Investors want Microsoft

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Grand Master

gameboy1977

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It's the morning after Satya Nadella's first day as Microsoft's CEO. Now that the confetti has cleared, Nadella faces tough choices about the path forward for the company.

Two influential Microsoft shareholders have been pushing the Redmond software giant to abandon what they view as non-essential product lines so that Microsoft can focus on its core strength: selling enterprise software to businesses. Nadella has spent the last seven months running Microsoft's $20 billion server and tools division, so he could be ideally suited to manage that transition.

But doing so would mean repudiating much of the legacy of his predecessors, Bill Gates and Steve Ballmer, who have long believed that Microsoft needs to win over consumers, not just corporate IT managers. As a 22-year Microsoft insider, Nadella owes much of his career to Gates and Ballmer.

Nadella's tenure at Microsoft's helm will be largely defined by how he balances the competing visions of Microsoft's future and the strong personalities who will be pushing those visions in Microsoft's boardroom. Having activist shareholders who are urging Microsoft to rethink its vision could give Nadella an opening to face down his predecessors, if he wants to do so. But it wouldn't be easy.

The business of Microsoft is business?

Ballmer envisioned Microsoft as a "device and services" company and reorganized the company last year to better execute that vision. But now Ballmer is out ? though still on the board ? and with a new CEO come fresh questions about the fate of consumer tech at Microsoft.

Microsoft's Windows division has been facing shrinking profits; last year, the unit pulled in a net $9.5 billion, down from $11.6 billion in 2012 and $12.3 billion in 2011. Company filings suggest that the drop is largely attributable to declining demand for Windows among consumers, even as sales of Windows to businesses remain strong. The same division also reported a $900 million loss on unsold Surface tablets. The online services division, which oversees search engine Bing, reported a loss of $1.3 billion in 2013 ? less than the previous year but still in the red.

Some investors have suggested that Microsoft spin off its money-losing consumer products and focus solely on the enterprise. Even the Xbox deserves to go, Paul Ghaffari, the wealth manager for Microsoft co-founder Paul Allen, said last year.

But Robert Bontempo, a management professor at Columbia Business School, is skeptical that Nadella will be able to chart his own course on the matter. "You're asking for Nadella to walk into a board meeting and look Ballmer and Gates in the eye and say, 'The decisions you've made over the past two decades are a mistake,'" said Bontempo. "That's going to take some serious strength of character."

"There's going to be a lot of tension"

If Nadella does choose to turn more decisively toward business customers, he may find a useful ally in a man named Mason Morfit. Morfit is a 37-year-old activist investor whose employer, the private hedge fund ValueAct, acquired a 0.8 percent stake in Microsoft in August. That was enough to put Morfit on the board.

Morfit was reportedly among those who urged Ballmer to step down. Microsoft denied that ValueAct played any role in the decision, but the way events played out nevertheless reflected on ValueAct's power as a shareholder voice.

More important, ValueAct has been a critic of Microsoft's strategy and ? like Ghaffari ? wants the company to consider shedding some of its investments in consumer technology. ValueAct also reportedly wants the company to unbundle its offerings, such as Microsoft Office, so that they can be used on other platforms besides Windows.

"Microsoft has historically had a supportive board," said Bontempo. But with the addition of Morfit, Bontempo said, "this is going to be an extremely toxic environment ... There's going to be a lot of tension."

That tension could come in handy for Nadella, who will need political cover to pursue broader changes at the company.

But there are some early signs that Nadella is interested in continuity with his predecessors rather than a radically new strategy. The Indian-born engineer asked ? and got ? Gates to step away as chairman of the board so that Gates could advise him on products and devices. Whatever Gates's qualifications for this job, it's clear Nadella recognizes his own weaknesses when it comes to consumers. It's also suggestive of Nadella's faith in the "device" part of Microsoft's "device and services" mantra.

Though no longer chairman, Gates will remain on the board of directors. Analysts say the programmer-turned-philanthropist has exerted a strong influence at Microsoft behind the scenes, even as he's kept a low public profile at the company.

How an enterprise-focused Microsoft can keep in touch

Nadella only hinted at wider changes in a company e-mail Tuesday. "Our industry does not respect tradition," he wrote. "It only respects innovation."

