With a major restructuring underway, and integration with Nokia in the pipeline, the Windows maker is in a state of upheaval. Mehak Chawla looks into Microsoft’s repositioning efforts and what it means for its India operations
On July 11, 2013 Microsoft’s CEO Steve Ballmer, in a long mail to Microsoft’s employees, set in motion a broad corporate shakeup. An overhaul of the corporate strategy in Microsoft had been under speculation a few months prior to this announcement. In his mail, Ballmer unveiled a plan aimed at restructuring the software giant and repositioning it as a “devices and services” firm. The message was not new, but the urgency had been intensified. The announcement came on the heels of a decent fiscal fourth quarter in which Microsoft reported quarterly sales of $19.9 billion. The software giant’s revenue for the period ending June 30 was up 10% year over year, a result that seemed to buck the sluggish sales trend affecting the global PC industry.
The prime reason behind this restructuring is that Microsoft continues to rake in huge profits from its traditional software business- licenses sold to businesses for its Windows PC and server operating system, and Office software suite. However, the company has been losing ground in fast moving technologies like cloud services and mobile devices, where Amazon, Google and Apple have established a strong foothold.
Dubbed “One Microsoft,” the major restructuring effort involves an executive shakeup and the consolidation of several principal business units and product lines along simpler tangents. Going forward, the company will be organized by function: engineering, marketing, business development and evangelizing’ advanced strategy and research, finance, HR, legal, and COO.
As a result of this restructuring, Microsoft will have four engineering areas: “Operating Systems (OS), Apps, Cloud, and Devices,” explained Ballmer. In what may be a fundamental change for Microsoft, it aims to make its Windows, Xbox and Windows phone platforms work more seamlessly together.
The restructuring process, which is likely to be completed by end of this calendar year, certainly has echoes of Apple’s restructuring that happened back in October 2012. The iPhone makers’ senior vice president of iOS Software, Scott Forstall, left the company as part of a reorganization designed to “Encourage even more collaboration between the company’s world-class hardware, software and services teams.” Microsoft’s restructuring has been accompanied by the exit of Kurt DelBene, who will retire as president of Microsoft’s Office division after having been at the firm since 1992.
This is Microsoft’s first real restructuring in over a decade, and will not be easy to establish, say analysts, given the many divisions and the huge churn required. “One Microsoft” and the subsequent acquisition of Nokia’s devices and services business, seem aligned with the organizational branding strategy. The only piece that Microsoft was missing in their mobility story so far, was the hardware bit. Though the company did try its hand at mobility devices through their tablets Surface and Surface RT, it failed to make a dent in an already crowded market. A dent which resulted in a $900 million write-off for the company. Nokia, which is already using Windows platform for its popular Lumia series, is likely to give Microsoft the back end integration between hardware and software, something that has been missing from their mobility offerings.
Urgent makeover
There is no doubt that Microsoft’s recent efforts signal the need for the company to re-brand and rebuild itself in the era of cloud and mobility, while there is still time. The analysts also feel that Microsoft did need to undergo a major shift in order to bounce back into the game, and this reshuffling drive, coupled with an acquisition that the experts largely claim to be a sensible one, is likely to give a more unified look to the company.
“Yes, restructuring will surely result in making operations more streamlined, more focused on innovation and especially aggressive in terms of presence and marketing,” observes Katyayan Gupta, Analyst, Serving Infrastructure & Operations Professionals, Forrester India.
So far, Microsoft hasn’t been able to get its hardware game on track in the mobility space. They couldn’t get the price points and marketing right, despite having some good stuff inside their Surface devices. Also, with Windows 8.1 update around the corner, the need to show results to shareholders has never been more compelling for Microsoft. If Windows 8.1 doesn’t deliver, Microsoft is in trouble, especially with rivals like Google and Apple already announcing OS updates.
So this restructuring signifies the urgent need to achieve more synergies and more alignment between hardware, software and services divisions. “For instance, we can expect Xbox and PC divisions to get closer to each other. Microsoft will also be looking to make its hardware talk to each other. The result of this could well be a piece of extremely powerful hardware, which none of the competition can match. Because Microsoft does have the resources. One Microsoft is aimed at better aligning these resources,” says Gupta.
Sanchit Vir Gogia, Chief Analyst and CEO, Greyhound Research, agrees that collaboration will increase as a result of this organizational shift. “With the simplification of entire portfolio that Microsoft is undertaking, we shall see more symphony and conjoined efforts between their hardware and OS divisions. Another thing working for Microsoft here is that their Office 360 can sit beautifully in a mobility scenario. There are bigger bets placed on Windows 8.1, and though it will see traction, that’s not likely to happen very soon.”
