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Rebooting Microsoft

Rebooting Microsoft

Will CEO Satya Nadella's game plan work?

Tall, wiry with a runner's physique, a clean-shaven pate and a ready smile, Satya Nadella leans forward and listens intently to the question before thinking for a bit and framing the answer. We have just asked him a leadership question.

"When I evaluate leaders, I talk about three attributes. And it is the same set of attributes I have got to hold myself accountable for," he says.

"One, every leader has to bring clarity in what is an uncertain and ambiguous context. You cannot wait for all the information to come in before you take a decision. The second piece is - are you able to galvanise and create energy? And then of course, finally, you have got to drive success. You cannot say, hey, I got everything right except I was not able to drive success."

Nadella scores high in all three areas. As the Chief Executive Officer, he has brought a certain clarity to Microsoft's strategy, unleashed enormous energy in the Microsoft troops and finally, achieved success - if you look at the steep rise in Microsoft's market valuation since he joined.

When Nadella took charge in early 2014, Microsoft seemed to have lost the strategy plot completely. It was still enormously profitable and successful, but was faltering on all new initiatives.

In 2013, under then CEO Steve Ballmer, the company's profits stood at $21.86 billion on revenues of $77.85 billion. It was sitting on a cash pile of $77 billion, primarily because of its Windows and Office businesses, which gave it a lock on the desktop market. On the other hand, PC sales started slipping while smartphones and other mobile devices took off. In fact, global PC shipments fell to 315 million in that year, a drop of 9.8 per cent, according to IDC, while mobile shipments hit a record one billion devices. At the time, Microsoft seemed unable to keep pace with the younger technology companies and became a marginal player in the mobile space.

In the final years of Ballmer's stewardship, the company seemed to stumble from one new product disaster to another, missing all technology shifts and made missteps galore. Zune, Microsoft's late response to Apple's iPod, was derided by critics and sank without a trace. The company also missed the search revolution and tried to get into it long after Google had walked away with the bulk of the market. Even Windows 8, the most ambitious remake of the operating system (OS) after the shift from DOS to Windows, was largely panned by customers and experts alike.

In the mobile space, the Windows Mobile software (it worked with a stylus) reached its peak popularity in 2007 and took an early lead in the smartphone market. But when Apple came out with its touch phone, Windows Mobile struggled. By 2010, Microsoft stopped developing Windows Mobile and launched a new OS called Windows Phone that would be adopted by Nokia's new handsets. Ballmer also plunked down $7.2 billion in 2013 to pick up Nokia and started making the hardware. But by then, Microsoft had lost the mobile game to Android and iOS.

Even in the enterprise market, it was still pushing standalone software and taking baby steps into the cloud while Amazon Web Services (AWS) built up a huge and profitable business. Understandably, the buzz in the technology space was around Google, Apple, Facebook and Amazon - and most people thought Microsoft, in spite of its enormous profits and revenues, was facing an existential crisis. It had a glorious past, but an uncertain future

The Turnaround

Since he took over, Nadella has scripted an amazing turnaround both in the company's fortunes and its narrative in the market. He loves talking about the company's culture and his efforts to change it, and his first move was to articulate a new strategic direction and bring some much-needed clarity regarding the future: Microsoft would be a mobile-first, cloud-first company.

Under Nadella, Microsoft has built an enormous cloud business. He has engineered deals that have seen the company rapidly increasing its presence across mobile devices. Most important, the tech analysts are once again taking stock of Microsoft and closely following its moves. Further, Microsoft's stock price has hit an all-time high of $78.81 from $36.5 in January 2014, and its market cap of $601 billion is only behind Apple ($805 billion) and Google parent Alphabet ($687 billion).

In many ways, "mobile first, cloud first" was a profoundly different path for Microsoft to follow. Until the first decade of this century, it was essentially a desktop company, pushing desktops and enterprise software. It came up with successful products in the consumer space - think Xbox (launched in the Ballmer era) - but its bread, butter and jam came from the software programmes it sold to organisations. Moreover, in those days, Microsoft was firmly wedded to Windows OS and considered Linux, Android and iOS as its enemies.

To give Ballmer credit where it is due, he had recognised the need to change Microsoft. It was under him that the company had embarked on its cloud journey and in 2011 he put Nadella in charge of enterprises and tools businesses that included the Azure cloud platform and services (before that, Nadella also headed the search engine, Bing).

"Nadella had a deep understanding of what Azure means to Microsoft. His strength lies in connecting the dots between multiple layers of the technology stack - business applications, web services, infrastructure and endpoint computing - to yield what I like to call all roads lead to Azure," says Manjunath Bhat, Research Director at research and advisory firm Gartner. Still, when Ballmer stepped down in 2014, Microsoft was way behind Amazon's enormously profitable AWS.

Ballmer also realised that Microsoft had no presence in the mobile devices market. He went ahead with a bold bet to build its mobile OS under the brand Windows Phone, wrote a massive cheque to pick up Nokia's devices and services business and wooed Stephen Elop back to the mobile business.

