Microsoft wants this on your plate but not in your computer

The high-tech industry is full of people opposed to GMOs and in favor of free range chickens, but when it comes to software, putting code in cages is currently all the rage.

What we tend to think of as the modern software industry started in the 70s with the introduction of such units as the Apple II, Commodore PET,  Atari, Radio Shack’s Tandy systems and others. Software was sold to the masses in a physical package that typically consisted of a box, documentation, and the software itself, which was copied onto different form factors including cartridges, cassettes, floppies and now, in the rapidly shrinking world of retail shelfware, DVDs.

By the 80s, a widespread two-tier distribution channel had come into existence to manage the process of shipping software to the market . The first tier consisted of distributors such as Ingram and others whose primary job was to break bulk, that is, ship heavy boxes of software to the second distribution tier. This consisted of resellers and retailers such as Egghead, Computerland, Computer City and others whose existence hasbeen consigned to history and the fading memories of those who worked and shopped in these venues. Software companies always reserved the option of selling software directly to their customers, particularly in the form of upgrades, but many chose not to  as the complexity and cost of shipping physical goods is not trivial.

This two-tier system remained robust until the early 2000s, then it began to shrink in the face of the Internet’s spread. As network bandwidth grew, the need to ship software physically faded away. The distributors were the first to be disintermediated, then, bit by bit, the resellers. Increasingly, software was sold online by ecommerce stores such as Digital River, Tiger, Mac Warehouse and a host of others or directly by the publisher to the consumer.

In 2008, the one-tier model was shattered by the introduction of the iPhone and iOS App Store. Steve Jobs was at first agnostic on how new software was going to be supplied to iOS users, but before his long standing urge to build walled technology gardens kicked in and thus the App store was born. It was a huge marketing and financial success, and it kicked the traditional software channels out of the fastest growing computing hardware market since the introduction of the original IBM PC. Oh, and it also kicked the publisher out of direct contact with the market.

The App Store model is simple and we won’t waste much time rehashing it. Apple enables you to upload your code to the store where it undergoes inspection for safety and adherence to Apples privacy and safety standards. Once approved, the app goes live in the store. Apple provides minimal marketing opportunities for new apps; it’s up to the publisher to attempt to optimize the app’s keywords, name, and other factors to make it stand out in a sea of 2.2B other titles. The reality is that external marketing programs and word of mouth are what will drive your program’s success (or faiilure).

There is no practical alternative to Apple’s store. Via jailbreaking and sideloading, it is possible to access some other stores and buy apps independent of Apple, but this violates your warranty and Apple won’t service jailbroken phones. Almost no one bothers to attempt to escape the App Store.

In return for listing your app, Apple takes 30% of all revenue from all paid downloads. If your app is sold on a subscription basis a la SaaS, on renewal of the subscription the split changes to 85% you, 15% Apple. Upgrades to free versions of your app must be purchased via Apple’s In-App purchase mechanism and if you try to bypass it you’ll quickly be kicked out of the store.

In 2016, the Apple App Store is estimated to have generated $28B in revenue, with $8B of that going to Apple. The store is immensely profitable as it doesn’t have to deal with physical inventory. All that’s ever shipped is bits on bandwidth.

After Apple came Android, Google’s successful, uh, “homage” to iOS. The search engine giant decided to emulate the App Store with Google Play and it operates on similar rules. Restrictions are not as tight as Apple’s and the split is more favorable for the publisher, 85/15 on all purchases. And Google does allow app developers to directly sell Android apps and keep all the proceeds.

Despite this, the bulk of the revenue flowing through the app ecosystem is made by Apple. (But don’t forget that Google is also making money both directly and indirectly from searches generated from Android.) In any event, if you’re a pure app and you’re not in the app store, you’re a market afterthought. (This is not necessarily true for SaaS and device-independent programs.)

So, where does this leave Microsoft?

Stuck with the traditional third party channels.  Resellers, download sites, publishers selling stuff direct, and a few remnants of first tier distributors. This makes Microsoft unhappy and feeling very 20th century.  An industry joke is that that the “S”  in 10 S stand for “saliva,” a more polite way of referring to the drool that leaks from the envious mouths of senior Redmond executives when they watch their two California rivals raking in all that profit from their captive channels. It’s no secret that Microsoft would greatly like its own walled garden and Windows 10 S is the mortar that will bind the bricks together around a sylvan Seattle paradise that will finally rid it of resellers, distributors, Digital River and its ilk and finally bring some proper order to the unruly Windows ecosystem.

And even better, Windows 10 S will also enable Microsoft to wet its beak in the revenues of every Windows publisher. (Yes, we’ve read the claims that’s not really what Microsoft is up to because you can sideload UWP programs. Uh, yes. If you’re making that claim, take a look at what you have to do to enable that ability in Win 10 S and be serious.)

From a technical standpoint, Windows 10 S is a new version of the OS locked to the Microsoft online store. Once installed on your PC, laptop, or Surface, it can’t install anything other than Microsoft Store applications. You also can’t download Win 32 applications and install them via DVDs or ram sticks; 10 S runs only Universal Windows Platform (UWP) builds.

Currently, the revenue split for Microsoft store apps is the same as Apple, 70/30. One twist in favor of the developer is that if your application sells more than $25K in the store, the split shifts to 80/20.

When Windows 10 S was released in May of 2017, it was pitched to the educational market as a way to help the kiddies avoid malware, crapware, and Russian hacking. Not to mention iTunes (no UWP version yet), Google Chrome (10 S is locked to Edge, which no one is using), Google (the default search engine is, you guessed it, Bing) and much of your hardware, as the drivers for many of your devices won’t install on 10 S.

No one is fooled by any of this. Microsoft is also pitching Windows 10 S to corporations, who it believes also need protection from malware, crapware and Russian hacking. The company is actively planning to make Windows 10 S the “standard” Windows. This is made clear by the Win 10 S upgrade strategy, which allows you to purchase the “pro” (unlocked) version for an additional $50 dollars.

Microsoft’s roadmap for Win 10 S isn’t hard to figure out. The company will use the its educational and corporate initiatives to begin the process of selling Win 10 S. Next, Microsoft will push Win 10 S at OEMs. Hard. I suspect they’ll be happy to give it away in hopes of recouping their revenue losses via store sales. Windows 10 Pro will be priced much less attractively. From the hardware buyer’s standpoint, paying $50 to “upgrade” to 10 S Pro is a considerable surtax on an under $500 laptop/desktop (the market’s sweet spot) purchase.

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