AI: Microsoft readies the AI 'Bundle Hokey Pokey'

...deploying the Bundling tactics that made Microsoft an Enterprise winner

In a post last September titled “AI: Bundle, then Unbundle”, I pointed out how businesses endlessly employ Bundling to bolster their businesses after innovation and competition catalyzes some Unbundling:

“Netscape CEO Jim Barksdale in 1995, formerly a cable company executive, famously riffed on one of the oldest tenets in business:”

“Gentlemen, there’s only two ways I know of to make money; bundling and unbundling.”

“That statement foreshadowed the unraveling of Netscape a few years later, as Microsoft bundled its competing ‘Internet Explorer’ browser into its market leading Windows operating system for free (they got their hand slapped for it later).  We have seen this cycle in businesses ranging from music to cable to streaming in recent years.”

That piece then went onto to outline the bundling/unbundling’ strategy in the media industry, especially with the coming impact of AI technologies. Bundling and Unbundling is a time-proven strategy in business beyond media and technology for a very long time, as expounded on by Stratechery. I’ve also talked about how tech companies in particular could potentially get ahead of the regulatory and antitrust blowback from ‘Bundling and Unbundling’ strategies.

As the ‘AI Tech Wave’ proceeds in the New Year catalyzed by massive multi-billion dollar proactive AI infrastructure investments the next task at hand for tech businesses is monetization. And Microsoft it the leading ‘Magnificent 7’ big tech company, that’s been the proven master at Bundling. It’s again is at the forefront as AI becomes added into all the tech products and services consumed by businesses worldwide, over the coming years.

Microsoft, whose stock gained almost a trillion dollars in market cap in 2023 following its historic and dramatic partnership with OpenAI and its ChatGPT successes last year, has the most at stake with its Enterprises customers globally.

The Information has a long piece worth reading on how the senior executive Takeshi Numoto, who’s introduced as follows:

“Takeshi Numoto has been one of Microsoft’s most influential behind-the-scenes executives in the past 20 years, helping turn its cloud business into a huge success. Now he faces the challenge of persuading customers to pay for AI tools.faces the challenge of persuading Microsoft customers to pay for AI tools”.

The piece then goes on to provide more context to this important move at Microsoft:

“When Microsoft announced the retirement of its longtime chief marketing officer, Chris Capossela, last October, its choice of his successor may have seemed counterintuitive to outsiders. Unlike Capossela, who had a flair for the spotlight, Takeshi Numoto has kept a low profile inside the software giant as a marketing executive over the past two decades. Numoto rarely spoke publicly at Microsoft conferences or product rollouts, and his face is unfamiliar to some of the company’s largest customers.

“But behind the scenes, Numoto has been one of Microsoft’s most influential leaders. Even before his promotion, his ambit has been far wider than that of a typical CMO. One of CEO Satya Nadella’s closest advisers, Numoto is revered within the company for his knack for growing revenue. He is credited with having figured out how to raise prices for Microsoft’s packages of software without alienating customers. His strategy turned Microsoft’s cloud business into an unqualified success, lifting cloud revenue to $140 billion in the year to June 2023 from $8 billion in 2015.”

The article then goes on to explain how Mr. Numoto is Microsoft’s ‘Baron of the Bundle’:

“Numoto’s influence is far greater than his title suggests. At Microsoft, the CMO role is more like that of a chief revenue and sales officer, who also sets prices and sales strategies as well as managing business planning across the company’s portfolio of products. In his new role, Numoto will also oversee Microsoft’s consumer sales, which include its Windows operating system and Surface tablets.”

“Inside Microsoft, Numoto is jokingly referred to as the “baron of the bundle,” current and former Microsoft employees say.

“Takeshi is a pricing and packaging genius,” said Nat Friedman, who worked at Microsoft with Numoto for years and is now a startup investor.”

The piece then highlights Microsoft’s immensely successful strategy of the ‘Bundle HokeyPokey”:

“After Microsoft debuted its Azure cloud service in 2010—four years after Amazon Web Services blazed the trail of renting out web servers—Numoto took the helm for setting Azure’s prices and strategy under Nadella, who was responsible for the cloud business.

In that role, Numoto perfected a trial-and-error approach that his underlings referred to as the “bundle hokeypokey,” in which the company tried different bundle configurations—often six or more—until one emerged as a winner and gave Microsoft the opportunity to raise prices without turning off customers.

“Takeshi is quick to assess the business and think about how you monetize. That’s his superpower,” White said.”

It’s all relevant again for Microsoft and CEO Satya Nadella, as it leads AI sales into the Enterprise, led by its new ‘Copilot’ brand increasingly front and center to the future of Microsoft Windows, Office and other services:

“As he takes on the CMO role, Numoto must now convince businesses to spend money on the costly AI-powered tools, dubbed Copilots, that Microsoft is adding to nearly all of its apps. There are early signs that customers are willing to pay a premium for the software, if only to test it.”

“The Copilots are mostly available in limited previews, and Numoto is closely analyzing customer demand to determine whether to bundle them with E3 or E5 or maintain them as a stand-alone offering, according to someone familiar with the situation. The company could add the Copilots to existing enterprise bundles and increase the bundle price or offer discounts to customers that buy a substantial number of Copilot seats for their employees, according to someone briefed on the situation.”

Bundling and unbundling of course has gotten Microsoft in conflict with Regulators for decades now. In fact Mr. Numoto joined Microsoft in the teeth of the battles with the Justice Department over then founder/CEO Bill Gates’ strategies of bundling to take advantage of another major technology wave, the Internet:

“Born in Japan, Numoto moved to California to get his master’s in business from Stanford University. After that, in 1997, he joined Microsoft as a program manager for Windows, and subsequently worked on the company’s marketing strategy for Windows and Office. At the time, Microsoft was fighting the Justice Department’s attempt to split the company in two, and a federal court ruling in 2000 found that it had a monopoly on PC operating systems and had violated antitrust rules by bundling its Internet Explorer browser with Windows. Microsoft settled the case a year later by promising to make it easier for app developers such as Netscape and Java to offer their programs on Windows PCs.”

Of course one of the headwinds for all the big tech companies this time is the intense Regulatory focus on AI. It’s something I’ve discussed at length and it’s occurring concurrently into and other anti-trust inquiries into many of the big tech companies like Google, Meta, Apple, Microsoft and others, both in the US, Europe, and other jurisdictions.

As businesses small and large, along with consumers figure out what they’re likely to be charged for AI products and services over the next few years, the initial challenge for all tech companies is how to best market these prices ahead of fully understanding the downstream benefits of AI in their activities.

AI Sticker shock for now is a bit of the order of the day. Especially given the high variable costs of providing AI services as compared to previous major technology waves. And Wall Street’s Mr. Market of course, is intensely watching the ups and downs of AI Adoption.

So seeing an executive with Mr. Numoto’s experience and background in ‘Bundling’ is a key trend to watch at Microsoft. Of all the big tech companies, Microsoft for now is the tip of the AI spear into the Enterprise globally. This nascent opportunity of what one could call Mr. Numoto’s coming ‘AI Bundle Hokey Pokey’, is just beginning.

It’s going to be an important dance for Microsoft customers, investors, and of course, the AI industry at large. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)