As PC prospects decline, the tech giant moves toward a hybrid, cross-platform future with opportunities in the server closet and the cloud

Microsoft has been in business, in one form or another, for 37 years. In the tech world, that’s an eternity.

Which isn’t to say Microsoft has remained static over that time. Regulatory pressures, strategic shifts in software and hardware, the rise of new breeds of competitors such as Google and Amazon have ensured that Microsoft isn’t remotely the same company it was just 10 years ago. Give it another five years, and Microsoft could be doubly unrecognizable — especially considering its current crossroads.

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It’s tempting to say the past five years has seen Microsoft’s desktop-centric strategy slowly give way to a pell-mell free-for-all made up of equal parts desktop, server, mobile hardware and software, cloud services, and auxiliary systems like the Xbox. Truth is, intention has always been present. It’s only now, thanks to major upheavals in consumer tech and the cloud, that Microsoft’s broad-spectrum plays are becoming more evident and critical.

Make no mistake: Redmond has always had a foot in multiple territories. This time around, cohering its strategy in these disparate areas could mean a major transfiguration of one of the few technology companies that can never be counted out.

Here’s a look at the sweeping challenges Microsoft will face and how the company will need to respond to maintain its relevance in the years ahead.

Microsoft Windows: The future is hybrid
Any bellwether of Microsoft’s long-term evolution would have to be found in its flagship product: desktop Windows. If the latest iteration of Windows surfaces anything about a latent strategy coming to the fore, it can be summed up in one word: hybridize.

In the time since Microsoft released Windows 7, the personal-computing market has been upended. PC sales are down, phone and tablet sales are up, and it has never been more evident that a full-blown desktop tower — or even a clamshell notebook — is no longer necessary to stay connected.

Microsoft’s response has been twofold. First, create a new version of Windows in the short run (Windows 8), and power it with a new set of programming APIs (Windows Runtime, or WinRT) aimed at the long run. Second, equip the OS with an interface suited for low-power, touchscreen devices, the hottest-selling form factor for personal computing.

Andrew Brust, founder and CEO of analyst firm Blue Badge Insights, puts it this way: “In terms of spanning the desktop and touch-first worlds, it’s clearly the only logical choice Microsoft had. They have an existing (and huge) customer base and an existing (and huge) ecosystem of software. They need to service those customers and be compatible with that software, and they also need to forge into tablet territory. They’re doing what they must. The question is whether it will work.”

So far, the payoff has been mixed at best. Sales of Windows 8 have been slow, with adoption projected to resemble Windows Vista more than Windows 7 — although Windows 8 is making a better show than Vista did in its first months of release. Enterprises don’t have much interest in Windows 8 either — they’re only now catching up with Windows 7 anyway, while Windows XP’s support window is nearing its close for good. And complaints about the Modern UI side of Windows 8 are legion, since it takes away about as much as it adds in.

Granted, it’s still early, but all signs point to Windows 8 not having the kind of momentum needed. The larger question: Does Microsoft need Windows 7-level momentum to justify the changes to Windows 8? Especially given that what’s under the hood in Windows 8 is what stands to make the most difference.

It’s a mistake to assume any one Microsoft product constitutes a long-term strategy. Together they are incarnations of the bigger picture, one in which Microsoft gradually — if painfully — shrugs off its legacy Win32 shackles.

It’s the platform(s), stupid
Put into context, Windows 8 matters most in relation to Microsoft’s new software foundation strategy: WinRT. At least that’s the take of Forrester analysts John R. Rymer and Jeffrey S. Hammond in their report, “The Future Of Microsoft .Net: New Options, New Choices, New Risks.”

Windows 8 users know WinRT as the foundation that powers the Modern UI side of Windows 8. It was designed to create software that runs efficiently across all the platforms Microsoft knows it needs to make a showing on now: desktops, notebooks, tablets, smartphones, even the server back end.

Microsoft knows that ditching its existing investment in Win32 is unwise, but it would be no less unwise to ignore a market that is only getting bigger. To that end, WinRT flanks the old-school Win32 APIs without replacing them — at first anyway.

Moving Windows to ARM by itself hasn’t been the big obstacle; the grandfather of the current version of Windows, Windows NT, has a history of running on non-Intel hardware (MIPS, PowerPC). The hard part is creating a software ecosystem to run in that environment. Modern UI apps found in the Windows 8 app store are the first wave of this tide.

In other words, Windows 8 has been less about making a smash hit and more about introducing users and developers to the first iteration of a software platform designed to span multiple domains.

