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Microsoft's Chanel No. 5 Moment

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Microsoft announced its expected restructuring plan.

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Every journey ends, but we go on. The world turns and we turn with it.
-- Brad Pitt, for Chanel No. 5

The most interesting thing about the world of technology is that, quite often, the most successful products are the ones we don't see coming.

Even the blockbuster products we do know are on the way -- like the Nintendo (OTCMKTS:NTDOY) Wii in 2006 or the first Apple (NASDAQ:AAPL) iPhone in 2007 -- often succeed for reasons we couldn't have foreseen.

Who would have known that a motion control system would get grandma playing video games?

And who would have thought before seeing the first iPhone that Apple was actually kicking off a touchscreen and mobile Internet revolution that is still reverberating throughout the world?

How about Google (NASDAQ:GOOG)? Forget about its search technology. There was Web search before Google, though it definitely could have been better. But I don't recall many people screaming for functional minimalism, revolutionized by Google's bare-bones user interface.

In summary, many companies observe how the world turns and they turn with it -- but the special ones, like the three companies I named above, actually do the turning.

I've extensively covered the downward trend in PC sales courtesy of the Toasterization trend following the release of Microsoft's (NASDAQ:MSFT) Windows 8, highlighting the fact that there was no post-release increase in sales, as is customary and which happened after the release of Windows 7.

I also pointed out in April that if you didn't know PC sales were horrible, then you just weren't paying attention.

Since then, there's been nothing but bad data, and it continued yesterday with Gartner's release of second-quarter industry sales numbers.

Gartner said that worldwide PC shipments fell 10.9%, marking a record five straight quarters of losses.

The song remains the same as tablets continue to cannibalize PCs, with Gartner noting the following:

"We are seeing the PC market reduction directly tied to the shrinking installed base of PCs, as inexpensive tablets displace the low-end machines used primarily for consumption in mature and developed markets," said Mikako Kitagawa, principal analyst at Gartner. "In emerging markets, inexpensive tablets have become the first computing device for many people, who at best are deferring the purchase of a PC. This is also accounting for the collapse of the mini notebook market."

Shrinking installed base?

Holy Schnikes!

What are things going to look in 10 years given that babies are being raised by iPads?

So how does Brad Pitt's line about a quasi-metaphysical concept from that famous Chanel No. 5 commercial tie in to the collapse of PCs, and Microsoft specifically?



Well, the world has been turning and Microsoft has been attempting to turn with it, primarily by trying to hitch a ride on the Apple-driven mobile computing boom.

But after plowing forward with its Windows Phone and Surface tablet initiatives, it hasn't exactly been killing it.

In the first quarter of 2013, Microsoft held 2.9% of the market share in smartphone operating systems -- a big improvement from the 1.9% seen the year before, but not close enough to move the needle.

It's had a similar level of success with its Surface tablets, with 7.4% of the market (up from zero the year before), according to Strategy Analytics.

And with PC sales collapsing while these mobile markets boom, we're actually seeing Windows fall behind Google Android in the overall device operating system market share.

In fact, for 2013, Garner predicts the following market share split:



Luckily for Microsoft, it is a more diverse company than many people realize, as its Windows and Business (mostly Office) divisions account for 58% of revenues. That's still a lot, and Microsoft still makes most of its profits in these areas, especially since Online Services bleeds money, but still, a declining PC market does not equal immediate death for the company.



In fact, Microsoft has been shaking off the PC blues pretty well; the stock is up 33% year-to-date, crushing the S&P 500 (INDEXSP:.INX).

But enough about the past.

On Thursday morning, the company published an expansive outline of its widely-rumored reorganization plan under the title "One Microsoft":

We are rallying behind a single strategy as one company -- not a collection of divisional strategies. Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do. We will see our product line holistically, not as a set of islands. We will allocate resources and build devices and services that provide compelling, integrated experiences across the many screens in our lives, with maximum return to shareholders. All parts of the company will share and contribute to the success of core offerings, like Windows, Windows Phone, Xbox, Surface, Office 365 and our EA offer, Bing, Skype, Dynamics, Azure and our servers. All parts of the company will contribute to activating high-value experiences for our customers.

