Microsoft is seeing record growth, but it wasn’t always the best kid in class.
Microsoft has been struggling to reinvent itself over the years, with the strongest dip of quarterly growth in 2009 with -17,29% during the economic fallout and four consecutive quarters of negative growth at the end of 2015 into 2016. The skies were turning dark above Microsoft as the PC market was shrinking, a failed mobile strategy and XBOX losing to Sony. Today, it is flourishing once again with its bet on cloud computing and its Azure platform. But how did it get from struggling behemoth to cloud innovator?
The Balmer era and the fight for entertainment
Old college friend Steve Balmer was appointed CEO in 2000, the first CEO that would take over the lead after founder Bill Gates. Steve Balmer inherited a company which was caught up in a negative PR whirlwind with most notably a case filed by the United States, yes you hear it right, the whole of the United States against Microsoft for its monopoly position in the PC-market. You know you’re in a big mess when you have a whole country against you.
In 2004 Microsoft found itself in a similar position, but not in the US, but in the EU, where it was fined a whopping $613 million for the monopoly position it had created around its Windows products. The main concern was the dominance of Microsoft Media player, which was bundled with the Windows operating system, and not including competitors such as Quicktime and Real Network. You don’t have to be a rocket scientist to know that consumers will go for the default option and back then the battle for home entertainment was in full swing. Now it’s hard to believe that such a huge battle was fought over matters such as windows media player, when today we see the power of the smartphone and its presence in everyday life.
But three years earlier, before the record fine came knocking on the doorstep of Microsoft, they wanted to conquer the living room with the Xbox, a rival for Playstation. The first generation Xbox launched in 2001 and according to Venture Beat, “it turned out to be successful beyond Microsoft’s wildest expectations”, despite losing a hefty $4 billion during the lifecycle of the first Xbox. One might wonder why the Xbox saw the light of day in the first place at the cradle of modern day home computers and enterprise software?
The answer is pretty simple. Sony was aiming for home entertainment with the Playstation 2, the market that Microsoft was willing to monopolize. Microsoft got afraid of Sony, because the tech giant wasn’t planning on using Microsoft’s programming architecture. Sony would go about it themselves. Gates had to come up with a cunning plan to beat Sony to it. So it came up with the Xbox. Gates was willing to go hard or go home with his console. In June 2002, Microsoft had sold 3.5 million units. But Microsoft was working on a feature that would for many years perhaps be the killer app for Microsoft. While not being ready at launch, one of the major appeals of the Xbox back in the day were the online gaming options and in 2002 Microsoft launched Xbox Live. The company pledged an investment of $2 billion into the online service which had to create a unique selling point none of its competitors could match.
Not only did it revolutionize how games would be played online, it extended the lifetime of games with Venture Beat saying, ‘Eventually, games like Halo 2, Halo 3, Call of Duty Modern Warfare and other giant games came to depend on Xbox Live to hold on to gamers for months at a time.’ Microsoft was aware that online services would be a major aspect of daily life, morphing into a community experience and they wanted to be part of this changing online landscape. Something we experience today through eSports, Discord communities and Twitch streamers.
Missing the Smartphone train
One of the most defining moments in Microsoft’s recent history is the mobile move it made where it lost billions of dollars and wasn’t able to get a footing in the then growing market. This period was still marked by the need of Microsoft to get into the hardware business. Selling phones with their operating system. In 2013 Microsoft bought Nokia’s mobile division for $7.2 billion.
A shy two years later in 2015 Microsoft wrote off $7.6 billion of Nokia, or in technical terms, an impairment charge, meaning the company has lost more value than its worth. If I would make it metaphorically it would be buying a house that has a depreciation rate due to unforeseen circumstances. You might wonder why Microsoft wasn’t able to kick start its mobile operating system together with Nokia’s hardware.
Obviously the purchase in 2013, wasn’t without struggle and the necessary scepticism. Despite the success of the Lumia devices, which sold 7.4 million units, it wasn’t ’t enough to topple the giants Samsung and Apple, shipping a combined total of a 100 million units. The issue could be laid primarily at the software side, because while hardware is nice, when the most popular apps aren’t released on the platform, it’s just a metal package with transistors and a screen slapped onto it. Or in the words of former Nokia’s vice president Bryan Biniak who spoke with the International Business Times, “To give you a reason to switch, I need to make sure the apps that you care about on your device are not only on our phones, but are better. I also need to provide you unique experiences that you can’t get on your other devices.” Further elaborating with, “We are releasing new devices frequently and for every new device, if there is an app that somebody cares about that’s not there that’s a missed opportunity of a sale.”
At the heart of successful hardware is good software and Nokia, or Windows mobile, just wasn’t getting any of that. For developers It’s therefore an easy choice. Develop for a platform which has minor reach or go for the masses with a lively ecosystem that can be easily tapped into? I think you know the answer. Nokia and Microsoft just couldn’t catch up. Android and iOs were going full steam ahead with all the new software that companies and individuals were pumping into the platform years before. The train was in motion and Nokia was just figuring out how to get it’s engine started. And just four years after its acquisition of the mobile division, Microsoft confirmed in 2017 it would no longer develop features or hardware for the Windows mobile platform. It was the end for a mismanaged project.
Nadella reimaging Microsoft
After the Balmer chapter, Satya Nadella was appointed the new CEO of Microsoft in 2014. In his first interview Nadella said he believes in impact, empowering employees to be a driving force of change and enabling people to innovate. Bill Gates said that Satya would have the right background to move Microsoft into a new era. An era of mobile computing and cloud solutions. He kept emphasizing that the cloud would become a growth opportunity for the company. With the combined architecture knowledge, Satya would be able to connect the different platforms to meet demands of the customers.