But just because Microsoft could stop producing gadgets doesn't mean it needs to disengage from the public altogether. According to one recent former employee, the company has a wealth of potentially inspiring research that would benefit Microsoft's public image but that's never publicized because the corporate structure discourages such results from trickling out. Many of these projects resemble the kind of work that rivals such as Google routinely turn into conversational hits, if not commercial ones, the former employee said. Unlike Google, however, the focus on selling products at Microsoft detracts from any attempt to publicize an interesting piece of experimental work.

"Marketing at Microsoft is mostly about sales," the former employee said. "And sales is largely about products. So if your product doesn't sell, it doesn't make it into marketing."

It hardly helps that Microsoft has very specific ideas about what a product is, the employee added, and that an innovation may never see the light of day if it doesn't fit into one of the company's existing offerings.

When asked how Microsoft's research priorities might change under Nadella's tenure, a company spokesperson declined to comment.

If the $10.4 billion Microsoft spends on research and development is as fantastic as the former employee says, Microsoft would have a prime opportunity to do what others in this space have also done: Build a consumer-facing brand that highlights Microsoft's technologies in virtually everything from ATMs to gas station terminals or that shows how Microsoft services are behind the next wave of other people's technological innovation. IBM's Smarter Cities Challenge is one example of a services company that stays in the public eye this way. So is General Electric's Ecoimagination project. If they can do it, why not Microsoft?

Yet history suggests this could be an uphill climb for Nadella. Ballmer struggled to build new consumer-facing businesses at Microsoft for more than a decade, with little to show for it. Nadella will have to decide whether to continue with that strategy or make a painful break and focus on areas where the software giant is a proven winner.

 

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paulheu

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Not being more consumer oriented and not allowing innovative and 'risky' products to really get out there is in part what is keeping MSFT back and allowed companies like Google and Apple to (re)gain traction in the marketplace. No doubt Microsoft will do well by focussing on business but it will make the company invisible to the public at large even more than it does now.

 

IMO technology is not a place where playing it safe will yield any serious reward beyond allowing you to remain alive and operational.

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Ian S.

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To stay in business, Microsoft needs to keep in the consumer biz. If it's not making them loose money, why kill it?

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Melfster

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The truth is if microsoft only focused on Enterprise then they would be marginalized in 10 years.  One could argue they took eye off the ball of consumers and missed the whole byod smartphone era and only launched windows phone when it was very late in the game.

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PGHammer

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As a shareholder of (very few) MSFT shares, I want to kill the investors who want to kill Xbox, Bing, and Surface.

These investors are (like all too many) very risk-averse.  It's all about revenue, and increasing it - if a business loses money, kill it.

I am a Microsoft shareholder, as well (in fact, I bought my stock when Steve Ballmer was named CEO), and I've held onto it ever since.

However, unlike those risk-averse shareholders and investors, there is no desire on MY part to see Microsoft abandon their investments in any of those areas, if for no other reason than they put more pressure on the competition.

  Nintendo is in trouble, and the big cheese (other than Xbox) is Sony - which is also in trouble; why should Microsoft bail out Sony?  (Killing the Xbox division would do just that.)

Melfster - the same investors that are pushing for the abandonment of Xbox, Bing, and Surface would prefer that Microsoft double-down on enterprise - which is NOT in trouble.  (They read the same annual reports the rest of us do.)  That's right - despite the slow uptake of Windows 8 in the enterprise - which is still faster than the uptake of Windows 7 had been in the enterprise - Windows 8+ is a long-term play.  Since when do enterprises upgrade their OSes immediately?  How long did it take enterprises to upgrade to Windows 2000, or to XP?

 

BYOD is strictly about shedding expenses - and onto the employees.  Thin clients and even zero-footprint clients - until the advent of BYOD - still meant company-owned hardware, and thus expenses.  You can combine BYOD and zero-footprint - especially with software such as Citrix XenApp - however, that merely gets rid of client hardware cost.  The applications running within XenApp and/or XenDesktop are still largely from Microsoft - as has been the case with most third-party software of this sort - so it's not exactly a loss for Microsoft.  Lastly, you can run XenApp and/or XenDesktop on Windows 8.1 just fine; therefore, not even the OS is a barrier.

