On this Moneycontrol podcast, we explore if perhaps for Microsoft , the term "valuable" connotes something beyond its obvious meaning.
Reema Moudgil | Seetal R Iyer
Bill Gates is known to be an avid reader. And famously keeps a low profile in a highly strung, competitive business climate. Even as news about Microsoft overtaking Amazon as the most valuable company in the world hit the headlines, there was another article about the four books that Gate is recommending to a civilisation running short of optimism.
He tweeted sometime back, "These books make me optimistic about the world and help me understand the role of innovation in driving progress." Unquote.
Note the linkage he makes between progress and the well-being of the world.
This is Seetal and on this Moneycontrol podcast, we dive deep to explore if perhaps for Microsoft, the term "valuable" connotes something beyond its obvious meaning.
Coming back to the reading list, from the book "Energy and Civilization: A History' by Vaclav Smil, Gates gleaned the importance of clean energy and what he calls are game-changing improvements in energy generation, storage and transmission for the next generation of consumers.
He also praised the self-explanatory message in author Steven Pinker's book "Enlightenment Now: The Case for Reason, Science, Humanism, and Progress." All the things that seem to be in short supply in the world today. Gates' enthusiasm for the book's theme demonstrates that as an entrepreneur it is important for him to stay cognizant of the world around him.
Gates commended the primary lesson in the book and said, "The world is getting better, even if it doesn't always feel that way. I'm glad we have brilliant thinkers like Steven Pinker to help us see the big picture." Unquote.
The big picture is what Gates has always focused on as his philanthropy will let us know but he has also cited "Factfulness", another book by Hans Rosling, Ola Rosling and Anna Rosling Rönnlund to underscore the importance of steering clear from unconscious biases and to focus on factual data at hand.
The book, he says, advocates that we look at the world with a prismatic view where economic diversity exists in various colours rather than in only two extreme, black and white halves divided between rich and poor countries.
Why are we telling you this? Just to give you an insight into the kind of a mind that has shaped Microsoft into one of the most influential and yes, valuable companies in the world. A company that is at some level intent on understanding the world better and simplifying it with solutions not just for big existential questions like how to accelerate the decline in HIV infection worldwide and save lives by ensuring expanded and simplified HIV treatment through a foundation. But also to make everyday fact sourcing and data collection easy via conduits of easily consummable technology.
That Gates does not want or need spotlight is established by now and that is why the face of the company is today Satya Narayana Nadella, the Chief Executive Officer (CEO) of Microsoft, who succeeded Steve Ballmer in 2014 and has spearheaded the company's success with computing platforms, developer tools and cloud computing services.
Why Microsoft was slated to win
In March 2018, writer Troy Wolverton opined in Business Insider that Microsoft was well-positioned to overtake Amazon as the top player in cloud computing. He was of course quoting Dan'l Lewin, a former Microsoft executive who explained how the company has a collection of advantages it could build on, including existing relationships with enterprise customers and expertise in operating data centers around the world.
Microsoft then was second in the cloud computing market, but the former head of its Silicon Valley presence, according to Troy, believed that it would become the no. 1 player because it had the international expertise to suit its biggest clients, plus a management team and a fail proof operating structure.
Troy had pointed out that the company had already successfully moved clients into the so-called private cloud model, where they turn their own servers into a unified cluster running virtualized software, and now it was helping those clients to move to hybrid services that combine their own data centers and its Azure public cloud service.
According to Lewin, Troy had also acknowledged that the company's latest reorganization under CEO Satya Nadella had consolidated its position in the cloud market. From a more traditional software model, the emphasis had shifted to selling subscriptions to Microsoft's cloud services.
According to Lewin, the company had other strengths like its pre-eminent position in machine learning, that developers and enterprises can tap into for their public and internal company apps. And the fact that the company operates in every country on the planet, has helped Microsoft in not just moving its own data around seamlessly, said Lewin, but in also applying the same wisdom to problem-solving for other multinationals too.
But yes, its not so secret weapon was Nadella and the management team he's put in place, Lewin said.
Nadella "is constantly skiing downhill. He's on the move," Lewin said.
