In November, Microsoft CEO Steve Ballmer praised the company's progress at an annual shareholder meeting. "We see nothing but a sea of upside," Ballmer trumpeted to investors .
Unsurprisingly, Ballmer painted a rather rosy picture of Microsoft for what was a rocky year filled with risks and stumbles. In 2012, the company faced ever increasing pressure from competitors such as Apple  and Google, and its stock remained roughly stagnant despite big changes at the company. While Microsoft would like investors to remember the positives --the launch of Halo 4, a new cloud-based version of Office, Bing's aggressive marketing campaign--they're more likely to focus on some of the bolder moves the company took this year , such as delving into hardware with its Surface tablet, redesigning its flagship Windows operating system, and doubling down on its mobile software.
Yes, Microsoft should be lauded for its recent spat of risk taking, however late this new capacity is arriving. But the recent axing of top executive Steven Sinofsky , who was the champion of the Windows 8 redesign, combined with questions from analysts and partners alike over the viability of the company's new initiatives, signal Microsoft has a long way to go before reviving its hopes for the future. The company still has a lot to learn.
Below, as we kick off a new year, we've outlined the five lessons Microsoft should've learned in 2012. Mind you, these are not the lessons the company did learn, but the ones Redmond should realize looking back on such a critical year in the company's history. We'll be doing the same for some of the biggest companies in tech, from Amazon to Google to Apple to Facebook. Think of it as a cheat sheet for how these corporate giants can win 2013.
1. There's No Turning Back Now. For Christmas, a few friends and colleagues finally got their hands on Windows 8 PCs. Their reaction? As one friend immediately texted me after turning his new HP desktop on: "How do I get the old Windows back?"
It's the type of resistance every company faces when redesigning a popular product, but none likely more so than Microsoft, which risks alienating a billion users with such a bold redesign of Windows. The lesson here? The company has to commit. Yes, that could mean potentially turning off part of the company's lucrative customer base, especially in the enterprise market. But with so much at stake, it’s now time for what PJ Hough, the head of Microsoft's Office division, refers to as innovation in fortitude. "It's easy to have a point of view that says we should change something," Hough told me last year. "The question is: When people start knocking on the door and asking for the old way back, how much do you believe you've done the right thing?"
Unfortunately in the eyes of some critics, Microsoft gave its users an easy out: With one click of the desktop app, users can bounce back to a more familiar Windows 7-like user interface, complete with toolbars and drop-down menus. Some have called this bimodal UI confusing, schizophrenic even. But to me, it's a sign that the company hasn't fully committed to its new Windows 8 design direction (formerly referred to as "Metro"). For example, Windows 8 comes with two versions of its Explorer browser, one pre-Metro style and one post-Metro. Even when using the latest version of Word on the Surface tablet, it'll revert back to the Windows 7-like desktop experience.
Hough draws a comparison to when the company introduced a controversial feature into Microsoft Office called the "ribbon," which replaced the program's traditional drop-down-menu navigation. "When we moved from menus and toolbars to the ribbon, there were a lot of people crying out for classic mode or the option to go back," Hough recalls. "One of the reasons why we persisted with the ribbon was because ultimately we knew the user interface model of menus and toolbars was actually reaching its limits, and our ability to innovate in adding new features was getting caught in a trap--there was no where else to put them. You just can't keep piling on menu after menu and toolbar after toolbar."
The same could be said of Windows 8, with its touch- and mobile-friendly user interface, and of the many applications that run on it. The company has to commit, and commit completely.
2. Hardware Makers Are Unreliable. The launch of Windows 8 became almost synonymous with the launch of Surface, the first Microsoft-manufactured tablet in the company's history. Surface served to show that Microsoft had learned the advantages of developing hardware and software together. (See Apple's share of the tablet and smartphone markets.) But the amount of attention paid to Microsoft's hardware efforts masked the fact the company still made a significant amount of its revenue from licensing Windows to third-party hardware makers, such as Dell, HP, and Lenovo. It would be these OEMs' products that would act as a stage for Windows 8, especially during the holiday season. But when it came to the devices they created, most I tested were cheap-feeling, ill-conceived, and boring.