Microsoft on mobile: Phoning it in
If this long-term strategy is to succeed, Microsoft must improve its presence in the mobile phone market, via Windows Phone 8 and its attendant devices.

Microsoft’s hurdles in mobile go beyond competition from Google (and its hardware partners), Apple, and even BlackBerry. They also include the stigma of having failed to capture any major mind share with any previous attempt at mobile. Most of Microsoft’s success in the mobile realm has come from providing the back ends — Exchange Server, for instance — accessed by devices that have run anything but a Microsoft OS. Few and far between are the corporations that view Microsoft as a major force in mobile, Forrester’s Rymer and Hammond contend.

Some of that is certainly the bad taste left by Microsoft’s previous forays into mobile. Windows Phone 7 debuted to poor reviews and minimal sales in 2010, and those who committed to it were given short shrift by Microsoft’s delaying upgrades for the platform until 2013. Worse, Microsoft has more to lose now than ever, with other mobile players capitalizing on the rising BYOD trend. (When IDC surveyed information workers for a 2011 Unisys-sponsored survey about the mobile devices they brought into the workplace as part of their company’s BYOD practices, Windows Phone wasn’t even on the list.)

The company’s hardware strategy for Windows Phone 8 has fallen somewhere between the exclusivity of Apple and the broad inclusivity of Android: Microsoft picked an exclusive list of vendors willing to follow exacting specifications for Windows 8, then worked closely with them.

The result? A rocky road for everyone involved. Nokia is seen as a troubled company that still plans to cut 10,000 jobs by the end of 2013, and HTC, though ranked as the fourth-largest smartphone vendor globally, has yet to achieve major name recognition. Samsung only just now released its Windows Phone 8-powered Ativ S and is far more aggressive in promoting its existing and future Android phones with memorable (if not always practical) form factors, such as the Galaxy Note.

Worse, sometimes Microsoft’s hardware specs work against the partnership. According to a report by Bloomberg.com, HTC had to dump plans for a large-screen Windows Phone 8 device due to the OS’s current technical limitations on displays larger than 5 inches diagonally.

What’s more, Windows Phone 8 can implement only a very small subset of the WinRT API. Not a major shock to seasoned application developers, but it’s a sign of the gap between Microsoft’s intentions for “one platform to rule them all” and the actual practice. Complaints about the complexity of the development kit, which requires a SLAT-capable processor to run the phone emulator, complicate the issue further.

These obstacles are at least as rocky as the ones Android surmounted to become a major smartphone player. But the motives are different. Google pushed Android to market to drive traffic and customers toward its ad business; if it failed, it wouldn’t have hurt the company’s core competence. Windows Phone 8 and Windows 8 are strongly complementary; if one fails, Microsoft’s larger cross-platform, WinRT-centric strategy will be damaged.

Chris Sells, vice president of the tools division at Telerik (and himself a Microsoft veteran, as a principal program manager for the developer division working on Visual Studio), thinks the volatility of the mobile market — the very thing that put such a dent in Microsoft’s sway in the consumer market — can work in Microsoft’s favor here.

“The key to remember is that consumers switch platforms fast,” says Sells. “So long as they can bring their email, contacts, appointments, pictures, and music between platforms, there’s no reason in the world for them to be loyal when the next cool thing comes out.”

Forrester’s Rymer and Hammond agree: “Only some consumers are strongly loyal to smartphone brands, and tablets may follow the same pattern. If Microsoft and its partners can create amazing new offerings at attractive prices, enough consumers may switch back.”

Blue Badge Insights’ Brust feels that Windows 8 and Windows Phone 8 can and should prop each other up — “get a virtuous cycle going,” as he puts it. But Microsoft needs more apps in both stores to get there, Brust says — possible only when a developer culture sees Windows 8, and Windows Phone 8, as worthwhile targets to begin with.

Under the Surface
Microsoft may have partnered with others to create Windows Phone devices, but what about the Surface, which sports the Microsoft brand and no one else’s? Is the Surface a sign that Microsoft is becoming a hardware company and shirking its software-and-services roots?

Probably not — for one, the Surface was developed mostly as a showcase for Windows 8, in both its x86 and ARM incarnations. It wasn’t as if other Windows 8 machines with touch weren’t coming to market; the Dell XPS 12, the Lenovo Yoga, and many others come to mind. But Microsoft wanted at least one machine to serve as a guiding light for what is possible, both for consumers and other manufacturers.

Surface attracted at least as much criticism as admiration, and it made others wonder if Microsoft was going to rebrand itself as a PC hardware company — again, along the lines of Apple. It’s a tempting view to take, but an incomplete one.

