MICROSOFT NOW—HOW IT RECLAIMED ITS TITLE

The 2000s—Bill Gates to Steve Ballmer

During the 1980s and 90s, Bill Gates led Microsoft. Since he was also leading the technology innovation, the company had an innovative culture. He handed over the reins to Steve Ballmer in 2000 just as the Dot Com bubble burst. This was a bit of a poison chalice as the next few years were very challenging for the tech industry.

Ballmer’s background was in management, sales, and marketing. His strategy was, therefore, to build technology that he believed had a market. This was a mistake, as many other tech companies were innovating and building technology that the market didn’t even know about.

At the time, Windows and Office were the most successful Microsoft products, and the company focused on growing the market by taking Windows to mobile. They did this with Windows Mobile and the Windows Phone. However, their culture didn’t support open source technology like Google did, which ultimately limited them.

Both mobile projects failed to gain traction and they lost out to Google and Apple’s mobile operating systems, both of which succeeded for different reasons.

During this period Microsoft’s cash cows, Windows and Office continued to generate cash, but no new products gained traction.

When Ballmer took over, the share price was in the process of falling from its $60 high to $20. When he retired 14 years later, the stock was still trading below $40. During that period revenue grew from $23 to $78 billion, an annual compound growth rate of less than 10%. Furthermore, margins steadily declined during this period.

The move to enterprise cloud computing

Satya Nadella took over as CEO in early 2014. While he gets a lot of credit for Microsoft’s turnaround, the foundations were in fact laid earlier. This happened when Microsoft embraced enterprise and cloud computing.

Azure is Microsoft’s cloud computing platform. It allows clients to build and deploy cloud-based applications that are run on servers in Microsoft’s data centres. The platform makes Microsoft a SaaS (software as a service), PaaS (platform as a service) and IaaS (infrastructure as a service) player.

Cloud computing platforms give companies more flexibility as their computing power is no longer limited by their own hardware. Capacity can simply be added or reduced as and when needed. Microsoft has used its corporate reach to grow Azure into the second-largest cloud provider in the world, behind Amazon’s AWS. Azure is now the company’s primary growth driver growing revenue at 60% a year.

Other areas of the business have also improved over the last 5 to 7 years. The office was switched to a subscription model with Office 365. This has expanded the market to include people previously reluctant to buy software that will need to be replaced after a few years. Rather than trying to force customers to use Windows devices to access Office apps, Microsoft took the apps to Apple and Android users. This again expanded the market for Office365.

In 2018, Microsoft also bought GitHub, the leading repository for code. Developers use GitHub to store, share and collaborate on code. The purchase will give Microsoft better access to the world’s development community and improve its image amongst developers. This marks a big change for a company that previously kept everything in the house and closely protected.

The hardware division is also gaining more momentum, though growth and margins trail the rest of the business. However, a new innovation in this segment can be used to showcase Microsoft’s capabilities.

The next frontier for the company is healthcare. Microsoft hopes to use its expertise and resources along with artificial intelligence to transform the industry on several fronts.

When Nadella took over in early 2014 the stock was trading around $37. Five and half years later it is above $140, a gain of nearly 400%.

Revenue growth has accelerated from around 5% to 15% and profits are now growing at over 20% a year.

Perhaps more importantly, Microsoft’s culture has changed. It is embracing open source development and collaboration with other companies. In the process, the company has regained the respect of the development and investor communities.

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