Nadella Breaks Microsoft Out of Windows
Could Microsoft Corp. finally be breaking out of the constraints of its Windows operating system? The sudden success of its Office software for Apple's iPad suggests that is where new chief executive Satya Nadella is taking the company.
For far too long, Microsoft has remained dedicated to an increasingly obsolete business paradigm, in which the operating system is the core product. In this model, the goal is to get the operating system onto as many devices as possible, and to have the best and broadest selection of applications. To that end, former Microsoft Chief Executive Officer Steve Ballmer was willing to buy an entire mobile handset business from Nokia, just to get Windows onto more devices. Microsoft also was reluctant to make versions of its most popular applications for other operating systems. Hence, no Microsoft Word for Linux or Android. Profitable opportunities were sacrificed on the altar of Windows.
Now, though, in a world where Microsoft Office applications can be accessed in the cloud from any computer running any operating system, the Windows-centric approach makes no sense. Judging from his blog post explaining the release of Office for iPad, Nadella recognizes this. He was immediately rewarded for the insight: On its first day in Apple's App Store, Word was the uncontested leader in the productivity category and the most downloaded app, period; in the U.S., PowerPoint and Excel were also doing great.
There is no such thing as being late to the market when you've delivered a good product under an instantly recognizable brand name. Word, PowerPoint and Excel are still industry standards, and despite competition from excellent (and free) products such as OpenOffice or Apple's productivity suite, you still have to send files in traditional Microsoft formats to make sure anyone in the world, running any office software, can open them. That may no longer be entirely deserved, but it's not worth fighting.
In terms of profits, Windows has long since stopped being Microsoft's dominant offering. In 2013, the operating system accounted for 33 percent of the company's operating profits, down from 54 percent in 2010. Windows versions for the PC had grown progressively weirder and more misunderstood, culminating in Windows 8 with a combined touch and traditional interface as confusing as it is unnecessary. The new touch-based version of Office is not available for Windows 8 yet because there are not enough tablets running it.
The business division, which includes Office, contributed 60 percent of operating profit in 2013. Last year, Morgan Stanley estimated that Microsoft was missing out on $2.5 billion in revenue by not releasing Office for the iPad. That's 13 percent of the 2013 revenue of the entire Windows division -- just for an Office edition for a single platform.
Windows revenue won't disappear, if only because corporate clients have already invested in the operating system and aren't going to drop it in the foreseeable future. But it is a legacy business that, under Nadella, is becoming secondary to the company's goals. Reports that Microsoft is now giving away Windows licenses to some (decidedly minor) mobile-phone producers confirm the strategy shift.
Nadella promised on the Microsoft blog that he would make it clear next week "where we are going with key platforms like Windows, Windows Phone, Xbox and Azure." With the launch of Office for iPad, though, Nadella has already made his major statement: Products are now more important for Microsoft than platforms. With plenty of cash and talent at its disposal, the software giant may well be able to reinvent itself and produce more cross-platform hits.
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