Narrative: Microsoft’s Comeback

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.