Disclosure: Microsoft is a customer of the author.
Microsoft’s decision to move away from mixed reality (where it was arguably the leader and market maker for augmented reality with HoloLens) was a big surprise. And its massive investment in OpenAI and ChatGPT was equally surprising, given the company’s advanced in-house AI efforts.
What we’re seeing, I suspect, is a company girding for war — and making sure what happened to it when the Internet, iPhone, and Google arrived doesn’t repeat itself with the advent of generative AI.
While Microsoft may not succeed, it won’t be for lack of trying. What will be fascinating is whether an early, aggressive jump on this technology will turn out better than its previous attempts to catch a wave from behind. Its recent bold moves remind me of approach it took with the Internet, when Microsoft so aggressively took the browser market away from Netscape that Netscape didn’t survive.
Here’s how the coming generative AI war is likely to affect Microsoft.
A mixed reality fail?
In many ways, Microsoft approached mixed reality (MR) the right way, at least initially. It developed HoloLens as an industrial-level product that, while expensive, gained a foothold with customers such as the Lawrence Livermore lab. The effort was marginally profitable, with sales successes in aerospace, microprocessor FABS, general manufacturing, and even the military (although the military trial ran into serious problems).
Microsoft approached virtual reality (VR) differently; it had more of a consumer focus, but with technology that didn’t meet the minimum benchmark. Facebook’s efforts were probably better, but Facebook threw more down the money hole than Microsoft did. So while VR was probably a failure for Microsoft, it could have been a lot worse.
For a business to make sense to Microsoft, it needs to see sales in the millions. With AR, the company never seemed to reach those numbers. The problems included a heavy headset, a lack of occlusion, ghostly virtual objects, poor field of view, less than stellar battery life, the lack of accurate manual indexing, and unfocused apps. Still, it was probably the best AR solution on the market. (Things might have turned out differently if Microsoft had spent more on marketing to gain critical mass in sales.)
Remember, Xbox was also a big money loser initially. But Microsoft fought to make it successful. So why not ride out the AR and VR problems as well?
Simple: generative AI scared the hell out of the company.
Windows and MacOS – the GUI problem
When Microsoft was just starting out, one major technology change helped ensure the company’s success. Computers began to move away from command lines and embrace Xerox’s concept for a graphical user interface (GUI). Apple was convinced that GUI was the future, and when the market started to turn away from the command line, it scared off a lot of big players. IBM licensed DOS, Microsoft wrapped it with the Windows GUI, and the OS wars began.
After a few years, Microsoft gained the upper hand with Windows 95; it was both an example of marketing excellence and a warning that the industry—especially Microsoft—didn’t yet know how to handle the service requirements of an operating system decoupled from hardware.
Microsoft came out of that effort significantly stronger, but did so by buying, not building, DOS. Microsoft moved early, but it still chased Apple.
The web browser is fighting
When Netscape was launched and the Internet became a reality, Microsoft was caught napping. It pivoted hard by buying a browser to compete, pivoted its MSN efforts away from CompuServe and AOL, and again successfully weathered the storm to become dominant.
It didn’t help that Netscape’s management made the same kind of mistakes Microsoft would later make with the Zune and tried to chase Microsoft’s market dominance. Netscape failed. If Microsoft hadn’t pivoted quickly and efficiently, Netscape might not have made that mistake, and Microsoft would either be gone by now or much weaker.
Compared to obvious failures like the Zune, the Microsoft Phone, Plays-For-Sure, and others that made the difference was seeing a threat early, responding quickly to it, and funding the effort adequately.
And now, generative AI
Generative AI has the potential to reshuffle the technology landscape because, like the GUI OS wars, it promises to change how we interact with computers, and, like the browser wars, it promises to change how we interact with remote services . In fact, it could potentially be more disruptive as it ages than the OS and browser wars combined.
If Microsoft wants to get ahead now, it needs to acquire a leading technology and then focus company resources on it to make it a decisive competitive advantage across the Microsoft ecosystem.
The potential benefits of being able to talk to a computer on topics ranging from office products to telesales should increase productivity for the former and be cost-effective with higher closing rates for the latter. Both are just a taste of the disruptive potential for generative AI technology.
As it moves to market, generative AI could launch the next Google — and kill any tech firm that doesn’t adapt to what’s coming. Microsoft wants a shot at the former and hopes to avoid the latter. This is why it is moving away from marginal long-term opportunities to generative AI.
Decisions, decisions
A company and its CEO are often defined by the choices they make. Although he was amazing at operations (and brilliant as an individual), former Microsoft CEO Steve Ballmer will forever be defined by the failed Yahoo merger (a response to Google), the Nokia acquisition failure (in response to Apple) and the Zune.
Current CEO Satya Nadella has so far been defined by the massive success of Azure, but this is the first time he has faced a major threat that requires a corporate pivot. Among the risks: ChatGPT may not be the leading technology; Nadella may underfund the shift; or, as with mixed reality, he may have moved too soon.
That last issue seems unlikely – funding seems to be sufficient and, given the nature of generative AI and its increasing popularity, the market-making requirement is being reduced.
We won’t know for a while whether Nadella’s embrace of ChatGPT is the right move, but it seems like a fair bet.
In the end, we’re watching a company turn to war before that fight really begins, and regardless of how it all turns out, Microsoft should be better for it. But the outcome is anything but certain.
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