Microsoft blues

IT IS always fun to watch the mighty fall. It is even better when they try to break their fall with corporate waffle. This week Microsoft said it was rethinking “key aspects” of its new operating system, Windows 8. But then it began to obfuscate. A Microsoft executive insisted that “customer satisfaction” with the new offering “is strong” while also conceding that “the learning curve is definitely real”. (Translation: customers are tearing out their hair and scattering it on the keyboard.)

The company is attempting a U-turn. Windows 8 was Microsoft’s biggest bid so far to adjust its flagship product to the new world of touch-screen devices. Out went the “start” button that had controlled access to the computer’s menu since 1995. In came giant multicoloured tiles that respond to the touch. Steve Ballmer, Microsoft’s boss, described the introduction of the new system as a “bet-the-company” moment. But the bet proved so ill-judged that an app which lets users reintroduce the familiar start button is now one of the bestsellers for Windows 8.

What does Microsoft’s U-turn mean? Is it a sensible manoeuvre or a humiliation? The Financial Times described it as “one of the most prominent admissions of failure for a new mass-market consumer product since Coca-Cola’s New Coke fiasco nearly 30 years ago.” Various analysts speculated that this is the beginning of the end for Mr Ballmer, who has been running the company since Bill Gates stepped aside in 2000. Others argue that the whole thing is overblown. Microsoft is simply doing something that is routine in the computer business—fixing glitches in an enormously complicated operating system and then launching a better product. The reality is more nuanced: Microsoft’s problems are smaller in the short run than its critics imagine, but bigger in the long run.

That Microsoft has admitted to having a problem is encouraging. Few firms are good at recognising their own flaws (which helps to explain why only one company from the original Dow Jones Industrial Average of 1896 is still on that list: General Electric). Henry Ford was so allergic to evidence that America was falling out of love with the Model T that he dismissed sales statistics as fakes and fired an executive who warned him of disaster. Sears started to build its giant headquarters—the 110-storey Sears tower—at exactly the moment, in 1970, when its fortunes began to go south. IBM allowed Microsoft to take over the PC operating-software business because it thought that the money was in hardware. Nokia allowed a substandard boss, Olli-Pekka Kallasvuo, to run the company for four years before finally getting rid of him. In contrast, Microsoft is hard at work on a new version (code name: “Windows Blue”) that tries to fix people’s complaints.

“Failure” has a different meaning for Microsoft than for other companies. Over 90% of the world’s PCs run a version of Windows (this column is being written on one of them, albeit a version with a comforting start button rather than a confusing set of tiles). Some 76m PCs were shipped in the first three months of this year. Microsoft has sold 100m copies of Windows 8, which means that it has sold as well as Windows 7 at this stage in the cycle. The company’s revenues have nearly tripled under Mr Ballmer, from $25.3 billion in 2001 to $73.7 billion in 2012. This suggests that he will not be leaving any time soon.

Yet it is Microsoft’s success that is the cause of its long-term problems. In “The Innovator’s Dilemma”, Clayton Christensen of Harvard Business School argues that companies are often doomed not by their failures but by their triumphs. They may realise that the world is changing. But they are so good at doing what they have always done—making mainframe computers in IBM’s case—that they make a hash of embracing the new.

Microsoft knows only too well that the PC market is stagnating as people migrate to hand-held devices. Sales of PCs have shrunk for the past four quarters—they were 13.9% lower in the first three months of this year than in the first quarter of last year. But sales of licences for Windows still provide the firm with about half of its profits. The company’s dominant position in operating systems meant that it was slow to enter the internet-search market in the 1990s. It has been equally slow to enter the hand-held market: Windows has less than 5% of the global smartphone market, compared with Google Android’s 70% and Apple’s 20%. It has less than 8% of the tablet market. The longer it dithers on the sidelines, the harder it will be to attract first-rate developers or establish customer loyalty.

New Coke was easy to fix

This is why Windows 8’s poor performance matters. It was an attempt to solve the innovator’s dilemma by creating an operating system and a user interface for both PCs and mobiles. Mr Ballmer hoped that consumers would want to move effortlessly from PCs to tablets to smartphones—and that Microsoft would be able to invade the mobile markets while simultaneously reigniting demand for its core PC products. But so far the reverse has happened: Microsoft has reinforced suspicions that it does not understand hand-held devices while simultaneously alienating its core PC users. It is possible that Microsoft will be able to solve this problem with future iterations of Windows 8. But it is looking likely that the two types of device need different operating systems. Microsoft’s biggest rival, Apple, has kept the two devices separate. That bodes ill for Mr Ballmer’s strategy.

The comparison with New Coke actually understates Microsoft’s problem. Nothing forced Coca-Cola to introduce New Coke: tongues and throats do not change much. And all the firm had to do to rectify its error was to bring back the old version. Technology firms, in contrast, must innovate to survive. Restoring the start button will not restore Microsoft to its former glory.

^{Economist.com/blogs/schumpeter}