Tablets and cloud services are major priorities for Microsoft in 2013 as it aims to right the Windows consumer business and maintain growth in the enterprise. To address these priorities, the company will try to extend its technology and licensing reach further beyond PCs to mobile devices and focus more development and sales effort on cloud services. Understanding Microsoft's priorities can help organizations anticipate the company's technology roadmap and plan purchases for the coming year and beyond.

Extending Reach to Tablets

In 2013, Microsoft will expand efforts to promote its tablet hardware and platform to enterprises, but it will also release more technology for competing tablet and smartphone platforms.

Tablets Key to Securing Windows, Office Future

Microsoft is moving quickly to adapt to Apple's iPad, hoping to secure the future of its Windows and Office businesses. The iPad and similar tablets on Google's Android platform have found a foothold with consumers, depressing consumer PC sales and noticeably squeezing revenues for the Windows client OS, over 75% of which come from sales with new PCs. (See the illustration "Revenues by Microsoft Division".) The impact will probably accelerate: Windows revenues have been shored up by a wave of deployments of business PCs with Windows 7, a process that will eventually end (55% of enterprise desktops already run Windows 7, according to Microsoft). Also, organizations have begun to buy and deploy tablets for tasks that formerly required a PC, such as mobile access to reports or point-of-sale transaction entry, and organizations increasingly allow employees to work on personal tablets under "bring your own device" policies. Both developments could reduce business PC usage and demand.

Microsoft's Office suite is also potentially vulnerable to the spread of tablets. Around 20% of Microsoft's Business Division revenues come from retail and OEM sales of Office and other products that are sensitive to PC sales. Tablets could potentially weaken sales in volume licensing as well. With devices like the iPad, which do not run Office today, business users can discover that they can get by without Office, or that they can make do with alternatives such as Google's QuickOffice. That could undermine the case for organization-wide purchases of Office, a common practice today.

Promoting Windows Tablets to Enterprises

The coming year will see Microsoft reach for tablet customers inside businesses. In 2012, Microsoft launched its own Surface tablet devices and Windows RT tablet platform. Windows RT includes a bundled Office suite, Office Home and Student, although it may not be used for business except with commercial use rights obtained through Microsoft Volume Licensing.

Surface Pro devices running Windows 8 and built on x64-architecture processors will become available in Feb. 2013. These will be able to run most existing applications aimed at PCs and can be managed by standard Microsoft technologies such as Active Directory, System Center, and Windows Server Group Policy. These characteristics could make Surface Pro more attractive to enterprises than the current Surface tablets, which cannot run most existing applications for PCs (apart from Office Home and Student and a few other Microsoft-supplied applications) and do not work with the usual Windows management technologies. Surface Pro devices have some disadvantages, however; their prices and battery life are similar to those of Windows 7 tablets, which have not proven competitive with iPads to date.

Nevertheless, in 2013, Microsoft might start selling Surface and Surface Pro devices through its hardware volume sales program for businesses: Surface devices today are sold only through Microsoft's own stores and select retailers such as Amazon and Best Buy. Microsoft will also continue to pursue developers to write Windows Store applications that run on Surface devices and other tablets on Microsoft's platforms: a strong base of developers and commercial applications is probably the single biggest factor that will determine the success of Windows 8 and Windows RT tablets in enterprises.

Hedge on Other Platforms with Management, Apps, Licensing

While Microsoft will promote its own tablet platform, 2013 will also see the company trying to profit from competing platforms through new management technology, new applications, and licensing.