Now, this reorganization may be something intended to smooth out internal company operations, and not something intended to please investors and the media.

Instead of being structured around business lines, Microsoft will be organized under functional areas:

1. Engineering (OS, Apps, Cloud, Devices)

2. Marketing, Business Development and Evangelism

3. Advanced Strategy and Research

4. Finance, HR, Legal, and COO

Microsoft has something of a reputation for breeding infighting and interdivisional rivalries.

In a 2010 New York Times editorial entitled "Microsoft's Creative Destruction," former company Vice President Dick Brass had this to say:

Internal competition is common at great companies. It can be wisely encouraged to force ideas to compete. The problem comes when the competition becomes uncontrolled and destructive. At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence. It's not an accident that almost all the executives in charge of Microsoft's music, e-books, phone, online, search and tablet efforts over the past decade have left.

As a result, while the company has had a truly amazing past and an enviably prosperous present, unless it regains its creative spark, it's an open question whether it has much of a future.

So hopefully, the new structure will have people more focused on the big picture in battling rivals like and Apple and Google, instead of on competing with other product groups within Microsoft.

But again, bigger picture questions remain -- namely, why does Microsoft change with the world?

Wouldn't it be better if it was like the 1980s, when Microsoft was itself driving the change?

I'm looking at an accompanying press memo, a letter from CEO Steve Ballmer, who says the following:

With the more recent growth of broadband and the mobile Internet as well as the development of newer devices such as tablets and smartphones, consumers' experiences and use of technology have fundamentally changed again. We have entered an always-on, always-connected era that holds new promise for what technology can bring to people's lives and to businesses everywhere on the planet. And this gives us an opportunity to help people lean in and do more in every part of their lives.

A few years ago in a speech I gave at CES, I observed that there was a shift underway. We were headed from a phone, a PC, and a TV to simply three screens and a cloud -- and over time, a common software-based intelligence would drive all of these devices, bringing them together into one experience for the consumer.

As well as this:

We will strive for a single experience for everything in a person's life that matters. One experience, one company, one set of learnings, one set of apps, and one personal library of entertainment, photos and information everywhere. One store for everything. Microsoft has the clear opportunity to offer consumers a unified experience across all aspects of their life, whether the screen is a small wearable, a phone, a tablet, an 85-inch display or other screens and devices we have not yet even imagined.

The problem is that these statements are sideways-looking, not forward-looking. Microsoft was very much late to the Internet and mobile device booms spearheaded by companies like Google and Apple. Unlike the 1990s, there is now competition for a "common software-based intelligence." As shown in the chart above, Google Android is outselling Windows, with Apple's iOS not far behind.

It all sounds like market research, as if the company's business plan can be distilled down to smartphone + tablet + cloud = success. It's not that these markets aren't important. But a true resurgence for Microsoft requires a step beyond simply fighting for the markets that are popular today. It means creating markets important enough that Apple turns around and says, "We need to get in on that!"

Now did Apple invent the smartphone market? Literally, no. Practically, yes.

Has Microsoft come remotely close to doing that with any recent product?

No -- and I'm not sure how this reorganization changes that.

One interesting thing to watch out for is how Microsoft changes its financial reporting methodology.

There is an awful lot of speculation that the company's going to re-jigger things to hide its poor results in the online services division, which includes the Bing search engine.

This article's grown a heck of a lot longer than I expected, so I'm going to wrap it up here.

I'm not saying that Microsoft's not going to continue making a lot of money, and I actually have no current opinion on the stock.

I'd just like to see Google and Apple put back on their heels for a change, and as a shopper, I just want to be excited.

Ya know?

Twitter: @Minyanville

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Position in AAPL,NTDOY
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