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Microsoft saw the future, but missed creating it

Here's a close look at Microsoft, and some of the reasons why it may have missed creating the computing world it envisioned.
By Ben Algaze
Microsoft

While I was researching another story, I ran across this Slate article referencing some futuristic Microsoft concept videos from 1999 and 2000(Opens in a new window). In these videos, it's clear Microsoft did have vision (and continues to), and foresaw much of the evolution and innovation of the past 15 years. And it’s a bit of irony that this was on Slate, which started out as an online magazine on Microsoft’s MSN online service in 1996 (for kicks, check out Slate founding editor Michael Kinsley’s 2006 retrospective here(Opens in a new window)).

At any rate, watch the videos and you'll see rich online collaboration, smartphones, tablets, location-aware services, voice controlled devices, personalized cloud based content on multiple devices, and more. At the dawn of the millennium, Microsoft was one of the richest companies on the planet, sitting on over $20 billion in cash and continuing to grow revenues at a 25% annual clip. Despite its well documented foibles in many areas, today’s Microsoft continues to be cash rich and extremely profitable. But where did it go wrong?

Much has been written about Microsoft’s missteps of the past 15 years in particular. A large part of the blame has been directed at Steve Ballmer’s leadership of the company since 2000, and the company’s historically competitive culture. In most cases, the CEO of a company gets a disproportionate share of both the credit and blame for a company’s performance. Of course, credit or blame has to go somewhere, and the person at the top is the lightning rod.

But reality is usually more complicated than that. Most companies that once dominated their core markets, like IBM and Microsoft, also tend to be criticized for not being innovators. People say they're just followers, adapters of others’ innovations, and better marketers. As companies build huge businesses, they tend to take less risks with them. While there is some truth to the innovation criticism, the real story is more nuanced.

The history of computing shows that one company rarely gets to dominate the next great technology shift. IBM dominated mainframes, successfully weathered the minicomputer wave, and created the PC architecture and market that opened the door for Intel and Microsoft. But IBM didn't dominate these other businesses in the same way as mainframes. Microsoft dominated the market for PC operating systems, extended that dominance into PC applications, and successfully weathered the initial shift of computing to the Internet. But it failed to extend that dominance to Web services, mobile devices, cloud computing, or even gaming -- despite investing tens of billions in those areas in the past two decades. Xbox One SmartGlass app on Windows Phone 8

Both IBM and Microsoft have other successful businesses, and each remains a powerful, profitable company in the Fortune 50. IBM has been around 100 years, and Microsoft for 40. The platform companies seen as leaders today, like Facebook, Google, and Amazon, have been around for 10 to 20 years. And today’s big gorilla, Apple, is a pioneer from Microsoft’s era, the era of the PC. Apple never dominated PCs despite being the early innovator, but its near-death experience in the mid-to-late 1990s caused management -- aided by the return of Steve Jobs -- to think about its core strengths and focus on a few key products. The other companies have seen one or two technology platform shifts. Time will tell if they will be able to be dominant in the next great platform, whatever that may be.

For now, let’s take a closer look at Microsoft, and some of the reasons why it may have missed creating the computing world it envisioned. This is by no means exhaustive or definitive. But there are some underlying themes that likely will apply -- eventually -- to some of Microsoft’s key competitors as well.

Early handhelds

As everyone knows, Microsoft is trying to maintain relevance in smartphones and tablets, two huge markets that have slowed the growth of PCs, and thus threaten Microsoft’s dominance. The irony, of course, is that Microsoft was a pioneer in this area, even though true to Microsoft form it was a fast follower, not an inventor of the product (as is today’s Apple).

It’s useful to trace back the history a bit. In the early 1990s, pen computing -- stylus-based touch interfaces and handwriting recognition -- was all the rage. Go introduced the Penpoint OS in 1992. Microsoft Windows for Pen also debuted in 1992, aiming to make Windows the OS of choice for new handheld devices, even though Windows was yet to be a juggernaut in the ensuing go-go PC growth years in the 1990s. Apple introduced the MessagePad in 1993, part of its Newton platform for these types of devices. For many reasons that would take too much space here, we know all of these devices never took off. Neither the hardware nor software was mature enough at that time to make those products popular outside of some vertical applications. And Microsoft’s WinPad project, in collaboration with leading OEMs like Compaq at the time, never even saw the light of day.

