Microsoft’s Shoulda-Woulda-Coulda Mobile Story

William Safire wrote a story in The New York Times in 1994 tracing the origin of the phrase. He was prompted to do so when First Lady Hillary Clinton used it in response to a pointed question she was asked during the Whitewater hearings. Safire, in that piece, traced its usage to a number of different situations dating all the way back to 1854. Lexicographers, he concluded, peg the phrase to mean, more or less, “spare me the useless excuses.”

Wiktionary takes a bit of a softer stance, defining the phrase as an expression of disappointment over missed opportunities — in other words, regret over not doing something that might have resulted in a different outcome. Rappers and balladeers have written songs about it, too — and the downside of not “going for it” in love and life.

Whatever the use case or application of the phrase, it’s typically uttered with the benefit of 20/20 hindsight and often to rationalize why something shoulda been done that also coulda been done and woulda been done — if only things had been different.

Which brings me to Steve Ballmer, Microsoft and smartphones.

Just last week, former Microsoft CEO Steve Ballmer invoked the spirit of the phrase to answer a question about how and why Microsoft ended up blowing the smartphone opportunity that was well within its reach in the mid-2000s.

“I would have moved into the hardware business faster and recognized that what we had in the PC, where there was a separation of chips, systems and software, wasn’t largely gonna reproduce itself in the mobile world.”

In that same interview, Ballmer also suggested that he long advocated for Microsoft to get into the handset business and that his stance on that point strained his relationship with Microsoft Founder Bill Gates. Remember, it was Ballmer who pushed Microsoft to buy Nokia for $7.6 billion in 2013 over the reservations of the board and incoming CEO Satya Nadella. The acquisition was announced weeks after Ballmer made public his intentions of stepping down. Three years later, Microsoft shut down what analysts described as a “colossal mistake” and wrote off nearly all of what it paid for the asset.

In that same interview, Ballmer also explained away his initial skepticism of Apple as his inability to process the “business model” innovations that he claimed drove its popularity — the carrier subsidies that made the iPhone cheaper for consumers to buy.

Shoulda-Woulda-Coulda.

Maybe those lexicographers have a point after all.

Grab your coffee, and let’s go back in time 20 years.

MICROSOFT AND APPLE MAKE PEACE — AND START A NEW WAR

One might say that Microsoft was Apple’s smartphone ignition strategy.

It was 1997, and Apple was on death’s door. Cash-strapped and laboring under the reign of John Sculley, who all but destroyed Apple after he fired Jobs in 1985 (a claim Sculley disputes), Jobs was brought back to the company he founded to save it. In return for non-voting shares and an agreement to drop the lawsuit that accused Microsoft of copying the look and feel of the Mac OS, Jobs persuaded Bill Gates to write Apple a check big enough to get the company back on solid financial footing. Gates also promised to support Office for the Mac for five years — pulling support for this major app would have pushed Apple into oblivion.

That served Microsoft well, too, since it came at the same period in time during which Microsoft was embroiled in a nasty antitrust battle over Internet Explorer with the U.S. Department of Justice. The check written to its well-known nemesis was also important symbolism — a way for Gates and Microsoft to soften its reputation as ruthless competitor. At least with Apple still in the game, Microsoft could still argue with a straight face that it wasn’t literally a monopolist.

But it was also all Jobs and Apple needed to keep its arch-rival thinking that all was copacetic in PC-land, fund the unraveling of just about everything that Sculley did while CEO and field the dream team that has since transformed everything about the music, personal computing and mobile industries.

Without this deal, it is pretty unlikely that Apple would have survived or at least had the ability to do all the great things it subsequently did.

Now, take another sip, and let’s fast forward a few years.

In 2005, two years before there was an iPhone, there was a small but rapidly growing smartphone market, and Microsoft looked like it was going to extend its Windows monopoly to handsets.

Microsoft was second to Symbian then, but growing quickly and with a much more sophisticated operating system. Handset manufacturers, like Motorola with the Motorola Q, rushed to produce handsets that rivaled the most formidable smartphone contender at the time — RIM and BlackBerry.

Life was looking pretty good for Microsoft and its command of the mobile market. Analysts predicted that its share of that market would only grow as its grip on the enterprise market expanded — and that Microsoft would become the leading mobile OS by 2010.

We all know what happened next.

APPLE AND THE TWO FORKS IN THE SMARTPHONE ROAD

On Jan. 10, 2007, Steve Jobs introduced the iPhone and brought the smartphone market to its knees.

Like the Mac that changed the whole computer industry and the iPod that changed the whole music industry, the iPhone, Jobs said, would change the mobile industry forever — not to mention the fortunes of every player in the smartphone business.

