Not Even Bill Gates Could Save Microsoft
salesforce.com CEO Marc Benioff thinks Bill Gates should return to Microsoft as CEO. He's not alone. With Steve Ballmer set to retire, the Windows-maker is in need of a new CEO. Who better to fill the spot than the man who started the company in the first place?
Unfortunately, Microsoft is in a tough spot, and based on Bill Gates' recent comments, not even he could turn the company around. Microsoft's management, including chairman Gates, just doesn't seem to understand the nature of the PC market.
Two different theories of the PC
Fundamentally, it goes back to the definition of the PC. At the AllThingsD conference back in 2010, Microsoft's Ballmer and Apple CEO Steve Jobs offered very different theories about the future of the PC market.
When we were an agrarian nation, all cars were trucks, because that's what you needed on the farm. But as vehicles started to be used in the urban centers...cars got more popular... now... maybe one out of every 25 vehicles, 30 vehicles is a truck, where it used to be 100%. PCs are gonna be like trucks. They're still gonna be around, they're still gonna have a lot of value, but they're gonna be used by one out of X people.
I think PCs are gonna continue to shift in form factor... real question is what's a PC? ... There may be a reason why they call them "Mack" trucks, but Windows PCs are not gonna be trucks -- they're not -- they will continue to be the mass popularizer of a variety of things people want to do with information.
In short, Jobs offered a view of the market that was highly fragmented. One with different devices satisfying different niches. Tablets would never fully replace traditional PCs, but for many users, they would be enough. In contrast, Ballmer appeared to predict the emergence of a single unified device, one that combined the benefits of a tablet (portability) with the benefits of a traditional PC (content creation, power).
More recently, in an interview with CNBC, Gates echoed Ballmer's comments, arguing that Microsoft's Surface was that ideal, hybrid device:
In terms of the devices themselves, Windows 8 really is revolutionary in that it takes the benefits of a tablet and the benefits of a PC, and it's able to support both of those... Surface, Surface Pro, you've got that portability of a tablet, but... the richness of the PC... iPad... users are frustrated, they can't type, they can't create documents... We're providing them with the benefits...without giving up what they expect in a PC.
The Surface RT bombs and Windows 8 fails
But Microsoft's vision of a unified product is clearly wrong -- the market has spoken.
Last quarter, Microsoft took a $900 million writedown on the Surface. Microsoft admitted that its tablet had not sold as well as expected, and that it was forced to cut the price by 30% in order to boost demand. It also noted that among consumers, demand for traditional PCs had fallen roughly 20%.
Consumers just don't seem to want what Microsoft is selling. Evidently, people are not as frustrated with the iPad as Gates believes. Last quarter, Apple sold 14.6 million iPads; in comparison, Microsoft sold just 1.7 million Surface devices from its debut last October through the end of June.
Throwing good money after bad
Microsoft's recent reorganization intends to shift the company to one focused around "devices and services" -- a strategy it said it will stick with even after it brings in a new CEO. This is why I find Microsoft's situation so alarming -- management just doesn't get it.
Even after the Surface RT's price cut, Apple's iPad is still a better buy than the Surface RT, and will probably continue to be for the foreseeable future. With its far better selection of apps, the iPad offers a much better tablet experience.
Sure, you might not be able to edit Excel documents on your iPad, or type a paper in Word, but how many people really want to do that on their tablet? A 10-inch screen just isn't ideal for work, regardless of how powerful the device may be.
Meanwhile, Apple continues to give consumers what they want. The King of Cupertino is expected to unveil a refreshed lineup of tablets this fall, including an iPad Mini with a Retina display, and a full-size iPad that's both thinner and lighter. Both devices are ideal for the sort of quick, on-the-go computing tablet users demand.
Microsoft commits to devices with Nokia buy
Microsoft's announcement that it was buying Nokia's handset business only strengthened its commitment to being a devices company. By adding Nokia's workforce, Microsoft will be able to produce its Windows Phones in-house, just as Apple has done with the iPhone since 2007.
Unlike tablets and PCs, there doesn't appear to be much of a difference in Microsoft and Apple's phone philosophies, outside of Nokia's long-standing commitment to produce phones at multiple price points (a strategy Microsoft is unlikely to abandon).
But despite copying Apple's proven strategy, Microsoft is unlikely to find success. Apple has a six-year head start -- and far more developer support.
Investing in Microsoft
Given that Microsoft's management is clearly out of touch when it comes to understanding the PC market, the company's decision to embrace a strategy centered around "devices and services" -- as emphasized by its recent purchase of Nokia's handset business -- is distressing.
Even Gates appears to believe that the market wants these sort of hybrid devices -- Surface tablets that can double as a laptop, a Windows 8 operating system that works as well on a tablet as it does on traditional PC.
As long as Microsoft sticks to this flawed philosophy, alternative operating systems are going to slowly chip away at its Windows empire. For that reason, investors should consider avoiding Microsoft.
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The article Not Even Bill Gates Could Save Microsoft originally appeared on Fool.com.Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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