Microsoft’s and Google’s next runtime and Apple’s differentiation
Last week’s Microsoft Build and Google I/O conferences were very different, but there was one theme that was shared between the two — both of these companies are building sets of core cross-platform technologies and SDKs for developers that are tasked with removing most of the value from traditional operating systems.
Both Microsoft and Google are facing some challenges on the market. As Benedict Evans tweeted, “Microsoft is adapting to a world in which it has no endpoints”, and to an extent, similar can be said about Google, but on the high-end smartphone market. In Microsoft’s case, the world is vastly different from what it was 15 years ago — with computers becoming increasingly personal, end users, not enterprises, are now making most of the purchasing decisions when it comes to buying computers of all shapes and formats (I include tablets, smartphones and wearables in this wider “computer” category), and Microsoft has never been well positioned to create products desirable by end users. The result is the fundamental restructuring of the company from Windows-first to AI- and cloud-first, focusing on professional and enterprise-grade software and services solutions. Last week’s Microsoft Build was all about servicing corporate clients and their IT professionals. Even hardware Microsoft now builds, from Surface to HoloLens, is clearly targeted primarily at businesses — these devices are niche products focused on serving edge cases, and none of them sell in droves on mainstream cosumer market. Microsoft, of course, still develops Windows 10, but it was evident from the Build keynotes that Windows is no longer the focus — between couple of minor Windows enhancements such as “Your phone” app and improvements to Sets, it was obvious that Microsoft was much more excited to talk about Graph and Azure instead.
Parallels can be drawn with certain segments of Google’s business. Like Microsoft with desktop OS, Google maintains the most popular mobile OS in the world, but few phone makers benefit a lot from selling Android smartphones. In the meantime, the core of Google’s business is organising all of the world’s data and monetizing it off ad sales — not Android OS, but Google services are real means of doing it. Both Microsoft and Google face the same challenges of some of their most valuable users being Apple’s customers — both on desktop and mobile, the people who are the most engaged with their devices and who spend most of the money, prefer Macs and iPhones, and the same dynamics is at play with wearables, with Apple Watch, as well. Recent survey indicates that, if presented with a choice, majority of corporate employees would prefer Macs and iPhones to Windows PCs and Android phones. Apple has been achieving great progress recently with enterprise penetration across all of their platforms (including massive partnership with IBM). When it comes to user-facing experiences, Apple’s service revenues have been growing double digits for many quarters now (in FQ2 2018, YoY revenue growth for services was an astonishing 31%), and it seems that more and more users of Apple’s hardware are now sticking with Apple Music, Apple Maps, iCloud, Apple Pay and other services default to Macs and iPhones.
For both Microsoft in the enterprise, and Google on the consumer market, some of their most valuable users are sticking with Apple’s hardware, software and services, and this is a threat. It seems that both of these companies, though, have found a way to address this concern.
The next runtime
Apple has been always taking pride in delivering best user experience by designing hardware, software and services to work in concert in a way that modular products and companies can’t. However, being a juggernaut selling tens of millions of devices to customers each quarter, Apple now needs to serve the widest array of use cases as possible, and the downside to this is a lack of focus on specific areas that might either seem niche or not important enough. Apple has never been a particularly strong provider of enterprise-grade software and services, which leaves the opportunity to Microsoft. Also, being a product company with a business model tied to hardware sales, Apple has never been well positioned to create and constantly iterate on services driven by AI, machine learning and massive data mining — which is Google’s bread and butter. The result is obvious — Microsoft’s corporate software and services solutions are much better fit for enterprises deploying macOS and iOS hardware, whereas Google’s services are becoming increasingly better offerings for end users of Apple devices. This, however, has long been the case, and one might argue that as long as Microsoft and Google develop their software and services for Apple platforms, Apple benefits from it. But as seen on Microsoft Build and Google I/O, both companies are essentially nurturing their own platforms now, which happen to relegate Apple’s devices to just another hardware products.
One of the major talking points at Build was Azure cloud platform. Azure IoT Edge is particularly interesting — designed to work seamlessly both in the cloud and at the edge, Azure is essentially a complex layer of software that powers intelligence on many kinds of devices, from specific professional hardware to drones to smart home accessories. Microsoft is building a software and cloud platform that is tasked with operating in a cross-platform, hardware-agnostic environment, where, according to Microsoft’s CEO Satya Nadella, “the world is a computer” that surrounds us, from home, to our car, to office and beyond. In addition, Microsoft now also focuses on Graph, which is basically the bulk of the data users produce based on their activity in Office, Edge web browser, and on Microsoft’s mobile apps, including apps for iOS and Android, and powers the intelligence of Office 365 and other Microsoft services.
