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The Microsoft campus in Redmond, Wash. (Microsoft)
The Microsoft campus in Redmond, Wash. (Microsoft)

Embracing the cloud: How Microsoft is radically changing its vision Add to ...

In the heart of Microsoft’s city-sized headquarters, amid dozens of self-same office buildings, is a courtyard designed to commemorate the 40-year legacy of the world’s most successful software company.

Hundreds of stone plaques along the ground bear the names and release dates of various Microsoft products, from well-known commercial blockbusters (Microsoft Windows 95), to the most obscure titles in the company’s catalogue (Microsoft Dogs).

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Today the plaques feel a little like gravestones. Taken together, they describe the sort of company that Microsoft is trying very hard not to be.

“Today we literally update [products] every minute of every day,” says Yousif Khalidi, a distinguished engineer with Microsoft’s Azure cloud computing unit, which has become one of the most important parts of the company as Microsoft transitions many of its most popular products to the cloud.

“We used to ship a CD and have a party.”

As it enters its fourth decade, Microsoft is on a tear. The company’s stock price, hovering around the $40 (U.S.) mark, is higher than it has been at any time since the dot-com boom. In its most recent quarterly earnings report this January, Microsoft posted revenue of $24.52-billion and profit of $6.56-billion – beating analysts’ expectations.

Yet the company still finds itself in the unfamiliar role of underdog, struggling to keep up with younger foes such as Facebook, Google and Amazon for dominance in the tech industry’s triple crown of social networking, mobile devices and cloud computing. In order to remain relevant, Microsoft is in the middle of a massive structural shift – from an inefficient collection of antagonistic silos (the Windows team, the Office team, the server team...), to a more efficient, unified entity.

For Microsoft, this transition is a matter of long-term survival. Very few of the companies it competes with today are saddled with decades of corporate tradition, and so are able to make decisions and change course quickly. Having already missed the first (and incredibly profitable) wave of the smartphone revolution, Microsoft has given its competitors a considerable head start.

While some of the competition has focused primarily on mobile or social, Microsoft is making cloud computing the heart of its metamorphosis. It’s a strategy that relies on the idea that if Microsoft can convince customers to store data and run cloud-based programs, it’ll be easier to get those same customers to buy mobile and social products down the line.

But Microsoft’s corporate transition could prove painful and costly, as increasingly aggressive competitors make life much more difficult for the software giant.

For Microsoft’s strategy to succeed, the company must address a glaring price gap between many of its most popular services, such as Microsoft Office, and the free or low-cost alternative offered by competitors such as Google.

“Do you know what the number-one-selling laptop on Amazon.com is right now? A Chromebook. Do you know what the number-two-selling laptop is? A Chromebook,” says BGC Financial analyst Colin Gillis, referring to the relatively cheap laptop running on Google’s Chrome operating system.

“And then you’ve got Android on a billion devices. At some point all these shifts are going to hurt Office.”

In order to compete, Mr. Gillis adds, Microsoft’s best bet may be to mimic Google’s strategy and try to build a user base by giving away some of its platforms – in particular, the Windows Phone operating system.

“Android gets traction by giving it away for free,” he says. “If you’re Microsoft, maybe you give it away for free now. If you want to get traction, you have to target the low-cost marketplace.”

Billions of people already rely on Windows, office and other products, but what Microsoft is discovering is that a massive user base may also be a hindrance to innovation. On more than one occasion in the past year, Microsoft has been forced to scale back a number of innovative new products and services – not because they were outdone by the competition, but because many of the company’s own customers were not comfortable with radical change.

In the most important battle in its corporate history, Microsoft isn’t just fighting for users, it’s often fighting against them.

The shift to the cloud

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