In a world now dominated by Apple--where good design is now good business--OEMs can no longer get away with marketing junk. Fast Company recently ran through the five ways hardware makers are hurting Microsoft , from introducing a range of confusing form factors--including a new category of "hybrid PCs" that can act as a tablet or notebook depending on how you swivel or unclip certain parts--to taking a whatever-sticks approach to accessories or features. (Free advice, PC makers: Stop thinking the Stylus pen will be a game changer.) Simply put, there wasn't one product that stood out among the rest: Not one third-party tablet or notebook that could go toe-to-toe with competing products from Google or Apple.
For Microsoft, that's a huge problem. No matter how beautiful Windows 8 is, the gap between it and the consumer will inevitably be filled by third-party hardware makers--in this case, for the worse.
3. Where's The Ecosystem? One reason why Apple has been so successful: It's created a seamless ecosystem of hardware and software products that work better when used together. Services such as iTunes enable users to take advantage of content on iPhones or iPads; AirPlay connects iOS devices to Apple TV; and MacBooks can be seamlessly synced with other Apple devices thanks to iCloud. It's not perfect, as any iMessage user knows--and many certainly are right to complain of Apple's "walled garden" approach. But the connective tissue is there, which is far more than Microsoft can say.
Certainly, we saw significant progress toward creating a more coherent Microsoft ecosystem system this past year, from SmartGlass connecting Windows and Xbox, to the company's SkyDrive cloud service integrating with Office. But it's not enough, and it's a failure of imagination on Microsoft's part.
After all, Microsoft has so many in-house advantages: Office, Skype, Xbox, to name a few. Yet we really didn't see enough collaboration between these product groups, at least in any revolutionary way. I was surprised there wasn't more cross-pollination between Windows and Xbox--the opportunities to tie tablets and smartphones together with TVs are endless, and must go beyond SmartGlass, which as of now isn't much more than a gimmicky second-screen experience. I expected tighter integration between Skype and GroupMe; Yammer and Office; Surface and Windows Phone; Kinect and, well, everything else.
Products at Microsoft too often feel disparate . (Just try explaining the difference between Windows 8 and Windows RT to the average consumer.) They need better integration beyond similar Metro-style UIs, and that integration needs to be simple and intuitive. We've heard promising rumors of a 7-inch Xbox gaming tablet and of a Surface smartphone. But until these supposed products hit market, I have trouble recommending the Microsoft ecosystem to any of my family members. I still believe it will be far easier for my mother to learn how to use an iPhone or iPad with a Windows PC, which is plain unacceptable given the opportunities Microsoft has to create a more unified family of products.
4. Apps, Please! It's impossible to read a review of any new Windows-based product without reading about Microsoft's lack of apps. Compared to iOS and Android's Bodleian-size library of apps, Microsoft's catalog is more akin to a used bookstore. It's a chicken-and-egg problem: Microsoft needs more apps if it wants to attract more users, but it needs more users if it wants to attract more developers to make apps on the platform.
But Microsoft has exacerbated the issue. It released its software development kit for Windows Phone 8 only after months of delays , for example, giving developers little time to actually create apps for the system. And rather than create a unified development platform (for a long list of wonky reasons, this is easier said than done), developers have to create separate applications for Windows Phone 7 and Windows Phone 8, Xbox, and Windows 8 and Windows RT, a lightweight version of the operating system that can't run traditional Windows programs. That means the Surface tablet, which runs Windows RT, comes with just roughly 3,500 apps: No Facebook app, no Twitter app, no Spotify app, no Dropbox app.
It's so bad that Microsoft reportedly started financing the development of apps on the Windows platform. But it's not been enough. And Microsoft must realize that none of its products can adequately compete in the market without a sufficient app store. It can't simply pay to attract developers. It can't simply develop in-house replacements for Facebook or depend on small third-party shops to imagine replacements for Twitter. Microsoft must think of more creative ways of attracting developers: introducing more competitive if not radical terms of service (say, allowing 99-cent apps  and taking significantly lower sales cuts, and not just for top sellers); working with OEMs to provide default placement for third-party apps on desktops (at least it's better than OEM- or carrier-developed bloatware); or offering product placement in ad campaigns.
