Why would Microsoft pay €5 billion for what apparently is a troubled mobile devices company?
Perhaps there’s a method to this madness. Let’s look at three facts that most of the critics never seem to mention.
First, Microsoft gets to pay for the deal with cash that’s trapped overseas, where it’s free of U.S. taxes. As the Wall Street Journal noted last fall, $69.6 billion out of a total of $77 billion cash on Microsoft’s books is held overseas in low-yielding securities. If the company brought it back to the U.S., it would be taxed at corporate rates. Not having to pay that tax makes the effective price of Nokia’s Devices and Enterprise division a mere €3.25 billion.
And in exchange for that relatively modest investment, the company gets an amazing pool of engineering and hardware design talent, worldwide supply chain management expertise, global manufacturing resources, billing deals with mobile carriers worldwide (crucial to selling apps and services), and access to a treasure trove of patents. Those 32,000 employees can make an immediate dent across the board in Microsoft’s other hardware lines, including Surface and Xbox.
This isn’t a struggling division. It’s worth noting that Nokia has won major awards at Mobile World Congress three years in a row: Best New Mobile Handset, Device or Tablet in 2012; Best Feature phone or entry level phone in 2013; Best Low Cost Smartphone (the Lumia 520) in 2014.
And here’s the kicker: the division promises to begin contributing to a positive bottom line for Microsoft immediately. As Microsoft noted in its required disclosures:
With ongoing share growth and the synergies across marketing, branding and advertising, we expect this acquisition to be accretive to our adjusted earnings per share starting in FY15 [which begins in July 2014, mere months after the deal is due to close].
Terrible deal? Colossal mistake? We can revisit this in a few years, but there are a lot of positives to start with. If you think this could end very well, you’re not crazy.
This one comes from the same crowd that’s been promising "the Year of the Linux Desktop” since dinosaurs roamed the earth. So adjust your expectations accordingly.
Still, the Microsoft that talked smack about Linux and Open Source software five years ago has undergone a fundamental transformation since then. I’m going to turn the mike over to Microsoft’s Scott Hanselman here. Scott is one of the most passionate and publicly visible advocates for the Open Source community and a genuine star at Microsoft. Here’s what he wrote just a few days ago:
We're putting source on GitHub, many groups are using Git with TFS internally for projects, we've open sourced (not just source-opened) huge parts of .NET and are still pushing. We've open sourced Azure hardware specs, opening SDKs, and we're making systems more pluggable than ever. Frankly, we're bending over backwards to NOT be dicks about stuff, at the very least in my corner of the company. Could we do better? ALWAYS. Are we pure evil? Nah.
Is Microsoft circa 2014 worse than Google, Apple, or Facebook? We're not nearly as organized as we'd need to be to be as evil as you might think we are.
Moreover, I think that Microsoft is very aware of perceptions and is actively trying to counter them by actually being open. I'd say we're more concerned than a Google or Apple about how folks perceive us.
And in the picture-is-worth-a-million-lines-of-source-code department, look at the screenshot above, taken from my own personal Microsoft Azure account. Yes, those are fully supported Linux distributions available for immediate, automated installation in Microsoft’s premier cloud-based service.
As Hanselman says, “This is not your grandfather's MSFT, and now the dude who helped us (Azure) change things in a fundamentally non-MSFT and totally awesome way is in charge. I'm stoked - big things coming, I think.”
Pick a whipping boy – Excel, Outlook, Word, or PowerPoint. Especially PowerPoint. In a few short searches you can find unbridled hatred for any one of those products, usually from someone in Silicon Valley who was forced to run one of those reviled programs on their MacBook Pro and did so with teeth clenched the entire time.
The reality is that more than a billion people worldwide are running Office today. As someone who has been documenting the development of Office online for roughly two decades, I can tell you that the latest version of Office has some mind-bogglingly awesome features. If you’ve ever seen the charts I produce as part of posts like this one and this one, you know Excel’s capable of spectacularly strong infographics. I’ve tried doing the same thing with free, Open Source alternatives. No offense, but the results simply can’t compare.
And those same limitations are found across the board in the other apps that compete with modern Office apps. Let's face it: Microsoft works its tail off improving Office. Your average Silicon Valley tech journalist might despise Office, but those of use who use it to get actual work done beg to differ.
In fact, those billion people have had free alternatives for years, and yet they keep paying for Office. I’m sure Yogi Berra would have had a snappy way to explain that phenomenon, just as he once dismissed a popular restaurant by saying, “No one goes there any more. It’s too crowded.”
At some point you have to let go of the past. The Web Standards Project, which was founded in 1998, did exactly that in early 2013, saying “Our work here is done.”