Updates to Windows Intune and System Center will enable better management of tablets and other mobile devices, including devices on other vendors' platforms. Windows Intune, a subscription-based, Microsoft-hosted device management and antimalware cloud service, will be rolling out an update in Jan. 2013 that enables management of most mobile device types through Exchange Server and its Exchange ActiveSync (EAS) protocol, which are already widely used for remote wipe, control of configuration settings (such as password requirements), and other mobile management tasks. The updated Intune will also be able to manage devices on Apple iOS (and Windows) directly, without EAS. These capabilities will help enterprises to extend management beyond their firewalls to mobile devices, and it will help Microsoft benefit from the spread of iPads as well as its own tablets. In early 2013, Microsoft's System Center 2012 software will also receive a service pack (SP1) update to enable management of Windows 8 devices, including Surface Pro and similar tablets. System Center 2012 Configuration Manager will be able to use Intune to manage PCs and mobile devices from the same administrative console that IT administrators use for on-premises infrastructure. (System Center 2012 SP1 can also manage mobile devices without Intune, through EAS and Exchange Server.)

Applications for Apple iOS and Google Android tablets are also likely to appear from Microsoft in 2013. Clients for these platforms will probably appear in the first half of 2013 to work with reports and charts on Microsoft business intelligence technologies, including SQL Server Reporting Services, the SharePoint PerformancePoint Services business scorecard feature, and Power View, which enables SharePoint users to design reports, charts, and animated presentations for SQL Server PowerPivot analysis databases. Business intelligence clients for Windows 8 and Windows RT tablets should appear around the same time.

Sometime in 2013, Word, PowerPoint, and Excel apps will probably appear for iOS, joining the OneNote and Lync apps that are already available for that platform. These Office apps might require additional commercial use licensing for businesses, as does the Office suite on Windows RT. The iOS Office apps will also probably be less capable than the Office applications that ship with Windows RT tablets. These licensing and technical restrictions will help limit competition with Microsoft's own tablet platforms.

Licensing rules aimed at tablets will also be an important part of Microsoft's strategy in 2013. At the end of 2012, the company raised the price of per-user Client Access Licenses (CALs) for most of its server applications; as the number of devices per user grows, per-user licensing will become more common. The company will also probably tighten enforcement of licensing rules that particularly affect tablets and smartphones, such as the "qualified device" rules that determine licensing obligations in Enterprise Agreements.

Hardware, Release Adjustments Likely Beyond 2013

Beyond 2013, more Microsoft hardware products based on Windows 8 and Windows RT are likely to join the Surface line. For example, Microsoft might launch high-end, touch-enabled conference room systems based on technology it acquired with Perceptive Pixel in 2012. Microsoft-branded hardware helps promote the company's platforms by demonstrating how to design hardware that exploits its software. However, Microsoft-branded hardware also brings in more revenue per device sale than Microsoft can by charging OS royalties to hardware manufacturers.

Windows 8 and Windows RT could also drive Microsoft to a faster release cadence for the Windows client OS. The last two Windows versions took three years to develop. A faster release pace, with fewer features in each release and a strong emphasis on the new tablet application platform and user interface, could help Microsoft quickly work out the kinks in its tablet platform and close the initial lead of its competitors.

Cloud Driving Server Businesses

In 2013, Microsoft will probably promote and rapidly update Office 365 and other enterprise cloud services that it hosts and sells on a subscription basis. Long-term, the company's focus on cloud services is likely to improve the large-scale management capabilities of its software and shift the company's product release patterns.

Cloud Expands and Protects Enterprise Revenue

Microsoft has steadily expanded its investment in hosting cloud services. Cloud services sold on subscription could help the company expand revenue because they enable it to compete for a share of all enterprise IT operations spending rather than just software spending, and cloud services are less prone to piracy and license noncompliance than on-premises software. Microsoft-hosted cloud services also respond directly to competitors such as Google, Amazon, and Salesforce.com, whose cloud services compete with established Microsoft software such as Office, Windows Server, and SharePoint Server.