In the mid 1990s, Microsoft resurrected some of the OS work on that platform into a project called Pegasus, which became Windows CE. Windows CE was intended to be a smaller, lighter version of Windows, to run on embedded devices (and non-Intel processors) and upcoming PDAs. Around the same time, Palm released its PalmPilot, one of the first commercially successful PDAs in the market; Nokia introduced the Communicator 9000; and IBM shipped the Simon. Both the Simon and the Communicator were probably the first devices we could consider a smartphone, as each device married mobile phone and PDA capabilities.

Microsoft Windows CE

Microsoft was not left out of the PDA market. In 1996, the first Windows CE-powered devices appeared from Casio and NEC. The original OS was called Handheld PC, then PalmPC, and then Palm-sized PC, as Palm sued Microsoft over the name. It later changed to PocketPC and Windows Mobile over time. The evolution of the name itself is telling, as it was always tied to PCs and Windows. The original interface for Windows CE devices was a touch screen, operated with a finger (difficult) or a stylus, and essentially it was a miniature version of the Windows interface.

Using a Windows CE PDA was never as easy as using a Palm PDA. The Windows UI did not scale that well to these small handhelds. The use of the stylus to operate the device made it tough to use one-handed, something we now do relatively easily with our smartphones. To be fair, Palm and other devices used styli too. The Holy Grail of useful handwriting recognition continued to be pursued. Yet the reality was that handwriting recognition was still clumsy and slow as an input mode, even if both Palm’s Graffiti and Microsoft’s own work made important strides with it.

In meetings at that time, Bill Gates didn't use a laptop to take notes. He used yellow legal pads, and would take copious notes on them. In fact, he also didn’t like PowerPoint presentations projected. He preferred them printed out, so he could easily write on them – as well as read ahead. Personally, he had always been passionate about embedding great handwriting writing recognition on a device. That passion drove a lot of the thinking around the user experience for Microsoft’s mobile efforts, and would affect Microsoft’s later tablet efforts as well.

Smartphones

In the early 2000s, the PDA functionality migrated to smartphones. BlackBerry had started out manufacturing two-way pagers, but in 2000 it introduced the first wireless email device, the RIM 957. In 2002, it followed with the BlackBerry 5810, its first product that was also a phone.

BlackBerry was successful with their devices largely because of two factors. The first was a focus on email, as that was the killer app that caused the devices to be extremely popular with professionals. The second was the keyboard design, which enabled people to actually input characters quickly for email and other purposes, without slow and inaccurate handwriting recognition or cumbersome virtual keyboards.

Palm’s PDAs morphed into smartphones, starting with the Handspring Treo in 2001. Palm also developed PalmOS as a product to license to other vendors, which put it into direct competition with Microsoft. In this timeframe, Microsoft’s PocketPC OS was also merging into smartphones, such as the T-Mobile Pocket PC Phone Edition. Microsoft began to ship the OS on phones with different form factors, and eventually included full QWERTY keyboards, stylus and no stylus, and touch screen and non-touch screen versions.

By 2007, Windows Mobile (as it was renamed) commanded 42% of the smartphone market in the US. Blackberry was still growing rapidly at this time, and Palm was falling off after going through different ownership, leadership, and changes in strategy. I went to CTIA in 2007, and came away impressed with the breadth of Windows Mobile phones available. Microsoft was licensing Windows Mobile to four of the top five mobile phone vendors at the time, including HTC, Motorola (pictured, right), and Samsung. Even Palm shipped a Windows Mobile phone, the Treo 700W, in 2006.

Motorola Q

What happened? We all know that the Apple iPhone happened in 2007, and the first Android phones shipped in 2008. From a product and technical standpoint, Microsoft’s OS was designed to bring the Windows experience to a smaller portable device. It started with the familiar Windows icon based interface and start menu, scaled for smaller screens. The scaled-down Windows UI never worked that well with touch, whether it was a stylus or a track wheel or directional buttons -- all of which were used on Windows Mobile phones. In addition, Windows Mobile phones were often on the slow side compared with later Blackberrys and then the iPhone, in part because there were scaled-down versions of full Windows components and apps in the Windows CE core.