 

The one thing they took their eye off of was smartphones - and there, Microsoft admits they missed that boat.  However, smartphones caught everybody - even Google to an extent - by surprise.  However, of what percentage has even smartphones been of Microsoft's consumer business?  The smartphone (Windows Phone) side of Microsoft IS picking up; the real angst from the investors is that there's a great deal of Android envy (Windows Phone revenue is not of the same volume as is revenues from Google services).  Think - do you really want to be Google so much that you are willing to engage in the same tactics Google is using to get there?  (For a company with the mantra "do no evil", Google is getting accused rather readily of doing quite a bit of "evil" in terms of their services.  Microsoft is in position as the non-evil alternative to Google - how much more trouble can Google afford to be in without it taking bites out of their revenue stream (and thus their stock value)?

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Active.

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To stay in business, Microsoft needs to keep in the consumer biz. 

That's clearly untrue. They certainly don't need to be in the consumer client software or hardware business. 

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MorganX

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Split them off into autonomous entities, but don't "kill" them. Not at this point having made the development investments.

 

Having said that, this generation of gaming consoles has been disappointing, there's nothing on either than makes me thing my PC isn't the best place for gaming. That includes building a new HTPC, still better than a console this gen. Would be nice if MS finished all of KI and did cross platform with PC and Xbox.

 

The Surface, it's innovation was its case I suppose, and everyone is copying the kickstand with cheap covers for smaller, lighter, cheaper, pro tablets with digitizers for under $400. TBH, I'm not sure how much life is left in the Surface, even the pro.

 

The Asus Vivo 8 with Wacom digitizer is HOT! With a kickstand case, there's no reason to buy a surface. Same goes for the Venue Pro 11. Only problem with Dell they can't seem to get a decent digitizer working reliably.

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DeadEndAccount

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To stay in business, Microsoft needs to keep in the consumer biz. If it's not making them loose money, why kill it?

 

And more importantly with the rise of BYOD in the work place the need to have a presence in the consumer space will be more important than ever. In all due respects CJEric - you're missing the point. Apple is making in roads along with Android because of the BYOD movement - Blackberry nose dived and where was Microsoft to pick up and create the end to end solution for enterprise customers? you really think that killing off a gateway product in the consumer space is going to save them? Microsoft is not unsalvageable - what they need is a clear vision of what Microsoft actually wants to see itself in the future rather than meaningless slogans - "we're a device and services company" what ever the heck that means.

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dead.cell

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The Xbox may not be at the top of its game right now, but all of that could easily change, just as things did with Sony. The brand is quite strong still too, it'd be stupid to just cut it.

 

The Surface really needs work I feel in terms of Windows RT and what they really want to do with it. As it stands, while I like the Surface, the lack of apps still hurts. Flash capabilities and Office is quite nice, but if they manage to get Office 365 on the iPad going, why the heck would I want a Surface then? Even printing has already become very easy with printers with Airprint / Wifi Direct. (I'm using the Surface for what it's worth, as I got it as a gift - don't own any iProducts)

 

And Bing, well, it just needs continued polishing/perfecting. I do like some aspects of it, I've tried using it on and off for a month or two, but when I got frustrated, I'd go to Google. After a while, I just asked why I'm torturing myself and gave up on Bing. Sorry, Microsoft. :(

 

Anyway, I don't think any of these need to be cut at all. Just improved. Same could be said with Windows though and many of their other divisions. The Office team is doing amazing things; 365 is absolutely fantastic.

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DrJohnSmitherson

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This is hard to believe. I just don't understand. Microsoft is getting their apps and OS's on every device. PC, phone, table, and their Xbox. Once they unify their app store, I assume it will be much easier to make one app that works for everything! It seems like Microsoft has all the peices there and they are just trying to fit them together.

 

And why kill Surface?! The Pro especially. Is there anything else on the market that can compete? The Pro has 4-8GB of ram and 64-512 GB ssd, all in a tablet form. It's amazing! With that awesome pen!

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Dot Matrix

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I love that the above link is to "fool.com" :P Really makes you think about what they post.

 

And who cares that Xbox hasn't sold what the PS has. Gaming consoles are long term investments, and there's still millions of users who are still firmly invested in their 360's yet. Asking MSFT to ditch Xbox because the XB One hasn't skyrocketed over night is asinine.

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