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By | Gavin Clarke 23rd July 2014 18:31

Microsoft: We're making ONE TRUE WINDOWS to rule us all

Enterprise, Windows still power firm's shaky money-maker

+Analysis Microsoft has cracked open its annual and Q4 results, the first end of year numbers it has spat out under brevity-challenged chief executive Satya Nadella.

As befitting such a results event, there was plenty of backslapping and self-congratulatory talk about how Microsoft is turning into a cloud business.

But why was Microsoft’s head of PR, Frank X Shaw, so furiously trying to put a positive spin on things via Twitter that he had to be told to shut up and “go home” by one of Bloomberg’s Microsoft watchers covering the results event?

Despite all the hype about being a cloud, devices or a consumer company, Microsoft must once again thank enterprise customers for paying their way. Revenue from business customers made up the single largest block of Microsoft’s year in 2014.

Redmond made revenue of $49.57bn during financial 2014 from two units – commercial licensing and commercial “other”, which reported $42bn and $7.5bn respectively. The commercial units were one of Steve Ballmer’s last acts as CEO and got board approval.

Between them, these two sweep up Microsoft’s hefty on-prem plus its aspiring cloudy business – Windows Enterprise and Windows Server products, Office business, Dynamics and Unified Communications, Office 365 and Windows Azure. Many of these products had been in the old Microsoft Server and Tools business that the company’s current chief executive Satya Nadella ran. S & T was one of Microsoft’s big three engines, along with Windows and Office.

In a further sign that it was Server and Tools running the show, it was – as ever – Microsoft’s database that was blowing the doors off. Revenue from SQL Server grew 19 per cent in the last 12 months.

As a business area cloud was also growing, and Microsoft claimed commercial cloud revenue grew 147 per cent ($564m) in the quarter “driven by Commercial Office 365 and Azure.”

The company’s other big revenue generator in 2013 was, as ever, Windows. The device and consumer-licensing unit created by Ballmer reported $18bn in revenue, down about one per cent on 2013 – or in Wall-Street-speak, “flat.”

After device and consumer licensing and the commercial licensing business (numbers two and one in terms of overall revenue size) there was a big drop off.

Next came computing and gaming (Xbox), device and consumer “other” – a runt category that includes Office 365 Home Premium and Bing. Windows Phone hardware – the old Nokia business - limped in on $1.9bn in revenue.

So not a cloud business after all, more an enterprise business?

Hold on just a second. While on-premises licensing of server and tools and sales of Windows were the big two Microsoft did claim large growth in the cloud: it claimed cloud annual revenue run rate now exceeds $4.4bn. There is a caveat, however: beware of tech companies and annual run rates.

It’s the claim du jour being wheeled out by all tech companies that are stuck with on-site license businesses and trying to spin up cloud subscriptions. It’s also opaque and not auditable.

Run rate is a simple extrapolation of one quarter’s results over four quarters; it, of course, takes no account of how results per quarter might change so is not to be trusted.

What else did we get from Tuesday’s results?

What consumer focus Microsoft does have at present is being reset. Xbox is staying, that's been made clear, but the grand plan of becoming a home digital and entertainment hub is over. It's back to being a games system.

"We made the decision to manage Xbox to maximize enterprise value with a focus on gaming. Gaming is the largest digital live category in a mobile first-cloud first world. It’s also the place where our past success a revered brand and passionate fan base present us a special opportunity," Nadella said, adding, "We will invest in our core console gaming in Xbox live with a view towards the broader PC and mobile opportunity."

Evidence of growing contradiction emerged in Satya Nadella’s stance on the role of hardware for Microsoft. In a widely circulated PR-authored communication recently, Nadella reckoned hardware is important to Microsoft – to proving new ideas.

He called Microsoft’s homemade systems “first-party” hardware.

In his recent memo, Nadella talked at great length about what is core to the Microsoft business. For the benefit of Wall Street he went on again about that core. Only this time, it seems hardware’s presence in the core depends where you sit.

On the one hand, Nadella promised “disciplined financial execution” – remember each Surface sold is currently costing Microsoft money. Yet, Surface aside, this is the right message a new leader needs to communicate: all things are under review, there are no sacred cows, everything must generate money and not become a vanity project or cost to the company.

But, barely pausing for breath, Nadella called hardware both “core” and a “supporting effort” – in other words, the same as MSN and retail stores, which excite nobody.

Here’s both quotes:

We will get crystal clear on the core businesses that drive long-term differentiation and the businesses that support them. For those supporting efforts such as MSN retail stores and hardware, we will also ensure disciplined financial execution. He continues, immediately after: Now let’s talk about the specific investments. We will be relentless in our focus on our core digital work and life experiences and the two platforms that support it, the cloud operating system and the device operating system and hardware.

We thought, Nadella was spouting contradictions on mobile first, cloud first, now it seems there’s a contradiction in the heart of the mobile part whether first-party hardware is core or non core – the, er, very core of Nadella’s premise.

The other action was on the cloud and it became clear Nadella’s strategy is to continue to turn Microsoft into a kind of back-end to devices, a repository of data, honing machine learning of big data. In other words, Google.

The Chocolate Factory has been buying heating control system makers and making its own cars turn into new network endpoints that generate and amass data that its boffins and algorithms can crawl and try to monetize.

Meanwhile, Microsoft has been buying software companies to Borg into the Windows Azure fabric. As such, in April Microsoft announced the Azure Intelligent Systems Service. Customers can use Microsoft tools such as HD Insights, Azure Hadoop and Power BI to capture and analyse data from the underlying data hovering service.

In May Nadella bought GreenButton to manage compute-intensive workloads, and Capptain, which lets developers track and analyse usage of their Web and mobile apps. This month they added InMage, which offers disaster recovery for hybrid clouds.

According to Nadella, he plans to make money from Windows Azure by charging for these as high-end cloud services.

How far that will fly is difficult to see, given Microsoft is up against Amazon, whose modus operandi is to offer new services and add them Amazon Web Services (AWS) while cutting the price of AWS. Nadella seems to believe he can fashion a high-end line from what’s becoming a commodity cloud cloth.

Microsoft's business has based on driving patrons to more expensive SKUs of Windows. The same strategy seems to be the mission on cloud.

In the meantime there will be plenty of spending from Nadella to deliver this expensive cloud. He promised spending on greater Windows Azure server capacity and more regions to get payback on these acquisitions, plus the launch of high-level services, including Azure machine learning which is currently in preview.

As for the, ahem, core Windows business, Nadella promised big changes. The drive to continue the convergence in look and features continues.

What you can take away from Microsoft’s report is this: that, once more, it’s the enterprise who the company is in hock to for the majority of its cloud growth. Yet consumer products are too big an elephant in the room to ignore.

Nadella told Wall Street: "We will streamline the next version of Windows from three operating systems into one, single converged operating system for screens of all sizes." ®

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