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In-Depth

WPC 2013: Microsoft Fleshes Out Its 'Devices and Services' Mantra

At the Worldwide Partner Conference this month, partners will find out what Microsoft's strategic shift to meet a rapidly changing market will mean for the channel.

  • Stay up-to-date on WPC 2013 news here.

Microsoft partners usually look to CEO Steve Ballmer's opening keynote to set the tone for the Microsoft Worldwide Partner Conference (WPC) and for the entire Microsoft fiscal year, which also starts in July.

But some years, Ballmer sets that tone many months earlier with a public comment.

One of the best-known examples came in March 2010, when Ballmer dropped the verbal bomb that Microsoft was "all in" on cloud. It took a few months for Microsoft employees to figure out what that meant for all of their business areas. By the time the WPC rolled around, Microsoft was ready to explain it to partners and the messaging dominated the show.

This is looking like another of those years. This time, the Ballmer statement came slightly earlier in the form of an Oct. 9, 2012, letter to shareholders. His phrasing was that shareholders should think of Microsoft as being a "devices and services" company going forward.

It wasn't immediately clear how seriously people should take the message. Coming just ahead of the Windows 8 and Microsoft Surface launches, was it just a bit of Ballmer pre-launch bluster and hubris? Or was it another twist on the perennial "this will be the biggest launch year ever" messaging Microsoft always engages in at launch time?

For its entire history, Microsoft has been predominantly a software company. The devices part is something Microsoft's partners have mostly done, with the exception of some mice and keyboards; and, more recently, a few Surfaces and the 100 percent consumer Xbox business. Even "all in," services were largely an outgrowth of Microsoft's server software, ported to and tuned for the cloud.

After a ripple of interest, the phrase "devices and services" mostly disappeared. It flared up again in June in a big way when the well-sourced Kara Swisher of AllThingsD.com reported that Ballmer was putting the finishing touches on a major reorganization of Microsoft. The driver behind the executive chair-shuffle was reportedly Ballmer's focus on reorienting the company around devices and services.

When we interviewed the top Microsoft channel executive, Jon Roskill, in mid-June, Ballmer's reorg wasn't final, although it probably will be by the time this issue mails. Microsoft's usual schedule on executive changes has those changes going public a few days ahead of the end of the company's fiscal year, on the last business day of June.

Roskill declined to comment on the reorg rumors, but he confirmed that devices and services would be a major theme at the WPC, which runs from July 8-11 in Houston.

"I think we have more work to do around the devices and services vision and landing that clearly with our channel. You can expect you'll hear more on that from me and from Steve [Ballmer] and from [COO] Kevin [Turner] at WPC," Roskill said.

The Market Backdrop
The Microsoft effort to shift away from a business strategy that leans heavily on the twin pillars of software sales for desktop/laptop PCs and servers is nothing new. But sharp declines in the hardware markets undergirding both of those software businesses greatly increase the pressure for Microsoft to execute those shifts more rapidly.

The latest quarter of PC sales showed the biggest percentage drop in shipments for a quarter since IDC started tracking the market in 1994. The decline was 14 percentage points compared to the year-ago period, according to IDC figures released in April for the first calendar quarter of 2013. That was almost twice as bad as IDC had earlier anticipated -- making for a stunning decline. (See my June 2013 Channel Watch column, "Has 'Peak PC' Passed?")

IDC attributed the decline to a laundry list of problems, including the effect of netbooks on consumers' price expectations, competition from smartphones and tablets, and the lack of cost-competitive touchscreens. But IDC also blamed Windows 8 itself.

"At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market," said Bob O'Donnell, IDC program vice president for clients and displays, in a statement explaining the market drop.

The server market is also suffering declines, although the picture there is less directly grim for Windows so far.

IDC reported at the end of May that the Q1 server market saw revenues fall almost 8 percent against Q1 2012. In all, server sales amounted to $10.9 billion, down from $11.8 billion. IDC also reported that server unit shipments fell by nearly 4 percent to 1.9 million units.