In a sense, Microsoft’s efforts initially achieved success with business users that needed the familiarity of Windows and the compatibility with Office, Outlook email, and Exchange mail servers, all standards in enterprises around the world. The drawback was that the company did not re-imagine what a mobile computing experience should or could be. The experience was viewed through the lens of Microsoft’s most successful and dominant products, Windows and Office, and Windows Mobile sought to put that experience on mobile devices.

Even though Microsoft offered a mobile app platform years before iOS and Android, it never took developers by storm either, despite its leveraging of the Windows API. When alternatives like the iPhone came out -- a clean sheet redesign of the user experience -- people that didn’t consider smartphones before suddenly wanted one. (And remember, the first iPhone couldn't even install new apps out of the gate; that ability came later, in the middle of 2008.) So even in Microsoft's concept videos from 2000, that now cartoonish-looking UI bears little resemblance to Windows.

Windows and Office

From a business standpoint, Microsoft looked at the world through a business model that had made it wildly successful. That model was effectively charging a royalty for almost every PC shipped in the world (as Windows had 90% market share), a fee that would average between $80 and $100 for every PC. On top of that, Office’s market dominance also extracted a similar royalty, the most profitable of which were the enterprise licenses, which offered the most favorable pricing to companies if they bought site-wide licenses to have Office on every PC.

Microsoft often looked at the worldwide market opportunity as “dollars per PC”, and growing its share of that. In charging up to $25 per Windows Mobile license, it wanted to take that model to smartphones and other devices. The problem was, the margins in those devices didn’t really support that level of pricing. Android came in and upended that by being free to license, and by being more customizable than what Microsoft would allow with Windows Mobile.

In fact, Microsoft’s dominance of the PC platform taught valuable lessons to today’s OEMs and consumer electronics companies. None of them want to be commoditized as they were in PCs, with Intel and Microsoft taking the lions share of the value chain. Android smartphone vendors understand that, and they seek to balance out Android’s dominance with their customizations and services, as well as investing in alternative operating systems as Samsung has with Tizen and LG with WebOS.

The other trend that accelerated in the past 15 years is that companies like Apple and Blackberry were paid for their software in the cost of the device. The “consumerization of IT,” as some have called it, brought capabilities previously available (and affordable) only to businesses to consumer devices. The software that enables productivity, entertainment, communications, and other features now comes with the device.

Smartphones and tablets have helped drive down the price of software, as they include lots of applications with basic to advanced capabilities. Today, the app stores are full of free programs that offer a huge amount of functionality, in exchange for access to your data, targeted advertising, subscriptions, or premium paid features.

That trend has not helped Microsoft’s traditional business model, even as it has adopted these new ones. But the reason the company can afford to play is that Windows and Office still have massive presence on the desktop and are hugely profitable businesses that subsidize virtually everything else. Looking at other products and markets through the lens of Windows and Office clouded the company’s vision of what it could do. Why? Because the fear of upending the existing cash cows with new products that may not be as initially profitable – even if they saw the threat – caused the company to move slowly, until the threat was there and clearly visible. Microsoft’s responses with its new Window Phone OS, the radical new design of Windows 8, the purchase of Nokia’s hardware business, the Surface, and several other acquisitions are all a reaction to the ascendance of iOS and Android and the existential threat they can eventually pose to Windows and Office.

Compaq Concerto

Tablets – From Pen Windows to Surface

Microsoft’s long history with tablets and “pads” date back to the aforementioned Windows for Pen Computing in 1992. Despite the fact that Windows itself was hardly a mature operating system, the pen computing frenzy of the early 90s fueled by Go’s innovative PenPoint OS and the introduction of AT&T’s EO communicator drove Microsoft to throw its hat in the ring with Windows for Pen Computing. It was an SDK for Windows 3.1 that included handwriting recognition software, a training mode to help recognize handwriting style, and a note-taking app for use with a stylus. Apple had been working on the Newton platform since 1987, although the MessagePad shipped in 1993.

