Economics for Managers

Assignment: Company & Industry Analysis

By: Felipe Veliz

Executive Summary
Microsoft’s HoloLens, known as the first mixed reality devices available at the market, are, without
doubt, leading the current immersive technology industry. The future for this industry is promising,
with an estimated spend of 27 billion in 2018, and a CAGR (compound annual growth rate) of 71.6%
until year 2022. Nevertheless, for Microsoft to capitalize the market, they ought to capture the
consumer industry through a public user version, and to prove economic benefits to industries
implementing mixed reality technology.

Microsoft’s Business Strategy

Microsoft’s current business strategy is outlined in three major components: “Cloud-first, mobile-
first”, Growing through mergers and acquisitions, and Focusing on augmented and virtual reality
(Dudovskiy, 2017, 5). Intelligent cloud represents one Microsoft’s most promising sectors, specially
driven by its cloud platform Azure. Regarding mergers and acquisitions, Microsoft has been very
active the past two years, accounting two emblematic acquisitions: LinkedIn during 2016 and Github
in 2018 (Shen, 2018, 5). Finally, Microsoft is centered in taking augmented reality to the next level,
moving beyond the gaming sector and seeking opportunities in other industries through its
emblematic product HoloLens. Furthermore, Microsoft is in good position to become the market
leader and increase it competitive advantage in the technology industry.

Immersive Technology 1at a Glance

The first virtual reality (VR) headset was released in 1990 by Sega Games Co., and for many years,
the entire market depended on the performance and requirements of the Gaming industry. In 2013,
when the concept of Augmented Reality (AR) was already well known, Google released Google glass,
with the intention to attract regular customers to its product. Unfortunately, the product and
industry were not mature enough, thus the initiative did not succeed. Not long after, the VR as well
as the AR industry soared with the entry of multiples companies to the industry such as Samsung,
EPSON, Vuzix, Baofeng, Letv and Meta. However, in 2015, Microsoft released HoloLens, a product that
they coined Mixed Reality (MR). MR is a blend of the physical and digital worlds in which users may
interact with digital and real-world objects while maintaining presence in the physical world. This
was clearly a strategy from Microsoft to differentiate its product from the competitors when entering
the market.

1Immersive technology is an integration of virtual content with the physical environment in a way that
allows the user to engage naturally with the blended reality.
 FIGURE 1 THE RELATIONSHIP BETWEEN AR, VR AND MR (RESNICK, 2018, 7).

As a strategy to grow and capture as many actors as possible in the market, HoloLens offers four
alternatives to implement and develop the environment in which the lens should be used. These
alternatives are oriented to independent developers and the business sector, and for the moment
there are no regular user versions available. The first alternative is to “Develop your own Solution”
through the developing suites provided by Microsoft. The second alternative proposes to use a
partner to develop HoloLens environment. Partners are considered expert third-party companies
with teams dedicated to discovering and developing solutions. The third alternative considers using
Microsoft’s in-house capabilities as developers. Finally, the fourth alternative involves using
Microsoft’s off the shelf solutions (Microsoft-2, 2018).
Along with the implementing options, Microsoft is doing many efforts to complement the already
known applicability at the gaming industry heightening case opportunities in different industries.
Examples from current industries using HoloLens at their initiatives are:
▪ Boeing is using HoloLens to train the employees
▪ Thyssenkrupp to enhance their measuring, visualizing and installing capabilities.
▪ Tetra Pak use HoloLens to access expert to guide their engineers, reducing time and cost.
▪ Case Western Reserve University and Cleveland Clinic are using HoloLens to improve the
medical education.
Regarding HoloLens pricing strategy, Microsoft does not price discriminate this product. They solely
offer two different plans with different services oriented to two types of customers: Development
Edition for $3,000 USD and Commercial Suite for $5,000 USD. The difference between these plans is
that the Commercial Suite considers more security and enterprise features that the Development
Edition (Microsoft-1, 2018). However, the nature of the product and services gives a fair amount of
information to Microsoft to implement a simplified first-degree price discrimination if intended in
the future:
▪ Currently, the demand for mixed reality is inelastic due to a lack of substitutes. Microsoft’s
ability to differentiate its product from the current augmented reality glasses, granted them
 the lead in this infant market. Yet, companies such as Google, Meta or Magic Leap are actively
improving their products to try to enter Microsoft’s niche (McKalin, 2017, 3).
▪ The HoloLens product, without disregard marginal sales from the development edition, is
oriented to the business sector, in which each customer will have to develop a customized
environment to use the device. This configuration gives the benefits of knowing the industry
and needs of your buyer before the transactions occurs. Thus, charging higher prices to
selected industries.
▪ Finally, due to the characteristics of the product and services, a resale from other customers
is rare to occur and easily detectable if happening. Development edition or a future personal
version could be sold at retailer stores. Commercial edition, focused on attracting the
business sector, is uniquely distributed by Microsoft. A resale among industries would be
inapplicable due to post sale services needed from Microsoft.
However, because the market is not capitalized and there are several other companies developing
similar products and trying to enter the market, it is not a recommendable action for Microsoft to
take at this instant.

