Wednesday, October 23, 2013

The Services Race: Microsoft and Apple Target Google's Business Model

It seems like only a few months ago that major technology companies were strutting about with new proprietary operating systems in tow, confident that both enterprise and consumer customers would gladly pay the freight for superior operating systems and installed software.

And yet after the awkward introductions of Windows 8, Windows RT, Windows Surface, Windows Surface Pro, and then Windows 8.1 upgrades (withdrawn after major installation issues) - all of a sudden those cloud-based services on Google's Chromebooks are looking better and better for both work and personal use. Chrome OS, the operating system for personal computers that keeps all of your content and services in the cloud with Web-based secure offline services, turns out to have powered the hit PCs this fall for back-to-school and beyond. Chromebooks are four of the top ten best-selling laptops on Amazon, and generally the most affordable ones. So, while Windows PC sales fall and Apple Mac sales were stagnating, Chromebooks actually gained PC market share.

A good deal of the appeal of Chromebooks has to do with their low prices and cloud-based reliability, which probably wouldn't matter as much if people were getting more value from installed software. In general, though, they're not - increasingly what people value is coming from online services, be it for productivity, information or entertainment. Hence Microsoft has had to slash prices for its new PCs and rely on institutional sales wherever possible to drive up unit volumes just to keep market share losses looking less than a complete disaster. It turns out that paying hundreds of dollars for an operating system just doesn't unlock the door to either enhanced productivity and gratification. Instead, paying for Windows and other operating systems in the face of free OSes from Google and others seems like a waste of money - and time, given the complexity of many upgrades for existing PC owners.

So it should come as no surprise, then, that both Microsoft and Apple are discovering the power of "free" for their emerging and shifting market strategies. For Microsoft, its latest move to attract people to its Web-based Office 365 productivity software is making it free for students - that is, if their school has ponied up to buy it for its faculty and staff. That may not excite consumers looking at PCs online or in stores, but it's Microsoft's move to convince a generation developing job skills that Windows is essential for surviving in today's workplace. Given that enterprises are not moving away from Windows in droves, yet, that's probably a reasonable argument - if more fear-based than desire-based.

On the other hand, Apple has a line of hardware which, while remaining premium-priced, has a solid "it just works" reputation and a core of iWork productivity apps that just got upgraded. Taking advantage of Apple's shift to 64-bit processing across all of its devices, iWork offers improved performance, syncing of content into Apple's iCloud storage services and document collaboration services that roughly parallel collaborative offerings from Microsoft and Google. The price? Yep, free. Software upgrades for OS X, the operating system for Macs? That's free now, too. So while Apple has barely made a dent in enterprises with its iWork offerings, it has two positive factors to boost it forward - well-loved hardware and operating systems and free productivity tools.

So now we have both Microsoft and Apple belatedly picking up on Google's emphasis on throwing away everything except that which gets information on to their cloud Web services. What happened? Well, there were a few key factors that have finally hit home for both of these companies:
  • Google asked, "What has your installed software done for you lately?" and their customers responded, "Not much."
    For all of the ridiculing that Google took in the tech press for launching Chrome OS, it turns out that Google was on to something that the techno elites weren't quite ready to accept and everyday people were quite ready to accept - PCs just don't do as much as the Web can these days, by and large. Since Google had almost nothing invested in existing hardware in their customers' hands, they just focused on lowering its price to lower its cost of signal acquisition costs for its various services. In essence, the Web as a whole is the largest services platform possible, magnified by Google's global dominance in signals gathered from mobile phones of all kinds via its apps services. Compared to that, PCs and mobile devices are just signal gatherers and display units.
  • Microsoft and Apple asked, "You'll love this machine," and their customers responded, "I guess."
    New PCs and mobile devices from both Microsoft and Apple are both actually quite nice by today's standards in terms of hardware and look and feel. They're not clunkers performance-wise by any stretch, and in fact in some ways they're leaders. Apple especially has done a great job of launching machines that feel good, look good and do what they say they'll do. But in recent product intros, the problem for both Apple and Microsoft has been its customers saying on one level or another, "Is that it?" There are things to be said for a marketing strategy based around premium hardware, but when your hardware doesn't do much of anything notably different for the Web services that people spend most of their time with, this love affair with nifty hardware cannot last forever. Unless Apple and Microsoft can build machines with tangible benefits far beyond what a Chrome browser can deliver today on any machine, they've got problems.
  • All of them said, "It's free!" and their customers responded, "How free?"
     While there are plenty of people who are going to be product loyalists no matter what, increasingly people's brand loyalties are built up around Web experiences more than specific pieces of software or hardware. Our relationship with specific phones, tablets or PCs is measured often in months, sometimes years; software is updating constantly or fades into the background. The real lasting gold that people value the most is content and the services built on content. So when Google says "free," it's giving away things that it can afford to give away, because it build the margins of their core content businesses. When Microsoft or Apple say "free," they have to hedge it a bit, because ultimately they're protecting their margins via integrated hardware and systems sales. Take that free iWork software, for example - it gets you locked in to Apple hardware. Same for Office 365, to a lesser degree. So free isn't so free, then.
While the Google ecosystem is certainly not hook-free, it has a lot more flexibility to wiggle this way and that to make it easy for people to be bored with whatever machine on which they find Google services and to be more excited with what those services do. Google chased Web signal, Microsoft and Apple chased unit sales. Neither are perfect strategies, but in technology, a strategy based on doing things with as much signal as you can get your cloud around is for now much more marketable than a strategy that lets others do things with signal no matter what device generates them. Google is also more likely than Microsoft and Apple to build in opportunities for competitors to challenge its core services into its offerings, knowing that this provides both "don't be evil" air cover and an opportunity to make its ecosystem more robust overall.

Finally, while Microsoft and Apple provide customer logins for its core online services, Google extended those logins to become the backbone for a social media service that embraces both personal communications and business collaboration - +Google+. Collaboration for Microsoft and Apple may work fine, but with Google+ emerging now as the second-largest social network by many measurements, Google's fundamental service relationships has a social component that both Apple and Microsoft have neglected. Content just isn't in their corporate DNA, you might say, it's more something that its partners offer through their technology. Fine enough, but all of Google's account login points link you in to the world of its social network by default - and to the collaborative services drive by that social network. You might say that while Apple and Microsoft were making phones and PCs, Google was making a global communications system that told them about what the world what thinking and doing.

We're always going to be interested in the latest technology, and few things provide a confidence boost to many people than sporting it in front of others. But the truth is that the technology that Microsoft and Apple tout most is now decades old. The Web is still in its infancy, barely starting to become everything that it could be. We'll continue to see interesting and sometimes even exciting machines from Apple and Microsoft, but in their shift to Web-centric services, it's far from clear that either of them have enough distinct advantages to make a go of it in the long run. Google's strongest future competitors may not turn out to be either of these companies - at least in their current forms. In the meantime, may the best services win.
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