Cloud services also offer Microsoft a new source of annuity revenue, which will be an especially high priority in 2013. Microsoft has steadily increased its software revenue from two- and three-year annuity contracts such as the Enterprise Agreement, in which customers make prescribed annual payments for the right to software versions released during the term of the agreement and other benefits. Annuity contracts appeal to companies because they make spending more predictable and simplify license compliance, and they appeal to Microsoft because they deliver predictable revenue that is not tightly coupled to PC sales or product launches. However, annuity sales of software licenses are not completely independent of launches: immediately after a major launch wave, such as the one that occurred in 2012, the case for renewing annuity contracts weakens, because Microsoft is less likely to release a compelling software upgrade during the term of an agreement started just after a launch wave. Sales of cloud services on subscription could compensate for this effect by providing another source of annuity revenue.

Service Updates, Licensing Push in 2013

Enterprise cloud services from Microsoft will all see significant changes in 2013.

Office 365 moves to 2013 versions, updates quickly. Office 365 is a line of plans that combine Microsoft-hosted cloud services based on Exchange Server, SharePoint Server, and Lync Server with subscription licenses for the Office suite run on-premises. In Nov. 2012, Microsoft began to update Office 365 customers to 2013 versions of the underlying software, a process that will continue for the next 12 months. The updated Office 365 services enable customers to employ the latest product features, but they also significantly reduce the gap in features between Office 365 and the corresponding software deployed on-premises. In 2013, Microsoft intends to update the Office 365 services on a quarterly basis, as it has done for some time, but it hopes to deliver new features in at least some of the updates. For example, Yammer enterprise social computing service will become part of Office 365's SharePoint Online service. SharePoint Online probably will receive server-side updates to work with Microsoft's future Office and business intelligence applications for tablets.

Windows Azure Infrastructure as a Service (IaaS) launched in production. Windows Azure is Microsoft's cloud application platform and enables customers to run their own applications in Microsoft data centers. Until June 2012, Azure only offered Platform as a Service (PaaS) features, in which Microsoft manages the data center hardware, OS, and platform software (such as database software), while customers manage their applications. In June 2012, Azure began to offer IaaS features as a fee-based preview; in 2013 it will begin to offer them for production use. With Azure IaaS features, customers install and manage the OS and all platform software required to run an application, as well as the application itself. These new capabilities will enable Azure to run a much wider range of applications with less modification by the application owner, and they enable Azure to compete directly with Amazon's Elastic Compute Cloud (EC2), which is probably the most widely used cloud platform service today. With the production launch, Microsoft will also begin to offer product support and licensing options for customer-deployed Azure instances of some Microsoft products, including Windows Server, SQL Server, and SharePoint Server.

Windows Intune expands from PCs to mobile devices. As explained above, in 2013 Microsoft will update its Windows Intune device management and malware protection cloud service, which provides smartphone and tablet management. The new Intune also offers a lower entry-level price and provides per-user licensing, which will make it more cost-effective in many organizations.

Annuity licensing contracts could also see changes in 2013, as Microsoft tries to make cloud services more attractive to renewing annuity customers. Enterprise Agreements, for example, might gain simpler, more cost-effective options for moving users and applications from on-premises to Microsoft cloud services.

Management, Release Frequency Impact Longer-Term

Cloud services are also likely to influence Microsoft's product roadmap longer-term.

Scalability, availability, and management improvements in software. Software development at Microsoft will probably continue to shift toward features that help the company manage cloud installations of its own products. For example, improving availability, reducing dependence on specialized hardware (such as networked storage), and enabling simpler multiserver and multitenant administration will all be high priorities. For some Microsoft business units, the process is already far advanced: "We had about half the team working on enabling the underlying infrastructure at SharePoint to work in the cloud," according to Jeff Teper, corporate vice president, Office Business Platform. The emphasis on cloud management will directly benefit Microsoft cloud services and their customers, but it could also pay off for organizations hosting large installations of its software on-premises for multiple internal tenants.

