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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

It used to be that new releases of the Windows operating system came out so infrequently that Microsoft could safely name them after the year of their release: Windows 95, Windows 98, Windows 2000. They were monumentally successful. Since the mid-1990s, roughly 90 per cent of the world’s desktops and laptops have run on some version of Windows, making it by far the most dominant commercial operating system of all time.

That was then. This month, Microsoft updated the latest version of Windows for the third time in 16 months. The sputtering saga of Windows 8 represents, simultaneously, everything Microsoft is trying to become – innovative, connected, forward thinking – and everything that’s standing in its way.

Microsoft’s cloud-first strategy envisages that customers will no longer buy software and services and run them locally on their devices. Instead, customers will rent everything from the Office productivity suite to server space. For a monthly fee, all that technology will be stored, run and updated in Microsoft’s own data farms, accessible from any computer with an Internet connection. Customers will become much more reliant on the company for their most vital technical needs, making it more cumbersome for them to switch to a competing company’s products and services.

As a cloud company, Microsoft is expected to address customer complaints in something approaching real-time, given that customers are now essentially technology tenants, and updates can be pushed to the cloud without delay. In that context, three major updates to Windows 8 in less than two years doesn’t sound unusual. After all, Microsoft’s cloud-based Office suite was the subject of 75 updates last year alone.

When it was launched in October of 2012, Windows 8 represented the most radical overhaul of the world’s most popular operating system since Windows 95 introduced the Start button. By combining two different user interfaces – a touchscreen-friendly one for mobile devices and a more traditional one for the 1.5 billion current Windows users – Microsoft hoped to give users the best of both worlds. A new tiled start screen, called the “Metro” interface, features apps that update and sync remotely via the cloud.

But almost every update the company has issued to the software since the launch has been a kind of partial retraction of that vision. Many users, it appears, were simply not willing to join Microsoft in its departure from the computing norms it helped establish.

“I miss the Start button,” said one user who logged in to a Windows users’ forum asking how to best remove a factory-installed copy of Windows 8 on his laptop.

“I don’t think I have any use whatsoever for the funny dashboard screen,” he added, referring to the Metro interface.

And so designers were forced to bring some of those norms back – they made it easier to switch from the mobile-focused user interface to the one that still resembles older versions of Windows; they made it easier to switch off the system using traditional commands; and they expanded the presence of the old Windows taskbar. In a way, they moved backward.

“Microsoft, to its credit, swung for the fences with Windows 8,” says independent technology analyst Carmi Levy. “In many respects, it was technology ahead of its time – it was exactly what Windows users needed, but Windows users are a very conservative lot.”

But simply continuing to provide customers with spiritual successors to Windows 95 is becoming untenable for Microsoft, given the growing consumer shift from desktops and laptops to mobile devices – a hardware industry where Windows owns minuscule market share.

Even in the world of traditional computers, there are signs the Windows era is coming to an end. Desktop sales have been plummeting for years, and the fastest-selling laptop today is the Chromebook – a laptop running on Google’s Chrome operating system that has almost no local storage capabilities, and instead stores all user data on the cloud.

A change in corporate culture

Despite the persistent perception that the company is unable to keep up with the Apples and Googles of the world, it is difficult to describe Microsoft’s recent financial performance as disappointing. Thanks to frequently better-than-expected earnings results, a newly resurgent Office productivity suite and a breath of fresh air in the form of a new chief executive officer, Microsoft has been the subject of several analyst upgrades, including two price target hikes this week alone.

Even though the company’s Windows mobile platform is a very distant third behind Google’s Android and Apple’s iOS operating systems in the world of smartphones, Microsoft’s share of the market is slowly growing, recently overtaking BlackBerry, according to International Data Corp. Indeed, IDC predicts Windows will be the fastest-growing mobile platform in the world over the next four years.

Most importantly, Microsoft is also seriously competing for dominance of the enterprise and consumer cloud computing market. The cloud, where Microsoft is locked in a fierce battle with Google and Amazon, is pivotally important because it allows Microsoft to offer its services across a range of devices – for example, a user can open a cloud-based copy of Microsoft Word on their tablet, smartphone or desktop, and sync the data across all those devices seamlessly.

But to achieve this, Microsoft risks stretching itself thin competing against behemoths on either end of the cloud computing spectrum – Amazon, which has created a massive enterprise cloud that powers many of the Web’s biggest services, and Google, which offers myriad cloud services such as Gmail to consumers for free.

Because cloud-based services require all of the company’s disparate divisions to work closely together, Microsoft has recently been forced to undertake a complete overhaul of its corporate culture.

Last summer, in an attempt to make the company more united and agile, then-CEO Steve Ballmer introduced an initiative called One Microsoft. Under the program, the company would no longer work in silos dedicated to certain products, but under more broad divisions, such as engineering and research. Within the engineering division, the company shifted to focus on its new top priorities: operating systems, apps, cloud services and hardware.

