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4/28/2014
10:46 AM
Michael Endler
Michael Endler
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Microsoft's Mobile First, Cloud First Strategy, Explained

Microsoft CEO Satya Nadella's plan to juggle Windows, cross-platform services, and the Internet of Things is coming into focus.

Microsoft tools to manage, authenticate, and secure devices, regardless of OS, and for developers to use Azure and Visual Studio, even for non-Windows apps.

In Microsoft's ideal world, more people would buy Surfaces, but even if the rumored Surface Mini is a hit, Windows will never be for tablets what it was for PCs. Nadella knows millions of iOS, OS X, Chrome, and Android users will likely never come back to Windows but still need Microsoft software. The cross-platform opportunity is too big to ignore, even if it strengthens Windows competitors.

Is this cognitive dissonance? Not if Microsoft makes more money from this dual strategy than it would focusing on either one or the other.

Nadella's tenure began auspiciously, but with Windows still an also-ran on mobile devices, challenges remain.
Nadella's tenure began auspiciously, but with Windows still an also-ran on mobile devices, challenges remain.

IoT is a mega-bet, and Microsoft would be foolish to exclude Windows from the party. Even if IoT achieves only a quarter of the most optimistic projections, it will be a profoundly disruptive force, a tide that raises many ships and encompasses everything from wearable devices to smarter city infrastructure. In the PC world, Microsoft made its money by snaring around 90% of the market. In the IoT world, the company could generate a lot more cash with a lot less market share.

The cross-platform opportunity is a mega-bet too -- and that's the point. When the bets are this large, Microsoft can afford for one to lightly infringe on the other. The company's focus is no longer the preservation of sacred cows; it's about synergies.

Microsoft doesn't need to match Apple's smartphone sales to become the next decade's biggest IT player, but it needs a critical mass of users across every sphere -- datacenters, offices, consumers, professionals, wearables, embedded systems, PCs, tablets, phablets, smartphones, you name it.

"This is gold rush time," Nadella said. "And when it comes to that, we have the broadest SaaS solution and the broadest platform solution. That combination of those assets doesn't come often."

Indeed, at the heart of the synergies sits Azure, the cloud platform that supports Microsoft's services, and which benefits from new users wherever they come from. If you're using Skype on a Surface, Office on an iPad, or outlook.com on an Android device, you're feeding Azure all the same.  It certainly doesn't hurt that as Azure grows more reliable and fully featured, it's also become a platform for others to build their own clouds.

Azure services such as Office 365 represent a strategic shift from one-time licenses to subscriptions. During the earnings call, Nadella linked subscriptions to wide-ranging benefits, such as apps and advertising, that create a long-tail revenue effect around each user. He pledged to develop a holistic subscription monetization strategy that ties revenue to usage.

Nadella singled out Office 365 as a gateway to additional services. He and CFO Amy Hood noted that once customers adopt a cloud service, they tend to not only renew the original subscription, but also purchase others. This echoed Nadella's earlier contention that Office will become "the UI for data"; that is, because so many people use Office 365 for spreadsheets and charts, it's a natural home for PowerBI's visualization and analytics tools.

"When you look at the [lifetime value of a customer], we will be better off for many reasons, including financially, when a person moves to the subscriptions," Hood said during the earnings call. She added that the company will succeed only if products become useful every day, a goal she characterized as "far easier in a cloud world than it is on prem."

Former Nokia CEO joined Microsoft in the acquisition-- but what happens next?
Former Nokia CEO joined Microsoft in the acquisition-- but what happens next?

To maximize these synergies, Microsoft must overcome numerous obstacles. Surface sales are still weak, and though Nadella has made a case that Windows should be on mobile devices, he hasn't explained why Microsoft needs to make its own hardware. The just-closed Nokia acquisition presents a similar challenge but on a Sisyphean scale. It ushers 25,000 new employees into Microsoft's ranks, inflating the company's workforce by around a quarter. It also means Microsoft is suddenly in the business of selling forked Android phones, and turning them into a Windows Phone 8.1 feeder system.

