Sunday, March 30, 2014

The Resurgent, Post-Windows Microsoft


This post was also published on TechCrunch.

Microsoft had become an oft-ignored, behemoth to the North, despite $77 billion in revenue, $57 billion in gross profits and $21 billion in net income. It seemed that the mobile revolution had passed it by. Although Steve Ballmer was already making many of the right moves, it took new CEO Satya Nadella to fully accept that Microsoft had to move beyond Windows into a new future of apps and cloud services.

The future of Microsoft is in selling its software, such as Microsoft Office 365, Microsoft Dynamics CRM and ERP, and Microsoft servers in the Azure cloud to business customers on whatever platform they like. Each of these products is arguably best-of-breed and cloud-based, and has a large customer base. Microsoft indeed has the ability to pivot, and pivot hard, as it did when it switched from pushing MSN to competing with Netscape in the Internet space. And Microsoft is once again not encumbered by antitrust restrictions from aggressively pursuing these markets.

There was a time when, if Redmond aimed its guns at a market segment, startups fled. Since the launch of the iPhone almost seven years ago, Silicon Valley startups have operated without any fear of Microsoft competing aggressively in apps and device-agnostic cloud services.

As the first step towards its new OS-agnostic future, Microsoft recently released its OneNote note-management software for the Mac OS, rounding out a full multi-platform strategy for the software, including Windows, Windows Phone, Mac, iPad, iPhone, Android and web.

Microsoft quickly followed up with Office 365 for iPad, in addition to its existing Android, iPhone and Mac support. Microsoft Office 365 is remarkably good, and offers a web only option that is priced the same as Google Drive with far better features and the familiarity of Office. Power users can pay more per month for small business premium that includes the desktop versions of the apps, so an IT department can offer different versions to different types of users. Office 365 now only has three different versions, versus the headache-inducing menu from years past. Most business buy Microsoft software through enterprise license agreements which will bypass the Apple 30 percent cut.

Although it is a huge step for Microsoft Office to now be available on all of these platforms, just touch-enabling software does not necessarily make it mobile first. Microsoft has to keep a sharp eye on startups like Quip that have completely rethought the office experience for mobile.

Microsoft Dynamics CRM and ERP are a billion dollar plus business and growing rapidly. Dynamics CRM is available as SaaS on all platforms including iOS and Android. Dynamics ERP is available as a cloud hosted solution but is not yet available on other client platforms.

Windows Azure cloud, which is rumored to be rebranded to “Microsoft Azure,” is also growing rapidly and provides a growth platform for .Net development platform, Microsoft’s Windows Server, Active Directory, and SQL Server database products.

Microsoft has an army of loyal developers who love its easy-to-use tools, and it is rumored that it’s going to acquire Xamarin, which lets Microsoft .Net developers build apps for iOS and Android. The companies recently signed a partnership, but an acquisition of this technology would be a huge step forward for Microsoft’s new mission of platform agnosticism.

So what of Windows?

Microsoft is not giving up on Windows, but it is going to stop tying its growth products to only one operating system. Windows 8.1, for all of its faults, is the same as Windows 7 once you ignore the Modern UI. And on a tablet, the Modern UI actually works quite well. I have been using a Lenovo Yoga exclusively for almost a year and have actually quite enjoyed it despite its quirks. In addition, Windows Server is seeing a renaissance as part of Azure cloud.

There is a report that Microsoft is seriously considering giving away a version of Windows 8.1, much like Google gives away Android and Chrome OS in order to drive more Google Search revenue, and Apple now gives away Mac OS upgrades.

Microsoft’s OEMs have been struggling to increase margin and have been extracting lower Windows licensing fees and even no licensing fees in some cases. However, these discounts could be used as a lever to finally get hardware OEMs into line with more stringent hardware standards.

With a free Windows on decent hardware and a $99 Office 365 home subscription, Microsoft can retain legions of value-oriented consumers (think Costco shoppers) that want to use the same computer at home that they use at work. While some urban Apple devotees may look with disdain on this strategy, there are many high growth, high profit companies that sell exclusively to middle America.

The saving grace for Windows Phone is that at some point, the apps market is going to calm down, and there will be 1,000 apps that matter to 99 percent of the population. Microsoft can pay each of those app developers up to $500,000 to port to Windows Phone, so it would cost $500 million for Microsoft to offer a phone that has the top 1,000 apps. Quite achievable for a company that has a $2.5 billion annual marketing budget and more than $100 billion of cash. The much-maligned Surface tablet is now a break-even business with almost $1 billion in sales. Even if consumers don’t buy them, Microsoft is selling large volumes to businesses such as Delta.

The operating system story for Microsoft is now one of slow growth and middling progress, which keeps it somewhat in the game without bogging down its application growth engines.

