Are we witnessing Microsoft's 'Californication'?

There was something unmistakably 'pink' about the evening on Oct 10th in Bangalore.  It was as if the entire sky had been draped in a pinkish hue.  And that's when I got an idea about writing this post.  Waaahaaahaaa.  I'm kidding - my inspiration comes from the brouhaha that's been created in the industry since last couple of weeks about Microsoft 'Pink' phones.  More on that in a bit.


2009 has been a testing year for Microsoft in many ways.  It closed the year with feeble financial results - revenue declined for all of its business divisions - Client, Server & Tools, Business, Online Services and Entertainment & Devices.  Q4 revenue down 17% YoY, operating income down 30% YoY, net income down 29% YoY.  Industry watchers say this is by far the weakest performance posted by the Redmond Raider since the days of 2000 internet bubble burst.  So what's been hurting Microsoft?

• sluggish PC sales 
• extremely tight IT budgets (both enterprise and local government)
• lesser volume-license renewals due to corporate downsizing
• ah, the much-talked about credit crunch 

And while all this has been happening, 2 extremely critical pieces of information have come up.  Word in the street is that Microsoft's J Allard, the guy behind X-Box and Zune projects, has been asked to be part of a team that's working on a supposedly multi-touch Microsoft tablet, called the Courier (image above).  The other news is that Microsoft is also working on building its own phones under the umbrella of 'Project Pink'.  

If this turns out to be true, this represents a paradigm shift in Microsoft's strategy.  Ever since its inception, Microsoft has always been known as the outfit that makes the software which runs atop the hardware manufactured by other vendors.  One of its core philosophies over the years has been to work closely with its partners (XBOX being an exception).  But what we're seeing here is the software giant going ahead with releasing its own hardware and software.  The Courier multi-touch tablet is basically a dual-screen tablet "PC" - so there is an inherent conflict in this since Microsoft also licenses its Windows OS to PC makers who in turn make tablet PCs.  Getting my drift?  

Microsoft's dominance in the operating system universe has been challenged of late by a variety of contenders.  It's still dominates the industry, don't get me wrong, but the trends below are disturbing for Microsoft.

• most PC makers are offering Linux as an option in their netbooks
• Apple is making significant market share gains in the US, EMEA
• Windows Mobile, once a mighty OS which commanded a lion's share of the mobile OS market, today is losing share each quarter
• more and more handset vendors are looking at Android as their choice of OS due to its open source capabilities.  In fact, Acer has gone on the record and said they plan to introduce Android-based netbooks from Q1'10.

Perhaps through the success of Zune HD (and XBOX to some extent), a finger has been pointed in a new direction for Microsoft - consumer electronics hardware.  Microsoft believes that it can control the hardware and software much more easily if it works on its own.  Now we do know who else follows this principle with quite a success - Apple.  The success of the iPod Touch has proved that there is a viable market for PMPs (portable media players) in spite of smartphones getting better browsing and music capabilities.  With Windows 7 just around the corner, the tablet PC category is set to explode due to Windows 7 support for multi-touch applications.  

There's no doubt Microsoft sees these as huge trends that could determine its success in the long run.  We've all been used to seeing it as the software provider, but that could change soon.  Over the years, California has come to be known as the Mecca of tech hardware (and software too) companies in the US.  Microsoft, on the other hand, decided to locate itself in the neighboring state of Washington.  The latest trends emerging from Redmond beg the question: are we seeing the 'Californication' of the Redmond Raider? 

Image courtesy: Gizmodo, All About Microsoft