THE STATE OF MICROSOFT: Microsoft has given up on trying to innovate.
This is usually a terrible sign for companies. We’ve seen countless examples of juggernauts
being toppled over due to a lack of innovation from Nokia and Xerox to Blockbuster and Yahoo.
But, this doesn’t seem to be hurting Microsoft, in fact, at this point, they haven’t been innovating
for quite some time. Microsoft is the only tech giant that hasn’t created a revolutionary product
within the past 10 to 20 years. Apple has the iPhone, Google has Chrome, Amazon has AWS,
Tesla has electric self driving cars, and even Meta is trying with the Metaverse but what about
Microsoft? Microsoft is still really only known for 2 products: Windows and Microsoft Office,
and it’s been nearly 40 years since Windows as released and over 30 years since Office was
released. For those of you commenting that they created ChatGPT, they didn’t create that, they
bought that and this is really the secret behind their success over the past 15 years. They’ve been
trying to buy themselves to the top. Historically speaking though, uninnovative companies buying
innovative companies doesn’t usually work out. Likely the most notable example of this is recent
history is GE. Back in the late 2000s, they did everything from jet engine manufacturing and
financing to producing appliances and pumping gas. But, eventually, this became way too much
to handle and GE would end up shrinking their investments from $781 billion to $164 billion.
They’ve even spun off into 3 different companies to try to lower the burden. So, little to say, you
can’t just buy yourself to the top. But, Microsoft seems to be the exception as they’ve been doing
better than ever. In the past 5 years alone, their revenue has doubled, their net income has tripled,
and their stock, well their stock has grown 10X within the past 10 years. For perspective,
that’s the same amount that Apple has grown and they had the mobile revolution on their side. So,
has Microsoft cracked the code to eternal life or are they going to end up like GE?
FAUX INNOVATION:
Taking a look back, the reality is that Microsoft has never been innovative with their products. The
key to their success has always been brilliant business strategies and marketing as opposed
to actually creating the next big thing. This is even true for Windows and Office. Windows
was ripped off from the Mac which was ripped off from Xerox. So, the product itself wasn’t all that
innovative but what was innovative was Microsoft’s go to market strategy. Instead of limiting their
software to a specific piece of hardware, they made it compatible with basically everything.
Not only did they make Windows compatible with everything, they also made Windows accessible
to everyone by actively encouraging piracy. And if you don’t believe me, here’s Bill Gates on the
topic. As you can see, the key to Microsoft’s early success was simply extraordinary market
penetration. While not everyone was paying off the bat, this strategy gave Microsoft unbelievable
market control which they were eventually able to monetize by licencing to PC makers, corporations,
universities, and governments. This was really phase 1 of Microsoft’s rise, they were able
to successfully substitute market penetration for innovation. Moving onto phase 2, we would
see Microsoft substitute market domination for innovation. The first notable example of this
was Internet Explorer. Microsoft saw the explosive success of the internet back in the early 90s with
AOL and Netscape, and they decided they wanted a piece of the pie. So, in 1995, Microsoft would go
ahead and launch IE. But again, there was nothing particularly special about IE. It was just a run
of the mill browser with even less inspiring name. I mean, it was literally named Internet Explorer.
At least, there’s no confusion about what it does I guess. But, none of this mattered because
Microsoft once again had an effective strategy to get the product to people. The strategy was
to simply bundle in IE with Windows. Sure, people could go out and download whatever browser they
want after they buy the computer. But, back in the late 1990s, people were just then getting their
first computers, so most people had no baseline or prior expectations. Everything was new to
them so might as well stick with the browser that’s already there. This would lead to IE’s
marketshare rising to 95% by 2003 and a slew of antitrust lawsuits but that’s a wholenother story.
The takeaway here is that IE wasn’t successful because it was innovative. IE was successful
because Microsoft was able to leverage their domination with Windows. Microsoft would use this
same strategy on a few more products throughout the late 90s and early 2000s. MSN Search,
for example, was decently popular because it was pushed by IE which was pushed by Windows.
The same thing could be said about Hotmail and MSN Messenger and basically all of Microsoft’s
other products during this time period. But, if you read the news at the time, you would
see headlines that yes Microsoft was a monopoly but also that they were the most innovative tech
company in the world. And let’s just say, Microsoft would let this go to their head.
HOPE IS LOST:
By the end of the 1900s, Microsoft had become the world’s largest company and they were synonymous
with tech. Fun fact, Microsoft is the only top 10 company from the year 2000 that’s still a top 10
company today. But maintaining this level of success was by no means easy. In fact,
the next 10 years would be the decade of failure for Microsoft as they would try to innovate and
their inability to innovate would really shine through. The first notable example of this came
in 2006 with the Microsoft Zune. Most of you have probably never even heard about the Microsoft Zune
and the main reason for this was that it was such a massive flop. The Microsoft Zune was
essentially Microsoft’s answer to the iPod, but there were a lot of fundamental issues with the
Zune starting with timing. For starters, the Zune came out 5 years after the original iPod meaning
that the iPod was already the go to product for most people. So, Microsoft was fighting an uphill
battle from day 1, but that doesn't necessarily have to be a bad thing. Plenty of successful
products came out super late like Chrome, Gmail, and Zoom. But the reason that these
products were able to takeover was because they were categorically better than the competition.