When The Web Standards Project (WaSP) formed in 1998, the web was the battleground in an ever-escalating war between two browser makers—Netscape and Microsoft—who were each taking turns “advancing” HTML to the point of collapse. You see, in an effort to one-up each other, the two browsers introduced new elements and new ways of manipulating web documents; this escalated to the point where their respective 4.0 versions were largely incompatible. … The WaSP’s primary goal was getting browser makers to support the standards set forth by the World Wide Web Consortium (W3C).
Thanks to the hard work of countless WaSP members and supporters (like you), Tim Berners-Lee’s vision of the web as an open, accessible, and universal community is largely the reality. While there is still work to be done, the sting of the WaSP is no longer necessary. And so it is time for us to close down The Web Standards Project.
Indeed, as someone who uses Internet Explorer 11 as my primary browser day in and day out, I can count on one hand the number of times each month I run into a compatibility issue. And 9 times out of 10 that issue arises because some Web designer with a chip on his or her shoulder has coded the site to fail when it detects Internet Explorer.
Hating on Internet Explorer 6 was a perfectly reasonable thing to do in 2008. But that relic of the early Web is dead and buried. Let it go, people.
This one stems from a fundamental misconception, that Bing (the search engine) is a direct competitor to Google (the search engine).
That might be the most obvious manifestation of these incredibly rich data-driven services to a casual observer (which accurately describes most of the pundits thumping the table for a Bing spinoff). But there’s a helluva lot more to Bing than just web search.
My colleague Mary Branscombe has done a much better job of explaining the role of Bing than I could. She explains, “At heart, Bing (like Google) is a huge machine learning system.” And key to that system is Bing’s engine for understanding what information is about, called Satori. She then goes on to list all the things that Satori powers:
Satori is a huge collection of entities: People, places, events, businesses, objects and the relationships between them. A movie is an entity; so is are the actors who are in the movie, so you can see that James Spader was in Stargate, and then jump to a list of his other movies. Bing knows that Yosemite is a place, so it has weather, and a national park, so it has opening times. Satori is what Bing can use to find tweets and Facebook posts from your friends about the movie you're searching for when you look at show times. If you want to show the right information to the right person at the right time, understanding that information is vital.
Satori and Bing are behind the new Smart Search in Windows 8.1 that shows you your own files next to results from the Web. Looking for the contract you need to sign this week with a partner might be a good time to see their share price and any recent news stories about them. Imagine all the other information that could include in future; search for the document you need on SharePoint and see what colleagues have said about it on Yammer without having to remember to go look on Yammer.
Bing drives the new version of the Windows Store in Windows 8.1. It’s behind Kinect and the amazingly accurate predictive keyboard in Windows Phone.
But more important than any of that, Bing is a counterweight to Google. In the present and even more so in the future, being able to combine, collate, and present information is a core feature of any computing device. If Microsoft gets out of the search business, it effectively hands over monopoly power to Google. That will not end well.
The early parts of the first decade of this century were a nightmare for Microsoft and its customers. The combination of a monopoly share of the market, minimal security awareness, and a criminal community that had discovered the Internet with a vengeance meant that malware was a fact of life for every Windows user, at home and in the office.
That all began to change in 2002, when Bill Gates basically slammed on the brakes at Microsoft and forced a fundamental reassessment of how security issues are handled. Allow me to quote myself:
As a result of the Trustworthy Computing initiative, Microsoft introduced a massive change in the way it develops software. The Security Development Lifecycle has paid off hugely over the last 10 years and has been widely praised and copied.
In addition to building a more disciplined process for writing secure code, Microsoft has improved its update infrastructure and worked closely with outside security experts and third-party developers to improve the way their products work. Over time, Microsoft has built its own antivirus and network intrusion software; now that the 2001 antitrust agreement has officially ended, that software will finally appear in Windows itself.
These days, most successful exploits come through vulnerabilities in third-party software. A brand-new report from Secunia, for example, notes that Microsoft has two-thirds of the software in the top 50 list on the average PC, but only 24 percent of the vulnerabilities. And even when those vulnerabilities occur, Microsoft customers are generally well protected:
It is one thing that third-party programs are responsible for the majority of vulnerabilities on a typical PC, rather than Microsoft programs. However, another very important security factor is how easy it is to update Microsoft programs compared to third-party programs. Quite simply, the automation with which Microsoft security updates are made available to end users – through auto-updates, Configuration Management systems and update services – ensures that it is a reasonably simple task to protect private PCs and corporate infrastructures from the vulnerabilities discovered in Microsoft products. This is not so with the large number of third-party vendors, many of whom lack either the capabilities, resources or security focus to make security updates automatically and easily available,” said Secunia CTO, Morten R. Stengaard.