The first Windows Pen device was the Compaq Concerto (pictured above) in 1993, which featured a detachable keyboard and Wacom tablet functionality. You could consider it the forerunner to today’s many Windows 8-powered 2-in-1 devices. The era’s hardware, form factor sizes, and battery life, coupled with the fact that Windows 3.x was still based on a DOS underpinning, and generally high cost, did not make for products that sold in significant numbers. Microsoft continued to develop pen capability for Windows, and offered a revamped and more stable SDK for Windows 95. Meanwhile, Go itself went bankrupt in 1994, as sales for PenPoint-powered devices flagged and the company were unable to secure more financing.

Microsoft’s next big push for tablets came in 2001, where Bill Gates showed a Microsoft Tablet prototype at his Comdex keynote. This time, Windows XP Tablet PC Edition OS was based on the recently released Windows XP. While handwriting recognition was much improved, as were the form factors, the UI still employed the Windows icon and windowing interface-with-a-stylus model, adding better apps for note taking, and integrating handwriting recognition more smoothly with other applications. An evolution, but certainly not a revolution.

In this early look at the OS(Opens in a new window) in 2002, PC Magazine noted that the tablets could still be slow to recognize handwriting, and were relatively heavy and expensive compared with regular ultraportable laptops of the time. Nevertheless, many new tablets came out, and even startup companies like Motion Computing, founded by early Dell execs, looked to build their business around the new platform. Outside of some vertical markets, however, the Tablet PC still was not a major sales success.

The next round came with Intel’s Ultra Mobile PC (project Origami) push, a joint effort with Microsoft and Samsung. This time, the pen-enabled OS was based on Windows Vista. The Samsung Q1 was one of the first devices for the new tablets. They had smaller 7-inch screens, better battery life, less weight, and were a slate design sans keyboard. It was much more like a modern tablet, with WiFi, Bluetooth, and a CF slot for extra memory.

Running an Intel Celeron processor, the machine was, however, quite slow for Windows 7. It could also boot an embedded version of Windows XP for use as a dedicated media player. I had one for a while in 2007, and it was not a fun device to use, thanks to the slow performance and its squished-down Windows 7 interface on a small screen.

Toshiba convertible

At that time, for work I also carried a Toshiba convertible laptop, which would convert to Pen mode when you folded the screen all the way back to use as a pad. Besides the form factor being heavy to hold in that mode, handwriting recognition could still be infuriatingly slow and inconsistent. The novelty of the pen and what it could do for markup and drawing didn't outweigh the drawbacks of manipulating the Windows interface with a pen. As a result, I rarely used the laptop as a tablet.

UMPCs were built until 2010, but again that form factor didn't take the market by storm. At CES in 2010, Steve Ballmer talked about new Slate PC form factors, powered by Windows 7. OEMs like HP, Samsung, and several others shipped these new slimmer, lighter, faster, touch-enabled products. But there was nothing new in the user experience. Perhaps as a saving grace, many of these Intel-powered tablets were quite capable of being upgraded to the upcoming Windows 8.

There's more. In 2008, Microsoft had a skunkworks tablet project named Courier, headed by J Allard, who had started and run the Xbox division among several other product teams in his long tenure at the company. The device sported a folding, dual 7-inch screen design that could be used with touch and stylus input. Covered widely by the press after the project’s cancellation in 2010, Courier’s cancellation was seen as yet another Microsoft move that didn’t favor innovative approaches outside of Windows.

Windows 8 and the Microsoft Surface

The Apple iPad launched in early 2010. The iPad was essentially a larger iPhone, and anyone that had an iPhone could instantly pick it up and feel right at home. Despite having a downsized-and-detuned OS X at its core, the iPhone and iPad were fundamentally different experiences designed for touch interfaces. By this time, Microsoft was already working on a thoroughly revised version of its smartphone OS, Windows Phone 7, with its new Modern (nee Metro) interface --the first true re-imagination (for Microsoft) of the phone experience. In 2010, Microsoft’s worldwide smartphone market share had already fallen precipitously to 5%, trailing Nokia’s (aging) Symbian, BlackBerry, Android, and iOS.

Microsoft was also at work on Windows 8, which sought to bring a unified and new experience to both desktop and tablet form factors, with the Modern interface. And Windows Phone 7 shipped in late 2010, to generally favorable reviews(Opens in a new window). However, it was facing an uphill battle, lacking many apps and trailing far behind the iOS and Android apps stores in depth and breadth, something that still inhibits the platform in 2015. The Windows Phone 7 interface was a preview of what was coming for Windows 8.

