Narrative: Microsoft's Comeback
Each narrative page (like this) has a page describing and evaluating the narrative, followed by all the posts on the site tagged with that narrative. Scroll down beyond the introduction to see the posts.
Narrative: Microsoft’s Comeback (Jan 28, 2017)
Written: January 28, 2017
Ever since shortly after Satya Nadella took over as CEO of Microsoft, there’s been a growing narrative to the effect that Microsoft is in the midst of a major comeback, and the trajectory is often attributed to Nadella himself. Just this week, following Microsoft’s earnings report for the December quarter, its valuation hit a peak not seen since Bill Gates’ time in charge, symbolizing a renaissance following a period of trouble and transition under Steve Ballmer.
The reality is, of course, that a number of the drivers behind Microsoft’s recent uptick were put in place under Steve Ballmer, but have only come to fruition under Nadella, much as Tim Cook benefited in his early years as CEO from product roadmaps put in place by Steve Jobs. The shift to the cloud, the creation of Office apps for non-Windows mobile devices, and Windows 10 were all Ballmer initiatives. But it’s arguable that Nadella has accelerated some of these shifts, while adding his own unique spin. Microsoft’s current emphasis on democratizing AI and putting AI into almost everything the company does is very much Nadella’s baby. And acquisitions of several productivity apps for mobile devices and their integration into Office and other Microsoft products has also taken place under his leadership, as did the LinkedIn acquisition.
Much of the upswing, though, has come from riding the massive growth in cloud services, the maturity of the Windows 10 installation cycle and the complicated financial impacts of deferred revenue, and from the fact that the phone business Microsoft acquired from Nokia has now shrunk to such an extent that it no longer acts as a massive drag on overall revenue.
Beyond the financial aspects, there’s a perception that Microsoft is perhaps becoming cool again, with innovative and clever mobile apps, eye-catching hardware like the Surface Studio, and pushing into new domains like holographic computing (AR/VR) with HoloLens.
Even as it undergoes this resurgence in interest and financial performance, Microsoft continues to face some big headwinds. Windows PCs continue to face declines as individuals and workflows switch from PCs to other devices including tablets and smartphones, which will impact Windows revenue. Much of the Office functionality that once required paid software is now free on smaller devices, and though the shift to Offce 365 among businesses is going rapidly and successfully, Office 365 consumer growth is slowing and subscribership plateauing around 25 million. Consumer continues to be one of Microsoft’s biggest challenges (see separate narrative), as it has some popular products and services, but many of them are unmonetized. Only gaming and search represent major revenue streams from consumers today. Microsoft is doing well, but it will have to continue to drive new sources of revenue fast enough to offset declines in legacy areas, and find new ways to monetize consumer products and services or instead merely use its consumer presence as a way to drive interest and revenue on the enterprise side.
Microsoft Makes Set of Announcements at Ignite Partner Event (Sep 25, 2017)
Microsoft kicked off its Ignite partner event in Florida today, and made a set of announcements during the opening keynote. The Microsoft blog post linked below gives a quick run-down of the big ones, which included new versions of the Microsoft 365 as-a-service Windows-Office bundle for education and “first-line workers” (roughly, workers who don’t sit behind desks but still use computers), new Azure partnerships with hardware vendors to enable hybrid cloud deployments, enhancements to Azure’s machine learning capabilities, and a push around quantum computing. Microsoft CEO Satya Nadella also launched a new book about his turnaround of Microsoft, and this was a theme throughout the day’s presentations. Lastly, it appears Microsoft is killing off Skype for Business in favor of its new Slack-like Teams product, which represents yet another in a string of changes to Microsoft’s enterprise communication software over the last few years – I’m hoping this strategy finally sticks. There’s nothing that significant here for the consumer technology market I spend most of my time covering, but the announcements are indicative of the big focus areas Microsoft has at the moment: cloud, AI and machine learning (as much as enablers of third party developers as within Microsoft’s own products), and openness and partnering.
Microsoft to Lay Off Thousands as Part of Reorganization (Jul 6, 2017)
Microsoft has now confirmed the layoffs which have been rumored for the last week or so, and which are the second part of the announcement made earlier this week regarding the restructuring of the company’s sales organization. CNBC says 3,000 jobs will go, while Mary Jo Foley at ZDNet, who I’m more inclined to trust with this stuff, says only that there will be “several thousand” cuts, with some of those losing jobs found roles elsewhere in the company. This is a relatively small round of layoffs for Microsoft given recent history, as the company’s core workforce excluding LinkedIn has fallen from a peak of around 128,000 in 2014 to just over 110,000 at the end of March already. The layoffs are likely to impact the sales team reorganized earlier this week, reflecting an ongoing shift away from legacy products towards cloud services. Over the last few years, Microsoft has been beefing up its support and consulting staff while reducing its engineering numbers considerably and keeping its overall sales and marketing staff roughly constant at around 50,000. Interestingly, Microsoft’s US/international employee split is now back at nearly 60/40, roughly where it was before the Nokia devices acquisition pushed it to about 48/52. The vast majority of the employees taken on during that period have now either been eliminated or moved to other roles in the company, though Microsoft currently has around 10,000 more core employees (and around 20,000 more including LinkedIn) than it did in mid-2013. Therefore, although this stinks for those being laid off, it’s not an enormous reorg by Microsoft standards, and mostly reflects subtler shifts in the emphasis of the sales and marketing teams and other effects from Microsoft’s ongoing move from legacy to cloud services, in what’s now become almost an annual ritual at the company.
