Monday, April 28, 2014

What Microsoft Doesn't Understand About Consumers

Microsoft and Apple are both in NDXT, the NASDAQ-100 Technology Sector Index, along with Intel, Cisco, Google, Facebook and other mega-cap companies.  Apple, in a real meaningful sense, achieved its post i-Phone success by becoming much more of a consumer-focused company.

We've written before about Apple's always having been a technology and design innovator, but this led it to many dead end devices like Lisa, which was nice to look at and cleverly designed; ultimately, it was too expensive in price-performance terms, and it was anything but intuitive to use.  It died.  More of these machines and Apple would have been  in a microcap technology index.

We recently wrote,
"Apple can charge outrageous prices for their devices for a few reasons: they all work relatively intuitively, the design and functionality of the phones and tablets are clean and present a consistent philosophy, the attention to detail even in the packaging is obsessive, and if there is anything wrong with the consumer's experience with the device or using it, the company stores make it right."
Right after this post came the announcement that "Apple has determined that the sleep/wake button mechanism on a small percentage of iPhone 5 models may stop working or work intermittently.  iPhone 5 models manufactured through March 2013 may be affected by this issue. Apple will replace the sleep/wake button mechanism, free of charge, on iPhone 5 models that exhibit this issue and have a qualifying serial number."

The process is clear, simple and owners have up to two years from their purchase to have their phone fixed or replaced.  I can tell you from experience that people on the floor are empowered to make a decision in the store to give a customer a deal, even if they strictly don't qualify.  I have never heard of a customer leaving their retail stores angry or unhappy. 

Apple has become a technology company with the customer focus and post-purchase relationship mindset of a premium consumer product or luxury goods company.  People are so satisfied that they rarely think about the cheaper price of a comparable Android device.  Of course, this can be pushed too far, but why does the opportunity persist?  Because of the engineering-driven, MBA mindset of Microsoft.  

The Nokia acquisition could easily become this company's Waterloo.  Value creation at Microsoft won't happen with the Ballmer-created organizational rabbit warren, bloated cost structure, and dysfunctional culture that we've written about in our most widely read posts.  

Analysts are making a big deal about the emerging hockey stick for revenue growth from Office 365, and since Microsoft is adopting the Intuit model of shoving customers into death march upgrades, it is true in the short term the revenue per conversion is significant.  This is certainly good for cash flow and margins.

We pointed out in our last post that over 80% of revenue and 95% of gross margin come from software licenses and the enterprise businesses.  In the future, this behemoth needs to lose weight and get a different culture in charge of businesses like phones, entertainment, and games.  

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