One thing is for certain: The current app strategy isn't working. It's not going to catch up to Google or Apple at this pace. For example, asked on Twitter whether Instagram, one of the most popular apps on iOS and Android, was available on Windows Phone, the group's SVP Joe Belfiore responded , "No Instagram yet, sadly. Send [Facebook] message to Zuck and [Instagram cofounder Kevin] Systrom and tell them you want it!"
Given Microsoft's $240 million investment in Facebook, I don't think begging is going to do the trick here.
5. Storytelling Is Important! Every company needs a story, and every product needs a narrative. Why can I not live life without this type of product? Why would I want to use your company's product over another? There's a story hidden in the answers to these questions that often makes up the emotional connection you have to a brand. And in 2012, Microsoft failed to build a compelling narrative.
Nowhere was this more evident than at the company's product launch events, which were as redundant as they were uninspired. The company's worldwide launch event for Windows 8, for example, contained no whiz-bang announcement: It was all recap, showing off the same elements and features that had been "unveiled" time and again at past events. It was shockingly boring. If not for the slide Ballmer displayed during his presentation that actually said the event represented an "exciting day ," it would've been hard to understand why anyone in the audience ought to be excited. Executives spent most of the time on stage hawking previously revealed products to the crowd, QVC-style. "You’ll be able to get a touch notebook on day one for only $499--I feel like it’s a commercial here, but that’s a great, great value!" said Mike Angiulo, the corporate vice president in charge of leading Microsoft’s partner and ecosystem efforts.
It's hard to imagine an Apple keynote with such a lackluster presentation. You just didn't get a sense of the story behind these products. The myriad Windows Phone events were perfect examples: repetitive, and often inconsequential. At one point late last year, at two separate events, Nokia and HTC unveiled basically similar smartphones, running the exact same software, followed by a "surprise" appearance by Steve Ballmer.
The Surface launch event was perhaps the one exception here in Microsoft's long list of event duds. But even with all the hype around the announcement, Microsoft failed to take advantage of the opportunity. The unveiling felt rushed and sloppy. Ballmer began with a boilerplate introduction; Steven Sinosfky's tablet crashed just minutes into his talk; and outside Panos Panay, the GM of Microsoft Surface, no executive presented the device with the right amount of passion. I vividly remember Sinosfky praising the tablet's novel kickstand, and boasting that "you could go and just put the Surface on a table, lay back and watch a movie." He sat down for a mere second or two before leaping up and racing to show off the next feature.
The same could be said of Microsoft's marketing. The company has spent recent months overwhelming the world with its shock-and-awe advertising campaign, which hasn't been very memorable. Windows 8 ads are now ubiquitous--aiming to showcase "hybrid PC" form factors and password-protected lock-screens--as are ads for Surface, which inexplicably feature an unending supply of people jumping. (Seriously, why are so many people are just leaping into the air and clicking their keyboards together?) The recent onslaught of Windows Phone commercials are all based on personalization--a tired concept reminiscent of years-old Android ads. And outside Bing's aggressive marketing campaign, I'd be willing to bet the only ad you can remember from this year featured a dub-step beat and rapid zooms into Explorer browser screens. ("It feeeelssss like I'm just tooooo clooose to loooovvve youuuu.") No wonder Microsoft had just one ad in the top 10 viral tech ads  of the year.
About a week after Microsoft's Surface event, Google held its own announcement, which included a circus-like unveiling of Google Project Glass , complete with sky divers leaping from an airplane. Such gimmicks are obviously not what Microsoft needs. But Google certainly built a better narrative about the product, right down to the passion Sergey Brin exuded talking about Google Glass.
The point is, Apple and Google events feel magical. Microsoft's feel mundane.
[Image: Flickr user Ralph Keating ]