Losing my Amazon Religion

Benedict Evans asks a good question:

The growth curve is impressive enough, even before you notice that the scale is logarithmic. And to be sure, Amazon has had doubters from the beginning: few gave the company a chance when it started, and even fewer thought it would survive the bursting of the bubble. And yet, today Amazon is the king of e-commerce, at least in the United States, and the clear leader in cloud services, and now they are making a big push into digital content and devices.

I too was once a skeptic. I remember several years ago, after being invited for final interviews with Amazon, I decided that I wouldn’t take the job even if offered.1 Beyond the fact the retail-focused role wasn’t a great fit, I was also concerned that total compensation at Amazon, at least relative to other established tech companies, is heavily stock-based. At that time the stock was trading at a price-to-earnings ratio of nearly 90, which on the surface seemed unsustainable, and it didn’t seem worth the risk.

As of today, the stock price has doubled.

Since that time I’ve come to appreciate what an incredible business Amazon has built, as well as the size of the opportunity. Just about a year ago, when every one was freaking out about Amazon’s earnings (this week’s angst is nothing new), I wrote about Amazon’s Dominant Strategy:

Jeff Bezos’ critical insight when he founded Amazon was that the Internet allowed a retailer to have both (effectively) infinite selection AND lower prices (because you didn’t need to maintain a limited-in-size-yet-expensive-due-to-location retail space). In other words, Amazon was founded on the premise of there being a dominant strategy: better selection AND better prices – the exact same as Sears.

And, just like Sears, Amazon has added convenience. No, they haven’t opened retail stores; instead they created the amazing Amazon Prime.

In a happy coincidence, the same day I posted my piece the aforementioned Benedict Evans posted his own defense of Amazon:

Amazon is constantly creating new business lines. When they start, like any new business, they’re loss making. But they don’t ‘flip a switch’ to get to profitability – they just grow and execute, like any other business…

To put this another way, Amazon is LOTS of different startup ecommerce businesses on one platform. All the profits from the ones that work are spent on new, loss-making ones.

This approach makes sense of the compensation scheme I was nervous about: small autonomous teams have a lot of agency over their own results, even as they all work for a mutually shared outcome, and each team has a part to play. Older groups like books and media are the cash cows, funneling profits to growth engines like clothing or shoes or auto or any of the myriad of businesses under Amazon’s roof, all of them focused on the massive e-commerce opportunity (e-commerce is still only 6% of United States’ retail), and each doing their part to deepen the moat that is Amazon’s scale, logistics network, and multi-sided marketplace of customers, suppliers, and third-party merchants.

My confidence had been further bolstered by the approach Amazon had taken with Kindle: while their own devices had created the market, Amazon was quick to have a Kindle app immediately available on all platforms. Clearly they understood that e-commerce – and it’s digital equivalents – was a service business that needed to be in front of as many people as possible; to be overly focused on their own devices would be a mistake.

I could even see the point of the Kindle Fire tablet; at that point the cheapest iPad was $500, and Android-based tablets were even more expensive. Here came an alternative for half the price, and even in version one the seamless integration of media you owned, were subscribed to, or could purchase was brilliant. Amazon’s investments into digital media were understandable: their e-commerce business was originally built on books, CDs, and DVDs, but all of those were going away in favor of digital alternatives. Worryingly, Amazon was barred from selling said alternatives on iOS devices, so it made sense to offer an iOS alternative with their media stores fully integrated.

It’s on this point, though, that the Amazon narrative starts to break down, at least for me. See, while Amazon’s revenues keep going upwards, their costs do as well – as, indeed, they always have. Those costs, though, are increasingly not about e-commerce, but rather two areas in particular: devices and video.

Amazon’s financials are famously opaque, and the investments the company is making in streaming video rights, original programming, and their devices are spread around between Cost of Sales, Fulfillment, and Technology and Content. Complicating matters is that spending for Amazon Web Services falls in the latter bucket as well. Still, in 2013 BTIG estimated that Amazon would spend $500 million that year on video, and FierceOnlineVideo has put this year’s expenditures at nearly $1 billion. Last quarter’s 10-Q noted (emphasis mine):

The increase in cost of sales in absolute dollars in Q2 2014 and for the six months ended June 30, 2014, compared to the comparable prior year periods, is primarily due to increased product, digital media content, and shipping costs resulting from increased sales, as well as from expansion of digital offerings.

