How Microsoft will change forever and thrive again

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Under the Surface

Microsoft may have partnered with others to create Windows Phone devices, but what about the Surface, which sports the Microsoft brand and no one else's? Is the Surface a sign that Microsoft is becoming a hardware company and shirking its software-and-services roots?

Probably not -- for one, the Surface was developed mostly as a showcase for Windows 8, in both its x86 and ARM incarnations. It wasn't as if other Windows 8 machines with touch weren't coming to market; the Dell XPS 12, the Lenovo Yoga, and many others come to mind. But Microsoft wanted at least one machine to serve as a guiding light for what is possible, both for consumers and other manufacturers.

Surface attracted at least as much criticism as admiration, and it made others wonder if Microsoft was going to rebrand itself as a PC hardware company -- again, along the lines of Apple. It's a tempting view to take, but an incomplete one.

Forrester's Rymer says it's best not to "read too much into Microsoft's hardware ventures."

"Microsoft is simply trying to stimulate innovation in what had become a static ecosystem," Rymer says. "Close collaboration with hardware providers is one way to prompt greater innovation. Creation of new devices is another way."

It also helps to remember that Microsoft has long been a hardware company. Case in point: the Xbox, a component of Microsoft's overall strategy that's often ignored in favor of its conventional desktop efforts. The Xbox isn't just a game console, but an entertainment hub of remarkable flexibility and breadth of third-party support.

Also, hardware makers typically deal with thin or negative profit margins, unless they have a compensatory strategy in place. Apple justifies its markups as the cost of being able to access Apple's exclusive product ecosystem. The Xbox may lose money on each unit sale, but Microsoft makes it back in licensing and royalties for game developers and hardware makers, plus the profits generated via the Xbox Live network. No such strategy exists for the Surface, except maybe via the Windows Store.

Besides, as far as Windows 8 hardware goes, "Microsoft is betting on its hardware partners," says Rymer. "Just consider the keynote at Build 2012 -- it featured eight different devices, one of which was the Surface." Telerik's Sells is convinced both the Surface and the Nokia Lumia (its new Windows 8 phone) are "the next cool things."

Still in the Office

Microsoft's other flagship product, Office, underscores the hybrid theme of Microsoft's long-term vision, pushing it beyond the mobile/desktop dichotomy to bring a new component into the mix: the cloud.

Even with the rise of in-the-browser productivity tools offered by the likes of Google or Zoho, Office is itself a platform offering tools not easily duplicated elsewhere. It's also a platform not easily thrown over and replaced in companies where millions of documents and thousands of existing users would have to be converted and retrained.

To keep that from happening, Microsoft has split Office into three parallel tracks. First is the continued development of the Office so many business users and consumers know and run. Second is the edition of Microsoft Office for WinRT devices, such as the RT Surface, which is nearly identical to its elder x86 brother albeit without some power-user features (such as PivotTables in Excel). Third is Office 365, Microsoft's cloud-hosted Office system, which includes not only Web-app versions of the various Office programs, but hosted support for Exchange and several other means for making Office easier to deploy without sacrificing functionality.

This strategy ensures that whatever happens, Microsoft can't lose too badly. If the desktop doesn't disappear -- all signs point to it remaining a staple of computing for years to come -- the standard edition of Office stays with it. If Windows RT devices make inroads, it will be at least in part because users aren't locked out of running some of the most popular commercial apps for Windows. And if the cloud does indeed swallow everything whole, Office 365 is prepared to be part of that future too.

Servers, services, Azure

The cloud and the server closet are becoming increasingly indispensable to Microsoft's long-term vision, as recent marketing and technological shifts have foretold.

"Microsoft now describes itself as a 'devices and services' company," not merely a devices company, Blue Badge Insights' Brust says. "Devices may get top billing [at Microsoft], but services -- and the server products that power them -- certainly shouldn't be ignored."

Brust sees significant traction for Microsoft's enterprise server line, citing SharePoint, Exchange, System Center, SQL Server, and Windows Server as strong offerings that are showing significant growth.

"These products are important for two reasons," Brust says. "They consolidate Microsoft's enterprise success, and they provide credible infrastructure for user/consumer-facing products like Windows, Windows Phone, and Xbox."

Becoming a megaservice provider via its fledgling cloud platform Azure is only half the story. Microsoft's boldest long-term bet may be its desire to become an infrastructure provider à la Amazon, and to give its customers the tools to build their own private clouds or virtualize existing server setups.

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