How Microsoft got its mojo back

UPDATE: The 40-year old tech giant's share price just hit an all-time high. Last year MT paid it a visit to see how Satya Nadella was turning things around.

by Jack Torrance
Last Updated: 21 Oct 2016
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Future Business

Microsoft’s share reached a record high last night for the first time in...wait for it...17 years. That’s right – despite the technology industry’s rapid ascent over the last decade, only now do investors regard the tech giant to be more valuable than it was at the time of the dotcom crash. It’s a massive feather in the cap of its CEO Satya Nadella, who was given the task of turning its fortunes around after a disastrous few years with Steve Ballmer at the helm.

The company’s overall revenue in the three months to September ticked up by an unremarkable 2.8% to $22.3bn (£18.2bn), held back by a decline in personal computing, its largest division. A dramatic 72% drop in revenues in its smartphone business didn’t help in that regard.

But what’s got investors especially excited is Microsoft’s rapidly growing cloud services division. Revenue from its Azure business cloud platform soared by 121% on a constant curreny basis. It might not as glamorous as Apple’s iPhone 7 or Google's robotic Home assistant, but the B2B market is clearly lucrative. Earnings per share hit 76 cents, well above investor expectations.

Last year MT paid a visit to Microsoft’s HQ in Redmond, Washington. This feature, first published in July 2015, gives an insight into the changes Nadella has made since taking over the year before. 

MT’s recent visit to Microsoft’s headquarters in Redmond, Washington, didn’t begin smoothly. Just minutes into the first of a series of talks by executives and engineers, the tour had already run into technical difficulties. Despite the efforts of more than one techie, Microsoft couldn’t get the audio to play on a video running through its own programme, Windows Media Player.

The painful awkwardness of that moment pales in comparison to the problems Microsoft has come up against in the last few years, though. Once renowned as being at the cutting edge of tech, the giant’s throne has been well and truly torn apart by the likes of Apple and Google, whose innovations in product design and software have been the definitive consumer tech developments of the last 10 years.

Microsoft owes its toppling to a series of mistakes that occurred both under founder Bill Gates and his anointed heir Steve Ballmer. That includes a failure to make the most of the web, neglecting the importance of cool hardware, the much-maligned Windows 8 and not getting into mobile quickly enough. When it did decide to go big on smartphones, with the acquisition of Nokia in 2013, it was too far behind Apple’s iPhone and Google’s Android to stand any chance of taking a big bite of the market – leading to the apocalyptic job losses we saw last year and earlier this month.

But there are definite signs of life. Speaking to people in Redmond, there was a real sense that Satya Nadella, who took over as CEO last February, represents a major break from the past. Our tour group didn't get to meet the man himself, but the Indian-born exec's presence is felt everywhere on the campus - from the language people were using to the types of services they were keen to wheel out for us to look at.

Microsoft occupies a massive sprawl of offices in Redmond, Washington

'Satya has been really clear from the day he became CEO that we have this worldview, that says we are all living in the mobile-first and cloud-first world, and that we have to be inspired to drive in that world,' says Frank X. Shaw, Microsoft's corporate vice president for communications.

Though Microsoft's recent financial perfomance has been shaky (partly thanks to writedowns on its phones business), its share price is still well up on where it was when Ballmer resigned in 2013 and in November it hit its highest point since the turn of the millennium. Investors seem to have faith in Nadella's way of doing things.

Nadella's tenure hasn't been fault-free though. His comments on women's wages last October, when he implied it was bad karma to ask for a pay rise, didn't go down especially well, and his corporate jargon-laden language when announcing job cuts has rubbed some people the wrong way too.

He has also got a lot of challenges on the horizon. PC use is on the slide as people turn to smartphones and tablets and Microsoft faces competition on several fronts. Thanks to Apple and Google, users have more choice when it comes to operating systems nowadays - especially on mobile and tablets. Microsoft Office, the jewel in Bill Gates’ crown, is being challenged by Apache Open Office, Libre Office and Google Docs. Microsoft is also going up against the likes of Amazon and Facebook in the battle for the web. In the Far East Alibaba plans to invest $1bn (£640m) in cloud computing over the next few years and there are no doubt more Asian upstarts loking to join the fray.

The battle to come out on top places pressure on those working for tech giants to come up with the ‘next big thing’. Someone who must feel that particularly acutely is Peter Lee, the former university professor who heads up Microsoft Research, which he describes as 'a very big and very small place'. Small because it's home to just 1% of the company's staff, but big because it's been involved to some extent with almost every product Microsoft has launched.

