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Back to basics with Nadella for Microsoft strategy?

Stuart Lauchlan Profile picture for user slauchlan November 25, 2014
Summary:
Satya Nadella’s first year as Microsoft CEO has seen some back-to-basics thinking, according to SVP corporate strategy Jeff Teper.

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Jeff Teper

As the lists of ‘Review of the Year in Tech’ lists start to get drawn up, the rise of Satya Nadella to CEO at Microsoft is a give inclusion on all of them as are the inevitable ‘Satya’s first year’ progress reports next February.

An early assessment came last week at the UBS Global Technology conference in California when Jeff Teper. Microsoft’s SVP for Corporate Strategy told the audience that Nadella’s leadership had taken the firm back to certain basics:

When I joined, people said, "You guys are a desktop company, that's what you do, you're a desktop, you can't possibly be an enterprise company, a server company. You have no server revenue and so forth." But we kept fighting, and we believed we could build better products, we could get the biggest partner ecosystem innovating around us, and we kept pushing and pushing, and we ultimately obviously succeeded there.

What Satya has done is bring us full circle. He’s brought that balance in the tone. On the one hand being very grounded in reality, but there's a ton of very strong competitors out there, who have different strength and weaknesses in market positions. Some places our hands [are] pretty strong, other places we've got more work to do.

But he also is incredibly optimistic that just like 20 years ago when we saw what the PC could do. Now we look at trends like the Internet of Things and Big Data and just trillions of dollars of opportunity is going to be created. So I think what Satya has done is kept us grounded in reality. People ask me a lot about the culture in the last six months or so, and I think everybody in Microsoft got an extra spring in their step.

One thing that has changed is the approach Microsoft takes to getting customer feedback on product development. Teper explained:

What we used to do is bring in a bunch of our top customers, get their feedback and for a few months come up with a plan for the new version of Office and the new version of Windows. And we knew the market really couldn't digest a new version of one of our products more than every two, three years. In fact, the IT leaders at most of the companies say they couldn't digest things except every five to seven years. They would often skip the release of Office or Windows because they didn't want to deploy and to be bothered with it.

So we had this two, three, maybe five to seven year feedback loop, where employees in a bank get new capabilities, they decide whether they like them or not, and they give us feedback, and then get in the next release. We were masters at that.

That's not the playbook anymore. The playbook is to get things out literally every day and get feedback and react and change where we're going to invest. "Look, we've got a hundred people on this, but everybody seems to be using this feature. Let's take those people and put them, pour gasoline on the fire, what's landing well in the marketplace." For the team, it's so much more fun because you don't throw things. It’s like dropping a note in a bottle and sending it around the world in the old model. Now, you can get things out there.

Cloud thinking

That said, the older model of taking on board customer feedback has influenced the direction products have taken. For example at an event in 2011 as part of Microsoft’s Technology Advisory Program which used to involve bringing in top customers.

Teper recalled:

We had about hundred people in the room talking about what we'd do for the next version of Office. I got up and gave the keynote and said, "We've got some ideas, but we want your feedback." We said, we had a cloud-ish version of Office called Business Productivity Online Services, which was a hosting play rather than a cloud play, but we wanted to go to the cloud.

We asked the people in the room, "How many of you're going to the cloud?" Ten percent of the room raised their hands. I said, "No, no, no. I don't mean this year, but in a three to five year time horizon." Another few hands went up.  That’s sort of when it hit me that sort of innovators dilemma story that [to] our customers, we are going to be a trailing indicator on the market. Those IT people in the room were not going to tell us when the market had turned. They were going to tell us after it turned.

Actually that motivated us to go invest even faster. We shifted to what we now term "Cloud First," which was instead of making the server every three years, running that in the cloud, we're going to go build the cloud every day and grab a piece out of it and make a server out of it. We've been at this for several years. Our run rate now is about $4.5 billion in cloud revenues for Office 356 and Azure.

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Satya Nadella

Teper argued that Microsoft’s cloud credentials are well-established now:

The thing that I think we're most proud of is the pace of the new product innovations. We have the enterprise management suite that lets you manage in all mobile devices from any vendor, any platform. We have the video service.  In the cloud side I think there is lot of proof points, both in the revenue and the product.

I intuitively knew the economies of the scale of the cloud would trump things, because you watched the technology industry and you see Moore's Law and what happened with the microprocessor and so forth. But as I stepped into the role, people showed me the math in great detail. And the economies of scale are pretty massive, and you're starting to see that in storage for example, versus three years ago. You can now buy first 699 a month subscription to Office, they gives you basically unlimited storage. We've gone from companies offering 10 GHz storage to 20 GHz storage to terabyte storage. And now, the big guys will give it to you essentially for free.

Cost isn’t the only driver any longer, he added:

Every photo my family has ever taken is now in the cloud, not just the good ones, but every one because I just don't have to think about it anymore.

Mobile focus

Away from cloud, mobile is of course another primary focus, but Teper wants to move the goalposts somewhat:

We have got to redefine mobility as the mobility of the user across all devices and not just necessarily our mobile platform. We have a great mobile platform. We're investing in it, but if somebody has got a Windows PC and an iPhone and they love our software, when they go buy their next PC, tablet, phone they're going to say, "You know that the new version of Office is amazing. I love it or the new version of Skype. Wow, they've done some unique things on the surface, on the Lumia phone. Let me think about that.” So I think Satya has really emphasized is the challenger mindset; "Let's get people love our products and that will pull them back to our platform.

This is another return to first principles. he added:

The first version of Excel was done for the Mac and not for Windows. The first version of the Office bundle was done for the Mac, and not Windows. Bill was pretty clear, "Look, we have an apps business, we have a platform business. Our apps business is to be successful; it's got to be everywhere. We do unique work in apps. People will prefer our platform and the flywheel will go."

We're back to those roots.  I think early proof point I'd give that is we're on our third round of the Surface. I think you can see as a product hit and a financial hit at this point. We had good news in the earnings our last quarter about doing $900 million in surface tablets. It took us a bit to figure out the right point factor in positioning, but this positioning of the tablet that can replace your laptop, that has unique things that the other platforms don't have like the pen integration with the OneNote and so forth. I think it's the model. Killer apps available on any platform and then ultimately the flywheel platform differentiation will happen again.

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