Windows to mobility
The acquisition of Nokia’s device and services business, according to Gogia, is not merely about phones, it is about having a footprint in hardware. “It is not about revival of a brand, it is about supply chain management for Microsoft.”
The acquisition, to many, did not come as a surprise. It is being seen in line with Microsoft’s recent drive to re-brand itself as a devices and services company. To that extent, it also follows the Apple story of one technology giant having full control over the hardware, device and services pieces.
“Phones today are no longer a hardware story. They are an experience and applications story. So when Symbian ship was sinking, Microsoft came up with a robust platform. With this acquisition, the platform as well the hardware supporting it will belong to the tech giant. Microsoft already sits pretty within the enterprise market- from a data center as well as a Windows stack perspective. With this deal giving it control over back-end hardware management, it could expand its share in the mobility pie,” elucidates Gogia.
The deal could also expand Microsoft’s reach to market, especially in developing countries where Nokia has a lot of entrenchment in channels and consumer retail, while Microsoft has a great foothold in the enterprise and the home segment.
What Microsoft did wrong, according to Gogia, is that it invested a lot of money in mobility prior to this acquisition. “But if they do get the hardware correct, then this deal can be a very compelling story. When it comes to the application ecosystem, Microsoft has the resources and means to build it.”
A tighter integration between software and hardware can also be a big driver for Microsoft’s Surface in the mobility space. “However, the level of integration is very crucial if this acquisition is to yield results. The success depends a lot on how swiftly and tightly can the devices, software and apps pieces be integrated,” emphasizes Gupta of Forrester.
A very important piece of this story, which not many are talking about yet, says Gupta, is the Maps bit (Though Nokia has per say not sold its Maps to Microsoft). Microsoft will get access to Nokia’s Here Drive, Here Maps and Here Transit, as a part of this takeover. “With Nokia, Microsoft has got access to what might still arguably be the best maps in the world. They are certainly one of the oldest and evolved maps. This is one area where Microsoft can very actively compete with Google. Microsoft can do a lot in the maps and augmented reality space,” elaborates Gupta.
The impact of the acquisition will only reflect by end of 2014. Though some believe that might be too late, the fact is that the smart phone market is nowhere close to saturation. It is all about bringing in innovation that will appeal to customers, opines Gupta.
India isolated?
India’s position in Microsoft’s corporate strategy has never really been clear. And though India has a robust developer and channel ecosystem, it has been isolated from corporate policies. Microsoft never released their tablets, Surface and Surface RT in India, a move that many analysts debated and the strategy behind which remains unclear. Even if they did not do well, a robust tablet market like India would have proved to be a great testing ground for them. Since they did not launch in India, Microsoft has no mobility hardware present in the country, something that can prove to be detrimental when they try to make inroads with mobile devices, thanks to their acquisition of Nokia.
Another complication that Microsoft might face is that in India, Nokia as a brand, might have far greater recognition than Microsoft itself, given the percolation of Nokia phones in semi-urban and rural areas. Another key question that everyone has been asking with respect to India is what happens to the hugely popular Asha series, because that’s where the installed user base is, at the moment. Gupta believes that feature phones will continue to be manufactured under Microsoft’s label. “We expect Microsoft to continue building feature phones, but they will certainly try to bridge the gap between smart phones and feature phones, both in terms of pricing and fresh capabilities.” Cost bridging is one of the widely expected outcomes of this acquisition. In line with “One Microsoft”, we can also expect Nokia’s mobility devices to be better aligned with other Windows running hardware possessions of Microsoft. According to Anshul Gupta, Principal Research Analyst, Gartner India, “For India, the implications of hardware will be more significant, especially with Windows 8.1 in the pipeline.”
Gogia of Greyhound believes that with this restructuring, which clearly centers around Windows OS and mobility, Microsoft cannot afford to sideline emerging markets. “Emerging market story will be big for Microsoft and it can’t afford to leave India out of their corporate story, as they have done in the past. India has been weak for Microsoft primarily because of its cost points. That will change.”
“India is strategic for all mobility firms because of two reasons. The first is the cloud computing wave gripping the country- cloud is being used for everything ranging from email, to music, to collaboration. The second aspect is India’s great appetite for devices. So from a Microsoft perspective, India cannot be ignored,” adds Gupta of Forrester.
However, the ripples of this restructuring are not likely to be felt in India before the end of next year. Ballmer’s controversial exit is slated for July 2014, and he is expected to see through the rejig at the corporate level before he leaves. Also, Nokia’s integration in Microsoft’s fold is likely to happen mid next year, and it will take still more time to stabilize corporate policies. Only by then can we expect to see some structural, organizational and strategical changes with respect to channels and go-to-market. As Gupta of Gartner says, “We see no implications for India in the near future. We might see effects in some more advanced markets first.”