Microsoft Surface Pro 3 with Stylus

That's where things began to really unravel. Microsoft’s true response to the iPad relied on the new interface of Windows 8, which aimed to bridge the desktop and tablet experiences into one. The new Modern interface is the first fundamental redesign of the Windows UI since Windows 95. Frustrated with the designs of OEMs that don’t push the envelope like Apple’s devices do, Microsoft built its own tablet, introducing the Surface in 2012.

Most everyone knows the recent history here. The Windows 8 interface alienated traditional desktop users, despite the fact that the OS could be used just like Windows 7 for regular desktops and laptops. Lots of moaning and groaning reverberated over the Internet on the removal of the traditional Start menu.

On Surface tablets, the ARM-based RT version was limited to running only the new modern apps -- not traditional Windows apps, which only ran on Intel-based machines. Despite a premium hardware design, the depth, breadth, and quality of the modern Windows apps paled in comparison with Apple’s App Store. Microsoft also thought that running Office on the Surface would be a big differentiator, especially to appeal to business users. But the truth is that there are quite a few good substitutes for Office on the iPad for light business and personal use. And now, Microsoft offers a completely functional, well-received version of Office for the iPad.

The Surface, at least the first version, was a neither/nor product, neither a real iPad killer nor a viable substitute for a laptop. Microsoft has lost as much as $2 billion dollars on this hardware line. With the latest Surface 3, Microsoft is slowly picking up market share, but it is no longer aimed directly at the iPad and is really aiming for sales at the expense of MacBook Air models (at the high end) and Android tablets.

The future is murky for Microsoft

What’s next? It’s hard to see Microsoft building significant share on the current platforms as they stand. The lead for iOS and Android is huge in both smartphones and tablets. Unless Microsoft can create the next great innovation that triggers another big platform shift, it will likely be the distant number three player. But it needs to do what it's doing if it plans to hold onto the desktop base that is under increasing pressure from Apple’s Mac and Google’s Chrome OS.

Xbox has been a successful platform, but a money-losing one over time. However, you could argue it succeeded in its main strategic objective: It kept Sony from dominating the living room, where it was quite well positioned a dozen years ago with assets in consumer electronics, PCs, mobile phones, content, and the flagship Playstation platform. Moreover, Microsoft’s competition robbed Sony of big profits it had enjoyed from the PlayStation to fund other wars.

Perhaps the end game requires Microsoft to be a player in mobile devices to protect the Windows and Office franchises, until it can build a large business with newer platforms like Azure in the cloud. Do they need to do the hardware? Perhaps yes, as they did with Xbox and Surface. Like gaming consoles, software and hardware are tightly integrated in mobile devices. If not for Microsoft, perhaps the PC industry might have evolved as Apple did, with tightly coupled hardware and software.

Microsoft also has a history of building hardware it thought was needed in the market to push its initiatives. Some products, like mice and keyboards, stuck around as they could profitably leverage the Microsoft brand despite being commoditized. Others, like sound cards from the early 90s, were more to push OEMs and Intel to incorporate audio capabilities into the hardware platform to enable multimedia.

There are other things that Microsoft has done that perhaps seem more out of line with the core platform strategy. One was the failed $6 billion acquisition of AQuantive in a bid to become a major player in online advertising like Google, which also resulted in huge financial write-downs. Bing search is another business that has been questioned, consuming millions of dollars, but not making a significant in Google’s share. Perhaps the strategy there is the same; don’t cede the entire market to Google, even if it means being a distant number two.

And if Apple and Google significantly slow the pace of innovation on their platforms, perhaps Microsoft can step in and make it a horse race. In the 1990s, Microsoft was once far behind Lotus in applications. The platform shift from DOS to Windows was the catalyst that allowed Microsoft to vault past Lotus and Borland. Apple jumped on the mobile platform with its innovations and transformed the landscape. We can’t rule out Microsoft’s ability to get its mojo back and do the same.

COMING NEXT: Microsoft missed badly on the iPod, but would it have done the same for them as it did for Apple?

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