Quick Thoughts: MSFT – Satya Nadella is no Steve Ballmer

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–          MSFT will cut 18K jobs, most from the former Nokia device business, a repudiation of Ballmer’s “Devices and Services” strategy and a bold move toward a cloud future

–          Device operations will be pragmatic, targeting the low end and emerging world geographies still open to Windows. Expect hard push for apps on rival platforms.

–          Clear move toward focusing on cloud hosting and application opportunities, where MSFT has substantial advantages. Consumer apps critical for scaling cloud ops.

–          Evolving org from the “milking windows” strategy will be tough, but Nadella’s direction is bold and right. We remain bullish on MSFT as a leader in the cloud era.

After last week’s vague and meandering strategy memo, Microsoft CEO Satya Nadella got specific this morning with a company-wide email to announce job cuts of 18,000 employees, most of whom came to Microsoft in its recent acquisition of Nokia’s mobile device business. This is more than a slap in the face to former CEO Ballmer’s “Devices and Services” strategy and his controversial acquisition of the Nokia business in the months before his retirement. It is also a rejection of the organizational focus on the Windows operating system that marked the last 30 years of Microsoft strategy and acknowledged the ugly truth that the device platform battle has been largely lost to Google and Apple during the bungling of the past decade. Of course Windows is not entirely dead, and Microsoft will do what it can to perpetuate the standard, but Nadella prefers to put his resources against opportunities in the cloud, where it is not too late and where Microsoft has advantage and momentum.

From an investor’s perspective, this is unequivocally good. Satya Nadella will NOT be throwing good money after bad, and will marshal the resources needed to make Microsoft’s most promising businesses sustainable, long term winners. 18,000 is not a small headcount reduction even at Microsoft, whose global employee count numbers 127,000 – its previous record force reduction came during at the start of the Great Recession in 2009, when it cut 5,000. Half of the employees that came to Microsoft with its acquisition of the Nokia business will be separated. A follow-on email from Stephen Elop, now head of the Microsoft Devices Group, clarified the shift in the company’s phone strategy. The non-Windows feature phone platforms – Series 40, Asha and the sub rosa Android implementation under the popular Nokia X – will be discontinued. Future Windows Phone models will be focused on the low end, where it is finding first time buyers open to the platform, and in geographies where it has already found some success. Windows Phone devices actually outsell iPhones in 24 countries, including significant growth opportunities like India, Mexico, South Africa and Vietnam, so the cupboard is not entirely bare.

Microsoft will still make high end Lumia phones, but it won’t get involved head to head to head battles with Apple and Google that it knows it can’t win. Windows Phone has a good market share footprint in Europe – a legacy of the Nokia brand – and Microsoft will look to exploit that.  In other developed markets, the new focus will be on driving adoption of cloud apps on competing platforms. Nadella made Office available on iOS just weeks into his tenure and the availability was a boon to Office subscriptions. Look for Microsoft to get aggressive in marketing an even broader range of apps for both iOS and Android going forward.

As Microsoft enters its second year of reorganization, Nadella is also focused on going beyond breaking the fiefdoms addressed last year, and making the organization flatter and less bureaucratic. Nadella wants to trim layers of bureaucracy by cutting redundancies, simplifying business processes and expediting decision making. While easy to call out in his eloquently written, but thematically disjointed memos, changing Microsoft’s culture will be an enormous challenge. Still, major parts of the heavily silo-ed Microsoft organization have already been indoctrinated into the cloud religion – Nadella himself led the efforts to build Azure into major business. That head start puts Microsoft in a far better position than its erstwhile enterprise IT rivals – i.e. HP, IBM and Oracle. (see http://live.ssrllc.com/2014/05/may-21-2014-tmt-culture-eats-strategy-for-breakfast/ ). In the end, I see “productivity in a mobile-first and cloud first world” as an appropriate rallying cry for the new era, and Nadella and Microsoft appear to have the goods to answer the call.

For our full research notes, please visit our published research site.

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