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In Microsoft's mobile-first, cloud-first strategy, Windows takes a supporting role

Mark Hachman | Jan. 28, 2015
The operating system that built Microsoft will serve as a conduit for the cloud services that now earn far more for the company.

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At the end of Microsoft's earnings call Monday night, Microsoft chief executive Satya Nadella explained what made Windows unique. And he flubbed it.

Or did he? 

Microsoft exceeded analyst expectations for the fourth quarter of 2014, its second fiscal quarter of 2015. During most of the call, Nadella and chief financial officer Amy Cook focused on where Windows went wrong.

They blamed a 25 percent decline in its Devices and Consumer Licensing unit on economic conditions in Japan and China, and the lull that followed a surge in PC buying as Microsoft ended support for Windows XP a year ago. This was also the first holiday quarter after Microsoft eliminated license fees for Windows devices under 9 inches, as Directions on Microsoft's Wes Miller noted.

Given that Microsoft grew revenue by 8 percent during a period when Windows OEM revenue dipped 13 percent, Office Consumer revenue declined 25 percent, and Windows Phone revenue fell 61 percent, clearly consumer products are not fueling Microsoft's' growth. A brighter future for Microsoft appears to lie with back-end software and services, and not necessarily Windows. Office 365 subscribers jumped by 30 percent sequentially to 9.2 million; Xbox Live resale revenue climbed 42 percent year-over-year; and commercial cloud revenue, including services like Azure, drove revenue up 114 percent versus a year ago.

The shift came into focus at the end of the call, when an analyst asked Nadella how the company's multiplatform products and services--Office, Skype, and Minecraft, to name three--benefit Microsoft. 

What makes Windows unique?

Services like Office 365, its enterprise mobility suite, and other cloud services cover all devices in the marketplace, Nadella said, and maximize the opportunity Microsoft has for subscription and capacity-based services. Nadella then took on the challenge of describing what made Windows unique.

"The uniqueness of Windows comes because we don't think of these services and their application endpoints as apps, but fundamentally, core to the Windows experience," Nadella explained. "For example, when you log into Windows you're logging into Microsoft account or Azure ID. When you have files, they're syncing with OneDrive. Outlook is the email client for Windows."

Nadella portrayed Windows as the best, but definitely not the only, platform for Microsoft's services. "Our application experiences for our cloud endpoints will be native in Windows, and at the same time we'll make sure our services will be available on all endpoints, driving more usage modes of subscription growth," he said. "The best way to measure our progress is Office 365 subscription growth, Azure subscription growth, and EMS [Enterprise Mobility Suite] growth."

Still, that stance diverges from the traditional view of Windows as the foundation of the Microsoft empire. In Nadella's interpretation, Windows is more like a trellis, supporting Microsoft services as they twine up, around, and through its beams.


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