It’s Too Soon To Judge Satya Nadella

It’s been quite a change of fortune for Microsoft under CEO Satya Nadella. In fact, for some he’s Saint Satya, the man who rescued Microsoft. Time called him one of the 100 most influential people in the world; Box CEO Aaron Levie, no Microsoft lover in the past, whose company made hay making fun of SharePoint, wrote a positively gushing tribute to him.

“In his short but impactful tenure, he has focused on driving openness where Microsoft was once closed, even when it has meant supporting competing services in the process,” Levie wrote in Time.

Nadella began as CEO in February 2014, and, after a little over a year, it’s too early to judge the results of his tenure. Microsoft has clearly started down the road toward a grand strategy revision, and it has begun making the transition in several key areas, including the cloud, the move away from Office/Windows franchises and perhaps most important an internal cultural shift and a significant change in external perception as Levie’s tribute attests.

But it’s very early days for him and for Microsoft’s overhaul from a 1990s PC company to a service and cloud company. And it’s too soon to say he’s successfully helped his company make that transition. Perhaps the key test is yet to come with the release of Windows 10 and whether Microsoft can finally make some headway in mobile.

Regardless, there are still many open questions, and it’s simply too soon to judge the Nadella body of work, much less call it a complete success.

Alex: What’s Working

You have to allow a new CEO sufficient time to enact his or her agenda before you can properly vet performance. That fact lasts precisely until it doesn’t, and as an argument, it can help people avoid scrutiny until after when it might have been reasonable. For Satya, we’re approaching the moment when we can tally up his company’s weaknesses and strengths to derive a grade. For now, Ron asked me to dish on what is working for Redmond:

Transitioning Office to a SaaS product appears to be proceeding strongly

Office as a product that is sold for a few hundred dollars in a box is on the way out. Microsoft, certainly not early to the SaaS revolution, has managed to build a new version of Office, Office 365, that it can sell by the family to consumers, and by the seat to enterprise firms using mostly the same code.

Office 365 for consumers picked up 2.2 million net new subscribers in the last Microsoft quarter, ending with 9.2 million. Office 365 for businesses, shaded behind a larger ‘Commercial Cloud’ number at the firm, also appears to be accreting recurring revenue at a respectable pace. Under Satya, the growth has continued.

Office is one of Microsoft’s three platforms that it is betting the farm on. If it couldn’t move the massive legacy business into a product, it can sell to a modern audience, Microsoft’s future cash flows would be deprecated.

If growth slows, that’s a separate problem. For now, Microsoft has shown that it has a shot of building a massive subscription business out of new versions of traditional products that have already brought it billions in profit.

Windows 10 is a sufficiently large bet with potential recapture market share

No one knows how well Windows 10 will perform, but I think that it is fair to say that the new Microsoft operating system is a gamble of sufficient size to potentially bring the company back into the platform wars. Android might now fit a role that is quite like what Windows once controlled, but Microsoft is making a different sort of wager: That there shouldn’t be a platform difference between mobile and not.

Windows 10 wants to be both and more. It’s no small effort. If Microsoft can pull the project off, it may be able to offer developers quick access to hundreds of millions of users. That could raise its profile among the developer classes, and boost their buy-in with Windows.

Or it might not, but the company is going for it. If Windows 10 fails to grow Microsoft’s mind-share among developers, I can’t precisely summon to mind a second act for the effort. Satya’s job is to land this particular jet in rolling seas.

Internal happiness appears to be at a local maximum

I spend too much time talking to past and present Microsoft employees, but doing so allows me to run short-sample sentiment analyses of their mood. The current bent, as far as I can divine, is that Softies are fired up about Satya. It doesn’t hurt that the company’s stock is over the company-specific, golden $40 threshold.

Having happy employees helps retention, productivity and hiring. You can’t buy love, per se, but you can earn it. This is, it should be noted neutrally, a change from previous years.

There are other things that are going well at Microsoft, but two potential platform wins and satisfied employees are my top three selections.

Ron: It’s Still Early, But There Are Some Red Flags

There is little doubt Microsoft has improved under Nadella and I’m not trying to minimize that. What I’m trying to do is apply is a bit of a reality check. A coach is judged by making the playoffs and winning championships. A CEO is judged by many factors including growth, stock price and managing cultural issues. These kinds of attributes take more than a year to judge, and while he has done undeniably a lot of good for the company to this point, the real proof is how he does long term and there is no way to judge that yet.