The Windows end of the server market largely held steady for the quarter. IDC estimated that Windows server hardware revenue declined 4 percent to $5.7 billion. But even with that drop, the platform picked up 1.9 points of market share to reach 52.2 percent.

Nonetheless, overall declines in the market for physical servers and steady progress for Linux-based servers are uncomfortable trend lines for Redmond. (Gartner Inc. reported similar trend lines in both markets, although the Stamford, Conn.-based firm's findings were slightly less grim.)

Meanwhile, Microsoft has struggled to take part in the growth industries -- smartphones and tablets. By one measure, the Microsoft Windows Phone platform recently passed BlackBerry for the honor of a distant third in the smartphone market behind Google Android and the Apple iPhone. Microsoft's presence in the tablet space to date, however, has hardly been a blip.

Despite that, Microsoft executives -- publicly, at least -- remain confident that the company's investments in cloud services and in the software that powers devices will still pay off.

In a presentation last month titled "Devices and Services," Turner talked about the well-balanced mix of Microsoft's businesses. Surprisingly, the Windows client business is only the third-most-important element, according to a chart Turner showed. In the pie chart, based on the trailing four quarters through Microsoft's third quarter of fiscal year 2013, Microsoft's revenues by percentage were:

  • Microsoft Office Division - 32 percent
  • Server & Tools - 26 percent
  • Windows - 25 percent
  • Entertainment & Devices - 13 percent
  • Bing & Online - 4 percent.

One other thing may be contributing to Microsoft's apparent confidence. The stock market has rewarded Microsoft's valuation since Ballmer's shareholder letter (a period that includes the launch of Windows 8). Between Ballmer's Oct. 9 letter and June 12 of this year, MSFT was up 22 percent. Not that Microsoft's stock price necessarily means much to its partners. After all, Microsoft partners had many of their best years in the mid-2000s when the markets rated MSFT a loser.

Devices
It's impossible to know for sure what Microsoft will say to partners about devices and services at the WPC, but previous statements provide some hints.

Looking at Ballmer's phrasing closely reveals that the devices and services messaging is in some ways a very subtle shift from Microsoft's prior emphasis on software. "Last year in this letter I said that over time, the full value of our software will be seen and felt in how people use devices and services at work and in their personal lives," Ballmer wrote.

On the device side, Ballmer's letter and the company's actions surrounding the Surface product launch provide some pretty clear clues as to what Microsoft OEM partners should continue to expect.

"We will continue to work with a vast ecosystem of partners to deliver a broad spectrum of Windows PCs, tablets and phones. We do this because our customers want great choices and we believe there is no way one size suits over 1.3 billion Windows users around the world. There will be times when we build specific devices for specific purposes, as we have chosen to do with Xbox and the recently announced Microsoft Surface," Ballmer wrote at the time.

Microsoft executives, including Turner during his recent talk, have begun acknowledging that it might have been a mistake to release a touch-focused OS before there was enough touch inventory at competitive price points.

Roskill took up that theme in his interview. "Reflecting back on things, we got a bit ahead of ourselves going into the holiday season and launching Windows 8 in that we were in market with Windows 8, but we didn't have a lot of touch devices," he said. "That's one of the things we've been working really hard to correct. I can tell you, I've been in places like Best Buy or Costco recently, and the amount of touch devices is really awesome to see. And you can go up to sites like CDW or Tech Data and look at the touch devices that are being featured there. I think both for Microsoft and for our partners specifically, the devices component is getting clarified."

Microsoft's new arrangement to open Windows Stores inside hundreds of Best Buys plays into the devices side of the company's new devices and services strategy.

One element of that work is a recent deal with Best Buy to open hundreds of Microsoft Stores within Best Buys, putting Microsoft's entire product line -- from PCs and tablets (both partner and Microsoft products) to Windows Phones and Xboxes -- on display in one large area within the store.