And, in the earnings call, Amazon’s CFO said spending on original content in particular would keep going up:

So video content, for example, we’re ramping up the spend from Q2 to Q3 significantly. And so it’ll be also a significant growth year-over-year. Keep in mind we have two types of content. We have licensed content. We also have original content. A lot of you have probably seen a lot of the announcements that we’ve green-lighted a number of pilots. We’re going to be in heavy production in those series that have been green-lit during Q3. We’ve also announced a number of pilots that will be in production on. And so that original content, it’s a portion of our total content, will be over $100 million in Q3.

It’s this focus on original and exclusive content – and devices that deliver it – that concerns me, and not because it’s expensive. Rather, what exactly does this have to do with e-commerce?

Best I can tell, Amazon’s story goes something like this:

  • Amazon gets or creates exclusive content at considerable cost
  • Customers are attracted to said exclusive content and thus sign up for Amazon Prime
  • Because customers are members of Amazon Prime, they start spending significantly more on e-commerce

Oh, and since mean ol’ Apple won’t allow Amazon’s digital content to be sold on iOS, Amazon will make devices to better sell said digital content. Which will ultimately accrue to e-commerce. And, profit!

I suppose this makes a certain kind of sense, but it reeks of what a former manager of mine calls a “double bank shot.” Amazon seems to be arguing that through this rather convoluted chain of events, all of which carry significant challenges and risks that are outside Amazon’s expertise (content creation, ecosystem development, etc.), they will be better placed to increase e-commerce’s share of retail. ‘

Here’s my question: why not spend all that money – and time and executive attention – on simply growing e-commerce? Instead of pushing for the Prime Rube Goldberg machine, how about simply advertising Prime? And instead of pursuing a separate ecosystem, with all of the challenges and incentive risk that implies, why not focus on both building better apps and on creating partnerships with Apple in particular (who certainly has no intention of competing in e-commerce; Google is obviously much more of a competitor)?2

Moreover, I’m concerned about the internal incentives that Amazon is creating for itself. Amazon is increasingly competing with its suppliers, particularly in the digital space, and I just noted that potential partners like Apple are instead rivals. More concerning is the effect of devices on the company’s overall strategy. In the Fire phone introduction, Bezos was very clear that any device needed differentiation. His answer was Dynamic Perspective, but when that doesn’t work – spoiler: it doesn’t – the easy fallback is to differentiate on services. This will be particularly tempting given that Amazon is clearly looking to make a profit on each device sale. I can’t overstate what a terrible idea this is; I hate the Fire phone not because it seems to be a terrible product, but rather because I see its very existence, at least in the current incarnation, as actively harmful to Amazon’s core business, which needs to be great on all devices.

So what exactly is going on? Why is Amazon building vertical devices that don’t fit a horizontal company? Why are they pursuing convoluted double-bank-shot strategies that are extremely expensive and high risk? All of these are much more pressing questions than why Amazon is or isn’t making a paper profit.

  • The first possible explanation is that Amazon’s core e-commerce business is in fact very threatened by the shift to mobile, and they feel they have no choice but to build their own platform with its own lock-in.

    The biggest problem with mobile is that, according to Michael Mace, while PC shoppers convert at about a 3% rate, mobile shoppers are a mere 1%. That’s a massive drop-off. Moreover, the rise of apps as a primary channel makes vertical and brand-specific retailers just as accessible and visible as Amazon (in contrast, few people go directly to specific web sites).

    In addition, the sort of shopping experience that Amazon is particularly strong in – extensive research, reviews, etc. – simply doesn’t work as well on mobile. What does work well are things like flash sales or direct marketing pitches. These new marketing and conversion channels threaten to break into Amazon’s share of wallet: you may not necessarily have bought an item purchased in a flash sale from Amazon, but you do have that much less to spend for the rest of the month.

    UPDATE: Check out Matt Drance’s Twitter replies starting here

  • At the other extreme, it’s possible that Bezos simply wants to rule the world, at least when it comes to buying and selling anything that can be bought or sold. It’s certainly hard to doubt the guy!

    Still, the Fire phone in particular gives me pause. Beyond the incentive issues I noted above, rumor has it that Bezos was very involved in the Fire phone’s development process, and that he fashions himself as a product guy. The way-too-long introductory keynote certainly hinted at a certain grandiosity about the phone and its development process.

