How Microsoft Climbed Out of Its Slump | A Brief History of Things

Since taking over in 2014, Satya Nadella has driven Microsoft into the cloud era, doubling its market value in three years and adding $300 billion.

When Satya Nadella became Microsoft's CEO in early 2014, the company was in deep trouble. Global PC shipments, after decades of steady growth, had peaked and turned down. PCs still shipped by the tens of millions each quarter, but that number looked small beside the hundreds of millions of phones — the favored device of the mobile and cloud eras — shipped in the same three months.

Fewer PCs meant fewer copies of Microsoft's software suites preinstalled on them, and so less licensing revenue. At the same time, as phones rose and PCs fell, Microsoft lost ground in the fight over operating systems: next to Windows, usage of Android and Apple's iOS was climbing fast.

Microsoft tried to catch up in phones and, through them, restore Windows to its old standing. In 2012 Nokia announced that its new smartphones would run Windows, and the strategy seemed about to pay off. In September 2013 Microsoft announced it would buy Nokia. But what looked like two strong players joining forces turned into two weak ones leaning on each other: Windows Phone sold badly, and in the race for operating-system share Microsoft harvested nothing but defeat at the hands of iOS and Android. It proved once more that a market has no use for a third place, and that trying to pass the leaders on the curve of a track they have already laid is a near-certain loss.

Having missed the opening of the mobile era, Microsoft could only escape its slump by starting a new game on new ground. For Nadella that ground was cloud platforms and cloud services. PC sales were falling, but the number of consumers reachable through connected devices, sensors and the Internet of Things would soon hit 3 billion. Microsoft should therefore set out to win billions of connected devices instead of fretting over a shrinking market. The first job was to serve the cloud needs of billions of customers, whatever phone or platform they chose. Win the cloud game and Microsoft could win back ground in the mobile one: device management for the mobile world, and the technology business customers needed to secure and manage Windows, iOS and Android devices.

To get there, Nadella set a $20 billion target for the cloud business. That meant persuading the whole company to look away from the packaged products that had once made it the richest in the world and toward something with a larger future: the Azure cloud platform and services such as Office 365.

Nadella's own career at Microsoft made him one of the first on the executive team to grasp the cloud era. Building Bing, while he ran the search division, showed him where the information industry was going: online, built on cloud platforms. The Bing team learned in practice that if every search query landed on one server, that server crashed; spread the queries evenly across a network of servers and the network's combined computing power could return relevant results instantly. That is the heart of the cloud business — and the device people use to reach it is the phone, not the desktop.

Fighting for search share also taught the team that good search depends on the aggressive use of machine learning. A search engine has to do two things at once: work out what a user means, and match that meaning to accurate information gathered from the web. This kind of machine learning is a major form of data analysis and the foundation of artificial intelligence. Bing, you could say, became the training ground for Microsoft's cloud services.

In Hit Refresh: The Quest to Rediscover Microsoft's Soul and Imagine a Better Future for Everyone, Nadella recalls how hard it was to move the company's focus from the huge server-and-tools business, whose steady revenue paid everyone's salary, to a cloud business that was tiny and barely existed. The server-and-tools division had to be talked into optimizing its products and technology for cloud services rather than, as before, for the private servers organizations built and ran themselves.

Nadella did not cut everything over at once. He chose a transition. The strategy was cloud-first, but Microsoft's strength lay in servers, so it offered customers hybrid clouds — private, on-premises servers combined with the public cloud. That kept the existing server-and-tools teams motivated while the shift to cloud-first went ahead.

When the moment came, though, Nadella moved decisively: the cloud platform Windows Azure went from a side project to a central one inside the server-and-tools division, and was renamed Microsoft Azure to show that the whole company meant to change. Along the way Microsoft rebuilt its business, management and technical architecture around cloud-first.

Beyond that internal rebuild, cloud-first also meant rearranging who Microsoft fought and who it worked with. It meant actively supporting Linux, the operating system it had spent years trying to crush, and giving Linux first-class support on Azure — Linux being the base on which Google had built Android and put Windows on the defensive. It also meant partnerships with old rivals such as Apple, which was happy to have one, since both sides stood to gain. Apple wanted Microsoft's help tuning Office 365 for the new iPad Pro. The partnership carried the value of Office to everyone, and Apple in return promised to show off what Office could do on iOS — which strengthened Microsoft's standing as one of Apple's top developers.

In the summer of 2015 Microsoft released Office apps for every device, the iPhone included. Today a device not connected to the cloud is hard to imagine; consumer products such as Office 365 and LinkedIn live there. In the cloud technology now remaking the world, Microsoft is out in front — an outcome that only a few years earlier looked unimaginable.

The cloud-platform strategy opened a wide new market with few rivals in it. As products grow smarter, every company is moving toward digital. One forecast puts the number of "connected things" in use by 2020 at 20 billion to 50 billion — a large opening for every company's digital transformation, and therefore a large opening for Microsoft.