Amazon can't keep up with Microsoft
Their business models are different, to start with. And Microsoft has the courage to tinker limitlessly with its services. Earlier this year, Forbes carried a piece by Bob Evans where he outlined why Amazon can't match Microsoft.
Much before it became official, the piece stated that Satya Nadella had leveraged the cloud phenomenon to turn the company into one of the world's most valuable corporations.
Bob believed that If Amazon's going to overtake Microsoft in the cloud, then Amazon will have to make a significant acquisition to close the gap that Microsoft's created through a sweeping series of reorganizations, through the customer-centric vision of CEO Satya Nadella, through its leverage of its power of incumbency within hundreds of thousands of companies large and small across the globe, and through relentless, focused and high-volume investments designed to rapidly turn Nadella's vision into real-world solutions that create business value for customers.
We quote, “To fully understand what Microsoft's doing in the cloud and why it's staying ahead of outstanding performances from Cloud Wars competitors including not only Amazon but also IBM, Salesforce, SAP, Oracle and Google, it's best to closely monitor and analyze the words of CEO Nadella. In his 4-1/2 years as CEO, Nadella has engineered what must be viewed as one of the greatest corporate turnarounds and revitalizations in the history of business, and his single greatest weapon in that stunning performance has been the cloud." Unquote.
In its fiscal year ended June 30, Microsoft closed a record number of multimillion-dollar commercial cloud agreements" and also doubled the number of $10-million-plus Azure agreements.
In short, Microsoft Azure, the ever-expanding set of cloud services to help organisations meet their business challenges and to build, manage and deploy applications on a massive, global network, has been hyperscaling.
And fiscal fourth-quarter commercial-cloud revenue surged 53% to $6.9 billion, with Azure revenue growing at 89% while also becoming more profitable.
Bob thinks that Nadella and (Chief Financial Officer at Microsoft), Amy Hood will continue to accelerate Microsoft's investments in its surging enterprise-cloud business.
The Azure Buildout Is Accelerating.
We quote, “For the past year, Nadella has been touting the benefits of elegantly interweaving the cloud and the edge, which he says is not only a logical extension of Microsoft's single-architecture strategy but also an ideal platform for customers' digital transformations. If he's right about the potential of intelligent cloud plus intelligent edge—and so far Nadella appears to be exactly that—he will force Amazon, IBM and others into trying to play catch-up." Unquote.
Nadella had said as well, "Azure is the only hyperscale cloud that extends to the edge across identity, data, application platform, security and management. We are investing aggressively to build Azure as the world's computer." Unquote. Yes, it is all about the big picture, and always has been for Microsoft.
It goes without saying that Microsoft's "global data center footprint" of 54 regions is unmatched among the enterprise-cloud providers.
Bob also praises Azure's new capabilities, its adaptability to hybrid environments, its ability to secure and manage IoT devices and solutions and efforts to "democratize data science and AI" with various layers of offerings like Azure Cognitive Services, Azure Machine Learning and Azure Cosmos DB. So yes, things were always going to continue being future forward.
Microsoft CEO Satya Nadella, foretold CNBC this May that consumer trust will push the company's cloud product ahead of competitors Amazon and Google.
We quote him, "Trust, not just in the technology, the ethics around AI, privacy, security — all that also matters —but trust in the business model." Unquote.
So yes, again, it is the emphasis on the intangible that has brought tangible success to the company.
This is particularly relevant in an era where, as the CNBC piece says, core business models of tech firms such as Facebook and Alphabet's Google have come under heightened scrutiny amid growing concerns about user privacy.
Nadella said refreshingly that the company simply leverages subscriptions with limited ad-supported businesses to help customers "get more out of their data, more out of their time."
Cleverly indicating that data is central to every business story. As Nadella told CNBC,
"I think people are going to put more value on their data. Even individual consumers are going to wake up to the fact that there's nothing free. It's not to say that there isn't room for someone to say, 'Yeah, this is a good trade, where I'm using a free service in exchange for some data.' But there's nothing free about it." Unquote.