    The problem, though, is that the phone is simply not good. Bezos is clearly an operational and organizational genius, but there is nothing in Amazon’s history to suggest he is a product person.3

These are two rather unappealing possibilities from an investor perspective: a rational response to a mortal threat, or an irrational belief Amazon can seize a seemingly non-existant opportunity. And still the question remains: what’s wrong with simply focusing on the massive e-commerce opportunity? Again, I don’t mind that Amazon doesn’t make profits; I love the way they are constantly building new businesses from scratch. But why can’t those new businesses leverage Amazon’s strengths instead of accentuating its weaknesses?

Or, perhaps there remains truths I still do not fully understand. I was wrong about Amazon in 2010, but my error was one of depth; once I took the time to understand the company, I became a believer. This time though, feels different: I want to give the benefit of the doubt, but I don’t believe in double bank shots or blind faith.

(Check back in 2018 when I write about how I was wrong).

  1. I try to make decisions before I have to
  2. To be clear, this ship has long since sailed; I’m referring to what Amazon could have done instead
  3. An earlier version suggested that no one at the company was a product person; that is obviously not true and was unfair. What I meant to say is that Amazon’s specialty is not finished physical products; rather, they are a services company that improves iteratively. There is nothing wrong with this (it’s something that Apple, for example, is terrible at)

Podcasts: Exponent Episode 010 – Clap on Three; This Week in Tech – Netflix Thinks I’m a Bronie

On the newest episode of Exponent, the podcast I co-host with James Allworth:

In this episode we discuss feedback about Uber and pricing, then talk about Ben’s recent articles on Microsoft and Apple/IBM.

  • Ben Thompson: It’s Time to Split Up Microsoft – Stratechery
  • Ben Thompson: Big Blue and Apple’s Soul – Stratechery (Note: We recorded this show before this piece was written)

Show Link

Feed | iTunes | Twitter | Feedback

I was also a guest on This Week in Tech with Leo Laporte, where we discussed Microsoft, Apple-IBM, Comcast, Kindle Unlimited, and more.

You can check it out here.

Big Blue and Apple’s Soul

I hope you’ll forgive my writing about week-old news,1 but I find it striking to compare the paucity of words written about Apple’s partnership with IBM, at least relative to what was written when Apple acquired Beats. After all, the IBM partnership is a much bigger deal.

It certainly seems that Tim Cook feels the same. On yesterday’s earnings call Cook spent, by my count, five times the amount of time talking about IBM than he did Beats2, much of it unprompted by questions. The key paragraph was this one:

We also are in the — virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500…[but] the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week. We think that the core thing that unleashes this is a better go to market, which IBM clearly brings to the table

In other words, lots of enterprises have dabbled with iOS, but Apple doesn’t have an effective way to sell more.

Apple is in a fascinating position when it comes to the enterprise: it turns out that iOS is the best choice for enterprise from a product perspective.3 Blackberry has the integration, but everything else is obsolete; Android has less-effective device management built in and suffers from the usual Android fragmentation issues (which are improving),4 while Windows Phone, shockingly, has only in the last update added basics such as VPN support.5

However, especially in the enterprise, product is not enough; in fact, very few devices are sold to enterprises as-is. Rather, they are delivered as part of “solutions”, the total cost of which is multiples greater than the underlying device. These “solutions” include things like custom software, implementation, training, consulting, and service contracts. Each of these pieces is fully customizable and negotiable for each enterprise customer, and it is for this you need a massive sales force. Ultimately, no matter how good of a product the iPhone may be, without the sales force and willingness to build “solutions” – the right go-to-market, in Cook’s words – Apple was never going to fully realize the enterprise opportunity.

The problem is that building said sales force is massively expensive, and not just in dollars: it has a big impact on a company’s culture.6 As Jobs wrote in his biography:

The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [Steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

To Jobs this was anathema. If Jobs was adamant about anything it was that Apple always focus on creating the best possible product. If that meant forgoing a massively lucrative enterprise market, then so be it.

That, though, is what makes this partnership so brilliant for Apple. By offloading everything onto IBM – who is playing the role of whats called a “Value-added reseller” (VAR) – Apple can now sell into the enterprise without building the sales capability that in the long run would be poisonous to the product-centric mindset that is their ultimate differentiator.