Faster and cloud-first releases. Cloud services enable Microsoft to deliver software updates more quickly to customers because it can limit the number of platform configurations that it must test, and it can control the pace of their deployment in its data centers. The company will probably take advantage of this capability to update cloud services more quickly than on-premises software. Faster releases will help the company keep pace with cloud competitors and more generally deal with technology and market shifts like the rise of tablets. For cloud customers, a faster pace means they will benefit from software improvements sooner. However, these customers will also have to move faster themselves to ensure that on-premises software and customizations work with each service update, and that users are not confused by changes in service user interfaces and features.

A faster release pace for cloud services could also mean that cloud services begin to run ahead of the corresponding on-premises software, something that has already occurred with some Microsoft products, such as Dynamics CRM. Microsoft might compensate for this effect by shipping more interim releases for its on-premises software: More software might see interim "R2" versions between major releases that restore some parity with cloud services. Such updates also could boost the company's annuity revenue by making it more likely that annuity customers receive useful updates during the terms of their agreements.

Business Intelligence and Other Areas See Advances in 2013

Tablets and cloud services will be top priorities for Microsoft in 2013 and will influence its longer-term direction as well. However, the year will see interesting developments in several other areas of Microsoft's roadmap, including the following:

Business intelligence, in-memory processing, and "big data." In 2012, Microsoft's SQL Server, Excel, and SharePoint groups updated the PowerPivot in-memory reporting and data analysis platform and introduced Power View, which enables SharePoint users to design reports, charts, and animated presentations for PowerPivot databases. In 2013, Power View will be updated to work with Analysis Services cubes, an older type of analysis database that is still widely used in installed systems and in Microsoft software such as System Center. Also planned for 2013 are an in-memory processing technology called Hekaton, which substantially enhances database transaction processing performance, and integration of SQL Server business intelligence technologies with Hadoop, a third-party "big data" technology that enables massively parallel analysis of unstructured data such as Web site usage logs. Both Hekaton and Hadoop integration should appear with a 2013 update to SQL Server Parallel Data Warehouse, a specialized platform for hardware vendors building business intelligence systems. The two features will probably not appear in the general-purpose SQL Server product until its next major release in 2014 or 2015.

Catch-up with 2012 releases. Many Microsoft products will receive updates in 2013 for compatibility with software versions released in 2012. For example, Exchange Server 2010 and SharePoint Server 2010 should both receive updates to enable them to run on Windows Server 2012, and Exchange Server 2007 and 2010 will receive updates to aid coexistence with and migration to Exchange Server 2013. In addition, Dynamics CRM and other products will receive updates to work with the 2013 versions of the Office suite and related servers. System Center 2012 SP1, to be generally available early in the year, will be the first version of Microsoft's security and management stack to manage Windows 8 and Windows RT; it will also be the first to run on Windows Server 2012 and manage that OS version.

New social and communications services for enterprises. In 2013, Microsoft will begin to sell the acquired Yammer enterprise social networking service to enterprise customers, the start of a long process that will probably end with the Yammer technology being absorbed into SharePoint. The company also plans to enable interconnection between its Skype and Lync communications technologies, enabling organizations that have deployed Lync to use it for communications with Skype users, of whom there are hundreds of millions worldwide.

New technologies promoted by Xbox. A new Xbox game console, which will probably appear in the second half of 2013, could introduce some technologies of interest to enterprises. The console will probably host a variant of the Windows Store application platform that is used for Windows tablets, providing a larger audience for developers who build on that platform, and potentially drawing more developers to the platform. The console will likely ship with a Skype client and improved browser, which could become useful ways for online retailers and other enterprises to reach consumers over the Internet. The console will probably arrive with improved Kinect voice and gesture control technologies, which some organizations have been evaluating for sterile environments and other situations where users can't easily employ mice or other hands-on input devices.

Resources

Microsoft's tablet platform is explained in more detail in the Dec. 2012 Research Report, "Windows 8 in the Enterprise."

Office 365 is outlined in the Aug. 2011 Research Report, "Office 365 Evaluation Guide."

Recent updates to Windows Intune are explained in more detail at technet.microsoft.com/library/hh452635.aspx.