The future
The future for immersive technologies is promising. The worldwide spending on augmented reality
and virtual reality (AR/VR) is forecasted to achieve a five-year compound annual growth rate (CAGR)
of 71.6% until year 2022 (IDC, 2018, 5). In addition, for the year 2018 it is predicted that the spending
in AR/VR products and services will reach 27 billion, a 92% increase y/y.
Based on a latest Gartner report (Burke, 2018, 5), by 2021, 25% of large businesses in mature
markets will pilot and deploy MR solutions, increasing from 1% in 2017. By 2022, 20% of early
adopters will use 3D input/output interfaces to replace traditional 2D interactions. Finally, by 2022,
AR/MR will surpass VR as the key driver of head-mounted display use. AR/MR will account for 55%
of unit sales, increasing from less than 5% in 2017.
To Microsoft to be able to capture that future capital, they will have to set HoloLens as the main
alternative for future immersive technology solutions at every industry. Furthermore, because a big
share of this future spend $80
$72
corresponds to the consumer $70
industry, Microsoft must release a $60 $56
$53
public version of the lenses, with
Spending [$bn]

$50
price and capabilities accordingly to $40 $34
a regular user, as soon as possible.
$30
The fail to accomplish this in time,
$20
could seriously undermine their
future market power, especially $10

because Google has been feeding the $-

Consumer Industry Retail / Discrete Distribution and Manufacturing and
public with information regarding Manufacturing / Services Sector resources
their new improved “Google Glass”. transportation
industries

FIGURE 2 FORECASTED SPENDING BY 2022 (IDC, 2018, 5).

References

[1] Dudovskiy, J. (2017, May 13). Microsoft Business Strategy and Competitive Advantage.
Retrieved from https://research-methodology.net/microsoft-business-strategy-and-
competitive-advantage/
[2] Shen, L. (2018, June 5). Microsoft's $7.5 Billion GitHub Acquisition Is One of Its Biggest Bets
Yet. Retrieved from http://fortune.com/2018/06/05/microsoft-github-acquisition-linkedin-
skype/
[3] Microsoft-1. (2018). Microsoft HoloLens - Price. Retrieved from
https://www.microsoft.com/en-us/hololens/buy#primaryR5
[4] Microsoft-2. (2018). Microsoft HoloLens - Development. Retrieved from
https://www.microsoft.com/en-us/hololens/commercial-build
[5] IDC. (2018, May 31). Worldwide Spending on Augmented and Virtual Reality to Achieve a Five-
Year CAGR of 71.6% by 2022, According to IDC. Retrieved from
https://www.idc.com/getdoc.jsp?containerId=prUS43860118
[6] Resnick, M. (2018, July 3). Virtual Reality and Augmented Reality: Using Immersive
Technologies for Digital Transformation, Customer Experience and Innovation. Retrieved from
https://www.gartner.com/document/3881066?ref=solrAll&refval=209912828&qid=00c7e4f
70964f7db8360202af7e32106
[7] McKalin, V. (2017, March 1). Top HoloLens competitors that could steal the market from
Microsoft. Retrieved from https://www.thewindowsclub.com/top-hololens-competitors
[8] Burke, B., Cearley, D., & Blau, B. (2018, March 8). Top 10 Strategic Technology Trends for 2018:
Immersive Experience. Retrieved from
https://www.gartner.com/document/3867163?ref=solrAll&refval=209956093&qid=6950d4
037a26c4c24580a6d43e452746
[9] Chang, N., Park, J. J., Hariharan, G., Itaya, M., Chen, J., Kwon, J., & Uchida, Y. (2016). Virtual
reality. New York: JPMorgan Chase & Company. Retrieved from J.P. Morgan Research