The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Until recently, products in the robotics industry have been primarily used in manufacturing and military applications. Robots in the home were for enthusiasts, willing to forgive high prices and limited functionality in exchange for novelty. These days are over: advances in product quality and acceptance by consumers have laid the groundwork for massive growth in household robotics over the next decade and previously uninterested companies are now entering the battle for market share.

The Boston Consulting Group predicts robotics to be one of the fastest growing industries in the world over the next few years, with an expected CAGR of 17% from 2014 to 2019 for the personal market, reaching a market size of $9B by 2025. Parallel to this industry growth is a significant shift in the consumer technology space toward the Internet of Things, increasing the interdependency of a wide range of products. Google, Apple, and Amazon are each looking to secure their position as tomorrow’s integrated consumer technology provider, and robotics will play an ever more pivotal role in this goal.

Rise of the Machines

In 2013, Google completed its eighth robotic company acquisition, with the promise of providing consumers with quality humanoid robots in the coming years. Also in 2013, Apple spent over $10B investing in supply chain robotics, in order to gain competitive advantages in manufacturing. Not to be left out, even Amazon has made splashes in robotics news with the headline-grabbing delivery drones proposal, as well as its acquisition of the mobile robotic fulfillment company Kiva Systems. All these companies are following different strategies. Where Google is acquiring companies, Apple seems to be partnering with them. Where Amazon uses its robots to provide supply chain management, Google targets consumer-facing devices, and Apple does both.

As it stands, none of these competitors have found a way to bring robotics to the home market, and no one knows when they will. However, all of them have acknowledged the importance of the upcoming robotics industry and demonstrated a keen interest in getting involved. The diversity of their strategies also shows the vast potential of robotics – a technology that is going to be used across industries. Amongst the big players in technology, Microsoft has conspicuously not made any significant investment in robotics. If nothing else, Microsoft stands to be left behind if it fails to act.

Microsoft’s Lost Decade

Currently, roughly 60% of Microsoft’s $5.8 billion operating income is derived from its Windows and Business divisions, marketing software primarily to corporate offices and households. While Microsoft still dominates the personal computer market, PCs represent a smaller portion of the technological landscape with each passing year. Microsoft has also stumbled with its numerous product introductions over the past decade. Microsoft’s Lost Decade in the Spring 2010 issue of the Ivey Business Review highlighted this point, demonstrating the company’s withering innovation as it became a “market follower, rather than a market maker.”

Windows phones are a prime example of the company following Apple’s market leadership, with the phones having yet to gain significant market share. According to an August IDC report, Windows phones are actually losing share. Microsoft’s Surface line has finally turned a slight profit, though only after two generations of losses. Windows 8, a public relations nightmare, has only captured 15% of the operating system market share after two years, less than half of Windows 7’s share (40%) in the same time frame. Finally, while the holiday season and recent momentum may prove beneficial, Microsoft’s Xbox One has been selling at approximately half the rate of Sony’s PlayStation 4, and represents another underperforming Microsoft product.

Ecosystems Evolved

The largest value of tech lies in the ecosystem; consumers are increasingly integrating their lives around interconnected devices. Again, the prime example is Apple. Known for having some of the stickiest customers, Apple’s ecosystem of phones, laptops, tablets, music, and TV, along with the ease at which these devices share content, prompts users to buy into, and remain in, the entire ecosystem. The value of each individual product also increases as consumers attribute some of the ecosystem’s value to the device itself. An example of this is the iPhone, which has used this ecosystem effect to drive much higher margins. Despite dropping to “only” 13% of the mobile market share compared to Android’s 80%, the iPhone represents over 50% of the smartphone industry’s profit. However, while Apple has dominated the current ecosystem driven by mobile and tablet integration, emerging markets such as wearable technologies, mobile productivity, smart homes and televisions, and now robotics, offer new opportunities and have yet to be claimed.

Microsoft has already started reacting to many of these market opportunities. With the Microsoft Band, Office Mobile for iOS and Android, and Xbox One, Microsoft is positioned to compete in all of these segments, except robotics. In the end though, much like smart-homes, smart-watches, and smartliving- rooms, the robotics industry will join the Internet of Things. With other players already making moves, Microsoft can’t afford to be left behind again. Ten years from now, when a consumer leaves the house in the morning, smart phone in her hand and smart watch on her wrist, she will return to an immaculate house at the end of the day. Integration between her phone and calendar will have managed the house’s thermostat, saving energy throughout the day; ordered the house robots to clean the floors, complete the laundry, and prepare dinner before she returns; and managed all her digital content, including downloading the newest episode of her favourite show. Our consumer is connected and she’s invested into the ecosystem that does it all. Without a Microsoft robot, there is a chance our consumer chooses an Apple one instead, which integrates better with iCal than Outlook, Apple TV instead of Xbox One, a MacBook Air instead of a Surface Pro, and her iPhone rather than a Windows device.

