One Microsoft is one big headache for Nadella

Friday 25 July 2014 14.31
Satya Nadella wants Microsoft to focus on productivity - and not hardware
Satya Nadella wants Microsoft to focus on productivity - and not hardware

It's official; Microsoft is no longer a devices and services company. Such was the subtext of Microsoft's fourth-quarter earnings report, according to Niall Kitson.

The dream of an inclusive hardware and software ecosystem – espoused by Steve Ballmer with his 'One Microsoft' strategy - has been replaced with Satya Nadella's more ephemeral 'productivity first' approach, based on cloud services and mobile using a common Windows platform.

Nadella's plan is about growing markets over disrupting but it has an appealing clarity; and he has the figures to back it up. 

According to the results, the quarter's revenue of $23.4 billion beat the same period last year by about $4 billion and also trumped analyst expectations by $400 million.

On a per-division basis everything looks healthy. 

Revenue from cloud services went up 150% year-on-year to $4.4 billion; the commercial division grew revenue 11% to $13.5 billion; and even the devices and consumer division improved its performance by 42% to bring in $10 billion.

Yet the bottom line - a net profit of $4.6 billion - is down from last year's $4.9 billion and there's plenty of pain to come, largely thanks to Ballmer's parting gift to the company: Nokia's mobile phone business.

One headache 

The One Microsoft strategy was designed to create a software and hardware ecosystem to rival Apple, with Nokia as its centrepiece. 

Ballmer wanted to retain Nokia's product lines, viewing low-spec, low-margin feature phones as “on-ramps” to the more lucrative Lumia Windows Phone handsets. 

This doesn't tally with Nadella's hardware agnostic, platform-centric vision. 

As a result, the new CEO is set to let some 12,500 former Nokia employees go at a further cost of up to $1.6 billion in settlements, on top of the original $7.2 billion spent on the acquisition.  

Granted, there is plenty more pain to go around. 

The Xbox division is about to be downsized and its original content studio is being closed, representing a further loss of 500 jobs. A further 5,000 positions are to be phased out as the company becomes more developer-centric. 

Cutting nearly 6,000 jobs could be argued away as refocusing efforts but cutting 14% of the workforce - the vast majority from a new purchase - is an admission that something went badly wrong. 

There are also additional issues with Microsoft’s hardware portfolio:

We still don’t know how much the Surface tablet is worth to the company. Based on the scrapping of an 8” model based on the ailing Windows RT operating and word of another massive inventory write-off it’s unlikely we’ll see another tablet running RT come to market. 

Nor do we know how well the Xbox One is performing. It took Steve Ballmer ten years to make gaming pay for Microsoft. Can Nadella avoid a difficult handover from Xbox 360 to Xbox One? 

In Xbox Live he has the services to provide continuity and ensure customer loyalty but Sony beat it to release with the PlayStation 4 and shifted more units over the Christmas period at a lower price point, and hence a lower margin. 

Consoles could be on the verge of becoming the new printers: low unit cost, high cost of maintenance. There’s a thought.

Still, the hardware conundrum debacle has bought Nadella time to see his Microsoft-as-a-platform vision become a profitable reality. 

He's got until the phrase 'impairment charges from the Nokia deal' disappears from the quarterlies to make Microsoft his own. The clock is ticking.

Niall Kitson is editor of