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7/25/2014
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Microsoft Faces 4 Big Challenges

Microsoft CEO Satya Nadella is riding high with analysts and investors -- but look at the remaining hurdles.

Microsoft Office For iPad Vs. iWork Vs. Google
Microsoft Office For iPad Vs. iWork Vs. Google
(Click image for larger view and slideshow.)

It's been an eventful few days for Microsoft, but new CEO Satya Nadella appears to have emerged with investors still on his side. Last week, he announced plans to lay off 18,000 workers. This week, his company announced earnings that would have been unequivocally strong had it not been for profit losses tied to its $7 billion Nokia Devices and Services acquisition, which accounts for two-thirds of the layoffs. Despite the tumult, and thanks to the quarter's stellar cloud and server revenue, Microsoft's stock has held steady since the job reductions were announced; within striking distance of $45 per share, it's also up more than 20% since Nadella took over.

But that doesn't mean Microsoft has nothing to worry about. The company had plenty of strong financials to crow about during the most recent quarter, but Nadella's popularity hasn't just been about numbers. It's also been about his willingness to admit that Microsoft faces an uphill battle in many markets, notably smartphones and tablets. By initiating layoffs, Nadella has taken a big step toward installing the "challenger mindset" he says his company needs -- but many steps still remain. Here are four pressing questions Microsoft and its new CEO must still face.

1. Will Nokia fit inside Microsoft?
Over the last week, Microsoft execs have gone out of their way to emphasize that the company is scaling down its device efforts. Yes, it will still make devices, because Windows Phone needs the help and because Microsoft wants devices that show off what its cloud services can do. But Nadella clearly knows some investors are leery of Microsoft's hardware ambitions, and he and other senior leaders have appeared determined this week to circumvent new concerns.

[For more insight on Microsoft's device strategy, see Nadella's Windows 9 And Device Plans, Explained.]

"We're not in hardware for hardware's sake," Nadella said during this week's earnings call.

That sounds good -- but what does it mean for Nokia? Microsoft execs spoke optimistically this week about Windows Phone growth in emerging markets, but they conceded that low-cost (and thus low-profit) devices drove most of the sales. Nadella said that, to generate high-end demand, Microsoft will create devices that "light up" Microsoft's digital services, such as Cortana, OneNote, and Office Lens. Will it work? Time will tell, but we'll know more after we see Microsoft throw its efforts behind a new flagship phone.

In the meantime, Microsoft will have to contend not only with Android, which is particularly dominant in the low-margin markets where Windows Phone has some traction, but also with the iPhone. Apple's smartphone could pose a particular challenge to Nadella's plan to situate Windows as the premier smartphone OS for productivity. Apple devices are already popular in the enterprise, could enjoy revitalized consumer growth when rumored phablet models arrive this year, and now have the backing of IBM's enterprise software and salesforce.

2. Will Microsoft's hybrid cloud synergies continue to click?
Nadella's cloud-focused strategy looked particularly promising after this week's earnings report; Microsoft said commercial cloud revenue was up 147% year-over-year and is on pace for a full-year total of more than $4.4 billion. Moreover, execs said the cloud momentum -- which includes products such as Office 365, Azure, Exchange Online, SharePoint Online, Dynamics CRM, Lync Online, and Intune -- isn't cannibalizing its on-premises products.

"We don't see it as a zero-sum," Nadella said this week.

Indeed, Microsoft also reported server products were up 14% from the same quarter last year. The implication is that hybrid cloud flexibility is helping customers to find the right balance

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Michael Endler joined InformationWeek as an associate editor in 2012. He previously worked in talent representation in the entertainment industry, as a freelance copywriter and photojournalist, and as a teacher. Michael earned a BA in English from Stanford University in 2005 ... View Full Bio

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Susan Fourtané
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Susan Fourtané,
User Rank: Ninja
8/16/2014 | 12:08:46 PM
Re: Nokia
You're welcome, Waqas. :) No, Nokia is not a part of Microsoft, or anything like that. 

-Susan
WaqasAltaf
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WaqasAltaf,
User Rank: Ninja
8/16/2014 | 11:00:10 AM
Re: Nokia
Susan

Thanks for clarifying again :) People are now becoming used to the idea that Nokia is a subsidiary or a part of Microsoft. 
Susan Fourtané
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Susan Fourtané,
User Rank: Ninja
8/1/2014 | 8:52:46 AM
Re: Nokia
Waqas, 

Oh, big mistake. :) There is still a healthy Nokia doing well with its three businesses. It seems like many people are confused about this. 

-Susan
Susan Fourtané
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Susan Fourtané,
User Rank: Ninja
7/31/2014 | 11:44:42 AM
Re: Nokia
You're welcome, Stacey. 

-Susan
StaceyE
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StaceyE,
User Rank: Apprentice
7/31/2014 | 11:24:26 AM
Re: Nokia
Thanks for the link and clarification Susan!
nasimson
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nasimson,
User Rank: Ninja
7/28/2014 | 2:15:49 AM
Devices as minimum
Now that Microsoft is dumping Nokia and opening up its products on other platforms, it should have minimalist device strategy. As few devices as possible. Just like Google. Meanwhile it should improve Windows experience on mobile and woo the challenger smart phone /tablet manufacturers like Lenovo, Acer, Huawei, Asus to adopt Windows on their hardware.
moarsauce123
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moarsauce123,
User Rank: Ninja
7/27/2014 | 7:02:00 AM
Re: Productivity is key
On a good track with Office and Lync? Uisng 2013 flavor (forced to) and it still sports productivity killer #1: the ribbon. Plus, the color schemes and visual cues are so antiproductivity that I still have a hard time figuring out in which Outlook folder are unread emails. On top of that, every Office app is dragging so much stuff around with it that they are slow, bulky, and cumbersome to use. So for real productivity work I switch to LibreOffce.
Technocrati
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Technocrati,
User Rank: Ninja
7/26/2014 | 11:44:10 PM
Windows 7: Just Admit It
I don't see MS loosing their dominance anytime soon in the enterprise. But they do have many issues to deal with, chiefly among them is this OS evolution that they seem to be going through.

Windows 8 probably will not be adopted in the enterprise, so I am waiting to hear MS admit that Windows 7 will stay their base platform.
Nemos
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Nemos,
User Rank: Apprentice
7/26/2014 | 5:33:47 PM
Microsoft
We have until today one very "good" decision from the new leader of Microsoft and one negative (in my point of view). The time will come we will see the common windows platform in all devices , that it was something that was missing and will give a great argument against competitors. From the other hand the 18.000 layoffs is something that we should not see happen especially from companies like Microsoft.
Stratustician
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Stratustician,
User Rank: Ninja
7/26/2014 | 11:32:22 AM
Productivity is key
Microsoft is definitely on the right track in some areas; Lync and Office for sure, but it's also about the ability to tie in cloud productivity so that users can not just communicate, especially in the work environment, but also properly collaborate.  I've seen some great cases of how organizations are leveraging these new tools, and there are great advantages.  The problem is they need to still compete with the fragmented device environment that is split between iOS, Android and Microsoft usage.
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