To be clear, while I’ve been writing from Apple’s perspective, this is an even bigger deal for IBM. As I just noted, the total cost of a VAR “solution” is usually multiples greater than the cost of the underlying device or software; fully integrating a device into an enterprise is a messy business, but dealing with messiness is not only worth a lot of money, it also entails building deep and ongoing relationships with the company you are servicing. In other words, when it comes to the sort of enterprise deals that IBM is going to put together, iOS devices are much closer to commodities; it is IBM that will provide the most value from the enterprise’s perspective. This is a risk for Apple: it’s certainly possible to envision a scenario where IBM switches out iOS for another platform, and there will be nothing Apple can really do about that.

I’m sure, though, that Apple is well aware of this and counts it as a price they are willing to pay7 (in addition to the commission they’ll likely pay IBM on each iPhone or iPad, in case it’s not clear who will be the lead in this partnership). Apple is getting access to a massive market that had long been off-limits, and they are doing so without giving up their product-centric soul.

  1. I was on vacation at the time
  2. 777 words versus 174
  3. It’s hard to overstate what a change this is; Apple has always prioritized the user experience over features, but in a market where the buyer is not the user, a user experience advantage is worthless. That’s what Steve Jobs was driving at in this classic clip
  4. Note: I originally said Android lacked device management completely, which was not right. I apologize for the error
  5. There is no greater example of Microsoft’s misplaced hubris than in launching Windows Phone without any enterprise features in the belief they could knock the iPhone off in the consumer market. Remember this?
  6. To be clear, I have no problem with sales forces or their effect on culture – they are critical for enterprise businesses. The issue is when you try to do both enterprise and consumer
  7. This is also an interesting contrast to Apple and Google Maps; in this case, Apple is prioritizing their culture over control. When it came to maps Apple prioritized control over the product

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It’s Time to Split Up Microsoft

To understand why so many serious Microsoft observers were encouraged by Satya Nadella’s week-ago memo Bold Ambition and Our Core,1 it’s useful to go back 10 years and read Steve Ballmer’s 2004 memo Our Path Forward. It was around this time that cracks were first starting to appear in the Microsoft machine: the stock had been stagnant for going on four years, Windows XP was besieged by a security crisis, and Microsoft was about to announce the reboot of Windows Vista née Longhorn. Meanwhile, the iPod was exploding, and Google’s stock price had quadrupled since its IPO earlier that year on the back of its 85% share of search.

In response, Ballmer said that Microsoft needed to innovate:

The key to our growth is innovation. Microsoft was built on innovation, has thrived on innovation, and its future depends on innovation. We are filing for over 2,000 patents a year for new technologies, and we see that number increasing. We lead in innovation in most areas where we compete, and where we do lag – like search and online music distribution – rest assured that the race to innovate has just begun and we will pull ahead. Our innovation pipeline is strong, and these innovations will lead to revenue growth from market expansion, share growth, new scenarios, value-add through services (alone and in partnership with network operators), and using software to open up new areas. Our focus areas are:

Ballmer then listed 10 different areas of “focus”, the vast majority of which were themselves so broad as to be meaningless. More disturbing than Ballmer’s abuse of the word focus, though was the fact that mobile barely figured in those ten areas. Here is the one mention:

Non-PC Consumer Electronics: The opportunity is virtually unlimited to integrate the richness and intelligence of the PC world with everyday devices such as mobile phones, handheld devices, home entertainment and TV. At the center of our efforts are products such as Pocket PC and Smartphone, Portable Media Center, MSTV, MSN TV, Windows Automotive, the Windows Media Center Extender, and other electronic devices built on Windows CE and Windows XP Embedded.

Even here, mobile phones are only useful insomuch as they “integrate the richness and intelligence of the PC world.” Ballmer and Microsoft simply could not break free of their Windows-first mindset, and while it would be another 3 years before the iPhone arrived, it was this memo and what it represented that marked the beginning of Microsoft’s decline.

The Power of Monopoly

It’s easy to dump on Microsoft now, but even easier to forget just how impressive and seemingly impregnable their core business once was.2 I have written multiple times that tech companies ought to be either vertically/platform focused, with software and services that differentiate hardware (like Apple), or horizontally/service focused, with the goal of offering superior software and services on all devices (like Google and Facebook). To try and do both, as Ballmer explicitly did with his “Devices and Services” strategy, is to do neither well: differentiating your devices by definition means offering an inferior service on other platforms; offering superior services everywhere means commoditizing your own devices. “Devices and Services” was nonsense.

