Microsoft's Way Forward: Business and Consumer Cloud

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No one in Redmond can be happy about the latest news out of Apple. Free operating systems? Free Office alternatives? Really? Has Apple lost its mind?

Nope. Apple has identified two markets in decline and has woken up to what Google knew a long time ago: traditional shrink-wrap software is dead.

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Remember, not that long ago, Apple struggled too
Could the Cloud Power Microsoft’s Comeback?
The Home Entertainment Cloud
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It’s time to figure out how to generate revenue in other ways. Google gives away search, leveraging it as the foundation for its online advertising empire. Google also gives away Android in the hopes of attaining the same monopoly power with mobile advertising. Google is also getting more aggressive about Chromebooks, which are dirt cheap and essentially just cloud delivery devices.

With each giveaway and each mobile device using Android, Google knows more about you, and it can charge advertisers higher rates for highly targeted ads.

Apple has clearly learned a few Google-inspired lessons recently. As it watched its desktop and laptop market share dwindle away to the point where they both risk becoming cost centers, rather than revenue generators, Apple wisely decided to regard the OS as a loss leader.

The upside is obvious: platform loyalty. As more Internet-connected devices flood our lives, consumers tend to prefer a unified platform for laptops, mobile phones, tablets, etc. It’s just easier to deal with.

However, consumers have also shown that they’ll tolerate some platform incoherence if they have to. I, for instance, refuse to pay the Mac tax, but if I were upgrading my tablet today, I’d probably pick an iPad, despite being an Android fan.

Remember, not that long ago, Apple struggled too

Of course, Microsoft used to benefit from the Window OS’s stickiness, but those days seem to be numbered. While it’s easy to pick on Microsoft for its lost decade of missed opportunities, it’s important to remember that back in the mid-90s Apple was treading water and was nearly acquired by Sun.

We all know how Apple’s funeral turned out. Instead of being buried, Apple brought back an older and wiser Steve Jobs, who then brought in supply-chain expert Tim Cook. The company also encountered a lot of luck along the way, which doesn’t diminish Apple’s comeback. The company was in the position to take advantage of luck, pouncing on trends that dovetailed with internal projects, such as the rise of MP3s and pent-up demand for mobile computing devices that weren’t terrible.

For deeper insight into just how Apple bounced back, check out Jim Collins’ and Morten T. Hansen’s new book, Great by Choice.

With Jobs’ return, Apple refocused on internal efficiencies and improved processes, but without an ace in the hole – the rising popularity of MP3s and the demand for an alternative to the theft-based models of Napster and the like – Apple may still have bounced back. Yet it probably wouldn’t have vaulted to become the market-shaping force that it is today.

Could the Cloud Power Microsoft’s Comeback?

Conventional wisdom says that the cloud is slowly but surely killing off Microsoft’s profit centers. That’s true . . . to a point.

I’m no big fan of Microsoft’s consumer-facing cloud efforts. To be fair, I haven’t tinkered with them in at least 18 months (which tells you what I thought of them back then), but one area Microsoft has been gaining momentum is with cloud infrastructure.

In a relatively short time, Azure has gone from a virtualization also-ran to a valid alternative to VMware, with about a 25% market share. Add on the Azure IaaS and PaaS services and Microsoft can also mount a serious threat to AWS and Google.

While the OS and Office markets are in decline, cloud markets are still in their infancy. We have no idea what cloud markets will look like in five or ten years, but Microsoft is well positioned to help define those markets.

Moreover, while the cloud matures, Microsoft is still able to cash in on the legacy Windows and Office markets – and will be able to do so for a while. Don’t forget, Microsoft earned $5 billion in profits in Q2 2013, despite a $900 million write-down on excess Surface inventory.

The Home Entertainment Cloud

The connected home offers Microsoft another juicy opportunity. The Xbox is evolving into much more than a gaming console, and it gives Microsoft a strategic advantage as consumers embrace the connected-home concept.

Apple has put a lot of time and money into Apple TV and connected-home technologies, but few consumers have bought in. I’d argue that the Xbox is a better beachhead than Apple TV. There are still plenty of obstacles, many of them tied to incumbent cable providers (exorbitant prices, poor set-top boxes and DVRs, terrible customer services, etc.), but Microsoft could challenge cable incumbents in much the same way Apple took on the music industry.

We consumers have plenty of pent-up frustrations with the Time Warners and Comcasts of the world, and whoever offers a cheaper, better, more forward-looking alternative – perhaps, some sort of simple and powerful cloud-based entertainment hub – stands to win big. Xbox could evolve into that hub. It’s not there yet, but it’s not hard to connect the dots to that outcome.

If I were a Microsoft executive, I’d spend less time throwing money away on smartphones and tablets and shift my attention to home entertainment. It may not work, but Microsoft must do some serious course correction to stay competitive in the years ahead.

Jeff Vance is a freelance writer based in Santa Monica, California. Connect with him on LinkedIn, follow him on Twitter @JWVance, add him to your cloud computing circle on Google Plus.