Meanwhile, the muted market response to the Microsoft Surface devices, and Microsoft's self-imposed limitations on the way the devices have been distributed, have both helped reduce the tensions Microsoft's entry into the hardware market originally created. At the same time, OEMs have aggressively rolled out new generations of Windows 8-focused devices with substantial improvements over the initial offerings, signaling a level of comfort with the Microsoft devices strategy.

Services
When it comes to channel concerns, the devices side of Microsoft's strategy is primarily an OEM and distributor worry. The services side of the strategy affects nearly all partners.

"The services piece in some ways is more obvious because it's very connected to, obviously, cloud services," Roskill said.

Roskill made clear one thing that he'd be saying at the WPC in explaining what the "services" half of devices and services means for partners. He'll be repeating an observation he made a year ago about Microsoft's place in the market.

"I've been sitting here for the last two to three years, watching as people have been writing about the cloud companies, and writing about people like a Google or a Salesforce. I've been sitting there, stomach churning, because I know that we've got great cloud offerings and we're just not being properly estimated or properly sized up in that regard," Roskill said. "I said at WPC last year that I thought we -- meaning Microsoft and our partners -- were being massively underestimated. One thing that's happened in the last 60 to 90 days has been that the world has really woken up to [our position as] a leader, if not the leader, in cloud software."

Roskill said Microsoft's third-quarter earnings announcement was an important spark for worldwide awareness of the company's cloud presence because Microsoft declared then that Office 365 had surpassed a $1 billion revenue run rate.

"Shortly after that, we announced that Windows Azure was also over a $1 billion run rate, and if you're paying any attention to Microsoft, you know we sell SPLA -- Service Provider Licensing Agreements -- and I can tell you that's over $1 billion. You roll all these things together and you see that Microsoft is very concretely in the several-multiple-billions of dollars on cloud revenue stream and ramping very quickly. That puts us, in my mind, in the No. 1 position, and that's pretty exciting," Roskill said.

It's more than revenues that Microsoft will emphasize on the services side. Expect a goodly amount of cheerleading about the scale of the Microsoft Partner Network (MPN) at the WPC.

Roskill previewed some of the themes.

One is that the recent introduction of an Infrastructure as a Service (IaaS) option inside the Windows Azure cloud platform will open Windows Azure to a huge group of existing Microsoft partners.

"Our 100,000 infrastructure partners, some of our best partners in the world, didn't really have a play in the cloud until we brought out this IaaS offering," Roskill said. "Those partners now see how they can pay off in this vision."

Another of Microsoft's scale storylines will involve the sheer size of the Microsoft channel. Microsoft currently has 140,000 partners signed up for Cloud Essentials, which is the basic program for Microsoft partners to sell cloud services.

"Our ramp rate right now is, we're having weeks that are over 5,000 partners a week joining. Just to put that in perspective, if you look at our competitors' partner programs, we believe that the bigger ones -- Google, Amazon, Salesforce -- their entire program is less than 5,000. We're growing a Google partner program every week here. That's what Microsoft has always been about. The reason why I've stayed here for 20 years is the excitement of that scale. If we can get things rolling through the channel, we get that kind of scale like no one else does," Roskill said.

Four Days in Houston
When Microsoft gathers 16,000 partners in Houston this month, its major goal will be aligning that channel on the devices and services sales. Part of that will come in one-on-one meetings with partners as Microsoft explains who may be in and who may be out in the devices-and-services reorganization. While any high-level executive changes will have already been known for several weeks, it will take until the WPC for the specifics to flow down the Microsoft org chart to the field level.

The more public part of the devices and services messaging for the channel will come in keynotes and sessions. Whatever the precise wording, expect to hear a lot about Microsoft's scale as a selling point for services, the more important half of the slogan for most partners. Microsoft will do its best to get partners excited about the sheer number of other partners getting involved in selling cloud services -- from Office 365 to the new IaaS component of Windows Azure.

And when it comes to scale, no vendor in IT has a more impressive channel story to tell than Microsoft.

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