"Steve made the big statement that they were all in and started the investment cycle for the cloud. Satya brought the teams together to enable the cloud and spent time undoing many of the acquisitions in mobile and other areas not core to the platform and the ecosystem business of Microsoft," points out Ray Wang, Principal Analyst, Founder and Chairman of Constellation Research, a Silicon Valley-based analyst firm.

Eric Horvitz, Managing Director, Microsoft Research

Nadella started pushing for Microsoft to put cloud at the heart of the company's business even before he became the CEO. He had already realised that the company's intention to protect the profitable enterprise servers was strangling the cloud business. Since then, Microsoft has spent billions of dollars and now boasts 100-plus data centres across geographies, including three in India (Mumbai, Pune and Chennai). These data centres ensure that services like the Azure cloud platform and Office 365 are available on tap, with enough built-in redundancies to handle any surge in requirement.

Initially, it was not an easy sell to customers. Rajesh Jha, Executive Vice President of the Office Products Group at Microsoft, recalls that it was difficult for both the organisation and its customers to transition. In the early days, Office 365 was not as reliable as it is now and that did create problems. Jha says he had to field calls from irate CEOs every time Office 365 was down even for a short while. When the software was widely rolled out and became more ubiquitous, a lot of engineering needed to be done to make sure it was fail-safe. Now, the focus is on integrating artificial intelligence (AI) to make the programme more intelligent and intuitive.

Equally important is the fact that Nadella, who believes Microsoft has plenty of rivals and competitors but no enemies per se, has pushed to engineer deals and make its products available across rival platforms. So, Windows is now playing more of a supporting role. It still lies at the heart of almost everything Microsoft does, but it is no longer THE thing Microsoft is pushing to all its customers. For years, Windows was a stumbling block because Microsoft did not want to launch or push any product that would, in any way, harm Windows sales. But now, despite the ambitious Windows 10 launch, the company is no longer pushing it. It has adopted the novel strategy of upgrading existing users of earlier Windows versions to Windows 10 for free to gain traction.

Other Microsoft products are also available across platforms. As a result, the Office software (featuring Word, OneNote, Excel and PowerPoint) is available across operating systems such as Android and iOS. He has even ensured that Linux is supported on Azure. (Just to give you an idea how big this change is, let us look back. Ballmer once called Linux a 'cancer', and until Nadella took over, Office was not available on either Apple or Android mobile devices because Ballmer wanted to keep them for Windows Mobile devices only). Recently, Microsoft has struck a deal with Amazon that sees the two personal assistants - Alexa of Amazon and Cortana of Microsoft - work seamlessly with each other.

Nadella says he has restated Microsoft's mission. Under Bill Gates and Ballmer, the Microsoft mission was to put a PC on every desk and in every home. By 2010, much of that was achieved, and Microsoft had more or less completed its mission. The new mission is broader in scope without losing its focus. Microsoft is now a "productivity and platform company for the mobile-first, cloud-first world. We will reinvent productivity to empower every person and every organisation to do more and achieve more," says Nadella. Google and Facebook were possible, he points out, only because there was a PC on every desk at that time.

KATHLEEN HOGAN, Chief People Officer, Microsoft

The new mission statement allows Nadella to cut a wide swath in the technology business. It is evident in his bets on the cloud, AI and Mixed Reality or MR (more about that later), and his two big but somewhat surprising acquisitions. The first big acquisition under Nadella is the Swedish video game developer Mojang AB, which has created the insanely popular game Minecraft, for which Microsoft paid $2.5 billion in 2014.

Many people within Microsoft found the deal surprising. Analysts later tried to rationalise it as the company's efforts to make the Xbox business even stronger. But for Nadella, the Minecraft acquisition was crucial as it is the best way to get future consumers involved with Microsoft. "It is the best way to introduce girls to computer science," he points out.

Another case in point is the audacious acquisition of LinkedIn for $26.2 billion, the biggest cheque that Microsoft has written so far to own a company. "The LinkedIn strategy was brilliant. They took a page out of's strategy by grabbing the second most valuable social network. It was a way to get data as a service and profiles of white-collar workers and move them into the HR space. LinkedIn's network effect gives Microsoft an inherent advantage in the AI and insights space," says Wang of Constellation. Bhat of Gartner also thinks it is a great strategic move. "It gives Microsoft a say in driving conversations and capitalising on them beyond the 'four walls of an enterprise'. The implications can be huge for its business apps."

Microsoft has started producing devices that critics rave about, including the Surface Book, a tablet-cum-laptop with detachable body parts, the Surface Studio, a desktop/tablet for designers, and the HoloLens, a mixed-reality headset.

As for the earlier products, Nadella has not shied away from taking hard decisions. One of those was to pull the plug on Windows Phone and write off the entire investment on the Nokia acquisition.

