1st Week Microsoft - Cloud lifting

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Microsoft

Cloud lifting

The newish chief executive offers good intentions but mixed news

Jul 26th 2014 | From the print edition

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As Nietzsche once said...

NO ONE could mistake Satya Nadella for Steve Ballmer, his predecessor as Microsoft’s boss. The burly Mr Ballmer brought high-decibel bumptiousness; the svelte Mr Nadella (pictured) speaks in measured tones and quotes Eliot, Nietzsche and Rilke in his news conferences and memos. The new style may in time grate as much as the old, but so far investors like what they see. Since Mr Nadella took over in February, the technology giant’s share price has climbed by 23%, to nearly $45—the highest since April 2000, shortly after Mr Ballmer’s tenure began.

On his first day in the job Mr Nadella said he planned to make Microsoft fit for a “mobile-first and cloud-first world”. Microsoft, the king of the desktop age, has been dethroned by the smartphone revolution. But Mr Nadella thinks the ubiquity of its software, in both homes and businesses, still lends it power. On July 22nd he gave his first proper progress report, in the shape of Microsoft’s fourth-quarter results.

In this section

• Fixing the German dynamo
• Shake, rattle ‘n’ roll
• Unwarranted
• Cloud lifting
• Pure, cheap and a bit dull
• Unplugged and unproductive

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Related topics

• Nokia
• Steve Ballmer
• Technology
• Software
• Science and technology

Those numbers showed that the cloud part of Mr Nadella’s plan is starting to lift Microsoft up, but that the mobile side is weighing it down. The purchase of Nokia’s mobile-phone division, agreed upon last year but completed only in April, has worsened the drag. Two months’ worth of the formerly Finnish phonemaker’s figures added $2 billion to revenue but subtracted $692m from operating profit. Total revenue in the three months to June, at $23.4 billion, beat analysts’ forecasts; but thanks to Nokia, net income, at $4.6 billion, fell short—and was less than it was a year before.

Mr Nadella already has plans for the ex-Nokians. On July 17th he said that Microsoft would shed 18,000 of its 127,000 staff, and that 12,500 would go from their ranks. Microsoft will focus more on cheaper smartphones, the fastest-growing bit of the market, and exclusively on Windows Phone, its own operating system—which lags far behind Apple’s iOS and Google’s Android. An inexpensive range running on Android, which Nokia unveiled only in February, will be switched to Windows. An internal e-mail leaked to tech websites implied that Nokia’s more basic mobile phones would be phased out.

On the cloud side, Mr Nadella had cheerier news. Companies and consumers are buying more software and services by online subscription; businesses are doing more computing in Microsoft’s data centres (or in their own with Microsoft’s help). Companies’ spending on cloud services in the quarter was 147% more than a year before and is running at an annual rate of $4.4 billion. Some other things have also gone Mr Nadella’s way. Demand for personal computers (PCs) has bottomed out, as companies at last replace old machines.

Looking ahead, Mr Nadella is placing a good deal of faith in what he calls “dual users”: people who use technology both at work and in their private lives. He believes that Microsoft can give them the software they need for both, and has reorganised some engineers at the company, previously split between consumer and business-to-business units, into single teams.

It matters less to Microsoft than it did whether that software runs on Windows, the operating system on which it grew rich and fat. To be sure, the firm is still pushing Windows hard, and not only in PCs and its own phones. It has scrapped royalties for devices with screens of less than nine inches, to lure other manufacturers. Its executives purr about the Surface Pro 3, the latest version of its hitherto unsuccessful Windows tablet. But Mr Nadella’s first public act as boss, in March, was to release its Office software suite for Apple’s iPad. Microsoft can no longer afford to be fussy.

Although Mr Nadella promises a leaner Microsoft (layers of management will go, as well as those ex-Nokians), he is not promising a narrower one. He is sticking with Xbox, its home-entertainment system, although he says it is not “core”. In fact, having added phones, Microsoft is doing more rather than less. Some think that unwise. But the shareholders are happy—including, presumably, Mr Ballmer, who owns more shares than anyone else.