That said, there are a couple of key areas that Alex left out in his analysis and I want to touch upon those now.

Cloudy with a chance of meatballs

The first is Azure. So far Azure has been doing relatively well, but like Office 365, it’s early days and too soon to really judge. The good news for Microsoft, is that according to figures provided in a recent article in The  Economist (using data from Synergy Research Group), Microsoft’s cloud business grew a whopping 96 percent in the fourth quarter last year. Google was next with 86 percent growth, but both companies were starting from very low market share numbers. When you look at overall market share, it’s a very different picture.

Amazon Web Services is in first place with almost 30 percent of market share. Microsoft is in second, but second is far back with less than 10 percent. Nadella has the company pointed in the right direction, but it started so far back in the pack that even 96 percent growth is only good enough for 8 or 9 percent share. It’s going to take consistent growth to continue to chip away at AWS, and there is no way to know if Microsoft can sustain it.

It’s worth pointing out the market is not static. It’s still growing, but all the competitors have an equal shot at the growth pie and we don’t know how much of the existing or new market share Microsoft can attain in the future.

Stuck inside of mobile with the Android blues again

Another 9001 pound gorilla hanging out there for Microsoft without a lot of good news is its mobile strategy. It bought the Nokia handset business, and it’s trying to make some progress there, but its market share numbers remain abysmal by any measure, and it’s hard to see any company succeeding over the long term without a solid mobile play.

It is hard to find good news on the phone side. The latest comScore mobile US market share numbers from January have Microsoft sitting at 3.6 percent up. 0.1 percent from October. According IDC, worldwide numbers were even worse with Microsoft garnering just 2.7 percent market share as of February, 2015 with year over year growth of 4.2 percent, the worst of the big three — iOS, Android and Windows Phone.

If you’re looking for a silver lining on the mobile side, Microsoft has gotten good grades for its latest Surface tablets and sales are trending up, but all that said, according to IDC’s latest numbers Windows-based machines still only account for 5.1 percent of worldwide tablet sales. The good news is that IDC predicts Microsoft could have 14.1 percent by 2019, but that’s a forecast and there is no way of knowing if it’s accurate at this point.

Windows mobile strategy is going to come to a head with the release of Windows 10 later this year. If it can’t begin to make substantial gains at that point, it’s not likely to happen at all, but if it can turn it around Nadella might indeed be a saint-like after all.

Alex: Ron Is Mobile Right, Azure Wrong

The mobile point holds. I won’t attempt to make the company’s case, but it seems that Microsoft is tackling the twin issue that hampered Windows Phone and Windows 8.x with a single move. If the combined store and platform unification solve the app problem for either formerly individual platform, it is likely solved for both. And if it fails for one, it has likely failed for both. It’s Matthew, all over again.

It’s worth considering where Ron picked his spots: Instead of going after the company’s continued Bing or Phone or Surface losses, or the potential impact of ending legacy enterprise agreements that might have made more in the past, he chose Azure and mobile.

The latter is an obvious weak spot, despite mostly functional attempts by the company to forge a different path from its rivals. But Azure itself as a potentially uncertain spot I can’t quite agree with — Microsoft lags in terms of market and mind share, but the company is going after a rich incumbent. The firm is even showing signs of life.

And given that Azure is in some ways Satya’s kid, it’s hard to imagine it seeing insignificant investment while he remains CEO. As such, I’m less worried about it than I am other projects that might have a higher chance of failure or, that aside, continued losses that might be harder to stem than the firm expects.

That’s not to say that Microsoft is somehow besting Amazon in the cloud computing domain (Amazon will break out AWS revenue in its next quarterly report, I haven’t heard that Microsoft will detail Azure at the same time), but being a strong No. 2 in what is becoming a $100 billion or more space where Google might be construed as third isn’t so bad a place to be.

I think that a key weakness that is rarely discussed for Microsoft is the handoff of revenue from old-school software sales to subscription payments. You get less revenue up front when you sell subscriptions, which could lead to Microsoft seeing slower-than-expected revenue growth in the next few years.

It’s all well and good to reinvent yourself; it just isn’t easy. And while Nadella has clearly done a great job to this point in changing an entrenched company culture, it’s far too soon to declare mission accomplished.