windows In Depth: Microsoft's future under Satya Nadella: a very different, braver company

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Introduction

We are halfway through 2014 and Microsoft is having a good year - well, almost - even if it had to cut 18,000 jobs, can the Surface Mini, kill Android for Nokia, shut its Xbox Entertainment Studios and merge its tech conferences.

The Xbox One was met with widespread praise and has been selling in record numbers; Windows Phone is improving rapidly, introducing Cortana; Windows 8.1 garnered praise and, most importantly, continues Microsoft's vision of one day linking the PC and smartphone together.

And of course Satya Nadella, who was appointed in February, is making vast improvements to both the ideas and operation of Microsoft, unveiling software and services which would never have occurred under Steve Ballmer, including Office for iPad, which opens up Microsoft and pulls the company further into competition with Google, Apple and others.

The Microsoft of the past is gone. Under Steve Ballmer's leadership Microsoft managed to miss out on both the smartphone and tablet explosions, forcing the company to rely on desktop sales and enterprise customers, and causing the "Microsoft" brand become irrelevant to consumers.

The latter - enterprise - is a solid bet. The former - desktop sales - is not. Revenue from enterprise continues to climb rapidly, but desktop and laptop sales are in free fall, with the prospect of growth becoming less and less likely as smartphones and tablets dominate buying patterns.

Satya Nadella aims to focus Microsoft on becoming a "devices and services" company, expanding Microsoft's software offerings – notably to the iPad with Office – and increasing the focus on hardware and, unsurprisingly, devices (including Internet of Things), filing patents for smartwatches and unveiling the Surface Pro 3, a direct competitor to both laptops and tablets, which Microsoft expects to be the pinnacle of Windows 8.1.

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Surface matters

The Surface division is one of great interest to investors, analysts and technology pundits alike. Just as Google does with its Nexus line, Microsoft holds up the Surface as an example of exactly how Windows hardware should be made and should function.

Sales of the previous Surface tablets – the Pro, which competes with laptops, and the vanilla Surface which competes with the iPad – have been poor, meaning Microsoft has taken financial hits on unsold stock to the tune of $900 million (around £525 million, AUD$960 million).

The Surface Pro 3, and updates to the Surface which are expected soon, show that Microsoft has chosen to play the longer game, investing time and money in the Surface brand and giving Microsoft a potential revenue source outside of software.

Microsoft brands the Surface Pro 3 as a device aimed at businesses, touting truly unique features such as "true" multitasking which allows applications to run side-by-side on the screen, and the laptop-style keyboard cover.

While the Pro is expensive, businesses tend to have deeper pockets than consumers and so can afford to buy the hybrid in bulk. The tide won't turn in the next few years – the iPad, for example, has taken four years to reach its current market-leading position – but Microsoft appears to be willing to stay put.

In terms of expansion of the Surface line, Microsoft will likely stick to incremental upgrades coinciding with new versions of Windows. The Surface Pro 2 is under a year old and Microsoft has already released the Pro 3, showing a total commitment to the programme and willingness to move fast (in the past, updates to Windows have occurred bi-yearly, or less frequently).

Introducing the Surface as a gold standard device that can help other OEMs build machines is beneficial to both Microsoft, which makes money from them, OEMs who can compete, and the Windows ecosystem as a whole.

Windows 8 making headway

Businesses are also warming to Windows 8, which was regarded with a sceptical eye when first released in 2012. Tracey Rothenberger, COO of Ricoh Americas Corp., runs a base of 17,000 PCs and is complimentary of Windows 8. "I don't think there's anything wrong with [Windows 8]," he told the Wall Street Journal. Gartner analyst, Mikako Kitagawa, agrees with Rothenberger. "Windows 8 is the right direction," he claims but with a caveat, namely that: "It will be a while before Windows 8 is adopted".

Scepticism from businesses is a hurdle that Nadella must overcome, especially since his company is becoming more and more reliant on their cash. Windows 8.1 sets out to ease the transition from Windows 7, the most popular OS in the world, adding a "boot to desktop" mode and more support for a mouse as opposed to a touchscreen.

Whether these updates have an effect on the adoption of Windows 8 by business customers remains to be seen, but it is certainly the right direction for Microsoft to move. The next version of Windows, codenamed Threshold, is rumoured to build upon Windows 8.1's successes, especially with regard to accommodating desktop users who are without a touchscreen, further ingratiating Microsoft with their business users. Nadella also confirmed that it will unify all current platforms, tying three OSes into one.

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Enterprising efforts

In terms of enterprise software, Microsoft is always making headways. Office 365, the cloud-based version of Office, now makes up roughly 40% of the value of the Office division of Microsoft and has just been updated with new business-focused features, such as more advanced levels of encryption for files and 1TB of storage.

Forbes estimates that Office 365 will bring in $1.7 billion (around £1 billion, AUD$1.8 billion) in revenue annually for Microsoft within the year, which is remarkable for a service launched to the public in 2013.

Expanding Office 365 to iPad and allowing new users to sign up for an account via their Apple ID will also bolster revenue, despite Apple taking a 30% cut, and is a sign of Nadella and Microsoft's new drive to work with other companies.

Microsoft's plans essentially extend to the philosophy of "carry on doing what we're doing". Enterprise and desktop sales – which still represent a significant cash flow, despite the wane – can support the company until it either pivots away from consumer-side endeavours, just as Oracle or IBM have done, or a consumer product that isn't the Xbox or Office catches on. Opening up Office 365 by lowering the subscription price and releasing an iPad app has allowed Microsoft greater mindshare and, in turn, greater revenue.

Importance of wearables

Windows is in the hands of 90% of the world but needs to come up with, or latch onto, the "next big thing". I've previously argued that Microsoft must get into the wearables game to stay truly relevant and there are signs that the company will.

Multiple people I've spoken to on condition of anonymity stated that Microsoft was indeed interested in making a smartwatch, actively exploring implementations of the device (no doubt spurred on by Google's I/O performance and rumours of Apple's interest in the sector). Microsoft was bitten when it came to smartphones and will be eager to prevent a similar situation from happening again.

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The Microsoft we see today is totally different from the Microsoft of a year ago, operationally and in terms of aspirations. Satya Nadella's leadership has brought about a braver company willing to take risks, but also ready to work with its core enterprise customers to retain the backbone of its revenue. As I've written previously, Satya Nadella's stewardship has had a great positive impact on Microsoft and we will start to see the fruits of his labour in the coming year.

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