The iPhone, Jobs said, “skated to where the puck is going” instead of where it had been — a not-so-subtle slap at the phones that were in the market at that time. It was quite clear that he and Apple didn’t want to create a smaller and better-looking mini PC that could connect to the internet and do email. Jobs reinvented the notion of what a smartphone could do by making a device that ditched keyboards for touch screens and a virtual keyboard and that made accessing the internet an app — and a year later, an app store with hundreds of apps — away.

Jobs got everyone’s attention — including Microsoft’s. Ballmer’s reaction at that time was, more or less, denial.

“[This] is the most expensive phone in the world. And it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine.”

So, Microsoft doubled down on its strategy — basically miniaturizing the Windows mobile OS for phones that would continue to look like and function like mini PCs.

Meanwhile, a few hundred miles away, Andy Rubin, Rich Miner and a slew of engineers were working on creating an operating system that would best Microsoft. That OS was Android, which Google acquired in 2005. For two years, teams were nose to the grindstone testing software, securing licensing agreements and getting handset manufacturers on board in anticipation of a year-end 2007 launch.

That all changed when the team at Google saw what Jobs and Apple had created with the iPhone.

Unlike Ballmer, they didn’t pooh-pooh it and continue on their merry way.

“As a consumer, I was blown away. I wanted one immediately. But as a Google engineer, I thought, ‘We’re going to have to start over,’” one of Android’s lead engineers, Chris DeSalvo, said.

What the team at Google did instead was junk everything they’d been working on for two years and started over.

Nearly two years later, in September of 2008, the Android OS was released, and a month later, the first handset running it was introduced. Android’s strategy was to create a robust and flexible OS that would offer handset manufacturers and carriers a way to embrace the Apple smartphone vision and enable them to compete with it across all handset price points — anywhere in the world. Apps and an app store (Google Play) were also big parts of their strategy. Developers who were developing apps for the iPhone now had a whole new world to leverage.

Microsoft, in the meantime, watched its share of the smartphone market tank.

The earlier predictions of its supreme reign over the mobile OS system were retracted quicker than you could say Bob’s your uncle. The double whammy of the introduction of Apple and Android and its army of handset manufacturers embracing its OS quickly drove Microsoft to less than a 5 percent share of the smartphone market by 2010.

HARDWARE AS SAVIOR?

Clearly, no one other than Apple saw the iPhone coming — and the transformation of the industry that it would portend.

But here’s an important point — and one that Ballmer sort of skipped right over last week.

At its core, Apple is a hardware company. And as such, Jobs and company understood well that selling more gear meant that Apple had to give consumers a reason to buy that gear. That, as it had demonstrated with the iPod, was the ability to access content consumers wanted in ways that they never could before — and could only do via those devices.

That meant that Apple needed developers as much as it needed anyone.

So, apps and the App Store became the bait that moved sales of the iPhone. Developers were given access to SDKs with hooks to iPhone features and functions that would make their apps more robust. Apple also provided a financial incentive that paid developers 70 percent of any sales they made.

Great developer tools drove the creation of more apps, and more apps drove more iPhone sales. At the end of the first weekend of the App Store’s official launch in July 2008, the App Store saw more than 10 million app downloads. By October of 2008, more than 10 million iPhones had been sold.

Android took a different tack — and in many ways, a play straight out of Microsoft’s playbook.

Like Microsoft and Windows for the PC, Android’s MO was to get as many phones running Android as it could by making its OS available to as many handset manufacturers and carriers as wanted it. Android gave developers a SDK toolkit that also included hardware specs to test their apps with a variety of handset manufacturers. But instead of a licensing fee, Android made money from the advertising revenues that accompanied the bundle of apps that came installed as part of the Android OS.

That worked pretty well, too.

In 2010, analysts reported that Android market share had grown 900 percent — from 6.7 million units sold in 2009 to 67.2 million units and a 22.7 percent share in 2010. That put it ahead of BlackBerry and Apple (46.6 million units and 15.7 percent market share) and second only to Nokia/Symbian.

Microsoft, in the meantime, was in the midst of a death spiral — a platform strategy that was unraveling. Developers were developing apps for handsets that consumers wanted to buy. And consumers didn’t want to buy handsets in 2008, 2009 and 2010 that looked like mini PCs running Windows Mobile. They wanted iPhones, and even the “it’ll be a cold day in you-know-where before I ever give up my BlackBerry” purists were — guess what — giving up their CrackBerries by the millions. Consumers wanted iPhones and Android devices that gave them apps and a new way to engage with a mobile device. And where there were consumers, there were developers itching to serve them. And handset manufacturers itching to have consumers buy from them.

That wasn’t Microsoft any longer. In 2010, Microsoft was a distant fifth place contender with 12.3 million units sold and a 4.3 percent share of the smartphone market.

So, was Ballmer right? Should Microsoft have approached the smartphone market differently? Yes, it sure should have. It should have realized in 2007 that Microsoft’s real competitor wasn’t Apple, but Google.