That being said, not all components of the Internet of Things are valued equally – and it’s improbable that any company is actually going to have an ideal offering in each segment. By 2018, the wearables market is projected to be around $11B, smart home products are projected around $9.4B, and the entire robotics industry will be around $30B, with commercial and personal robotics accounting for approximately half of that. Therefore, if Microsoft can do to robotics what it did to PCs, Microsoft stands to dominate one of the most valuable subsegments of the Internet of Things.

Clear Azure Skies Ahead

Robotics also represents an industry that Microsoft is well suited to compete in. Bill Gates describes the robotics industry as “a highly fragmented industry with few common standards or platforms”, which is very similar to the PC market before Windows was developed. He also describes how Microsoft is working to develop software that makes robotics development easier, but it’s not enough. While it’s clear that Microsoft has little strength in developing hardware, it has proven its ability to build software platforms that enable a wide range of hardware developers. The consumer robotics market is ripe for a similar unifying platform, and Microsoft should create it. By combining this platform with Azure, Microsoft has the ability to change the robotics industry for the next few decades.

The goal of any ecosystem should be to drive adoption of a company’s most profitable segments, and for Microsoft, that currently is Office and Windows. Yet these segments are changing, primarily from box-software for desktop PCs, to cloud offerings for a range of devices, and this change is being powered by Microsoft’s up-and-coming Azure platform. Growing faster than its main competitor, Amazon Web Services, Azure is powering Microsoft’s ecosystem, including OneDrive, Office 365, Xbox Live, as well as all corporate web services. Azure’s ecosystem is the key to Microsoft’s future, and the goal of robotics must be to drive value to this package.

To enter the robotics industry, Microsoft needs to develop a cloud-driven robot operating system. Starting from nothing is too slow, so Microsoft should acquire an existing platform, and finish developing it to incorporate Azure technology. Microsoft should then partner with robotic developers across the industry to maximize the platform’s efficacy. To bring it to market, Microsoft should follow its current Azure model, giving away basic features for free, and charging more for bandwidth and hardware time. Microsoft can also profit from the value this platform drives to its other products, such as the ability to use your Windows phone to control your Windows robot.

I, iRobot

Founded in 1990 by a team from the MIT Artificial Intelligence Lab, iRobot is a longstanding leader and innovator in household robotics and represents the perfect target for Microsoft. Its flagship product, the Roomba vacuum, is the first fully autonomous robot to gain nationwide recognition and acceptance in the household. Today, iRobot offers a line-up of household robots that perform menial tasks such as vacuuming, tile scrubbing, mopping, pool maintenance, and gutter clearing. It also offers robots for video collaboration and telepresence in businesses and military robots for government contracts. When it comes to robotics, and especially to personal robotics, few companies have comparable platforms to iRobot.

Threats to iRobot are powerful and come from multiple directions. Dyson, Samsung, and numerous other companies have announced similar robotic products. iRobot, with 2013 revenues of $487 million, has openly acknowledged the danger of entrants that hold substantially greater financial and operational resources. Should Microsoft choose to step in, the company can strengthen iRobot’s ability to innovate and operate successfully by providing it with the necessary financial resources. Microsoft can also improve iRobot’s products, easily offering inter-connectivity to Windows products, and a greater product reach through Microsoft distribution channels.

A Unified Platform

With around $89B in cash and cash equivalents, Microsoft can easily afford the purchase of iRobot, currently valued at $1.2B. Upon acquiring iRobot, Microsoft should focus on the development of a new robot-based operating system (OS) to ship with iRobot and other potential partners. Microsoft should start with one of iRobot’s newest platforms, such as the system used in the new Ava robot, an upcoming multifunctional robot. Microsoft should then completely integrate the OS with its Azure offering. Azure will enable the connected robot to be taught more tasks, such as how to do basic or more complex household chores via additional programs running in the background. The largest challenge in unifying robotics is the differences in hardware components used by developers. By connecting the OS to the cloud, Microsoft has the ability to handle vast amounts of configurations from a central service. Finally, the goal is to open up the platform to developers and allow them to decide how the marketplace will work, similar to the app store for smart phones. While the robotics application marketplace is likely going to function very differently from that of mobile phones, having more developers on Microsoft’s platform will only lead to a stronger ecosystem.

After creating the platform for developers, Microsoft must develop software that will bridge the gap between robotic function software and Microsoft’s current offerings. This software will allow the robot to interface with users from their desktops, mobile phones, or tablets over the cloud infrastructure Microsoft has already developed. Through successful integration of Microsoft’s and iRobot’s intellectual property, the company can achieve the first step in creating a Microsoft dominated robotics platform.

Microsoft cannot afford to keep stumbling with product introductions when a new opportunity presents itself. Given the value of the ecosystem and the pace at which components are added to it, Microsoft needs to proactively build out the pieces it needs to compete. By being bold and connecting robotics to its cloud service, Microsoft has the ability to boost the value of its entire ecosystem.

Robosoft

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