Written: January 28, 2017
From early in its history, part of Microsoft’s vision was to serve both consumers and businesses, and its vision of empowering people today still encompasses those who use technology in their personal lives. Indeed, for many years now, Microsoft’s consumer and enterprise businesses have been tightly intertwined, and in fact this was the subject of one of my first Beyond Devices blog posts a little over three years ago, when some were pushing for a split between Microsoft’s consumer and enterprise businesses. Office and Windows both serve consumers and business, and the fact that people can use the same tools at work and in their personal lives creates significant synergy at a personal level, and also gives Microsoft massively more scale around these big platforms.
However, what’s increasingly clear is that Microsoft will struggle to monetize some of the things it’s traditionally charged for on the consumer side. Apple and Google have taught people that operating systems should be free, and to a great extent that productivity software should be too. Microsoft’s free upgrade for Windows 10 was supposed to be a one-off, temporary move, but I wonder to what extent it will be able to charge meaningful amounts for end users to upgrade to future versions of Windows. And the fact that a lot of Office functionality is already free on mobile devices is another sign that Microsoft recognizes this. Even though Office 365 has grown decently in the consumer market for Microsoft, growth has recently slowed and subscribers seem to be plateauing at around 25 million – that’s far smaller than the overall installed base of Office in the consumer market, but is likely a sign that many people will stick with what they have or use free software instead.
One of Microsoft’s biggest challenges in the consumer market is its lack of mass-market consumer computing hardware. It provides Windows to OEMs, but its own Surface hardware is very much positioned for enterprise use and price points. Its purchase of Nokia’s phone business might have created another consumer hardware category at Microsoft, but that business was declining from the moment the acquisition closed and has dwindled to almost nothing since then. To the extent that Windows on mobile survives at all, it’s fairly clear that it will do so predominantly as an enterprise play, and not a consumer one.
The two areas where Microsoft still will drive significant revenue from consumers are Xbox and search. Gaming makes up 10-15% of Microsoft’s revenue on a quarterly basis, so that’s not to be sniffed at, while search makes up 6-7% of total revenue, so the two combined hit around 20% of the total. That’s not bad, but that makes Microsoft primarily a company that monetizes through enterprises and not consumers. To the extent that it’s had hits in the consumer market lately, they’ve typically been with free software, like OneNote or Wunderlist, or its Outlook app for mobile. It’s still not 100% clear to me whether Microsoft has given up on monetizing the consumer, or whether it’s simply trying and failing. but the consumer market continues to be a significant challenge for Microsoft outside of these two small areas, and I don’t see that changing anytime soon.
One of the symptoms of Microsoft’s consumer challenge has been its focus on productivity, and its awkward attempts to apply that term to things that people don’t think of as productivity at all. Its recent focus on creativity in introducing the Surface Studio (and the Surface line more broadly) is a sign that it’s finally starting to understand this, and wants to appeal to a different side of potential customers. The Studio itself is massively out of reach for most consumers, but things like the revamped Paint app and some other features in Windows 10 Creators Update suggest Microsoft wants to mainstream this commitment to creativity. That’s still a long shot – most people still don’t associate creativity with Microsoft products – but it’s a subtle change that Microsoft may just be able to drive home given enough time and effort.