‘The best tech companies right now are hiring a hell of a lot of PhDs,’ he tells MT. ‘And the tech CEOs at these companies are putting a lot of pressure on their innovation partners.’ Jeff Bezos, for instance, reportedly spent a full month at Amazon’s research unit, Lab126, in the runup to the launch of its ultimately disappointing Fire Phone. ‘I wake up with sweats imagining our CEO spending a month with us,’ says Lee. ‘Not that we don't love him, we do, but talk about meddling in disruption in a research lab!’

Google X’s dogged determination to release Google Glass, which had been put on hold but is reportedly being quietly reintroduced in the workplace, is a similar example. ‘Google X is just innovating so well but hell they have to ship something – anything. Because otherwise the pressure is just going to keep ratcheting up on them,’ says Lee.

He acknowledges that he faces much the same pressures from Nadella, but says that Microsoft has got an edge when it comes to future developments. ‘When I think about what our unfair advantage is in front of all the other labs that I talked about, it is our sheer scale and diversity,’ he says. ‘We can afford to place several different bets, take several different management philosophies and plant a lot of different seeds.

‘I would say in Microsoft research we have never been better resourced, we have never had more freedom to just deliver great things. We have always dreamed of being in the situation we are in right now. But it’s also scary, because we are being expected to deliver the next big thing.’

Early reviews of Microsoft's HoloLens have been positive

Gamechangers have proven elusive for Microsoft in recent years but there are real glimmers of hope. Early reviews of HoloLens, its augmented reality headset, have proven very positive – and it looks a lot less dorky than Google Glass. Windows 10, Microsoft’s final version of its operating system (continuous updates will be offered for free) has been well received so far and Skype Translator, which allows speakers of two different languages to have fairly rapid conversations, looks impressive.

Of course all of these have their roots in the pre-Satya era, but Nadella has been credited with generally changing the direction of the company to make it fit to compete. 'When Satya came in as CEO that's really one of the things that he started to address right away,' says Shaw. 'He said that we needed a culture that changed, that allowed for more speed, more risk-taking and more openness to the world.'

That openness will likely come to be a hallmark of Nadella's reign. Weeks after taking the helm he announced that Microsoft Office would be made available for iPads and Android tablets for free, a stark contrast to the days when Microsoft's big focus was on getting people to use Windows – and to pay for Office.

'We feel that we’re going to be in the device business but we’re only going to be able to service a percentage of devices,' says Susan Hauser, corporate vice president of Microsoft's enterprise and partner group. 'Customers should choose the best device but you should be able to run those services whether you’re using an iPhone or a beautiful Windows phone or some other device.'

That's not to say Microsoft has gone soft though. At its Cybercrime Center, a glass and steel complex straight out of an espionage film, investigators scour reams of data for signs of counterfeiting (as well as working on malware and child protection issues).

Investigators at Microsoft's atmospheric Cybercrime Center

Microsoft has also been trying to bolster what it can provide business customers, a core component of its revenues that is under threat from new best buds Apple and IBM. Back in Blighty, MT went along to 'The Pitch', an event held by Microsoft Ventures. The venue, a trendy but cramped nightclub in North London, is a far cry from the sprawling office parks Microsoft inhabits in Washington.

Microsoft's start-up arm supports entrepreneurs in bringing their ideas to market. It's not enjoyed the same attention of its equivalent at Google, which invested in $258m in Uber back in 2013, but it does serve a couple of useful purposes for its parent company. As well as giving the big corporate an insight into the way new businesses work and the technology they are developing, it's also useful piece of PR.

'Start-ups are small businesses – they’re hip and cool but they're still small companies,' Microsoft's UK CEO Michel van de Bel tells MT. 'So I think if you look at the role they can play in showing small businesses in the UK how to adopt new technology and do things faster, more efficiently and more productively, it's clearly a big interest of ours.'

Back in Redmond there's plenty of enterprise technology on display - from customer tracking systems for shops to a new interactive whiteboard, the Surface Hub, that's designed to let workers in distant meeting rooms collaborate with each other more easily. Focusing on useful but pretty dull business products like these might present the best growth opportunities for Microsoft but that does risk leaving it an uninspiring, if successful, business in the mould of IBM, Oracle and HP.

If Nadella wants to make Microsoft the biggest tech brand in the world again he will also need to empower the likes of Peter Lee to come up with groundbreaking ideas that get consumers excited. Microsoft will never have the same coolness that Apple and Google enjoy, but with Nadella at the helm it is at least beginning to look a little more like a Silicon Valley disruptor, and less like a dull, grey dinosaur.

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