It additionally remains to be seen if Windows XP's end-of-life deadline leaves any lasting fallout, if cloud services can overcome persistent privacy concerns, and whether Microsoft can outmaneuver competitors. But based on Nadella's attitude the last few weeks, if Microsoft missteps, it won't be for lack of big, ambitious bets.

What do Uber, Bank of America, and Walgreens have to do with your mobile app strategy? Find out in the new Maximizing Mobility issue of InformationWeek Tech Digest.

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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dlampe328
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dlampe328,
User Rank: Apprentice
5/27/2014 | 4:43:26 PM
I think I get it
I might not be Microsoft's target demo, but I like what I have seen from Nadella. If the CEO’s job is to be the face of the company to The Street, then Ballmer wasn’t hacking it. I never really understood what he was doing other than trying to fix an organization that was attacking itself from within. I don’t think there is much new in Nadella’s strategy but there seems to be more focus and clearer communication. One key positive I see is in looking at the OS as a vehicle to deliver content that generates revenue instead of a source of revenue in itself. MS doesn’t have the same luxury Apple has with their closed ecosystem so they can’t build big profits into the hardware (i.e. Surface or Nokia phone). They can however generate a huge revenue stream through licensing apps like Apple does and they have a similar advantage to Google due to the number of white box vendors ready to sell Windows devices. Add that to a very active developer ecosystem which has already become WAY more open-source friendly and I like what I am hearing. I think Nadella “gets it”.
shakeeb
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shakeeb,
User Rank: Black Belt
4/29/2014 | 7:31:40 PM
Re: I feel sorry for Nadela. Snake bit by Microsoft's greedy past.
@Lorna. I agree with you, companies around the world spend many dollars on Microsoft products and I wonder whether people will be happy about this concept. 
SaneIT
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SaneIT,
User Rank: Ninja
4/29/2014 | 7:34:49 AM
Re: Pet phrases
People may not trust the cloud but look at the direction every other company is going.  Microsoft isn't unique with their push to the cloud they are just a little more transparent about it.  I don't remember hearing much "cloud" talk when Apple pushed Mobile.Me accounts but that was exactly what the push was.  Google doesn't have one application that isn't in the cloud and that's not hurting them.  I think when we say people are afraid of the cloud we are saying that people are used to Microsoft doing business as usual and any change is unsettling.  
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
4/28/2014 | 5:41:38 PM
Re: I feel sorry for Nadela. Snake bit by Microsoft's greedy past.
This is a great bird's-eye view of the complex state of Microsoft. Nadella is doing a good job of creating a new narrative with what he's inherited. And he has Microsoft's deep pockets and no hard deadline in his favor (Microsoft doesn't really do deadlines). But it's becoming clear that the Nokia buy -- and the integration of 25,000 new employees -- is a big old snafu. It's a Ballmer decision that Nadella must figure out. Nokia's assimilation gets even more perplexing as Nadella further explains his vision of cross-platform software, "ubiquitous Windows", and cloud infrastructure and support with Azure. From all he's said, Microsoft future does not involve manufacturing mobile hardware.
Michael Endler
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Michael Endler,
User Rank: Author
4/28/2014 | 4:28:55 PM
Re: Pet phrases
"'Ambient intelligence' is not a phrase that makes me feel warm and fuzzy. Instead, it makes me think about security and privacy."

In addition to my other comment, I should add that even if "ambient intelligence" has a bit of a 1984 vibe, it's not that different from what a lot of other companies are saying. At a high level, Cisco paints basically the same vision for the future, for example, though Cisco has learned to emphasize that the user is in control, that services must be opt-in, and so forth. But even if the messaging is a bit different, the point is-- most huge tech companies are hanging future strategies on some version of this "ambient intelligence" concept. Apple, Google, IBM, and on and on. "Ambient intelligence" is basically the intersection of the Internet of Things, and big data, and few experts believes this basic formula isn't worth trillions. We might not call it "ambient intelligence" in the future, but whether our sense of privacy is ready for it or not, the concept is coming. The question, for Nadella, is whether things like SQL Server, Windows and Excel will be at the center of it.

 

 
Michael Endler
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Michael Endler,
User Rank: Author
4/28/2014 | 4:22:15 PM
Re: Pet phrases
Good point. No doubt, Microsoft will have to tackle privacy concerns. A lot of people don't trust the cloud, and as envisioned by Nadella, the cloud is Microsoft's future.