In his first interview Satya pointed out that the world was becoming more software driven and envisioning ‘a mobile first, cloud first world’. A very important statement and in line with the vision Bill Gates had for Microsoft when he appointed Satya. During the founding years, the company was betting hard on hardware, with its first desktops, mobile phones and the Xbox game console. But times were changing rapidly and a new sun was rising above Microsoft, as the desktop market was shrinking, its mobile phone business failed and the Xbox was facing tough competition from Sony still today.
Talking to Bloomberg in 2017 Satya talked about integrating Microsoft with partners instead of going it their own way like they’ve done in the past, saying ‘customers are heterogeneous, they use some of what we do and some of what you do.’ Satya breaks with tradition admitting that consumers flow across products and platforms to meet their needs, gravitating to reliable products.
Satya was also a key-figure in the acquisition of LinkedIn, which seems a far stretch from its core competencies, but the addition of the service to the portfolio fits into the cloud narrative that Microsoft set out for itself 3 years prior. Through its 365 office solutions it enables professionals to do their work and with LinkedIn they will be able to connect all these professionals. It can enrich its products with data from the network and be a strong BtoB sales channel. Without making it sound like a fluff piece about Satya Nadella, it’s an important transition that Microsoft has made and adjusting it to new consumer demands.
In line with its transition to software, on June 26, 2020 Microsoft announced it would close its retail stores and keep 4 of them as experience centers. In their press release they said, “Microsoft will continue to invest in its digital storefronts on Microsoft.com, and stores in Xbox and Windows, reaching more than 1.2 billion people every month in 190 markets.” which further emphasizes the push to a digital only company, where software is at the core of the company.
Azure growth spurt
One of key drivers for Microsoft’s revenue growth is its cloud solution Azure. In the last three months of 2019, Azure saw its revenue grow by 62%. The cloud division where Azure falls into generated $11.9 billion in revenue in the last quarter. This is almost 30% of the total revenue generated by Microsoft in that same period, where it accumulated $36.9 billion in revenue. But it wasn’t all Satya Nadella’s doing. Microsoft already started speculating on what they call ‘live services’ in 2005 and three years later it came with Windows Azure. A platform on which Microsoft services were being developed.
It’s also very tempting to see Azure as something that spawned out of thin air, but it’s already been 15 years ago at time of writing that the cloud service was conceptualized and 12 years when it was the light of day. So a lot went down before the 30% revenue mark was reached. When Chief Technology Officer, Ray Ozzie announced Windows Azure in 2008 during the Microsoft Professional Developers Conference, it got a lot of attention from the press such as the New York Times, Wired, ZDNET and CIO, the latter two being closest to the target audience that Microsoft was aiming for.
During an interview at the Developers Conference, Ozzie said they gave ‘concrete deliverables around what we’ve been about for a few few years under the name software plus services.” The vision was there and now Microsoft had given the tools to customers to move to cloud environments. Ozzie and his team back then were on the right track as they’ve already seen that consumer demands were changing. Or in his own words, “we believe that it’s a multi-screen future.“ And along with it belonged a platform which would empower developers to build for this multiscreen future.
That Mircosft was already speculating about this type of multimedia future is no surprise. It was a year after the release of the first iPhone, which was selling like hot cakes. The iPhone 3G, the successor to the first iPhone, sold 6.9 million units during its first quarter, smashing the sales of the first generation who needed 5 quarters to reach the 6.1 million mark.
Streaming services were also entering the stage. Netflix announced it would launch its streaming product in 2007 and Hulu got out its beta phase and became available to the public in the United States in 2008. Hulu CEO Jason Kilar said, “Today, Hulu is crossing a milestone in its mission to help people find and enjoy the world’s premium content, when, where and how they want it.” The landscape around Microsoft was rapidly changing into a digital services on-demand environment. The traditional desktop PC would soon become obsolete as an entertainment hub.
But did Nadella really reinvent Microsoft?
That’s a very difficult question to ask, because a lot of the organizational restructuring happened before the Nadella Era, if you can already speak of it so early on. We’ve talked about all the ups and downs of the products and the brand, but we can see that a lot has been established during the Balmer era and groundworks were laid for the company to undergo rigorous changes.
Microsoft underwent some serious downsizing before and during Nadella’s appointment as CEO. Nadella announced in July 2014 that 18,000 employees would lose their jobs and in 2015 another round of job-cuts were planned, adding another 7,800 employees to the job cuts. In 2016 another 1,850 jobs would be cut in the smartphone division.
While these numbers are very depressing as standalone numbers. The workforce at Microsoft was growing rapidly and in places where it shouldn’t be, like the smartphone hardware business which we’ve learned was struggling to say the least. A rapid growth happened when Nokia was acquired and the workforce expanded from 99,000 to a whopping 128,000 in a short time frame. But we saw that the strategy was shifting and Nadella had a different vision for Microsoft which required a radical change. The different lay-offs made the company shrink to 118,000 in 2015 and 114,000 in 2016, but the workforce is bigger than ever. Microsoft had 144,000 employees in 2019, just a decade earlier the workforce was 93,000.
Hence not everything can be attributed to Nadella, but he made due with the past and shrunk business units that weren’t aligning with the vision of the company, investing where the consumers were. And it wouldn’t be an Everyday Online Marketing article if it wasn’t to point out the connection with marketing and strategy. Strategy is nothing when you put your money where your mouth is and growth isn’t realized on its own.
As a marketer or business leader, you have to know where the customer is going. That can be on a macro level like Microsoft experienced with changing consumer behaviour, which would result in businesses having different needs. To enable them to create software that would fit this new future, it became a hub for software development. Azure had become the go to platform. Microsoft also saw it wouldn’t in the smartphone business even if they had the resources to do so. It was not their strength. Their software connectivity was their unique selling point, going back to where the story started.