As Nadella sees it, when another company has built a strong position with its products or devices, Microsoft has to find a smart way to partner with it, so that Microsoft's own products can move onto that popular platform. Classic Microsoft applications — Outlook, Skype, Word, Excel, PowerPoint — and newer mobile ones such as Dynamics, OneNote, OneDrive, Sway and Power BI all moved onto Apple's iOS. The traffic runs the other way too: General Electric, by then a mature digital company, put Predix, its industrial-internet operating system, on Microsoft's cloud to connect industrial equipment, analyze the data and deliver insight in real time.

Since taking over in 2014, Satya Nadella has driven Microsoft into the cloud era, doubling its market value in three years and adding $300 billion, and pulling the company clear of its slump in a single move. Now that its footing in the cloud is secure, Microsoft has announced a "beyond the cloud" strategy, pointing its attention and its money at three technologies it takes to be the next frontier: mixed reality, artificial intelligence and quantum computing.

Every successful transformation shares one secret, and so does every failed one. A company that misses a wave will lose if it chases the leaders down the track already laid; to rise again it must open a new front. Microsoft missed the smartphone era, and after the Nokia purchase disappointed, it went straight for the cloud platform, serving every mobile and connected device — and the transformation worked better than anyone expected.

Behind the "soft" ingredients, the changes of mindset and culture, lay harder ones: data and computing power accumulated over many years, enormous sums spent on the shift, the patient coaxing of vested interests and old profit centers into something new, and the nerve and the means to take very large risks, because a company that big and that rich could absorb the losses if the change went wrong. Put that way, it is easy to see why the great majority of transformations are bound to fail: an old profit model that keeps shrinking and cannot be changed, plus piecemeal me-too innovation built on ideas other people have already used up.

Recommended reading: Hit Refresh

Cover image: Wikipedia

How does an object become a globalized commodity? How does an object drive globalization? And how is an object manufactured on a global scale? The column "A Brief History of Things" starts from "objects," looking at how these "objects" have permeated our lives and changed our world.

Topics it has covered include: shipping containers, railroads, water, Disney, climate, discounts, T-shirts, nautical charts, warriors, tea, spices, opium, coffee, timber, used clothing, trade, soybeans, IKEA, Arabia, corn, hotels, gold, disease, silver, fur, oil, natural gas, Western civilization, the railroad stock wars, automobiles, luxury goods, poverty, antibiotics, the Swiss tourism industry, General Electric, cable TV, advertising, Discovery Channel, merchants, car models, the yuan, missionaries, guano, Amway, adventurers, the steam engine, addiction, shipping routes, cotton, eggplant, the Huguang-fills-Sichuan migration, the Nicaragua Canal, FAW-Volkswagen, bathing, New York, agriculture, alliances, HSBC, mountaineering, ports, cotton cloth, the euro, Amazon's "priority delivery", weeding, tea theft, scrap, "Zara syndrome", wilderness culture, Matteo Ricci's map, the convert Shen Fuzong, the Black Death, cod, human genes, migrating to Southeast Asia, red-barbarian cannons, barbarians in economics, the welfare state, herbal medicine in Western medicine, machine guns, tin tanks, smallpox, ISIS, the Cold War, sports, overseas Chinese, the Battle of Waterloo, Zhukov, Republican-era political parties, the East India Company, artillery, Stilwell, innovation, the Pacific War, the Opium War, "Western Shock", Chinese food, Europe, Prussia, Arab nationalism, the Middle East wars, the collapse of Lehman Brothers, the financial crisis, Chinese youth tour groups to Japan, air pollution, The Internationale, the masses, the "Jiang Qing dress", the Manchus, teamwork, Japanese industrial policy, appeasement, the Nazis, coal, World War I, the collapse of the Soviet Union, lawsuit marketing, "Collecting China", ballots, Indian independence, tea sterilization, Captain Sully, populism, Portuguese expeditions, Brzezinski, the Turkish empire, the Afghan war, 9/11, China-Japan relations, the fabi currency reform, red currency, Connectography, the domestic-brand counterattack, the August 19 incident, street protests, the Qing government's market bailout, Japan's underclass, the fates of the Nationalists and Communists, the "Punish Vietnam" diplomatic war, the Taiping Rebellion, the Qin and Han empires, the Tibet question, the British Empire, Stalin, Kublai Khan's "capital region", the wokou pirates, democracy in wartime, MacArthur's legacy, brandy, rum, and modern America, Soviet cinema, the Ottoman Empire, young Stalin, the foreign-run customs service, the Soong family, 1916, vegetarianism in Asia, the divide between Europe and America, late-Qing newspapermen, Afghanistan, Qing finances in Xinjiang, the Genghis Khan exchange, German nationalism, the Qing empire, royal hunts, America 1927, the war of the currents, rust, sleep, the Vietnam War, Reagan, ruins, the May Thirtieth Movement, the partition of Palestine, Israel, Bridgewater Associates, post-industrial cities, The Wealth of Nations, World War I, 1950s America, U.S. naval warfare...