So far, focus at Microsoft’s Build developer event on the audio-driven Cortana PDA has garnered tremendous publicity. Saugatuck believes that Cortana right now provides a sexy sideshow distracting from what Saugatuck considers to be a public acknowledgement by Microsoft concerning its core strategic positioning.

In Saugatuck’s opinion, the Microsoft news this week with the greatest impact on Microsoft and IT markets was announcement of free Windows licensing on smaller mobile devices.This announcement puts clear and massive Microsoft internal and ecosystem emphasis on Cloud; it positions Cloud as keystone in Microsoft’s strategic business. That’s an excellent move, and at in business terms, it is much more sexy than the Cortana PDA. The move helps to push developers and users away from traditional computing devices, and reduces (and over time removes) the company’s opportunity for massive, volume-driven revenue growth in smaller, more numerous devices.

We think that this is an interesting step, an important step, but one that indicates that Microsoft is really still pursuing its traditional business model – just under a “Cloud-first” halo.

Why is it Happening?

Microsoft is in effect strategically accepting the overall decline – not death – of traditional computing device form factors and its traditional Windows business. By foregoing licensing revenues from smaller mobile devices, Microsoft shows that it expects to have a relatively large and sustained revenue stream from its traditional Windows business while it re-invents itself as a prime enabler and provider of Cloud-based IT. In pushing Windows for smaller, mobile devices and developers, the company is seeding the Cloud.

Microsoft is enabling a Cloud-driven ecosystem and revenue stream via a mobile Windows OS developer ecosystem attracted by as-yet-unknown numbers and types of mobile device makers. We believe that the company knows that it cannot count on, and is not counting on, users wanting Windows as much as it can count on developers and device makers accepting and promoting it. Users are not Microsoft’s target.

Users did not originally seek out and demand Windows; they accepted it because it was the evolution of the MS-DOS OS that the vast majority became familiar with via devices and software in the 1980s. One could argue that IT users and buyers as a whole have rarely sought out Windows; they sought devices that could use software that was compatible with their environments, expectations, and experience.

Free Windows for mobile devices is the next-gen Microsoft version of that strategy. Microsoft expects/hopes to enable a massive, mobile-first (and therefore Cloud-dependent) user and developer base that becomes expectant of using Windows, and then increasingly relying on Windows. Then, the company hopes/expects that a massive use of Windows on the user side will in turn enable or drive retention of Windows within corporate IT infrastructures – and the combination of mobile user and corporate Windows use will drive increased use of Windows within Cloud platforms and services providers’ infrastructures and offerings. And it is hoped that this familiarity with, and dependence upon, Windows will improve Microsoft’s presence and role as a Cloud-based services provider, from core IaaS and PaaS through SaaS levels (e.g., Office 365).

This is where we see the same old business strategy shining through. While this seems like a strategic shift of seismic proportions by Microsoft, Saugatuck sees it as an extension of decades-old strategy that still relies on a very traditional vision regarding IT development, adoption, and use – i.e., that buyers, developers, and providers will prefer a single OS technology thread and theme throughout.

To some extent, we agree with this premise. At this point in time, and for the next few years, the comfort of a known brand and experiences related to that brand will continue to affect IT buying, development, and use choices. IT organizations especially will continue to center on strategic technologies and providers in attempts to contain costs of support.

But the evolution, growth, and increasing business and consumer importance of Cloud reduces, and eventually removes, most of these desires and concerns, because Cloud platforms and services increasingly integrate disparate technologies and interfaces. Cloud also reduces and can even remove the above concerns regarding centralized, corporate IT support by shifting the majority of technologies, and the responsibility for making them work, to the Cloud providers. Meanwhile, Cloud providers need IT technologies and infrastructures that are inexpensive, readily-integrated, massively scalable, and adaptable – capabilities for which Windows can be used, but for which our research finds that OSes like Linux are more and more widely utilized.

All of this conspires to reduce the traditional role and importance of any OS. The OS dependency from user through device to server and storage is diluted. But Microsoft’s strategy still builds on this – likely as a cultural remnant, and a compromise between the brave new world of Cloud and the safe, comfortable world of traditional IT dependencies and relationships.

Figure 1: 2014 as Cloud Tipping Point for New Business Software

Growth of Cloud

Saugatuck sees Microsoft as pursuing this strategy because it’s the normal thing to do. This approach basically translates the company’s 30 years of strategy into a Cloud-dependent model. And we think it’s tactically correct, but strategically wrong for Microsoft.

To read the Market Impact, click here.

This post was originally published on April 3, 2014, on the Lens360 blog. Published with permission.

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