Microsoft At CES 2012: New Phones, Same Struggle For Customers

LAS VEGAS -- The first time a Microsoft chief executive delivered the keynote at Consumer Electronics Show, the annual industry expo that has become the world's largest consumer tech tradeshow, nearly two decades ago, the company looked poised to take over the world. Apple was lurching toward bankruptcy, Microsoft had a stranglehold on desktop computers, and the U.S. Department of Justice was seeking to curb the behemoth's power. The company seemed ready to parlay its dominance of the desktop into other markets, sure to leave a trail of crushed competitors. It hasn't turned out that way. On Monday evening, Microsoft gave its fifteenth and final keynote at CES, putting an end to a tradition that has, especially in recent years, spotlighted the company's struggle to win the hearts and minds of customers abandoning camp for rivals that include Apple and Google. To be sure, Microsoft has enjoyed numerous successes, all of which were on full display on the CES stage. Microsoft CEO Steve Ballmer, voice booming in his familiar fashion, noted that Microsoft Windows software now powers more than 1.3 billion PCs worldwide, and the latest suite of Office applications had been the fastest selling in the company's history. He also teased the forthcoming Windows 8 operating system, a complete and impressive overhaul of software that features the new interface Metro, as well as future applications of its gesture-based controller Kinect. Yet Microsoft continues to have trouble adapting to world where computing is done on tablets or smartphones, not desktop PCs, and where corporate IT departments increasingly follow employees' leads. For the past several years, Microsoft's address at the annual Consumer Electronics Show has followed a predictable routine. Ballmer takes the stage, makes promises, and insists everything is all right. But it isn't. "In consumer tech, Microsoft is absolutely and afterthought," said Howard Anderson, a professor at MIT's Sloan School of Management and founder of the Yankee Group, a research firm. "Microsoft is a competent, well-balanced company that's financially driven and market-driven, but less and less innovation-driven. Consumer electronics has always been innovation-driven business." Ballmer acknowledged his company must do better at putting its phones in people's pockets and tablets in their homes. "We have a chance in the next year to raise our game, our product line to the next level across phones, tablets, TVs, and Xbox," said Ballmer. "Really, the heart and soul of that will be our new Metro interface." Microsoft's Xbox and Kinect gaming systems are bright spots in the company's repertoire of gadgetry targeted primarily at households, not businesses. Xbox boasts more than 66 million users and Microsoft has shipped more than 18 million units of Kinect, according to Ballmer. The device also inspired a slew of unanticipated applications that range far beyond gaming, from controlling robots to making music. Other key offerings aimed at positioning Microsoft as a consumer favorite have failed to gain traction. Microsoft's Zune, its answer to the iPod, was discontinued. Microsoft, one of the first companies to grasp the potential for tablet PCs, has yet to deliver an iPad competitor. Microsoft's Windows Phone software powers just 5.2 percent of smartphones in the U.S., while offerings from Apple and Google run 28.7 and 46.9 percent of smartphones, respectively, according to comScore. Microsoft's flagship enterprise sales to businesses has been eroded by the creep of consumer-targeted devices, like the iPhone and iPad, into the boardroom. Increasingly, individuals, not IT technicians, are having the final say over what smartphone powers their enterprise email accounts. This puts Microsoft, a company more synonymous with "corporate" than "cool," at a disadvantage. "The line between what is enterprise and what is consumer is falling apart because people bring their own tech to work and IT departments have to adapt to it," said J.P. Gownder, an analyst with research company Forrester. "It's a challenge for Microsoft in the sense that as smartphones are coming into the enterprise from workers, those consumer are not buying Windows Phone, meaning Microsoft won’t be able to play in that part of the space." The company is also playing catch-up when it comes to mobile devices, which are tipping the balance of power in the tech industry and opening up important new business opportunities. Though Microsoft's Windows operating system remains a cash cow for the company and still powers an impressive nine in 10 PCs, demand for the software is gradually being eroded by the shift away from PCs toward lighter-weight, more portable devices like the iPad. Confronted with this trend, Silicon Valley's software king seems to have put its head in the sand. Two years after the iPad debuted, Microsoft has yet to launch a Windows-based tablet that can give Apple a run for its money. Google, a newcomer to the world of software, released an Android operating system for tablets earlier this year. Even Barnes and Noble shipped a tablet ahead of Microsoft. The Redmond, Wash., giant has promised that its forthcoming Windows 8 software will run on both tablets and PCs, effectively "bring[ing] together the potential of a tablet with the power of a PC," as chief marketing office Tami Reller said Monday. The Metro interface looks promising. It offers a clean, colorful collection of tiles and seamless transitions between programs and devices. But a release date has not been set -- there are only hints it’s to be expected sometime in 2012 -- and by the time it arrives, it may already be too late. "Microsoft doesn’t have viable tablet product out on market at this point," said Gownder. "Windows 8, which will be released presumably sometime next year, is very late to the game compared to iPad, Amazon Kindle Fire, and Barnes and Noble Nook tablet. They’re lagging behind here." Ballmer emphasized that Windows is still the heart and soul of Microsoft. "Nothing is more important to Microsoft than Windows and delivering the kind of no compromise experience, that dynamic Windows interface we described," he said. Microsoft smartphone slump also has proved hard to shake. The company's Windows Phone software has been a critical success, but sales remain anemic. Ballmer admitted in September that he was disappointed with the state of affairs. Microsoft is betting big that its partnership with Nokia, which agreed to scrap its Symbian software in favor of Microsoft's, will put more smartphones in consumers' hands and reverse the downward trend. The first three Windows Phone-powered Nokia smartphones will be arriving in the U.S. beginning in February. Experts blame Microsoft's flagging fortunes in the consumer space on its size, sluggishness and complacency. The company has tried to mimic its rivals' products, while ultimately delivering too little, too late. Microsoft must deliver bold, innovative products at a faster pace to avoid becoming obsolete, they said. "As far as being nimble and ahead of the curve, Microsoft has been playing catch-up. That’s their principal problem," Gownder explained. "Microsoft needs to focus on innovating, rather than following a little more. And if they're going to follow, they need to do it more quickly." The success of products like Xbox and Kinect show that the software giant can still strike it big. Ballmer pointed out that these devices suggest a path forward for the company, one grounded in inimitable technology and massive moves. "Xbox represents the best part of our DNA, which we’re really proud of: making big, bold bets and investing for the long term," Ballmer said. "Ten years later, we’re the world sales leader for consoles."