Why is Microsoft Tilting at Consumer Windmills?

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Microsoft traditionally has made — and continues to make — the lion’s share of its revenues by selling software to businesses. But in the coming post-Bill-Gates era, Microsoft is gearing up to get more serious about selling to consumers.

Microsoft’s growing consumer-market love is going to require substantial changes, several of which are underway, by the Redmond software maker. For one, Microsoft is going to have to make good design and simple and elegant out-of-the-box experiences a top priority.

The company needs to go after students and younger consumers to get them excited about Windows and other Microsoft products before they descend on the workforce with pre-established Mac OS X and Linux preferences. And somehow Microsoft needs to find a way to achieve that elusive goal of changing the perception of its products and technologies as being for staid enterprise users, not the cool kids.

Just last week (March 13), Microsoft brand managers were staked out at the Hotel Sax in Chicago to promote Microsoft consumer products to guests of the property. Microsoft had set up a number of Xbox 360 Elite gaming consoles to show off Windows Media Center and Microsoft games; Zune listening stations; Windows Vista PCs running Windows Live services; and “The Studio–Experience by Microsoft” lounge.

The message: Microsoft is all about “connecting people to whatever it is they want (leisure travelers who want to connect for work, or vice versa), and showing in a hands-on way what they can do with tech in their lives, and how attainable it is today with the right set-up,” a company spokesperson explained.

The Hotel Sax demo was just a drop in the $300 million bucket that Microsoft has earmarked for consumer-advertising spending this year. Why is Microsoft so adamant about gaining more consumer street cred?

Microsoft is in the midst of diversifying its business. For the past year-plus, CEO Steve Ballmer has been telling Wall Street, Microsoft shareholders, partners and customers to expect Microsoft to invest heavily in online advertising, search and services; the mobile space; entertainment (including IPTV); and healthcare (via its HealthVault and Amalga platforms).

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These are long-term bets, Ballmer has reminded Microsoft’s constituents, which may take as long as 10 years to ripen. But Microsoft has no choice because “software never wears out,” as Ballmer has taken to proclaiming. (Ballmer isn’t stating outright that Microsoft has almost completely saturated the market for PC operating systems and desktop productivity suites, but that’s what he is really getting at. Windows Vista’s biggest competitor is XP and Office 2007’s is older versions of Office.)

Microsoft brass, from Chief Software Architect Ray Ozzie on down, have said they believe that future technology innovations will come more from the consumer side of the market than the enterprise side. At the same time, Microsoft is hoping it can create the same type of “halo effect” from which Apple has managed to profit. Apple managed to parlay sales of iPods and iPhones into increased Mac sales. In Microsoft’s case, the company would be trying to convert Xbox and Zune users to Windows PC users (and/or to get Windows users to try other Microsoft-branded wares, like Xbox, Zune and Windows Mobile phones).

Microsoft execs also see the consumer market as being Microsoft’s weakest link — and not just in its battles with Apple. In his February 14 post-corporate-reorg e-mail to the Microsoft troops, President Kevin Johnson acknowledged Microsoft’s need to get its consumer messaging and marketing in order. Johnson wrote:

“Today, looking globally, our sales and marketing organizations are not as well aligned by customer segment as needed, particularly as we compete in the consumer segment with companies such as Apple and Google.”

Microsoft is responding by consolidating, Johnson explained:

“We have revamped our engineering approach and the team is making progress on key user scenarios across the PC, phone, and Web. As we look to the future, we must reinvent our approach to consumer marketing, the pre-sales experience, the way we work collaboratively with our PC partners, and how we communicate our brand and what it stands for. To do this, we will make changes to bring all consumer audience marketing across PSD (Platforms & Services Division) into a single organization. This will enable us to align marketing resources, eliminate silos, communicate the end-to-end experiences, and better connect with consumers.”

The next step in Microsoft’s consumer campaign will be to deliver the infrastructure that will enable “mesh networks” of devices, social experiences and other areas, company officials said earlier this month at Microsoft’s Mix ’08 conference.

The thinking: If users can get all their Microsoft products to work together more seamlessly, they’ll have less reason to add an iPod or a Google Docs to their technology mixes.

It’s worth remembering, however, that Microsoft officials have been promising connected entertainment and connected productivity scenarios for years. Consumers are still waiting….