Peter Kafka

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Reed Hastings on Microsoft: Watch Windows 8, Not Surface

After more than five years on Microsoft’s board of directors, Reed Hastings is stepping down at the end of the month. And if you think the Netflix CEO is going to give you insider dish on what’s been going on at Redmond, you’re going to be disappointed.

But last week Hastings did lay out a concise summary of the challenges Microsoft is facing as it launches its newest operating system, along with its Surface tablet/PC. Hastings made his comments in front of a group of Dow Jones reporters and editors, and I figured it’s useful for everyone to see them.

In case you don’t like to read: Hastings says that he likes the Surface, but that it doesn’t really matter whether he and other users like the device — the key battle for Microsoft will be how developers respond to Windows 8. And he thinks CEO Steve Ballmer is “unbelievably self-aware” about the challenges his company faces. “He’s the last guy to be in any little bit of denial.”

His full comments:

[Microsoft has] many great assets and many great challenges. The great assets are the technology, and Windows, Office. And you guys know Ballmer. He is unbelievably self-aware, self-critical, smart. He’s the last guy to be in any little bit of denial.

So he sees the challenges clearly. But they’ve got a better set of competitors than they’ve ever had, in Google and Apple, on different sides. So they’ve got some big, interesting competitive battles.

If you think about the development of the mouse, when they had DOS, that was a real challenge to the whole Windows ecosystem. And they eventually won that, with Windows, because you could run DOS in an internal window, and so they had compatibility to all your DOS-based apps. But they did use pointers and mice and that kind of thing, and they were able to keep the installed base of DOS people and move forward into Windows.

So now look at what they’re doing, which is when you use Windows 8, it’s all for touch. But you can hit a thing and you open a window, essentially into the the old desktop, and you have all your apps and compatibility.

So it’s basically that play, that was so successful for them, again. Which is, essentially “we’ve got all the things about Windows you still need,” especially for the corporate users that generate the profits, “plus we’ve got the new touch stuff.” And then slowly apps get built for the new world. And you use DOS in the original example, or Windows 7 in the new example.

What’s great is they see the threat. They didn’t wait, like RIM, and sort of say “Oh, touch isn’t very good,” and that sort of stuff. Just like they did in the late ’90s about the Internet tidal wave. They’re really good at seeing the threat, and saying, “goddamit, we’ve got to nail this,” and putting all hands on deck and doing that.

I use the Surface. It’s great because you can plug it in at night, and it lasts all day long. It’s like an iPad, it’s ARM hardware.

Does Windows 8 work? That’s the more relevant question. Surface is a tactic to spur people on, to get Windows 8 really successful. It kind of doesn’t matter how successful Surface is. But it does matter a lot if Windows 8 is succesful.

They’ve got 350 million PCs that will be sold next year, and they’ll all have Windows 8 on them. So there’s a huge installed base for people to write Windows 8 applications. And then that kickstarts the application cycle that makes it valuable.

The challenge for them is, okay, what’s the profit stream, if the marketshare is different than it has been in the past. The big profit streams are from very high-share products — Office and Windows. So to the degree that the eventual revenue is not the same split as in the past, then there’s a threat to the profit stream.

Which is why the stock has been flat for eight or 10 years. People see that, and they’re scared about the future profits. The profits in 10 years have grown huge, but the stock hasn’t moved, because people are afraid of the future profit stream.

So, as the company succeeds with Windows 8, that takes away a big fear — if they do. And if they don’t, it’s a different battle.

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— Gitesh Pandya of comments on the dreadful opening weekend box office numbers for “The Fifth Estate.”