Changing Culture

People often comment on how different Ballmer and Nadella are and how their personalities might have affected Microsoft. Ballmer was famously extroverted, a hard-charging marketer who promoted a competitive, win-at-all-costs culture. Nadella presents a gentler, more thoughtful mien. Nadella might be quieter, but he is also focussed on goals and winning. After all, he has worked with Microsoft for decades and risen through the ranks, thriving in the old culture under Gates and Ballmer. The difference is that he seeks to emphasise on teamwork as the means to winning rather than individual success. That plays a big role in the cultural transformation he is leading at Microsoft.

"Nadella not just believes that culture eats strategy but has brought together people and teams to work closer together. The collaborative change is seen in that Microsoft no longer sees itself as a Windows-only company but delivers apps and services on whichever platform a user chooses to use. There is a Copernican shift under way from treating the OS as a platform to using apps and cloud services as the new platform," says Bhat.

While most leaders are great communicators, Nadella is also a thoughtful listener. He listens with genuine interest to understand other points of view, and that has often enabled him to carry people with dissenting opinions along with him. It was quite different from the old culture where people listened only to be able to jump in with counterarguments.

Kathleen Hogan, Chief People Officer at Microsoft, points out that in the series of employee roundtables they did, several things came out clearly. There was a lot about the old culture - of adopting big bold ambitions and the spirit of giving, for instance - that people were very proud of and did not want to change. "But when we looked at the pace of change and what was going to be required, we knew that we needed to evolve, and ultimately, we decided to ground our culture in the concept of a growth mindset," she says.

So, what is new about this growth mindset? Was not Ballmer focussed on growth as well? Yes, but there were differences, point out Microsoft insiders. The super competitive attitude of Ballmer had rubbed itself on the entire organisation, and Microsoft was full of smart people who were focussed on individual performance and winning. In meetings, people competed to be the smartest person in the room, but that did not lead to great teamwork. Very often, departments worked in silos and fiercely competed with each other.

For Nadella, the growth mindset envisaged feeding off each other's best ideas and building on them. The CEO puts it as moving from a "know-it-all culture" to a "learn-it-all culture". To promote it, the company is now organising hackathons where engineers come up with new ideas and solutions, which are then integrated with existing products.

The first hackathon under Nadella saw people work on technologies to help Steve Gleeson, the former NFL great who suffers from amyotrophic lateral sclerosis or ALS (a nervous system disease), lead a more independent life. These included voice command and eye-tracking software. Now the technologies are finding a way into Microsoft products. Frank Shaw, Corporate Vice President at Microsoft, puts it this way: Nadella has essentially supported the employees' desire to make great products and blown away all obstacles.

The Future

Nadella has been at the helm for just three years, and it is easy to get carried away by the successes of the day, especially the growth of the cloud business. But has Microsoft got its mojo back? Nadella says he is betting on three big technology trends - AI, MR and Quantum Computing.

Microsoft has been running an AI research programme for more than a couple of decades and it is easy to overlook its contributions. Part of the reason, says Eric Horvitz, Managing Director, Microsoft Research, is that while the researchers developed many cool applications, most of them did not get much attention when Windows and Office were doing spectacularly well. Some of them got integrated into products, like grammar in Word, but they did not get much attention. "I think when a company is doing great, research might be viewed erroneously - like look, that is very interesting, but we are busy, and we are doing well," he says. Today, with AI in the spotlight because of Google and IBM, Microsoft's AI labs are getting prominence.

Another big bet is Mixed Reality where a person wearing the headset can be in a virtual world without losing touch with reality. MR is a different experience from virtual reality, where one is purely immersed in a virtual world. Microsoft thinks MR will have far more real-world applications than virtual reality. In one of the low-slung buildings not too far away from the executive offices in Building 34, a team is working day and night on new developments for the HoloLens.

The most far-out bet is Quantum Computing, which is expected to make today's most powerful computers look like primitive implements. Computers today work on the binary system, but Quantum computers will work on cubits, leading to super powerful systems that will also require a whole new computer language. Many of the stumbling blocks in AI could also be solved by Quantum Computing, researchers say. The technology might be far away, but Microsoft is already shipping products that leverage AI and MR.

There is a new division called Microsoft Ventures to invest in promising start-ups working in its interest areas. Executive Vice President Peggy Johnson, whom Nadella had lured away from Qualcomm, is in charge of buying these promising start-ups. It has already invested in 30-plus small firms working in areas such as AI and enterprise productivity.

The future is still not certain. Both IBM and Google have been working on AI for ages, and some of their products get better publicity than Microsoft products do. For instance, a software programme from the Microsoft AI lab can live translate presentations into different languages. Google has recently introduced its Pixel Buds that do a similar thing. But the search giant got more publicity than Microsoft. Ditto for the Microsoft devices that get good reviews from critics but often fall behind Apple in terms of hype and publicity.

Nadella is trying to change all that. How well he succeeds will determine the future of Microsoft.


Published on: Oct 30, 2017, 1:10 PM IST
Posted by: Anneshwa Bagchi, Oct 30, 2017, 1:10 PM IST