Still, it’s understandable why Ballmer thought differently: Microsoft in the 90s managed to do exactly what I just said was impossible. Because Windows was a monopoly, making their software and services work everywhere meant making them work on Windows. There was no choice between horizontal and vertical, and the company profited fabulously. Over time Microsoft added a server component to this virtuous cycle: people depended on Office, which ran on Windows, and was enhanced by services like Exchange Server, Sharepoint Server, SQL Server, etc. It didn’t matter that Office for Mac kind of stunk; that product mostly existed because of a (failed) attempt to fend off antitrust watchdogs, and it made a ton of money to boot.

This cycle is why breaking up Microsoft, as Thomas Penfield Jackson originally ruled in 2000, would have been truly destructive to shareholder value. The company was strong because its products built on each other, and at the root of that strength was the Windows monopoly.

Microsoft’s Opportunity

Fast forward to last Monday, and the opening of Microsoft’s Worldwide Partner Conference. COO Kevin Turner put up this slide:

Kevin Turner's slide at WPC. Curiously, and in contrast to the rest of WPC, Microsoft has not made Turner's keynote available publicly.

Kevin Turner’s slide at WPC. Curiously, and in contrast to the rest of WPC, Microsoft has not made Turner’s keynote available publicly.

A monopoly that is not.

My first reaction to this slide was quite positive, but the more I’ve thought about it, the more I think the slide represents Microsoft’s biggest issue moving forward. It’s not that their devices share is at 14% – that’s just a fact, and I applaud the honesty; rather, I’m bothered by the phrase “We have a big opportunity.” For Turner, the opportunity is in growing that 14%. As quoted by Gregg Keizer:

We want to go from 14% to 18%, from 18% to 25%, from 25% to 30%. That’s the beauty of this model … [the opportunity] is much bigger than anything we’ve had in the past.

Turner is still talking about devices, and it’s really too bad, because the real opportunity is in the 86%. Microsoft already has software and services like Skype, Bing, and OneDrive that work right now on 100% of that pie; it’s only a matter of time until the same can be said for Office. That is the opportunity; to even think about the share of devices, particularly at the executive level, is to handicap Microsoft’s greatest chance for growth before it even truly gets started. It’s not just that Windows is no longer Office’s only market that matters; it’s that Windows and Microsoft’s devices focus is actively damaging Office’s prospects.

Nadella’s Memo

And so we are back to Nadella’s memo. In contrast to Ballmer’s anything-but-“focus,” Nadella was quite specific:

More recently, we have described ourselves as a “devices and services” company. While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy.

At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

Nadella was clear that focusing on “every person” meant focusing on every device as well:

[Microsoft’s productivity apps] will be built for other ecosystems so as people move from device to device, so will their content and the richness of their services – it’s one way we keep people, not devices, at the center.

This is exactly right. Nadella is making a choice here: productivity as a single unifying principle, and by extension, services based on people, not differentiation based on devices. Moreover, it’s a far more difficult and brave choice – obvious though it may be – than outside observers could likely understand. It was only a little over a year ago that Ballmer declared, “Nothing is more important at Microsoft than Windows.”

Last week, Nadella said “No.”

The Power of Culture

The problem, though, was elucidated by Nadella himself in an interview with The Verge:

At the end of the day, look, any strategy gets eaten for lunch if you don’t have a culture that’s also changing.

Nadella is referencing the famous Peter Drucker3 quote “Culture eats strategy over breakfast”; unfortunately, as we have already seen with Kevin Turner’s presentation, that is almost certainly what will happen at Microsoft. For all the talk of moving beyond Windows (and Windows Phone), I am deeply skeptical that Microsoft can truly pursue its potential as a software and services company as long as Windows is around. Culture is developed over years, and for decades everything at Microsoft was about Windows. Read again Ballmer’s statement:

Nothing is more important at Microsoft than Windows

The problem for Nadella and Microsoft is that ultimately this wasn’t a declaration of strategy; it was a declaration of fact, and facts don’t change by fiat.

Understanding Nokia

This is how one can really understand why Ballmer – over the objection of Nadella, among others – made the disastrously stupid decision to buy Nokia. We now know for a fact that my speculation at the time that Nokia was about to introduce Android phones was spot-on, and the terms of the deal suggest that Nokia was having financial difficulties as well; if Microsoft would have lost Nokia, they would have lost Windows Phone, and Ballmer saw that as a mortal threat. Never mind that Windows Phone is for all-intents-and-purposes already dead; the thing about culture is that it not only eats strategy, it washes it down with a potent mixture of selective facts and undue optimism.

