Microsoft's New War Against Apple, Part II

Many observers are, with plenty of justification, slamming the recent Microsoft "You Find It, You Keep It" TV ads, but that's just a minor tactical setback for Microsoft. In the long run, the ads are a possible early warning signal that Microsoft is starting to think on a more quantitative basis about what the real problems are that they face as a corporation. Otherwise, the dismissal of a Mac as an option wouldn't have been a feature of those ads.

I suspect that Microsoft is sensing that it's time for a fundamental change in their foundation. Throughout the lifetime of Windows XP, a fundamental change in Windows wasn't necessary to either succeed in the enterprise or against Apple. Apple had to build a new foundation with a UNIX-based Mac OS X to succeed; Microsoft had to not change to succeed.

Apple's success with the iPod and iPhone, built on that OS X foundation, has to be regarded by Microsoft as a new, perilous threat, one that can no longer be ignored. Close to 30,000 iPhone applications and almost a billion downloads is a wake up call in anyone's book, even Mr. Ballmer's. So what's the first thing a company does when it realizes that it's facing a crisis? Buy time. Look for weaknesses in the competition, skirmish, and buy more time for R&D.

The "You Find It, You Keep It" ads are the first skirmish.

In Part I, I discussed what Microsoft has to do to get its house in order before it can proceed. Right now, the best the company can do is stall and buy time. Probing for weaknesses in Apple is part of that strategy.

Apple's Weaknesses

A corporation, in competition, has to not only deal with its own weaknesses but also probe the competition's. That is, while some of Microsoft's weaknesses derive from its inattention to OS quality, user interface and security, Apple has weaknesses that can be exploited on face value.

1. Arrogance. For starters, Apple fundamentally doesn't believe Microsoft has the will, leadership and technical talent to change its foundations. That's a weakness that can be exploited by keeping some R&D secret, getting a lot of ducks in a row, then introducing it at breathtaking intervals. While the competition ridicules you, get inside its decision cycle. That's been hard to do against Apple, but it's getting easier now that Apple seems satisfied with major product updates at yearly intervals.

2. Apple agenda induced weaknesses. There is no question that Apple, wanting to always be on the cutting edge, elected not to constrain itself with HDMI. When Apple bypassed HDMI and jumped to DisplayPort, to support both its high resolution displays and also include the necessary HDCP (DRM protocol), it paid a small price. The elimination of converter cables to save a few bucks and the selection of a display protocol that's so advanced that few displays on the market have caught up creates a bit of an opening for PCs and other devices.

A rumor surfaced recently that the next generation Zune HD will have an HDMI connector. That's another signal that Microsoft is trying to appeal to customers who are just now, during the DTV transition, catching up with HD terminology. Customers will instantly recognize HDMI is something that's compatible with their new HDTV while many are perplexed with DisplayPort. Apple presents a difficult choice with the Macs: either lose protected content with DVI or mess around with DisplayPort to HDMI converters.

This is an item that could show up in a future "You Find it, You Keep it" ad.

3. Apple's obsession with wealth. For a long time, Apple's philosophy was to go its own way and use the best regardless of the PC market. From the 1990s, I recall the Apple Desktop Bus, AppleTalk, auto-eject floppies and so on. Over time, Apple learned the hard way that this kind of idiosyncratic thinking was self defeating and subsequently made industry standards and open source their Holy Grail.

But with enormous success, driven by the iPod and iPhone, Apple started pouring in the coals with penny pinching. MacBooks no longer come with remotes for Front Row. Extra converter cables, for a few bucks, are missing from new Macs and create a customer feeling of being nickel and dimed to death. That's amplified by #2 above. Meanwhile Apple accumulates billions of extra cash for which they admit they don't have a use. Well, there is one use. It gives the company warm fuzzies to keep at arm's length the haunting nightmares of a near death experience in 1997.

4. Apple's Blu-ray delay. Consumers like to watch high-definition movies on their PCs. Hollywood recognizes that there are many different kinds of customers and each type favors a different video technology. Or different combinations. As a result, Apple's mantra that too many choices is bad works against them -- in this case.

Many PCs come with Blu-ray players, even Blu-ray writers, but Apple didn't like the licensing terms. When you're a very large company, with dominant market share, like Microsoft, Hewlett Packard or Dell, you can get though that. Apple, always mindful of draining complexities, avoids certain technologies until they can approach them on their own terms and with their own vision. That creates a weakness that can be exploited because it slows Apple down. It's how Apple found itself flat-footed with CDs in the 90s, later with PCI-E, and then netbooks today.

5. Apple TV vs. Netflix. Netflix is getting ready to spend a hundred million dollars on streaming technology. Their forward thinking and smart business maneuvering has just about put Blockbuster out of business. In a few years, in my opinion, Netflix will eclipse all other companies and become the National resource of choice for watching streamed movies.

So far, Apple is trying to hold its own, believing that the market will sort itself out in favor of the Apple TV. However, that's questionable, and if Microsoft fixes the critically flawed Xbox 360 and starts to really cater to customers with the right kind of vision, inspiration and marketing, the Apple TV could quickly wilt under the combined pressure of Xbox + Netflix. I say could because Microsoft has shown no signs of commitment to hardware quality in the Xbox, locked as it is into a debilitating war against PS3 and Wii.

Note that the Netflix plug-in for Macs utilizes Microsoft's Silverlight. That's just another in a series of in-your-face signals that Netflix doesn't think it needs Apple and can, in fact, compete successfully against Apple.

All these Apple weaknesses will take Microsoft some time to learn to exploit. Until Microsoft deals with the fact that no hardware vendor wants to display the (dreaded) image of Vista in their advertising for PCs, Microsoft probably cannot exploit Apple's current OS advantage. What they've been doing, however, is chipping away at these other weaknesses in a fragmented way, and that won't work against Apple's strong marketing. A grander plan is necessary, and one that isn't at odds with the interests if Microsoft's hardware partners.

The Right Sequence Mixed with Attitude

So, in the style of Apple's comeback, Microsoft has to first worry more than they normally do, then get angry, then engage in a sequence of actions that pave the way for each successive stage that builds on the next. For example, Apple bought time with the insanely popular iMac in 1998 (even as it had the pitiful Mac OS 8) while it got its act together with Mac OS X. Mac OS X on PPC bought Apple time to make the conversion to Intel so that it could exploit virtualization on Intel chips.

If Microsoft figures out the right sequence of events and the right technologies, it could slow Apple's Mac growth by just a bit, from one percent per year to zero, especially in this economy, pulling one leg out from under the troika.

Looking at the numbers, however, shows that Microsoft is slowly waning while Apple continues to gain incrementally. A subtle shift in Microsoft's corporate attitude is all it would take, and the iPhone App Store may have been that final straw. What better time to make a move than when customers are cost conscious, Apple is possibly over confident and their founder's role might possibly be reduced, leading to enormous pressure for the first time on Apple's other executives.

Risk? Microsoft?

Indeed, taking coherent action to blunt Apple is a risk. Microsoft executives will find it worthwhile, but only if it's a tactic to buy time for a next generation OS. Otherwise, it's just a finger in the dam, holding back the App Store.

Taking some risk is also worthwhile simply for some self-respect, long sought payback and insurance for the future. Otherwise, Microsoft, under its current leadership, shows every sign of a slow, steady decline as it remains the whipping boy of Apple.