seeks solace in the enterprise rather than fully embracing the new applications stack.

Google isn't the enemy Microsoft needs to worry about now. It's the mobile-to-cloud application stack that Apple and various cloud and social media startups are advancing. If iPhone/App Store succeeds, Apple -- or even Google with Android tied to Web search -- will control the standards that define the next-generation computing platform; all around mobile devices and the cloud. Google and newer startups have vested interest in preserving the early Web 3.0 status quo: Open standards or others with published APIs that Microsoft doesn't control.

As Microsoft has lost control of standards defining the new applications stack -- notebook/mobile device to the cloud -- the company has retrenched and pulled back to where its standards control is strongest, the Windows-Office-Windows Server applications stack. In the consumer marketplace, where social media and cloud computing products and services rapidly gain attention and adoption, Microsoft's strategy has been to pull back. Since 2006, Microsoft has cut most of its major consumer desktop applications, shifting some capabilities to Windows Live services.

The timing of Microsoft's consumer pullback coincides with a surge of transforming consumer products or services tied to control and using standards or formats outside Microsoft's control. Most social media startups, whose products and services are taken for granted today, started in the last three years. Facebook, Twitter and YouTube opened to the public in 2006. Most other popular or growing popular social media tools launched within the last three years: Disqus, FriendFeed, tumbr, Twine, Qik and USTREAM, among many, many others. Apple's iPhone launched in summer 2007 and the mobile App Store -- now with more than 100,000 applications -- a year later.

Recent cutbacks and internal refocusing point to Microsoft making its core business market the top investment priority. It's a shortsighted strategy that will lead to long-term problems. The products, services and standards that will eventually take hold in the business market are winning over consumers now. Microsoft doesn't control the standards or file formats behind them.

Among businesses, Microsoft controls an application stack that no competitor has shaken, let along topple. Microsoft's control of technologies, standards and formats gives it a stronghold on enterprise computing. Two-fold problem:

• Microsoft has abandoned most consumer products and focused its cloud strategy (e.g., Azure and Online Services) on businesses.
• Microsoft seeks to preserve its existing applications stack, while failing to engage the newer one around the mobile device and cloud.

Stated differently, Microsoft is too focused on seeking to preserve existing revenue streams when creating newer ones should be the priority. Microsoft's self-preservation approach compels its developers to bind new technologies to Office or Windows, when they should be set free to embrace standards and help establish others. Related, as mentioned earlier, Microsoft also is distracted chasing Google search.

Perhaps Microsoft could, or would, be more adaptable if not for the global economic crisis, which has compelled executives to push harder the preserve-the-application-stack strategy. IBM followed a similar path in the 1980s, seeking to preserve its application stack around the mainframe. IBM released a PC, but the company made protecting its legacy business priority. IBM and its mainframe business didn't go away, but its relevance diminished before a new applications stack. Microsoft faces similar challenge before the new applications stack. That path will make Microsoft the IBM of 2010s, unless there is a dramatic course correction; if it's not already too late.