Kill Windows Phone or risk dying, analyst tells Microsoft

That won't happen after Nokia acquisition, but Ben Thompson argues a focus on devices will weaken Redmond where it's strongest, in services

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As Thompson saw it, Microsoft had a choice: It could either try to sell hardware -- the "devices" part of the strategy -- to a fraction of the potential market, or try to sell services to anyone and everyone with a connected device.

But Microsoft wanted all the cake. "Instead of choosing one or the other, Microsoft wants to do both," said Thompson.

And that's a bad move. Not simply because by doing all, Microsoft risks doing nothing well, but because its strengths clearly lie in the services side of the strategy.

"It's never been a hardware company," said Thompson. "I don't see any reason to expect that they now will become one. The danger is that the services that ought to be pushed, like Office 365, which could run on every platform, are going to die on the vine because of the emphasis on [Microsoft's own] devices."

Thompson was high on Office as a platform, in part because of its importance to the company's revenue -- in the most recently reported quarter, the division responsible for Office accounted for 36% of the firm's total, the most of any group -- but also because of Office 365, the software-by-subscription service Microsoft significantly expanded earlier this year.

"Over time, value moves up the stack," said Thompson. "First from the chip to the OS, then to the software, and on to the services. That's just the way technology goes. I think there's room for a premium service ecosystem built on their Office layer. Office is further up the stack than the OS, and they could leverage that to be the major player in the cloud."

In a post to Stratechery last week, Thompson was more specific in his advice. "They ought to pursue a strategy -- services -- that entails being everywhere," he wrote.

The problem is that while "services" is part of Microsoft's new slogan, the purchase of Nokia makes Thompson suspect that that half will not be the one calling the shots.

"The issue for Microsoft is that a services strategy and a devices strategy are fundamentally opposed to each other," he said [emphasis in original]. "Your services will be forever paying a strategy tax to support your devices, which won't even be fully differentiated."

The most prominent example of that "strategy tax" has been Microsoft's refusal to offer Office on Apple's iPad or Android tablets. Most experts believe that Microsoft has withheld Office from rivals' tablets as a strategic move to protect Windows and the tablets that it and its OEM partners sell. Microsoft also gives preferential treatment to Windows Phones, bundling Office Mobile, a subset of Office on the desktop, free with handsets running the operating system. But Android and iOS users must, if they want the same functionality, subscribe to Office 365.

In other words, Thompson sees Microsoft continuing to withhold services from rival platforms or making customers with Android or iOS phones pay for something Windows Phone owners get for free, missing out on the revenue the services would generate if the company wasn't using them as a carrot for its own hardware.

And the temptation to continue the practice will be enormous. Not only will Microsoft have reason to sacrifice service ubiquity -- it will naturally want its $7.2 billion investment to pay off -- but the revenue per unit from sales of a device will always be higher than the revenue per user from sales of services. It will be simply too tempting to drive devices at the expense of services.

Long before Microsoft bought Nokia, or even announced its corporate restructuring this summer, clues abounded that the company would try to mimic Apple -- with its high margins on hardware -- rather than Google, which relies on a service-based business model, in its case, advertising, to generate revenue.

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