Wednesday, September 26, 2012

Microsoft Hires Nancy Tellem: Why This Is Important

This week, Microsoft hired veteran television executive, Nancy Tellem, to head the company's new entertainment division.  The new division will be based in Los Angeles (where Tellem lives), rather than in Redmond, Washington where the main Microsoft headquarters is located.  When I posted this news on Twitter and Facebook a couple days ago, my buddy Mike Duffin asked me to explain why I thought this was important. So, this is why.

At its core, Microsoft is a software company.  It gained ubiquity and riches by commandeering the controls of virtually every PC in the world.  But that battle was over decades ago.  The real question since then has been "What should Microsoft do with its huge footprint and bank account?  Where does it go from here?"

The company has dabbled in hardware, sometimes with success and sometimes not, but hardware is a very low margin business.  It takes constant research and development, as well as constant design upgrades, and at the end of the day, the profit margins are generally tiny.  And other than Apple, it is difficult for a company to develop real brand loyalty around hardware.  Consumers like their latest gadget until a better one comes along.

Consumers are generally more interested in using gadgets than in just owning them.  That means that consumers ultimately respond primarily to the content and experience that their hardware and software deliver.  They like to watch programs and play games and use apps.

And not only are consumers more loyal to content than to hardware, but the per unit profit margin on content is much, much higher and it has a shelf life that keeps it earning money for decades.  It simply makes economic sense to move towards the content business.

So, why does Microsoft need a veteran entertainment exec like Nancy Tellem?  A couple of the biggest reasons:

1.  They recognize that if they want to develop a loyal audience, they need content that consumers actually like.  They ultimately can only develop and keep their audience engaged by delivering superior  entertainment.  Nancy Tellem is an experienced programming and development executive.  She knows how to create superior content.

2.  The entertainment business is very particular in its culture, and different from the technology business. Nancy Tellem is not only the ultimate insider, she is a major player who garners instant respect and stature for Microsoft.  Everyone in Hollywood takes her call and listens to what she says.  Microsoft needs that kind of power to break into an otherwise insular industry.

With all of that said, there is no guarantee that this will work.  It might be that Microsoft will not be welcomed into Hollywood.  But if anyone can help Microsoft succeed in entertainment, Nancy Tellem may very well be the one.  It will be interesting to see what happens.