Forrester’s Rymer says it’s best not to “read too much into Microsoft’s hardware ventures.”

“Microsoft is simply trying to stimulate innovation in what had become a static ecosystem,” Rymer says. “Close collaboration with hardware providers is one way to prompt greater innovation. Creation of new devices is another way.”

It also helps to remember that Microsoft has long been a hardware company. Case in point: the Xbox, a component of Microsoft’s overall strategy that’s often ignored in favor of its conventional desktop efforts. The Xbox isn’t just a game console, but an entertainment hub of remarkable flexibility and breadth of third-party support.

Also, hardware makers typically deal with thin or negative profit margins, unless they have a compensatory strategy in place. Apple justifies its markups as the cost of being able to access Apple’s exclusive product ecosystem. The Xbox may lose money on each unit sale, but Microsoft makes it back in licensing and royalties for game developers and hardware makers, plus the profits generated via the Xbox Live network. No such strategy exists for the Surface, except maybe via the Windows Store.

Besides, as far as Windows 8 hardware goes, “Microsoft is betting on its hardware partners,” says Rymer. “Just consider the keynote at Build 2012 — it featured eight different devices, one of which was the Surface.” Telerik’s Sells is convinced both the Surface and the Nokia Lumia (its new Windows 8 phone) are “the next cool things.”

Still in the Office
Microsoft’s other flagship product, Office, underscores the hybrid theme of Microsoft’s long-term vision, pushing it beyond the mobile/desktop dichotomy to bring a new component into the mix: the cloud.

Even with the rise of in-the-browser productivity tools offered by the likes of Google or Zoho, Office is itself a platform offering tools not easily duplicated elsewhere. It’s also a platform not easily thrown over and replaced in companies where millions of documents and thousands of existing users would have to be converted and retrained.

To keep that from happening, Microsoft has split Office into three parallel tracks. First is the continued development of the Office so many business users and consumers know and run. Second is the edition of Microsoft Office for WinRT devices, such as the RT Surface, which is nearly identical to its elder x86 brother albeit without some power-user features (such as PivotTables in Excel). Third is Office 365, Microsoft’s cloud-hosted Office system, which includes not only Web-app versions of the various Office programs, but hosted support for Exchange and several other means for making Office easier to deploy without sacrificing functionality.

This strategy ensures that whatever happens, Microsoft can’t lose too badly. If the desktop doesn’t disappear — all signs point to it remaining a staple of computing for years to come — the standard edition of Office stays with it. If Windows RT devices make inroads, it will be at least in part because users aren’t locked out of running some of the most popular commercial apps for Windows. And if the cloud does indeed swallow everything whole, Office 365 is prepared to be part of that future too.

Servers, services, Azure
The cloud and the server closet are becoming increasingly indispensable to Microsoft’s long-term vision, as recent marketing and technological shifts have foretold.

“Microsoft now describes itself as a ‘devices and services’ company,” not merely a devices company, Blue Badge Insights’ Brust says. “Devices may get top billing [at Microsoft], but services — and the server products that power them — certainly shouldn’t be ignored.”

Brust sees significant traction for Microsoft’s enterprise server line, citing SharePoint, Exchange, System Center, SQL Server, and Windows Server as strong offerings that are showing significant growth.

“These products are important for two reasons,” Brust says. “They consolidate Microsoft’s enterprise success, and they provide credible infrastructure for user/consumer-facing products like Windows, Windows Phone, and Xbox.”

Becoming a megaservice provider via its fledgling cloud platform Azure is only half the story. Microsoft’s boldest long-term bet may be its desire to become an infrastructure provider à la Amazon, and to give its customers the tools to build their own private clouds or virtualize existing server setups.

To this end, Microsoft has integrated its hypervisor product, Hyper-V, directly into Windows Server 2012; it has made the bare hypervisor available as a free-to-use product (Hyper-V Server 2012); and it has contributed a Hyper-V driver to the Linux kernel so that Linux could run better under Hyper-V — tactics aimed not just at old foe Linux but at an increasingly formidable competitor: VMware.

By giving away Hyper-V, offering free tools for migrating from VMware products, and positioning Azure as a cloud environment that’s technologically compatible with Microsoft’s in-house servers, Microsoft is taking aim at VMware’s deeply entrenched position in the data center. Microsoft has even turned the tables on VMware’s cost calculators, claiming Hyper-V yields better cost/performance ratios than vSphere under specific workloads — yet another shot across VMware’s bow.

For Microsoft, the battle with VMware is at least familiar, albeit with a services twist. Stepping into the burgeoning IaaS (infrastructure as a service) market, however, pits Microsoft against a new breed of competition from the likes of Amazon and (once again) Google. Here, adaptability will be key.