The other businesses

As many an analyst has stated, the Xbox and Bing businesses should be spun out. One option is to sell Xbox to troubled Sony so it can combine the declining consoles market into a single larger entity and gain efficiencies in production and retain AAA game developers. Yahoo could pick up Bing in order to accelerate its renewed focus on search.

Perhaps I have a tendency to favor the underdog, but Nadella has a great shot to make Microsoft relevant again with its new focus on selling its high-growth software to businesses on whatever platform they want. There was a time in the early 1990s when Microsoft made more money on every Mac sold than Apple did. With its new platform-agnostic strategy, this is a metric that Microsoft could attain again for every device sold to a business.

Saturday, March 15, 2014

Why Can't a Startup Build a Self-Driving Car?


This post was also published on TechCrunch.

On a 10- to 20-year horizon, large-scale technological innovation is going to center around machine intelligence, robotics and sensors. Each of these fields requires gargantuan amounts of capital and a lot of patience, a combination well beyond the scope of even the most progressive venture capital firm.

As Google has demonstrated with its self-driving car, the combination of machine intelligence, robotics and sensors can already perform better than a human at a complex task such as driving a car, something that 10 years ago was unthinkable to most people.

No doubt, Tesla has built an amazing car and after much trial and tribulation, brought it to market. However, General Motors had already shipped a production electric car years before. Tesla took advantage of the innovator’s dilemma, where legacy car companies are virtually incapable of embracing electric-only cars and integrating modern electronics.

Tesla’s roadmap includes “autopilot” and eventually “autonomous” features. Perhaps Tesla also will deliver these features slightly before legacy car manufacturers do, including Mercedes and Lexus, which are aggressively adding similar features. But the winner in this game is Google, which has a multi-year technology lead and can extract enormous licensing fees.

The amount of raw computing horsepower necessary for cognitive computing is massive. Integrating next-generation sensors such as LIDAR is extremely complicated. The regulatory environment for introducing smart machines is extremely unpredictable, and the required experimentation and unpredictable timelines of this type of work puts it squarely in the “research” side of research and development. And venture capitalists inherently hate research – they like development.

Even the biggest venture-backed play in machine intelligence, DeepMind, with $50 million in very patient funding and 75 top researchers on staff, was recently acquired by Google for $500 million. Google has been on a massive buying spree lately, snapping up the building blocks of future technology with robotics acquisitions, other AI acquisitions such as DNNresearch, and key hires such as Ray Kurzweil, who is considered by many to be the godfather of commercial cognitive computing. Google is among the only customers of D-Wave, a much-maligned quantum-computing company.

Companies like Google, IBM and Microsoft have been building out machine-learning teams that can leverage their investments in vast networks of computers built around the globe. The amount of transistors needed to match the number of neurons in a human brain is a tremendous 100 billion, and it will take us until around 2025 to replicate on a computer chip, according to Kurzweil, although this might be aggressive due to the physics around increasingly smaller transistors in microchips.

The market uptake of machine intelligence is going to take a while. IBM has shown that a computer can outperform humans at chess and Jeopardy, and is transitioning its cognitive computing work into fields such as medicine. Even at the scale of an IBM, shareholders are complaining about the cost of this transition and the head of the Watson group was recently replaced. If IBM’s Watson were a startup, its investors would have long ago forced it to sell so that they could put their capital into more efficient short-term and mid-term investments.

Other companies with large computing grids are starting to get into the game. Facebook recently kicked off an artificial intelligence lab with the hire of Yann LeCun from NYU, and also acquired speech recognition company Mobile Technologies. EBay hired Hassan Sawaf from SAIC to spearhead its machine-intelligence efforts. Yahoo! has spun a deal with Carnegie Mellon to access their researchers. Apple, with its relentless focus on the client side of computing, is struggling to keep up with making its email systems scalable, let alone keep its Siri acquisition on par with Google’s relentless drive towards machine intelligence.

The upside is huge. Every sector of the economy will soon enough have its own version of a self-driving car, even fields as advanced as medicine. As anyone with an undiagnosed or somewhat diagnosed medical condition can tell you, the amount of guesswork and over specialization of medical professionals is maddening. A computer can take a holistic approach and quickly narrow down what a problem could be, and iterate with exclusionary tests. Given the fundamental shift required, it will take quite a while for this transition to happen in fields such as medicine.

Despite repeated fears, startups are definitely taking on far bigger challenges than just photo and chat apps. But will startups be able to compete with these giants in areas such as machine intelligence? Perhaps Google, IBM and Amazon will offer Cognition-as-a-Service that would usher in a wave of new companies, much like Amazon’s Infrastructure-as-a-Service offering reignited the web.

IBM has created a $100 million investment fund for Watson-based companies and just made its first investment. Amazon could kickstart a cognition service by acquiring nascent cognition service companies such as Wise.io, Expect Labs, and BigML and offering them at scale. Now that would unleash a generation of “smart” startups.