Microsoft has hit the ecosystem wall

By Ross Rubin

Last week's announcement that Microsoft would scale back its smartphone efforts was a clarifying moment. The resulting smartphone segments that the company will play in—which it calls business, value, and flagship—mirror those of its Surface tablets. In an email to employees explaining the change, Satya Nadella noted: "We are moving from a strategy to grow a stand-alone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family."

The word "ecosystem" is tossed about a lot in the tech industry, but it does not simply mean having a bunch of stuff out in the market. As in nature, having a tech ecosystem implies that one part of a business feeds another part. Unlike in nature, though, ecosystems are expected to not only continue in their cycle but keep growing. And growth is where Microsoft's prospects still look iffy.

The company was once the grand master of ecosystem strategy. Beginning in the 1980s, it leveraged its position in DOS to create Windows, which let it move from client operating systems into server operating systems, applications, and development tools. Its strength in development tools helped it move into video games.

Before the iPhone, it even appeared as if Microsoft could extend its close relationships with developers and Windows' familiar user interface elements into a dominant position in smartphones. Indeed, while Microsoft is often criticized for being late to the smartphones market, it actually entered it a half-decade before Apple did. Even in retreat, the company's position is less dire than the fates of its once-powerful competitors BlackBerry, Palm, and Symbian.

As Microsoft's smartphone journey became an uphill battle, Apple's ecosystem started gaining steam. Unlike Microsoft's efforts, the iPhone was driven principally by the Apple brand and the user experience the phone offered. Technical ties didn't matter so much: The Mac had little direct influence on the iPod, which had little direct influence on the iPhone and iPad. Today, the Apple Watch leverages the installed base and developer support of the iPhone, but there are signs that the company's nearly two decades of hit products may be finally slowing down.

Google, too, has seen its ecosystem limits. Despite Android's dominance of smartphone market share, the company hasn't been all that successful in bringing Android variants to new categories of devices even though vendor support for its Android Auto car software has picked up significantly since launch. Undaunted, Google is charging ahead with its own platform and language for linking together the Internet of Things.

Back to the PC

Apple and Google may face uncertainty, but their strength in smartphones still provide a prime position from which to attack whatever may be next. Microsoft, on the other hand, is receding into the shrinking PC market as the core of its ecosystem. If it could not extend that to mobile devices over the long haul, how can it make a bid for wearables or the Internet of Things that have close ties to smartphones? Indeed, its scaling back of Windows phones already throws a damper on developer outreach efforts to bring Android and iOS apps to the Lumia Windows smartphones that need them.

Microsoft's Surface Hub is heading to the conference room, not the living room.

In a recent interview with ZDNet's Mary Jo Foley, Microsoft CEO Satya Nadella made the case for the company's position as a viable third ecosystem both for businesses and consumers. He discussed the portfolio of products that the company is building. That includes buying its way to success by acquiring popular apps such as Sunrise, Wunderlist, and Minecraft, all of which must deal with the home-field advantage that Apple and Google have on their own devices. He also mentioned the HoloLens (whose price remains unannounced) and the Surface Hub conference-room computer, both of which are unabashedly corporate-focused.

In some areas, of course, Windows remains a formidable force. Neither Apple nor Google can touch it in terms of enterprise productivity, even as more tasks migrate to the Internet and mobile. Nadella is betting that Windows can power an ecosystem for those people who most focused on getting things done in an efficient and secure fashion. That's an approach that has been successful for Lenovo, which continues to buck the PC sales shrinkage trend, but one that's proven tough to exploit for Blackberry, which is struggling to protect what's left of its core business. Stuck between the rock of a failed phone business and the hard place of having no easy way to extend into emerging product categories such as the Internet of Things, Microsoft cannot hope to win as a third broad consumer ecosystem.

[Photo: Flickr user Khánh Hmoong]