The same could not be said about the Zune. The Zune was by no means a bad product. In fact,
users liked it just as much as the iPod and it costed the same as the iPod. But, this was also
the biggest problem. If its identical to the iPod, who would buy it over the iPod which was already
the popular thing? Well, the answer is no one and Microsoft would cancel the Zune just a few years
later. Microsoft should’ve learned from this and approached smartphones with a different strategy
but Microsoft would go ahead and make a fool of themselves not much later. I mean just listen to
former Microsoft CEO’s reaction to the reveal of the iPhone. Now, to his credit, he did clarify
that it might sell really well, but if that’s the case, you probably shouldn’t be laughing
at it. Instead, you should be looking at why it might sell well, who will be buying the product,
and how you can get a piece of the pie. Microsoft was in the perfect position to become the Windows
of the smartphone world, but instead they would let Google take this spot. In the meantime,
Microsoft would sit around for 3 years and come out with the Windows Phone in 2010. The worst part
though was the OS. The reason the iPhone was so successful was not because it was a small
computer but because it was a reimagined small computer. Every single application, interaction,
and were reimagined to work on a smaller screen with fingers instead of a mouse. You could say
that Apple was indeed innovating. With the Windows phone on the other hand, you basically got a
beta version of Windows 8 on a smaller screen. Unsurprisingly, the Windows Phone would not only
be a humiliating failure but also an expensive one. But unlike with the Zune, Microsoft would
actually learn from the Windows phone, and let’s just say, they’ve turned things around big time.
ACQUISTIONS GALORE:
Usually, companies have quite an ego when it comes to acknowledging or acquiring a competitor. They
usually want to do everything themselves. This was very much the case with Microsoft as well.
Instead of working with AOL and Netscape, Microsoft decided to compete against them.
Instead of working with the iPod and iPhone, Microsoft decided to compete against Apple. But,
all of this would change when Satya Nadella tookover the company in early 2014. Satya
was very different from his peer CEOs. Most tech CEOs are world class in specific fields. Tim Cook,
for example, is world class at supply chain and operations. Similarly, Sundar Pichai is
the technical genius behind Chrome. Satya, on the other hand, wasn’t an expert in any one field nor
did he go to IIT in India or Stanford and Harvard. This isn’t to say that Satya was incompetent,
but the biggest characteristic he brought to the table was not a technical skill. Rather, it
was humility. He had the humility to accept that younger newer companies were simply doing things
better, and instead of trying to resist like his predecessors, he was going to embrace leading to
Microsoft’s era of acquisitions. He started of relatively small with Mojang in 2014 for $2.5
billion. These are the guys behind Minecraft. But, it didn’t take him long to scale up.
In 2016, Microsoft would go ahead and buy LinkedIn for $26.2 billion. He followed this up with
GitHub for $7.5 billion, ZeniMax Media for $7.5 billion, Nuance Communications for $19.7 billion,
Activision Blizzard for $68.7 billion, and of course $10 billion into ChatGPT. Those are just
a few of Microsoft’s most notable investments and acquisitions. Here’s a full list of all of
Microsoft’s known purchases. This is stark contrast to every other tech giant. Apple,
for example, just avoids high profile acquisitions altogether. Their last big purchase was Beats and
that was almost 10 years ago. Google on the other hand does do a crap ton of acquisitions,
but almost all of them are in the tens of millions or hundreds of millions. They’re
not in the billions or tens of billions. They clearly prefer to play an active role in building
up brands as opposed to buying out established businesses. The only other tech company that
has engaged in such massive deals is Facebook, but there’s a key difference between Facebook’s
purchases and Microsoft’s purchases. Facebook buys products to integrate into their own ecosystem.
Microsoft buys companies as passive investments and keeps them as separate from the original
business as possible. If you don’t believe me, check this out. It’s been 7 years since Microsoft
acquired LinkedIn, but to this day, there is no sign in with Microsoft or Outlook option,
though there is a sign in with Google or Apple option. The same thing can be said about GitHub.
To create a GitHub account, you have to do it the old fashioned way by entering an email address,
you can’t just login with Microsoft. It’s not just signing in either. Users of these services
wouldn’t even know that these companies are owned by Microsoft unless they were explicitly told.
This goes much deeper than just superficial things as well. If you ask the CEOs of these
acquired companies, they have nothing but good things to say about Microsoft. “Microsoft has
not forgotten why we did the deal in the first place and what the important pillars of the deal
are. The first and foremost principle is to put developers first. And that is what
we do every day.” In stark contrast, all of WhatsApp and Instagram’s founders have
left Facebook on negative terms. Clearly, Microsoft is not just acquiring a bunch of
companies for a bunch of money, they’re also maintaining them in the right way.
A HOLDING COMPANY:
In the beginning of the video, we talked about how Microsoft is the only tech giant that hasn’t
created a revolutionary product in the past 10 to 20 years, but they’re also the only tech
giant that isn’t dependent on one revolutionary product. To this day, over 50% of all of Google’s
revenue comes from Google Search. Over 50% of Apple’s revenue comes from the iPhone. The only
reason Amazon is even profitable is because of AWS. And the entire business of Meta can
be summed up by Facebook, WhatsApp, and Instagram. Microsoft on the other hand isn’t tied down by one
or even a handful of products. They are truly a diversified business with hundreds and hundreds
products each operating on independent terms. Before, the sentiment around Microsoft was that
they were able to transition from being a consumer business to being an enterprise business. But this
doesn’t paint the full story as they have since transitioned from being an enterprise business to
being a full on holding company, and that is the state of Microsoft today and why they’re able to
get away without innovating themselves. Are you a fan of the new Microsoft? Comment that down
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