Surface 2: Everything that's wrong with Microsoft's model

Microsoft will unveil its latest Surface devices, which illustrate why the hardware fascination in Redmond may be the wrong path to take. Software anywhere trumps devices and services as a model.
Written by Larry Dignan, Contributor

Microsoft on Sept. 23 will launch its Surface 2 and Surface 2 Pro devices---known around here as YAFS (yet another financial sinkhole)---and we're likely to see a refresh and some modest improvements. Let's give Microsoft props for its persistence, but the company's latest devices and services business model are a case of skating to the puck where it used to be and not where it's going.

Surface, the laptop meets tablet device, has cute anti-iPad advertisements but nothing close to its rival's sales. Before Microsoft's acquisition of Nokia---an exclamation point to the company's plan to be about hardware too---Surface was the biggest sign that the software giant had Apple envy.

Today, Nokia and Surface illustrate how Microsoft wants to be vertically integrated. Microsoft wants to own the hardware and software so it can provide great integration.

In other words, Microsoft wants to be more like Apple. Here's the problem: Microsoft's horizontal business model---software and an ecosystem of hardware partners---is converging with the vertical integrated scheme where one company controls everything. In other words, Microsoft is running toward the place where the optimal business model used to be.


Let's get real: Apple may be a unique situation when it comes to business model. If you believe Apple's success can't be replicated---even by Apple going forward---then Microsoft is doing the exact wrong thing at the exact wrong time. Perhaps it's time for Microsoft to leave hardware to the professionals also known as the ecosystem it's annoying with the Surface. Surface isn't going to woo the masses. Nokia currently isn't wooing the masses either. Microsoft has the money to continue to fight, but needs a hit desperately.

Wells Fargo analyst Jason Maynard outlined the conundrum in a research note:

In our opinion, Microsoft "Devices & Services" mission needs to change to a new mantra we are calling "Software Anywhere." We see a burgeoning competition between horizontal and vertically integrated models. Computing is shifting from being device centric to user centric. We think the locus of value is transferring from hardware and software to data. App services should ultimately have the most value because they capture user data. We think Microsoft should move horizontal and deliver value to users in both consumer and work scenarios across all devices. Our view is that a "Software Anywhere" strategy is the best shot at recharging relevancy and revenue. From a financial standpoint, we think Microsoft can generate enough apps revenue to offset the decaying Windows business.

Bingo! Instead, Microsoft execs at the company's financial analyst meeting Sept. 19 talked devices and services that go with them. Let's hear it for commoditized markets. To be fair, Microsoft did have a little bit of news for everyone at its analyst powwow. Talk of touch-optimized Office on non-Windows operating systems was welcome.

Microsoft needs to be more like Google, which has branded devices via partners and clearly focused on the data. Motorola Mobility was more about the patents, but Google has juggled it with partners like Samsung pretty well. Maynard said that Microsoft should revisit its 2001 Web services game plan, called Hailstorm. The analyst also said Bill Gates is the only one to reboot the company and make the Web services thing work. We at ZDNet disagree, but you get the gist. Microsoft needs to be a lot more about services and unleashing Office from being a Windows franchise body guard and less about devices.

Nevertheless, Microsoft will keep pushing hardware up the hill. Surface this week. An armada of Nokia phones in the near future. Good luck with that Redmond.


ZDNet's Monday Morning Opener is our opening salvo for the week in tech. Since we run a global site, this editorial publishes on Monday at 8:00AM in Sydney, Australia, which is 6:00PM Eastern Time on Sunday in the U.S. It is written by a member of ZDNet's Global Editorial Board, which is comprised of our lead editors across Asia, Australia, Europe, and the United States.

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