Quick Thoughts: MSFT – Mobile First, Cloud First, CHECK!

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–     MSFT revealed details on Windows 10 – tight integration btw phones, PCs and Xbox; free upgrade for Windows 7 & 8 users; traditional look but modern functionality; a powerful new browser, etc.

–     Free upgrade will drive fast adoption, reduce fragmentation, increase appeal to developers. Cross device integration adds valuable functionality and promotes platform loyalty. Big benefits for users.

–     Concerns over lost revenue are myopic – upgrades are a minor part of sales and reducing fragmentation will be a boon to cloud applications, which we believe will be the future of MSFT

–     CEO Nadella delivered some sizzle with the steak. Xbox support on Windows, the Spartan browser, the 84 inch Surface Hub conference room device, and the MSFT Hololens VR headset will draw press.

Upon rising to the top of Microsoft, new CEO Satya Nadella was clear in asserting a “Mobile First, Cloud First” future. Today’s event, giving details on the company’s new Windows 10 platform strategy affirmed that he is moving aggressively to build that future. Windows 10 is presented as a single platform designed to run on devices from a smartphone up to the newly announced 84 inch Surface Hub conference room system, and soon to be available for hundreds of millions of installed PCs as well. As a single platform, users will have a consistent interface and access to programs and files seamlessly across their devices, while developers will be able to easily adapt applications for the full range of device types as well. This is a big deal for taking the Windows platform, still the overwhelming device standard for enterprise computing, confidently into a future where devices in the workplace will be heterogenous and where workers will expect to access their files from their office, their home and their pocket.

Importantly, Windows 10 will be a free upgrade for users of Windows 7, Windows 8 and Windows Phone 8. Free means that the normal upgrade process will be greatly compressed, eliminating the incentive to squeeze another year out of the old platform and assuring a much bigger market, much sooner for application developers accustomed to lingering fragmentation. The Windows installed base is still dominated by 2009’s Windows 7, with 56% share. 2001’s Windows XP still has 18% share, despite having support killed off in April 2014. The latest versions of Windows 8/8.1 have just 13.5% penetration. In comparison, Apple’s last two Mac OS X releases, Mavericks and Yosemite, make up 73% of the Mac installed base. Nearly 90% of Mac users are running versions of the software released after 2011, allowing Apple to push critical enhancements like cloud services and mobile integration. Giving away Windows 10 will allow Microsoft to do the same, greatly aiding its SaaS software efforts by allowing its developers to take fuller advantage of the evolving capabilities of the OS platform.

Investors are concerned that offering Windows 10 as a free upgrade is leaving money on the table, but I think these fears are misplaced. First, upgrade sales of new Windows releases have typically been a modest percentage of overall Windows shipments vs. new devices, and Windows, in general, is a modest share of Microsoft revenues relative to Office and other products and an even more modest share of Microsoft profits. Second, failing to coax its installed base to implement its newest platform would leave Microsoft vulnerable at many clients to the siren song of competitive platforms, such as Google Chrome or Apple OS, looking to gain relevance in the massive enterprise market. Third, we believe that future enterprise devices will be thinner with much functionality accessed via SaaS applications hosted in the cloud. Maintaining its hegemony at the device level will give Microsoft a leg up in delivering functionality in its lucrative cloud-based applications.

Beyond the price tag, Windows 10 offers many benefits to users. For enterprises, many of which were put off by the radical touch-friendly tiles of Windows 8, Windows 10 represents a familiar user interface while adding enhancements like an app launcher, intuitive notifications, and integrations across devices and the cloud. Apps like Outlook will have a consistent look and feel whether accessed on a smartphone, PC, or tablet. Windows 10 also brings Cortana to the desktop, which will be able to learn about users over time based on app use and execute complex voice commands that include desktop searches for documents beyond sending emails and adding reminders the feature can already do on phones. For consumers, the OS represents a move to a device independent environment integrating more than just smartphones and tablets to the desktop, but taking another approach at the living room with XBox One integration allowing Windows 10 users to stream XBox One content to other Windows devices. Windows 10 also brings a new web browser, which to date is only known by its codename “Project Spartan.” An enhanced web browser is critical for the company to regain the share it lost to Chrome in recent years. Though little was revealed about Spartan, the new browser will also include support for Cortana. For all users, Windows 10 offers true integration across platforms with the “Continuum” feature that allows users to seamlessly switch between tablet and PC interfaces. So far, it looks good though no release date has been set yet.

Aside from the Windows 10 demo, today’s presentation also featured the debut of a couple of unexpected devices. The large Surface Hub is an updated version of the Perceptive Pixel, whose parent company Microsoft acquired a couple of years ago. The original displays have so far had limited applications mostly seen on news programs, but the new versions feature 4K display and built in computing along with built in video conferencing. The Surface Hub is big, and will likely be expensive initially, but it is an interesting device for enterprise boardrooms, which to date have relied on a hodgepodge of AV equipment from various vendors. It could sell enough to warrant marketing less expensive permutations for other markets, such as education. Finally, Microsoft wrapped things up with its take on augmented and virtual reality, the HoloLens, which resembles the love child of Google Glass and Oculus Rift. Though Microsoft has already been hard at work on visual interface and detection for the Kinect, the HoloLens marks Microsoft’s entry into the world of augmented reality, albeit with a holographic angle. Though no price points or details on specs were revealed for the HoloLens, Windows 10 will feature holographic APIs giving developers the tools to build apps and find use cases. The initial use case is almost certain to be games, but in time the technology could be a game changer in markets like heads up displays for automobiles or industrial applications. In the meantime, we expect the device will help Microsoft grab some press attention, which is critical for any forward thinking platform.

Windows 10 is a big release for Microsoft, one that could solidify its hold on the enterprise device market and create valuable synergy to help jump start adoption in consumer markets. Importantly, the hooks in the OS and the browser will enhance the value of Office 365, Microsoft’s other internet services (Skype, Bing, Xbox Live, etc.) and new SaaS applications that are yet to come. The freebie upgrade is a savvy tool to drive adoption, and any short term value lost from forgoing upgrade sales should be more than made up by long term platform benefits. Satya Nadella is walking his “Cloud First, Mobile First” talk.

 

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