Entelligence: Market caps and dunce caps

Entelligence is a column by technology strategist and author Michael Gartenberg, a man whose desire for a delicious cup of coffee and a quality New York bagel is dwarfed only by his passion for tech. In these articles, he'll explore where our industry is and where it's going -- on both micro and macro levels -- with the unique wit and insight only he can provide.

The buzzword of last week was "market cap." To those unfamiliar, market cap is the total value of outstanding shares of a company, and on May 26th at around 3PM Eastern, Apple's market value reached $225.1 billion, surpassing Microsoft's $222.3 billion. Apple isn't the largest technology company around, but it's become the most valuable, and it's valuation is second only to Exxon in the US. Later that same week, Microsoft announced that Robbie Bach and J Allard, the head of its Entertainment and Devices group and the division's CTO, were both leaving the company. There's been speculation that these two events were somehow intertwined, but I don't think that's the case. In addition, as good as Robbie and J are, there's more to the E & D team than two people -- as grandpa used to say, the cemeteries are full of people who couldn't be replaced.

Historically, Microsoft has always been two companies, the parts that made lots of money (Windows, Office, Server) and the parts that don't make money yet but might someday soon. E & D is the latest incarnation of the latter. Let's take a closer look.

First, the E & D group isn't doing nearly as poorly as some people think. Both Robbie and J were instrumental in bringing Xbox to market and driving that initiative forward in the face of great market skepticism. Xbox has now become a key component of Microsoft's digital home strategy, as it turns consumer TVs into connected digital portals for various Microsoft and partner services. Microsoft's mobile efforts have also done better than commonly perceived. With more than 20 million devices shipped last year and a major new platform initiative due later this year, Microsoft is still well positioned to be a force in the mobile space.

Microsoft, however, has done a poor job of recognizing major market trends and then been slow to create and bring to market the proper products to capitalize on them. Ironically, many of today's hottest consumer technology trends are all things that Microsoft pioneered long before competitors launched products. Digital music, photos, videos, tablets, touchscreens and smartphones: all of these were technologies and devices for which Microsoft had key ingredients for major success -- and in many cases lost mindshare and market share to competitors instead.

I believe Microsoft will and must continue to stay in the consumer market. I also believe that Microsoft has the fundamental core ingredients needed for success in these spaces. What the company needs is the will to execute and the belief in its own convictions to drive new initiatives forward. To do this, it's going to require a break from known to the unknown. Even as Microsoft has learned that mobile devices shouldn't have little task bars and Start menus to make them look like Windows, Microsoft needs to go beyond the idea that everything needs to be tied to Windows -- or worse, built on Windows. The leaked and ultimately abandoned Courier project showed great promise because it did not look like a Windows device -- it looked like something that was designed and optimized for the tablet form factor. Xbox succeeded because it wasn't a just another PC with a splashy UI on top of a Windows core.

With the shakeup of Entertainment and Devices, Microsoft has the ability to refocus itself and being next stage of its evolution. It's an opportunity to for the company to shine, as it has in the past when it's been perceived as being down and out. The technology and talent are there, but the pieces now need to be combined properly and marketed well. The time is now for Microsoft to execute.

Michael Gartenberg is a partner at Altimeter Group. His weblog can be found at gartenblog.net. Contact him at gartenberg AT gmail DOT com. Views expressed here are his own.