In so doing, though, Ballmer dramatically compounded his 2004 error. When Nadella took over earlier this year Microsoft had not only missed the mobile boat, he was now saddled with a $7.2 billion dollar anchor and 34,000 new employees. That’s the thing about last week’s layoffs: even after shedding 18,000 employees Microsoft will still be about 16% bigger than they were before the acquisition, and still tightly bound to a devices group that is working at diametrically opposed goals from the software and services businesses that are Microsoft’s future.

The Solution

It was just about year ago that I wrote in Services, Not Devices:

The truth is that Microsoft is wrapping itself around an axle of it’s own creation. The solution to the secular collapse of the PC market is not to seek to prop up Windows and force an integrated solution that no one is asking for; rather, the goal should be the exact opposite. Maximum effort should be focused on making Office, Server, and all the other products less subservient to Windows and more in line with consumer needs and the reality of computing in 2013…

As for Windows, let it focus on solidifying Microsoft’s hold on the enterprise (it’s here the need to fight the iPad is most acute), with a nice spillover into Home PCs and gaming, and accept the fact Windows was only ever relevant in the consumer market because nobody got fired for buying IBM.

In other words, keep Windows as a cash cow, but be explicit that the future was in cross-platform services. Unfortunately, this was before the Nokia deal. The effects of that deal – and understanding why it was made – have convinced me that Microsoft cannot truly reach its potential as a services company as long as Windows and the entire devices business is in tow.

In short, it’s time to break Microsoft up.

In 2000, Windows, Office, and Server were a virtuous cycle. Today, Windows and the entire devices business is nothing but a tax. Microsoft is a company that is meant to serve the entire market, and the way to do that is through services on every device. It’s all fine and well to say that you will treat devices equally, but given Microsoft’s history – and the power of culture – I just don’t believe it’s possible.

I would create two companies: the devices side, which includes Windows, Windows Phone, and Xbox, and let them do the best they can to grow that 14%. Heck, make Kevin Turner the CEO. Windows profits will keep the company going for quite a while, and who knows, maybe they’ll nail what is next.4

The other company, the interesting company, is the services side – the productivity side, to use Nadella’s descriptor. This company would be built around Office, Azure, and Microsoft’s consumer web services including Bing5, Skype and OneDrive.6 These products don’t need Windows; they need permission to be the best regardless of device.

Of course, the Windows company does need Office, and Azure, and all the other Microsoft growth engines, and this cleavage would likely hasten Windows’ decline. But that’s exactly why a split needs to happen: anything Office or Azure or Microsoft’s other services do to prop up Windows – that focuses on that 14% – by definition limits Microsoft’s opportunity to address the far bigger part of the pie that ought to be the future.

  1. I’m very puzzled by the URL here: It is “”, which means this email is the de facto home page for Satya Nadella. I presume that won’t be the case forever, but how then will you find this note?
  2. To be clear, from a revenue and profit perspective, the business still is incredibly impressive. Microsoft still makes more revenue and profits than Google. Revenue in particular, though, is trending in the wrong direction, and Microsoft’s decline in relevancy, particularly in the consumer market, is large
  3. Supposedly
  4. One more thing: this devices company would not have killed Nokia’s feature phone business. The “tax” works in both directions
  5. Don’t laugh; the thing with search is that when you reach the tipping point, it can become very profitable very quickly, and Bing is getting closer
  6. Probably the toughest division to split would be the on-premise server groups. On one hand, they make Office go; on the other hand, their incentives and sales patterns aren’t perfectly aligned with Azure and Office 365. I could see arguments on both sides, but would tend towards leaving them with the new Services Microsoft

Site Note: Vacation and the Daily Update

Just a quick note that I am on vacation this week and do not plan on posting an article (although I certainly picked quite the week to be gone!).

The Daily Update will continue but instead of analysis of recent news, I have written brief overviews of the Strengths, Weaknesses, Opportunities, and Threats (SWOT) of five of the most important companies in tech (all links members-only):

These will be delivered to members as usual by email, private RSS, or via links on the right side of this page (bottom on mobile).

To become a member of Stratechery go here; to read through the archive of past Daily Updates, go here (members-only).

My thanks to all of Stratechery’s readers and especially members for your support. Look for new content starting on Monday, July 21.