Microsoft in 2014: Reboot or Game Over?

What's This?

By Todd Wasserman2013-12-25 19:03:58 UTC

For Microsoft, 2013 was a disaster. The company's ambitious Windows 8 operating system didn't gain much traction, its foray into tablets was a non-starter and it continued to struggle for phone sales. The discontent prompted CEO Steve Ballmer to announce he would retire within 12 months.

Despite all this, Microsoft's stock was upvo about 38%.

See also: How to Install Windows 8 Without Ditching Windows 7

The stock performance illustrates the gap between reality and perception surrounding Microsoft. Judging only by headlines in the tech press, you might conclude that the company is in deep trouble, but analysts covering the company it say it's being buoyed by a strong enterprise business. The failures on the consumer side are important, but not yet crushing Microsoft's overall business.

That could happen over time, but the company still has some time to turn things around on the consumer side.

The Rise and Fall

Before we delve into Microsoft's outlook for 2014, let's first take a look back at the past year. Microsoft officially released Windows 8 in October 2012. Consumer sales were poor within the first few weeks, though around the same time Microsoft also reported that it sold 40 million Windows 8 licenses.

The dissonance continued. Microsoft's self-reported sales for December 2012 were decent, but then in April, the market intelligence firm IDC blamed Microsoft and Windows 8 for a 13.9% drop in first-quarter PC sales. By autumn, Microsoft had updated Windows 8 with Windows 8.1, which included some features that users had requested, most notably a Start button.

By the end of the company's fiscal first quarter, even the Surface — Microsoft's would-be iPad killer — had logged $400 million in sales after a disappointing debut. By December, the Surface 2 was sold out in many retail locations.

Current CEO Steve Ballmer announced in August that he would retire, thus missing out on any late-in-the-year comeback. Ballmer had announced a massive reorganization of the company's executive ranks the month before, ensuring that 2013 would be seen as a transitional year.

A Look Ahead

A lot of Microsoft's future direction, of course, will depend on its CEO pick, which is now slated for early 2014 (originally, Microsoft said it would announce the new CEO by the end of 2013). Alan Mulally, Ford's 68-year-old CEO, and Microsoft cloud boss Satya Nadella are said to be the top candidates in the running.

The next CEO will have to figure out a way to avoid the same fate as BlackBerry. BlackBerry (nee Research in Motion), famous for popularizing the first mobile device to securely send and receive emails, fell into a slow death spiral after the iPhone debuted in 2007. This is partially because the iPhone was a sneak attack on the enterprise market. The device ushered in an era of "bring your own device," which blurred the lines between work and home and thus, the B2B and consumer markets.

"CIOs started getting the CEO coming into the office and saying 'I've got this cool thing. Make it work,'" said Patrick Gray, president of IT consultancy Prevoyance Group.

A survey from TechRepublic of more than 1,000 tech execs found 62% of companies plan to offer BYOD (bring your own device) by the end of 2013. That figure is by no means definitive, said Christian Kane, an analyst with Forrester Research.

"Honestly, the BYOD number is really hard to get to because the definition is changing," Kane said. "People don't necessarily always work from a single location ... Every survey I see has different numbers for BYOD and it also really depends on the company size, vertical and region."

Microsoft's initial response to the BYOD trend has been slow and riddled with errors. If history is any guide, though, that doesn't mean game over. Microsoft was famously blindsided by the web in the mid-90s. Its response — creating the Internet Explorer browser and bundling it with Windows — earned the company a rap on the knuckles from the U.S. Justice Department, but also allowed it to dodge a bullet that might have consigned it to irrelevance.

This time around, Microsoft made some false starts in mobile and tablets. But true to form, it's working out the kinks. Owning 90% of the desktop computing market definitely helps, as does the fact that most actual work is still done on PCs, Gray said, despite all the talk about tablets and mobile. "The smartphone and tablet stuff is cool," Gray added, "but the majority [of workers] are sitting at desktops and cranking out PowerPoints and doing mundane stuff."

Microsoft continues to excel at those quotidian applications. In September, Microsoft announced that its cloud-based Office 365 suite had a $1.5 billion run rate, a figure that shows "there seems to be a lot of momentum," according to TJ Keitt, a Forrester analyst. In Keitt's view, Microsoft is on its way to refashioning itself as a devices and services company.

In other words, business customers who formerly bemoaned the lack of mobile- and cloud-based solutions from Microsoft no longer have a valid complaint. That should counter any possible defection from Windows, Keitt said.

Chances of a Breakthrough

While Microsoft's corporate business may be humming along, it is still challenged on the consumer front. The Surface and Surface Pro didn't sell well, and Microsoft's Windows Phone OS is still a distant third next to iOS and Android. A $7.4 billion deal to buy Nokia will likely inject some life into Microsoft's lagging mobile offerings, but it's hard to see how Microsoft can unseat either Apple or (far less likely) Google anytime soon.

That's not to say that Microsoft is in a bad position. Cushioned by its corporate revenues, Microsoft can keep pumping money into its consumer products for some time. Plus, the possibility always exists of some sort of breakthrough in mobile that will give the company a much-needed edge against its competition.

In all likelihood, though, 2014 will be another rebuilding year for Microsoft on the consumer side. Expect steady, incremental gains and improving products rather than a great leap forward. The fact that Apple seems content with perfecting its product rather than introducing bold new ones will help Microsoft get its act together. It's not the most exciting outlook from a consumer point of view, but it's the ideal environment for a slow and steady Microsoft comeback.

Image: Mario Tama/Getty; Stephen Brashear/Getty; Timothy Clary/Getty; Mandy Cheng/Getty

Topics: beginning 2014, Business, end of 2013, Gadgets, Microsoft, Mobile, Steve Ballmer, Windows 8, Windows 8.1