Microsoft's Risky Netflix Strategy

New Windows 8 software could alienate computers users--but the software giant may have no choice.

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For decades, successful companies milked their competitive advantage for as long as they could, until an upstart came along and disrupted their business model.

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But a new strategy seems to be emerging, as some dominant companies attempt to disrupt their own business model before a competitor gets the chance.

Microsoft is the latest company that's trying to force change upon itself, lest it become too flat footed in a market characterized by nonstop innovation. Its new Windows 8 operating system dispenses with many of the procedures and conventions that have become second nature to computer users everywhere over the last 20 years.

Windows 8 is optimized for newfangled touch-screen computers and tablets, not for traditional mouse-driven machines. The reassuring Start menu and desktop have been replaced by a mosaic of tiles similar to the apps laid out on the screen of a tablet. Instead of layering windows one on top of the other, Windows 8 requires users to "snap" tiles around the screen, while different types of trays and sidebars help keep track of everything. "It's such a grand departure from legacy Windows software that most users won't recognize it as Windows at all," tech site CNET explained in a review.

Mike Angiulo, corporate VP of the Planning and PC Ecosystem team at Microsoft and Microsoft VP Julie Larson-Green show mobile phones running Windows 8 at the launch of Microsoft Windows 8, in New York, Oct. 25, 2012.
Mike Angiulo, corporate VP of the Planning and PC Ecosystem team at Microsoft and Microsoft VP Julie Larson-Green show mobile phones running Windows 8 at the launch of Microsoft Windows 8, in New York, Oct. 25, 2012.

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Microsoft has rolled out Windows 8 while the prior operating system, Windows 7, is still in its prime — and many users, including some key corporate customers, still rely on even older systems. Clearly, Microsoft is paying heed to the declining use of PCs and the skyrocketing popularity of mobile devices, while simultaneously trying to grab a share of the booming table market with its new Surface device, which runs on a mobile version of Windows 8.

But forcing consumers to adopt new technology before they're ready is a very risky strategy, and Microsoft could end up alienating more people than it pleases. That's what happened in 2011 when Netflix famously tried to push its own business model into the future—and drag its customers along.

Netflix CEO Reed Hastings is a notorious worrywart who studies failed companies to learn how his own firm can avoid obsolescence. It's been clear for awhile that Netflix's signature innovation from the 1990s — sending DVDs by mail, instead of renting them through a retail outlet — is fading, as online streaming becomes commonplace. So in 2011, Hastings decided to split Netflix into two companies: one focused on the legacy business of mailing DVDs, and the other committed to streaming. Existing customers who wanted both services would have to maintain two accounts, and pay about 60 percent more than they had been up till then.

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There are numerous examples of companies that waited too long to change and ended up losing market share, or worse: Kodak, Blackberry, AOL, and Blockbuster, which Netflix itself helped push into bankruptcy. Hastings was shrewd to anticipate what might impair Netflix's business, instead of waiting until somebody else had surged ahead and then trying to catch up.

But his modernization plan turned out to be a disaster. Customers revolted when informed that they'd have to keep two accounts and pay more. The Netflix subscriber base, which had been growing consistently, suddenly shrank as people dumped Netflix for Amazon, the reformulated Blockbuster, or other services. Netflix's stock price plunged by nearly 80 percent in a matter of months. Hastings was right about the future of video, but Netflix tried to force its customers into the future much faster than they were ready. Netflix eventually reversed itself and killed the plan to split into two different companies. But it took months to regain lost customers, and the stock price stabilized far below its earlier peak.

Microsoft has advantages that Netflix didn't. It's much bigger and far more dominant, with roughly $60 billion worth of cash and short-term investments it can tap if needed to ride out tough times. It's also hedging its bets with Windows 8, since there's a latent feature that allows users to mimic the look and feel of Windows 7 if they feel too put off by the unfamiliarity of the tiles and apps. That may reflect a general lesson learned courtesy of Netflix, which tried to bust an audacious move without a backup plan in place.

Still, even Microsoft, a giant of the computer era, can't afford to play it safe. Its own stock price has been essentially flat for the last decade, while the tech-heavy NASDAQ index has risen by about 130 percent. That's why some analysts consider Microsoft to be more like a utility than a technology company. Microsoft has also stumbled with lackluster efforts to challenge Apple's iPod music player (anybody own a Zune?) and get traction in the smartphone market.

By taking some risks with Windows 8, Microsoft is trying to act more like a fearless young company and less like an entrenched goliath. But there have been many efforts by corporate giants to roll out a "skunk works" operation or inculcate a startup mentality, and more often than not, it flops. If Windows 8 turns out to be a hit, other firms will end up studying Microsoft for pointers about how to grow young again.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.