In February, Satya Nadella replaced Mr. Ballmer as Microsoft’s newest CEO. “We need a CEO who will be here longer term for this new direction,” Mr Ballmer said in a memo to Microsoft employees. “Microsoft has all its best days ahead. We cannot and will not miss a beat in these transitions.”

Mr. Ballmer’s chosen successor, Mr. Nadella, previously headed up Microsoft’s cloud services division, illustrating just how vital the technology is to Microsoft’s future plans.

“As we look forward, we must zero in on what Microsoft can uniquely contribute to the world,” Mr. Nadella said in his first note to employees. “The opportunity ahead will require us to re-imagine a lot of what we have done in the past for a mobile and cloud-first world, and do new things.”

It’s still early days, but some of those new things – particularly, the One Microsoft streamlining initiative – seem to be showing some signs of success.

“With One Microsoft, it brought the leadership closer together,” says Karsten Aagaard, who helps run Microsoft’s hardware prototype modelling shop. “Before, we would work with individual teams. Now it’s better, there’s more partnership.”

But as Microsoft works to streamline its decision-making processes and become more innovative, nothing in the One Microsoft manifesto addresses how to convince customers to come along for the ride.

The same tug of war between Microsoft and its Windows users can be seen with other products. Last summer, in the lead-up to the release of the newest gaming console in the highly successful Xbox family, Microsoft attempted to radically change the way the system worked – for example, requiring users to always be connected to the Internet in order to play games, and putting severe restriction on used games.

Even as a minority of observers commended the company for making a big bet on the concept of always-connected gaming, a massive number of users were outraged by the changes.

“It would have been absurd if your [Super Nintendo] cartridges only worked in your [Super Nintendo console],” Luke Plunkett said in the influential gaming blog Kotaku. “Or if Street Fighter II couldn’t be played at an arcade if Capcom’s phone lines weren’t working.”

Ultimately, Microsoft was forced to take back almost all the major changes it had proposed.

Microsoft’s history also hinders its attempts to innovate in other, less tangible ways. Despite building a string of consumer-focused gadgets over the past few years – many of which received critical acclaim for their design – Microsoft has seen many of those gadgets either discontinued (the Zune music player) or struggle to gain traction (the Surface tablet, on which the company took a massive $900-million writedown in July). Repeatedly, Microsoft has tried to build products that the average consumer finds alluring, all the while fighting the perception that it’s not the sort of company that builds alluring products.

“For those of you who think there’s a barge on the ocean with $900-million worth of Surfaces on it, you are incorrect,” said Ben Reed, senior manager of the Surface line. “People are buying them.”

However, there are some signs of success. According to the company, one in four Microsoft Office enterprise customers have already switched to the newest version of the software – an impressive percentage, given that the new Microsoft Office exists almost solely as a cloud-based, subscription service. While Office 365 may keep many of the user interface norms of its predecessors, the way it stores data is a significant departure.

“It’s challenging to make a pizza for 1.5 billion people, but we don’t view a [user base of 1.5 billion] as a hindrance,” said Chris Flores of the Windows team. “That’s an opportunity.”

But not everyone shares that optimism.

“It’s a huge hindrance,” says BGC Financial’s Mr. Gillis. “It’s about what people are trained to use. Re-training people is a huge problem.”

In a way, Microsoft’s challenges may well be indicative of the issues that other tech giants will face in the coming years – if Google, one day, tries to transition its billion-plus Android operating system users to something new, or if Apple ever builds a new mobile platform that differs radically from the current iOS. In that respect, Microsoft’s woes represent the eventual flip side of the technology industry’s current corporate ethos – that nothing is more important than building a massive user base.

A transformation to a utility

Not far from the courtyard where Microsoft’s software achievements are commemorated in stone, there’s an outdoor water feature, roughly the size of a basketball court, called Lake Bill.

Named after co-founder Bill Gates, Lake Bill has in previous years been the subject of a Microsoft ritual. Whenever the company hit a major milestone, such as shipping a new product, a senior executive would jump in the lake and swim from one end to another – the launch being a moment for celebration, for catharsis.

Not too many people can remember the last time an executive took the plunge. That may be because big launches are becoming more rare at Microsoft, as it transitions to the always-on world of cloud services.

Instead of a software company, it is aiming to become a utility – the technology industry’s equivalent of a gas company or electricity provider.

In a way, that vision of the end of the traditional desktop, with its local hard drive and software, appears inevitable. As BGC analyst Mr. Gillis notes, traditional PC sales have been in decline for the last 10 quarters in a row.

What remains to be seen for Microsoft is whether the company can truly capitalize on this transition – breaking free from four decades of tradition – without losing its customers in the process.

“They are moving in the right direction; the question is whether the change will be fast enough or deep enough to make a difference,” says technology analyst Mr. Levy.

“The Titanic is in the process of turning, and the ocean is filled with icebergs.”

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