We are already seeing this in action, as Microsoft’s approach to Azure has been to make it more than a Microsoft-only playground. Microsoft has added support into Azure for many non-Microsoft languages and frameworks, including Node.js and Java, and Linux-based virtual machines — which, again, benefit from having Microsoft-contributed code to allow them to run well under Azure. Microsoft has even added support for what amounts to competition for Microsoft’s own server-level products, such as Apache Hadoop for Azure.

Coming from Microsoft, this surprisingly open approach to competition within its own walls may be the key to luring converts, Forrester’s Rymer and Hammond contend.

“Microsoft hopes to attract developers who don’t identify with .Net today in hopes of converting them to the new Windows Platform — and possibly even .Net — in the future,” Rymer and Hammond say in their report, emphasizing how the new .Net 4.5 Framework is “a combined client and server-side framework,” with asynchronous server APIs that are designed to work hand-in-hand with WinRT’s client-side parallelism features. It’s another sign of how the current RT front end is meant to complement the current and future .Net back end.

Telerik’s Sells also notes, “Windows Server and Azure have become wonderful back ends for Web and mobile apps, depending whether you want to use an on-premises or off-premises cloud. As Win8 and Windows Phone 8 grow, they’ll attract developers who will make use of Windows Server and/or Azure for their back ends.”

Microsoft’s future
Conventional wisdom casts Microsoft in the role of lumbering dinosaur, slouching off into the dusk, coasting on what little momentum it’s retained from Windows and Office. The reality is that Microsoft is constantly moving in a number of areas at once: on the desktop, in the server closet, in the services market, in entertainment and mobile tech. They may not always come out ahead (Windows Me, the Kin phone, Windows Mobile 6), but they never stop evolving.

What may be new for Microsoft is the need to better cohere its strategy around an ever-widening array of services and technologies, especially as the breadth of competition it faces widens.

While Microsoft has thus far lagged Apple and Google on mobile, Microsoft would be wise not to let the mobile cart lead the company horse. Yes, mobile tech is king right now, especially as Android and iOS devices eat into PC sales. But those devices are only what they are because of the services they talk to. As the mobile field flattens out and becomes further commodified, Microsoft will be able to better see opportunities to distinguish itself on all sides of the equation: client experiences, service offerings, and infrastructure. Rushing this by forcing the desktop to be more like a mobile device would be a mistake.

Going forward, Microsoft will also have to find a better revenue model for the Surface. Microsoft’s other big hardware product, the Xbox, remains a loss leader, but sales of software, auxiliary hardware, and services for the Xbox more than make up for this. The Surface needs a similar ecosystem. Otherwise, Microsoft needs to cut it loose.

RT presents an intriguing opportunity for Microsoft, but if Microsoft is to take RT seriously as a future platform for the company, it must ensure everyone else does, too. This starts with smoothing the path for software makers to port and deploy RT editions of their apps. Microsoft Office on RT isn’t bad, but it’s missing just enough features (say, macros) to be problematic. We should be able to get 32-bit, 64-bit, and RT-based editions of all our favorite software without feeling like we’re missing out. After all, the legacy Win32 world isn’t going to die that easily.

Ironic as it may seem, building an open source framework people want to use should also be a key initiative for Microsoft going forward. Microsoft has been accommodating open source products better in their proprietary offerings — say, Linux in Hyper-V. But it needs to contribute a framework of its own — a PHP without the cruft or a Ruby without the overhead. TypeScript is a step in the right direction, but there’s no question Microsoft can do more if it wants to.

Most of all, if there ever comes a time to stop being a consumer-oriented company, Microsoft shouldn’t flinch. A future where Microsoft doesn’t make hardware or end-user programs seems remote, but there was a time when IBM abandoning its PC business seemed jarring, too. If the current whispers about Microsoft having a hand in running a revivified Dell are true, it’ll be at least as much for Dell to be a supplier of cloud hardware as it will be for Dell’s Windows PC market.

In the end, if Microsoft has one thing going for it above all, it would be its drive to continually stake out new territory and competition — an essential trait to provoke its evolution. Telerik’s Sells believes that, for Microsoft, tackling new competition is simply part of its DNA.

“Microsoft goes through phases in its focus based on the competition,” Sells says. “When it was WordStar, you heard about Word; when it was Google, you heard about Bing; when it was Sun, you hear about Windows Server; and now that it’s Apple, you hear about Windows Phone 8 and Windows 8.”

And with VMware, Hyper-V; with Amazon, Azure. And the beat goes on.

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