Microsoft: The fading grip of an old giant?

Chief Operating Officer
Gavan Grenville-Hunt
Chief Operating Officer

Last weekend I was having a coffee with my brother, a fellow software engineer and technology enthusiast. His laptop, a Microsoft Surface Book 2 is getting fairly old and in need of replacement, but after 30 years of Windows (a Microsoft offering), he has made up his mind - his next purchase is going to be an Apple Macbook Pro.  

The rationale he gave for making the switch is becoming increasingly common within the development community. Microsoft’s aggressive push for people to use their latest operating system, Windows 11, and their web browser, Edge, is alienating many in the tech world.

The rest of the coffee was spent discussing what the ramifications of such a shift could be.

“Developers, developers, developers”

In September 2000, Microsoft’s then CEO Steve Ballmer created one of the internet's early memes when he took to the stage at a Windows conference and screamed the word “developers” at least 14 times. Well known for his energetic on-stage presentations, Ballmer’s frenetic presentation was done to emphasise the company strategy of building a strong developer community. 

The thinking was that this community would help entrench Windows as the dominant platform for personal computing, ensuring a rich software ecosystem that would encompass everything from niche utilities through to bespoke line-of-business applications.

Attracting developers to create software for its operating systems formed part of the company’s protective moat and built a self-reinforcing cycle of success. A healthy development community increases the quality and variety of software available for Microsoft’s platform which in turn leads to wider adoption, and therefore a greater addressable market for software development companies. Once the dominant market share had been achieved, the other systems wouldn’t have sufficient users to justify the costs of developers targeting other platforms.

Moreover, Microsoft’s dominance in the business sector had a significant spillover effect on home computing habits. As Windows became the standard in professional environments, employees became familiar with its interface and functionality. This familiarity led many to choose Windows-based PCs for personal use, seeking ease of use and compatibility with the technology they used at work. This seamless transition from office to home computing further solidified Microsoft's presence in the everyday lives of users, reinforcing its market dominance across both professional and personal realms.

It’s a strategy which paid off. Between 1992 and 1996, Microsoft reported a compound annual revenue growth of 25% to $8.7bn. It was the 21st consecutive year of growth in both revenue and profits and in that time the company had invested $4.4bn in research and development. By 2000, revenue had risen to $23bn and net income to $9.4bn.

Today’s developers, tomorrow’s software

But in the 20 years since the famed ‘developers’ presentation, Microsoft has embarked on increasingly aggressive business practices, which benefit the company rather than the user. This is especially irksome for techies like me. Take, for example, the intrusive adverts that regularly pop-up to encourage users to switch their default search engine to Bing. A simple irritation perhaps to those not in the tech space, but enough to send developers like me seeking alternative operating systems where I feel respected as a user. 

And so, although the majority of Windows users are less technical consumers, the shift in the company’s priorities is disproportionately affecting those of us in the developer and technical community. Developers like me and my brother (and many of the staff here at Stockopedia) are slowly being chased towards other platforms such as Apple and Linux. And though we don’t represent a meaningful proportion of Microsoft's overall user base and jumping from the Microsoft ship won’t have an immediate impact on the company’s top line, it will erode the strength of the developer community that the company has spent the last two decades building. 

And as the software of tomorrow is built by today's developers, Microsoft may soon find itself uncomfortably unwanted by those developers who end up writing their best software for Apple and Linux.

Ironically it’s a similar issue which faced Apple in its years in the wilderness before Steve Jobs returned to the company. In the late 1980s and early 90s, Apple fostered a similar pro-business, anti-consumer stance, attempting to carve out a niche in the market with a high price point. Looking at the results from 1994, the top line doesn’t seem to show any real issues - revenues rose 24% thanks to demand for notebook sized personal computers. But the company was forced to keep dropping its prices to attract customers and with thin margins and tiny profits, research and development expenditure was meagre. Within two years, revenue had halved and the company was on the verge of bankruptcy.

The ups and downs of a ‘Walled Garden’

Now that’s not to say that if Microsoft doesn’t get its act together it’s at risk of total collapse. Unlike Apple in the 90s, this is a giant of the tech world which generated $62bn in the last quarter alone. But it’s worth being wary of the exodus of developers. And there’s another trend to be aware of, especially when it comes to comparing Microsoft and Apple: the so-called ‘walled garden’. 

Apple computers and (more recently) its iPhones and other devices have always sung from their own song sheet: to close your Safari window you need to click the icon in the top left of your browser; your applications all sit in a tray along the bottom. For a long time, during Microsoft’s dominance, Apple's visual metaphors and design choices seemed quite alien and this ‘walled garden’ provided some protection for the incumbent - switching to the Apple ecosystem seemed like a major leap. 

But, for consumers who enter into the Apple universe, it’s hard to jump back out again. 

For most users, the iPhone represented the first real daily use of an Apple user interface. Significantly better than the Blackberrys and PDAs of the day, the iPhone was an instant success. And as Apple tweaked its business model, it became an expert in tightly integrating additional products. Building upon the iPhone platform produced the iPad and the want to seamlessly access your photos and application data. The removal of the earphone port now means most iPhone users reach for a set of AirPods. And iPad users are adding the Magic Keyboard to build a ‘franken-laptop’ - which, although questionable as a laptop replacement, does an excellent job of teaching someone how to use a Macbook.

This process has enabled Apple to do the impossible; educate consumers how to use Apple software and hardware without being forced to take a leap of faith from the comfortable family to the new and unknown.

Perhaps Microsoft is well aware of such risks, which is fuelling its drive towards a service based company. Proponents of Microsoft would quickly point out the healthy revenue growth in Azure, Microsoft's Cloud infrastructure and Office 365 business units. They’d also likely point to the major investment in OpenAI. These two aspects will likely bring significant recurring revenues for the business.

But here the story may also not be as rosy as the advocates might suggest, with more than 50% of Azure workloads running non-Microsoft operating systems. A figure which I suspect will grow as more developers switch onto Apple based silicon. What’s more, any gains that the company makes in these exciting new areas could easily be eroded by the continued alienation of the community.

The 10 year problem

In every system, from the humble central heating system to the complexity of global economies, there's a universal phenomenon of lag between cause and effect. This lag, also known as a time delay, represents the period between the initiation of an action and the observable impact of that action. 

With the technical community being pushed away, and the general consumers and business users alike becoming familiar with Apple, Microsoft may find itself in a problem; the most talented developers creating their best work for Apple’s ecosystem and a general public primed and well educated in the use of Apple products.

Given Microsoft is pushing away a community it spent 20 years developing, and Apple has spent 17 years teaching consumers how to use its own systems, it may be that if these risks do materialise, Microsoft will find it will take another 20 years to recapture and retrain the market.

Finishing the last of my coffee, I was minded of the old Hemingway quote “How did you go bankrupt? Two ways. Gradually, then suddenly”.