Here's The Only Thing Satya Nadella Needs To Realise About Microsoft

Microsoft boardMicrosoftThe Microsoft brain trust: Chairman John Thompson, CEO Satya Nadella, founder Bill Gates, and former CEO Steve Ballmer.

As Satya Nadella takes over as CEO, this is the only thing he really needs to remember: Microsoft is not a consumer technology company.

Oh sure, it sells a lot of stuff to consumers — Xbox, Windows phones and PCs, Surface, etc — so people think it’s a consumer technology company.

It competes with Google and Apple and so people want to compare it to those companies. But the truth is that Microsoft is completely different.

Microsoft is an enterprise technology company.

Just look at last quarter’s earnings report. The commercial groups’ earnings grew by 10%. The consumer groups’ earnings contracted by 14%. And, the consumer groups’ earnings are about half the size of the commercial, or enterprise, groups.

Nadella should be pounding the table at every chance he gets to say that Microsoft is an enterprise company, not a consumer technology company.

As Microsoft has grown, it’s struggled to define itself. This is partly because former CEO Steve Ballmer didn’t want to make Microsoft an enterprise company. And since Microsoft was struggling in consumer technology, it was silly to make it a consumer focused company.

Why didn’t Ballmer want Microsoft to be all-in on the enterprise? A former employee told us that he didn’t want Microsoft to become IBM, which he considered to be an irrelevant company.

Nadella shouldn’t have this concern. He should make the enterprise the focus on his tenure, and make it exciting. There should be no doubt in anyone’s mind as to what Microsoft is working towards: Complete domination of enterprise technology.

Now, this doesn’t mean Microsoft should spin out Nokia, Xbox, Bing, or any of its consumer facing businesses. They are all very useful for Microsoft.

But, a lot of pundits obsess over Microsoft’s consumer tech businesses. In particular, they look at Microsoft’s failure in the smartphone market and the collapse of consumer PC sales and want to write Microsoft’s obituary.

They say Microsoft must get better at Windows PCs and it must get better at selling mobile phones. It needs to be more like Google and Apple, they say.

There is no doubt that Microsoft wishes it was selling more smartphones and more PCs to consumers.

But does it need those businesses to succeed?

Last quarter, Microsoft’s consumer PC sales fell 20%, but enterprise PC sales were up 12%. As a result, the company’s revenue was up 14%, and EPS was up 3%.

Is this a one-off quarter? An anomaly? No. This has been going on for a while, and Microsoft is doing just fine.

This doesn’t mean Microsoft can just abandon its consumer businesses. They’re all really important for the long term of Microsoft.

There’s a trend in technology called the “consumerization” of IT. Essentially, people are bringing the gadgets they use at home into the office. So, iPhones and Android phones are invading Microsoft’s enterprise territory.

As a result, it needs to continue developing consumer facing technology like Nokia phones and Surface tablets.

As for the Xbox, it’s not essential for Microsoft.

Bing isn’t essential, but Microsoft swears the technology used in Bing has been helpful for its servers group.

Either way, who cares?

Self-driving cars aren’t essential for Google. Neither is Google Glass. Or contacts that check on glucose, or balloons that deliver Internet, or clean energy, or a lot of other side projects in development at Google.

Yet, Google is applauded for pursuing these projects.

My theory is that Google has established itself as a technology company pursing the future. Its core business is still growing at a fast clip, so people are willing to forgive the sideshows.

If Nadella came in as CEO put 100% of his attention on the enterprise business, which is growing at double digits, investors and pundits would be more willing to forgive stuff like Nokia, the Surface, and Xbox.

As for dealing with the growth of iOS and Android, it doesn’t have to be a bad thing for Microsoft.

Instead of feeling beaten by the iPhone and Android, Microsoft should embrace those platforms. It should be delivering the best applications for iPhones and Androids.

Google has done very well at taking over the iPhone with Chrome, Gmail, Google Maps, and Google Now.

Microsoft has done almost nothing on the iPhone or Android. Microsoft Office should be an amazing suite for the iPad, iPhone, and Android. Internet Explorer for Android should be better than Chrome for Android.

Even if Microsoft fails to get its software on those platforms, Nadella should point out that Microsoft’s servers group benefits when users start firing up iPhones and Android-based phones.

A lot of people talk about Microsoft like the company is hosed.

It will generate ~$85 billion in revenue for the next year. It has $US84 billion in cash. It has a brilliant group of employees working on some truly innovative technology.

Microsoft is not hosed. It just needs a CEO that’s willing to focus on one thing, and that one thing should be the enterprise where it can serious kick butt.

When investors see the commercial business chugging at a double digit pace, they’ll be a lot less worried about what’s happening to consumer PC sales.

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