Apple Reportedly Updating MacBook Line at WWDC (May 16, 2017)
I’m at Microsoft’s Build developer conference this week, and got a little preview of some of what’s being announced in a private session for analysts yesterday. Today’s day 1 keynote is focused on Microsoft’s broad vision for this year’s event and its cloud and AI business. Many of the things I cover most closely will actually be in tomorrow’s keynote, which will cover more of the consumer-facing parts of the business. But there were still several notable announcements today that are worth talking about, even on a site like this that’s more consumer tech-focused. Firstly, it’s worth noting CEO Satya Nadella’s philosophical intro, which emphasized the ethical and other responsibilities tech companies have as well as the limits of tech in solving the world’s problems. That’s an admirable stance and a theme we’ve seen more from Nadella than any other tech leader in recent years.
Secondly, Microsoft’s big push this year is a shift from Nadella’s earlier mobile-first, cloud-first vision to a new vision around intelligent cloud combined with intelligent edge. What that means is that Microsoft sees the cloud as being less centralized and more distributed, including in edge devices, and its new Azure IoT Edge concept takes cloud computing functionality and puts it in potentially tiny devices at the edge of the network. That’s a somewhat unique vision for the cloud, especially from a company that’s also strong in the core cloud context. If Microsoft is right about this vision, and I suspect it is in the industrial world especially, then that raises interesting questions for other vendors and their ability to push that capability into edge devices, where operating system companies are strong but others tend not to be.
Thirdly, Microsoft is pushing what it calls its Graph, which is a sort of backend for its own services but also opens up to developers, and began as an agglomeration of data about users and is expanding to include those users’ activities in apps and across devices. The idea is that this Graph will power continuity between apps and other activities for users through both first-party and third party features. It’s a good concept and in some versions is reminiscent of what Apple does with Handoff and Continuity in its operating systems. But the big challenge for this vision at Microsoft is that it’s got a huge gap in its Graph around mobile, because people spend the vast majority of their mobile time outside Microsoft devices, operating systems, and apps. I can’t see it changing that, and that’s going to reduce the value of the Graph significantly, especially in the consumer world. I’ll have more commentary on some of the consumer-focused announcements in tomorrow’s keynote.
Lastly, one kind of consumer-focused announcement today, which has been subtle on stage but covered somewhat in the press regardless based on pre-briefings is Cortana Skills, which were announced way back in December but are now going more generally available to developers. What’s interesting here is that unlike Amazon’s Alexa Skills, at least some of these third party capabilities will be built in even if users haven’t explicitly installed or enabled the apps, including weather app Dark Sky and Domino’s Pizza. We’re still in the very early days here, but it will be interesting to see how skills on a PC-centric assistant like Cortana evolve differently from those on speaker- or phone-centric assistants like Alexa or Siri.
via Techmeme (and about a thousand articles on different announcements made today which you’ll find linked there)
Microsoft today held an education-focused event in New York City, at which it announced a stripped-down version of Windows, new end-user and teacher/administrator apps, and new hardware for the education market. This is by far the biggest and most comprehensive education push we’ve seen from any of the three big OS vendors, and is clearly intended to reassert Microsoft’s pre-eminent position in the education domain. What was evident from the first part of the event was how committed Microsoft is to making this work, and it began with an impassioned and personal talk from CEO Satya Nadella about his own family background and how education made a difference. Just as Microsoft’s AI mantra has been about democratizing the technology, so he now talks about democratizing educational opportunity. That’s a worthy goal, and Microsoft’s new announcements are a great way to try to bring that about, but Microsoft was also admirably realistic about the role technology plays in education: it assists and empowers but can’t replace committed teachers and parents or educational institutions. I have separate posts about Windows 10 S (here) and Surface Laptop (here). But I like the way Microsoft is introducing education into many of its existing products, including Office, Minecraft, Intune, and so on. Treating education as a first party audience alongside consumers and enterprises makes perfect sense, and is the route others have already taken. What Microsoft announced today feels like it will move its story forward in education considerably. Both Google and Apple have developed more comprehensive stories in education over the past couple of years too, but Microsoft’s arguably goes further, though developer events from the other two in the next six weeks could redress that balance a little.
Microsoft was one of numerous big tech companies that reported Q1 2017 financial results (its fiscal Q3 results) this afternoon, and the only one of the big three to miss on revenue. That revenue miss was largely due to a shortfall in hardware revenue as Surface had its first big year on year decline in a year and a half due to a lack of new mass market hardware, and phone revenue dropped to essentially zero. However, these two businesses together make up just 4% of Microsoft’s revenue, which continues to be dominated by software and to an increasing extent services, while growth is dominated by the move to the cloud. Microsoft’s cloud revenue run-rate is now at an annualized $15.2 billion, compared to Amazon’s $14.5 billion in actual annual revenue, though Microsoft’s definition of cloud here is far more expansive than Amazon’s. The productivity business had a particularly strong growth quarter at over 20%, while the Intelligent Cloud segment also improved a little to just over 10%. But margins continue to fall overall as the newer cloud services generate less profit than Microsoft’s old massively profitable software business did, and that picture isn’t likely to change. Microsoft is growing again after both lapping the introduction of Windows 10 and the revenue deferral associated with the new business model, and also getting past the biggest drops in the phone business, but it’s mostly doing so by doubling down on enterprise products and services while its consumer and hardware businesses mostly continue to struggle to find growth.