Thanks to its massive footprint, Microsoft software is still a massive target. It’s a well-protected target, fortunately. And if you think otherwise, you might be living in 1998. Coincidentally, it’s a 1998-era PC (shown above) that Apple uses to illustrate a PC in Finder. I guess they’re too busy fixing horrifying SSL bugs to actually replace that icon with a modern Windows PC.
One influential financial analyst has been pounding the table for this change for the past year or so, all in the interest of “unlocking shareholder value.”
While it’s true that Xbox had a string of losses in its early years, those are sunk costs. The platform today is at least break-even and probably profitable. It spawns games that can bring in hundreds of millions of dollars in revenue. More important, it is a well-loved Microsoft brand that is widely available in hundreds of millions of living rooms, where it has the potential to tie into other Microsoft services and expand Microsoft’s reach into the consumer market. Do you really want to give those all up if you’re a Microsoft shareholder? I didn’t think so.
And finally, there’s the pure technical side. The technology that drives Xbox, both as a gaming platform and as an entertainment hub (that’s a big growth business, by the way), comes straight out of the same groups that build Windows. If you sell the company, how do you expect the Xbox developers to extend their platform?
No, Xbox belongs in Redmond. The only people who would applaud a spinoff are vulture capitalists who skim off profits as they drive a once-proud company into the ground.
Make them go away.
Poor Steve Ballmer. Despite leading a fundamental transformation of Microsoft from a software licensing powerhouse to one that has a strong future in cloud-based services, he gets no respect.
So the “One Microsoft” reorganization that he instituted last July is as misunderstood as Rodney Dangerfield. Here’s the key paragraph from Ballmer’s memo:
We are rallying behind a single strategy as one company — not a collection of divisional strategies. Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do. We will see our product line holistically, not as a set of islands. We will allocate resources and build devices and services that provide compelling, integrated experiences across the many screens in our lives, with maximum return to shareholders. All parts of the company will share and contribute to the success of core offerings, like Windows, Windows Phone, Xbox, Surface, Office 365 and our EA offer, Bing, Skype, Dynamics, Azure and our servers. All parts of the company will contribute to activating high-value experiences for our customers.
You can already see hints of how radical this new approach is. At Mobile World Congress, the big news about Windows 8.1 Update 1 came from Joe Belfiore, who until recently was exclusively a Windows Phone guy. Inside the company, I am hearing that the reorg has already helped break down some of the silos that led Windows developers to resist cooperation with divisions that didn’t share their lofty operating margins.
This is the kind of reorganization that takes years to fully execute in a company the size of Microsoft. Fortunately, Satya Nadella appears to have embraced and even extended the concepts.
Pundits have been bombarding new CEO Satya Nadella with advice on how he should "save Microsoft." If you could pick the single piece of misguided advice that has become most popular in recent weeks, it's the recommendation to ditch Windows Phone and go all Android.
Those same voices, plus a veritable backup choir of new players, were vocal this week with the announcement of the new Nokia X line, a low-cost phone for emerging markets powered by (gasp!) a Nokia-forked version of the Android Open Source Project code.
Settle down, people. Windows Phone isn't disappearing.
The current installed base of Windows Phone users numbers approximately 50 million. In the year after Microsoft closes its acquisition of Nokia, that number should blow past 100 million. By any rational standard, that's a market big enough for developers to take seriously. For the sake of comparison, that's more than the entire worldwide population of Apple Macs.
If you think Microsoft is going to turn its back on a growing installed base of 100 million customers, you really need to find a different beat to cover.
It's true that Windows RT had an inauspicious and confusing debut, culminating in an embarrassing $900 million writedown of the Surface RT. The ironic thing is that that writedown came about as a direct result of Microsoft's confidence in the product it had produced. Had executives been more cautious with their launch plan, they could have built and sold a smaller number and never had to deal with that writedown.
But is Windows RT going away? Hardly. And anyone who tells you so is betraying a fundamental understanding of the Microsoft roadmap.
Windows RT is, at its core, the Windows 8.x/9 platform, minus the ability to run desktop apps. Now that 40 percent of new PCs are shipping with touchscreens, do you think Redmond is going to drop its new touch-centric user experience and app platform? Uh, no.
The confusion comes about because Microsoft has announced plans to consolidate its APIs for Windows across the board, so that developers who write Windows apps can target phones, tablets, and PCs with relatively minor changes in code.
It's possible that Windows RT as a brand will fade into the background. You can already see hints of that in Microsoft's decision to build a successor to Surface RT and call it simply Surface 2.
But the basic concept of a touch-first platform that runs modern apps from a curated store in a highly secure environment? That's not a dead end; it's the future.