Google is building something similarly OS-agnostic by providing a layer of core technologies that is designed to serve as a foundation for developers creating cross-platform apps and services. Google Assistant is becoming a flexible service designed to be deeply integrated with developers apps beyond just Android (for example, app Actions, which are deep links to specific content within apps, now work with Google Assistant beyond Android smartphones). ML Kit is a newly introduced SDK that Google wants all developers to use, regardless of OS they are writing for — you can write an iOS app which machine learning would be powered by Google’s ML algorithms. Google keeps rapidly improving AR Core, which is a cross-platform and cloud-based ML-powered take on Apple’s proprietary AR Kit. From image recognition, to text, to voice, to powering AR, to analytics — Google’s goal is not only to create the best apps for your iPhone, but more importantly, to power all apps third party developers would make with Google’s proprietary software frameworks.
Game engines of tech
What both Microsoft and Google are offering developers reminds me of the role of game engines, such as Unreal or Unity, and how these affected games industry — these core software development enviroinments are great tools for developers to make games that can be easily deployed on many platforms across hundreds of PC hardware configurations, and consoles. Nintendo aside, the result is that all modern video game consoles provide very similar experiences to users, with vast majority of the same cross-platform games running very similarly — with platform exclusives, financed by Sony or Microsoft, essentially being the only meaningful differentiation (multiplayer and digital services, such as stores, being another big differentiation). In games industry, neither Sony nor Microsoft no longer offer any of the core hardware or software technology differentiation that would truly set their platforms aside — the technology value has completely moved to companies providing game engines to developers.
If this plan plays out as Microsoft and Google intend, very soon Apple might find itself in a situation where many of their customers would buy their hardware and use their operating systems, but spend vast majority of their time in both web based and native apps and environments that all run on Microsoft’s and Google’s core technologies. Essentially, Microsoft and Google are creating the next runtime which sits on top of traditional operating systems* — the whole value of using a device would shift up the stack to these experiences that would be fundamentally cross-platform, uncontrolled by Apple and not leveraging Apple’s hardware and software differentiation. On desktop, in many use cases, the value has been moving from native apps to web for quite some time already, and now on mobile, Google’s goal is to own the layer between OS and apps. Imagine a situation where in the office, you would spend most of your day on your Mac running Office 365 web experiences powered by Graph, coupled with hardware controlled by Azure, and then at home, you would use iPhone apps which would leverage object, image, voice recognition technologies, data and ML algorithms all powered by Google. What the differentiation then would be, beyond hardware design, for Apple products, what software would then set these devices apart?
These dynamics, combined with the fact that Microsoft and Google both increase their investments in first party hardware, tailored specifically to work seamlessly with these software and cloud services technologies (and thus providing better integrated experiences, compared to Apple’s products), should make Apple question their current and future position on the market. Interestingly enough, Apple now seems to be doubling down on investments in proprietary chip designs to leverage hardware and software differentiation. But if the aforementioned example of games consoles hardware market dynamics is any indication, writing for vastly different and distinct architectures is the last thing third party software developers want — unless they are developing for Nintendo Switch.
Hardware differentiated by software
Nintendo can be a great example of a games company that Apple might want to take a few lessons from in the new emerging reality of the next runtime. The current success of Switch, as well as many past Nintendo successes, are based on the Japanese company, being a software and game design company at heart, creating their own hardware to leverage exclusive and ground-breaking first party software. Customers are not buying Nintendo Switch because of the cool industrial design and support for third-party games available on the store — they are buying it because it is designed from the ground-up to work best with industry-leading first party games such as The Legend of Zelda: Breath of the Wild, which are not available anywhere else. This, however, is a risky business that requires vision, boldness and courage, and a few missteps might lead to products like Wii U.
Should Apple follow the software differentiation path, the company might want to significantly increase its investments in core software, cloud, AI and ML technologies and user-facing services to come up with exclusive, proprietary apps and services that would be better than anything else on the market. After all, by designing the whole widget of hardware, software and services, one would think Apple should be best positioned to do so. Alas, in spite of soaring services revenues, it doesn’t seem to be the case currently — Siri, Apple Maps and Apple Photos seem to be increasingly inferior to Google’s offerings in terms of intelligence and data processing, and it’s only a matter of time before many customers would start noticing. Apple’s goal should be to create software and services which would differentiate their hardware and would convince people to invest in it — if customers are buying iPhones because of Apple Music, Apple Photos or Siri (and yes, exclusive TV shows available only on Apple Video), not in spite of them, then Apple is on the right track.
*Satya Nadella thinks that AI is the third runtime after operating systems and the web