When Google saw what Apple had created, it quickly recognized that its competitor wasn’t Microsoft but Apple. And it pivoted dramatically to develop an OS and vision for an overall hardware-software platform that would bring that same functionality to as many handsets and carriers that wanted to compete with Apple. Microsoft had a ton of handset and carrier relationships in place and could have done the same thing. But instead, it kept true to an OS strategy that supported the status quo that no longer drove handset sales. That gave Google all the runway it needed to capture the market at Microsoft’s expense.

It should have remembered how money gets made in a two-sided market.

Microsoft didn’t become a $454 billion company by not doing a lot of things right. And one of the things that Microsoft has done right is recognizing that software platforms make money by getting lots of devices to run them and lots of developers to use them. Sixty percent of Microsoft’s revenues is from licensing its Office suite of products.

Microsoft didn’t have to make smartphones to make money from the sale of them. It made a boatload — and still does — when other devices run its OS.

But it did have to create an environment that would court developers and get them jazzed about making cool apps for the devices that consumers were buying. When consumers stopped buying devices that were running Windows OS, developers stopped developing. When developers stopped developing, phones become even less attractive to consumers.

And so it went.

It should have recognized that hardware and software are very different businesses. Microsoft had a shot at making a phone in 2010 in the Ballmer years. Remember the Kin? I’ll bet you don’t.

The Kin was Microsoft’s billion-dollar attempt to create a smartphone for that burgeoning market of 15- to 30-year-old women who wanted a device only to interact with their social network. No apps, no games, no data plan — and running a fork of the Windows Mobile OS that made it extremely hard for developers to want to give a Kin. Not surprisingly, Microsoft discontinued the line in 2011. (You can still buy one today on eBay for about $18.)

Buying Nokia in 2013 wasn’t only too little (well, as little as a $7 billion acquisition can be) too late but set up a raft of conflicts for Microsoft. Not only was Nokia on its last legs as a handset manufacturer, but with that acquisition, Microsoft became an instant competitor to anyone who might have been interested in licensing the Windows Mobile OS. That might have been OK if consumers were buying Nokia phones like there was no tomorrow — but they weren’t. So, developers had even fewer incentives to spend time developing apps for either scenario. It was a lose-lose all the way around.

Google, by the way, ran into the same brick wall with its $12.5 billion acquisition of Motorola in 2011. The GOOG said that it bought the company for its patents, but handset manufacturers began hedging their bets by forking versions of Android that were different enough to blunt some of Android’s control. Google dumped Motorola three years later in 2014 for $2.1 billion after suffering the double whammy of not making any money via the acquisition and driving its channel partners in different directions.

SHOULDA-WOULDA-COULDA.

Didn’t.

That’s the part of the Hillary Clinton response that really drove William Safire to research the meaning of the phrase. He marveled at the candor and brevity of response wrapped up in those four words.

Ballmer clearly believes that Microsoft shoulda and coulda gotten deeper into the smartphone market by making them. And it woulda if he had his way.

It’s a good thing it didn’t.

Without a willingness to let go of the status quo, it would have been years upon years of distraction away from the core businesses and likely billions upon billions of red ink as a result. It’s one of the hardest lessons to learn but one of the most important ones for payments and commerce execs to take on board — particularly as innovation and new technologies increasingly challenge the status quo and the players who are the custodians of the way “things have always been done.”

The trick, though, is to have a framework that can identify the ideas that are worth junking two years’ worth of work for — taking those lumps and starting a new — from the ones that are interesting but not worth getting distracted over.

All the while, making sure that even the so-called status quo doesn’t stand still.

So, who’s at risk today? You tell me.

Maybe not Microsoft anymore.

Until Nadella took over as CEO in Feb. 2014, there didn’t appear to be much of an appetite on the part of Microsoft and Team Ballmer to do anything more than see life through a Windows Mobile OS lens that, from a smartphone standpoint, didn’t excite consumers, developers or handset manufacturers. It was a lens that investors didn’t seem to like much either.

Under Ballmer’s 14-year tenure, Microsoft’s stock dropped 40 percent (and surged 8 percent on the news of his departure.) Over that same period of time, which had the financial crisis sandwiched in between, the NASDAQ declined about 10 percent.

Since Nadella has taken charge, the stock has increased 60 percent. He’s refocused the business around its core — software and services — and seems to be investing in making that core stronger.

Apple?

Ironically, the device that launched a thousand imitators and tanked one OS in particular — Windows — seems to struggle now to create the “one more thing” that is exciting enough for consumers to want to buy new devices. Investors aren’t happy either — Apple’s stock is down 11 percent over the last year. It hasn’t produced a real dud, like the Kin, yet, but it’s seen a streak of product introductions that just haven’t sizzled. If I were at Apple now, I’d be worried that someone somewhere is creating a device that would make the iPhone look like your dad’s Palm Pilot.