Cortana will be a sort of test case. It knows as much about you as you care to share. If people find it useful, they'll entrust it with more info, and Microsoft might begin to allay some concerns. If people find it to be mostly a gimmick, they'll use it for fewer things, and Microsoft's reputation for privacy won't necessarily benefit. Cortana alone won't fully address this problem by itself, of course-- but like I said, it's a test case, a sort of litmus test. If average people won't share details with a smartphone assistant, how on earth will they allow sensor-embedded, data-slurping objects to surround them?
Laurianne
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Laurianne,
User Rank: Author
4/28/2014 | 4:11:38 PM
Pet phrases
"Ambient intelligence" is not a phrase that makes me feel warm and fuzzy. Instead, it makes me think about security and privacy.
Michael Endler
IW Pick
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Michael Endler,
User Rank: Author
4/28/2014 | 4:02:51 PM
Re: I feel sorry for Nadela. Snake bit by Microsoft's greedy past.
I'm with Lorna on this one. For at least some segment of customers, Ballmer's Microsoft clearly left a bad taste, both in terms of licensing policies, and his mostly late and ineffectual attempts to cash in on consumers. But I think the anti-Microsoft stuff is getting a bit mythologized. If the company is as allegedly doomed as some people seem to think, its financials are inexplicably sound-- not only because of long-term deals, customer lock-in and accrued wealth, but also because a lot of core assets have performed excellently. And Microsoft didn't force 12 million people to download Office for iPad during its first week. We don't know how many of those have translated into Office 365 subscriptions, but growth so far has been strong, and Microsoft seems satisfied with recent conversion rates.

Yeah, Windows 8.1 doesn't have many passionate defenders, Microsoft's licensing is byzantine, and so on—but it's just as easy to point to Microsoft's unequivocal success as it is Microsoft's most infamous failures. And a lot of people forget that Microsoft is more than Windows and Office. SQL Server hauls in something like $5 million per year, for example, and though I'm sure not everyone is thrilled about Microsoft's cloud-centricism, the company hasn't left the old world in the dark; they emphasize hybrid models as much as anybody because they realize most people need a bridge to cloud services, or will only use them in specific ways.

This isn't any kind of Windows fanboy-ism, just to be clear. Cost being no object, I'd choose an Apple product over a Windows product for most things I do (but cost is of course an object). I've also written more than a few critical words about Windows 8 and the Surface line's mass market appeal. But I think Nadella has handled the cards he was dealt as well as could be expected. He's also been relatively candid about Microsoft's challenges, and he's presented a much clearer vision for leveraging Microsoft's existing user base to launch new products, both for Windows and for other platforms. Nadella didn't build yesterday's Microsoft, and there's plenty of reason to think he'll build a different Microsoft for tomorrow. I think it's telling that so much criticism focuses on what happened before Nadella took over, rather than the numerous announcements Microsoft has made in the last month.

Tom bring up a point with "thinking about users." Apple cracked the UI question first, and has only gradually figured out supporting software and infrastructure. Microsoft has the infrastructure but is still figuring out the user-facing side, at least with Windows. This is one of many reasons that Microsoft isn't out of the woods. But I like said, I think Nadella knows that, and I think Myerson (the new OS boss) does too. I don't think Nadella is Steve Jobs, but he doesn't have to be. Microsoft isn't in nearly as bad a shape as Apple was before Jobs came back.
Lorna Garey
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Lorna Garey,
User Rank: Author
4/28/2014 | 3:32:30 PM
Re: I feel sorry for Nadela. Snake bit by Microsoft's greedy past.
I wouldn't be so quick to count Microsoft out. Millions of people are comfortable with Windows and Office, and the company has the $$ to tweak its OS for use across platforms and play the waiting game. Heck, it has the money to jettison Win8 altogether and try again. I suspect the market will like the story Nadella is telling.
Thomas Claburn
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Thomas Claburn,
User Rank: Author
4/28/2014 | 3:11:21 PM
Who's on first?
Cloud first? What ever happened to customer first?
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