Success comes when mass movement occurs
The Forbes piece pointed out on the other hand, how massive mission-critical workloads are moving to Azure, ensuring its success and quotes Nadella, "The one thing that I would say that I am increasingly seeing is Tier 1 workloads. In some sense, when you think about some of the commitments being made by some of the biggest brands in the world in terms of what they’re doing, one, it’s very core to their operation; and two, they are running it in the cloud. And so, that’s one thing that definitely is a market difference for us." Unquote.
As companies migrate workloads to the cloud, Microsoft continues to benefit from what Nadella calls are the "lift and shift " of current data-center workloads. More and more companies, are modernizing their legacy apps and often complementing them with higher-level AI services and data services, informs the Forbes piece.
Creating value for customer
Informing the technical jargon, is the utmost importance Microsoft gives to creating customer value. According to Amy Hood the concept of adding a lot of value is all about by giving comfort to the customers as they make a commitment to the Microsoft platform. Note again, the way the word, "value" has been used here.
As we said before, the inclusive vision of the company has trickled down right to the roots.
Also in Microsoft's arsenal is Microsoft 365—a combination of Office 365, Windows 10, and EMS (Enterprise Security + Mobility)—that says Forbes, allows business customers to leverage their existing investments, processes and familiarity to begin moving aggressively into higher-level cloud services. Bob quotes Nadella, "Microsoft 365 is now a multibillion-dollar business that gives our customers a path to the cloud and broadens our reach with new and underpenetrated markets, including more than 2 billion first-line workers, and industry-specific workflows." Unquote.
Talk about a competitive advantage!
What sets Microsoft apart, says Bob, is the concept of a single unified approach and architecture that is central to everything Microsoft is doing in the cloud.
There is also the revolutionary Azure Hybrid Benefit, a licensing model that allows businesses to shift dollars committed to on-premises versions of Windows Server Standard and Datacenter Editions to the Azure cloud.
There is also the disruptive suite of Dynamics 365 SaaS applications that according to Nadella has price advantage and the value advantage for customers.
What we learn from the piece is that as an enterprise-cloud provider, Microsoft spans the entire spectrum of services and technologies that large and midsized businesses could want. It guides customers through the digital-transformation journey in a fragmented market cluttered with highly priced monolithic apps. And leverages its success by investing billions of dollars across its broad spectrum of enterprise-cloud services.
Helping the company's profile is the fortunate $26-billion acquisition of LinkedIn, that has amassed, we learn, more than 575 million members and a revenue growth of 37%.
Says Bob though astutely, "As brilliantly as Microsoft's performed over the past several quarters as it's ascended to the top of the Cloud Wars and extended its lead, it's surely not invincible. But for Amazon or anyone else to displace it will require a combination of circumstances and market dynamics that at least for now are nowhere to be found." Unquote.
But as of now Microsoft is on cloud nine
The news that Microsoft had overtaken Amazon to become the second most valuable company in the world broke on October 26 and made many wonder if there is a lesson in this development for revenue-generating beasts. That they perhaps need to diversify and expand their vision beyond just revenue accumulation.
As Your Story reported, the fall in Amazon's share price wiped out $65 billion from its market capitalisation. Its market cap now stands at $805 billion, down from $1 trillion in September.
We quote, "Microsoft, on the other hand, reported strong quarterly numbers, which took its stock up four percent to reach a market capitalisation of $828 billion. This is the first time since April that Microsoft's market cap has surpassed that of Amazon.
Amazon missed revenue expectations for the third quarter, reporting a revenue of $56.6 billion on a profit of $2.9 billion. Following the release of its results, market experts had predicted its valuation would take a hit as shares fell." Unquote.
However, a triumphant Microsoft has already announced, says the piece, the $7.5 billion acquisition of open source platform GitHub, which has a community of over 40 million users and more than 100 million data library repositories. We quote, "Although GitHub will run as an independent platform, the acquisition marks Microsoft's growing interest in the developer community. GitHub's founder and former CEO Chris Wanstrath will now be a Microsoft technical fellow. Former Xamarin CEO Nat Friedman will take over as the new CEO of GitHub." Unquote.
So diversity in services and in thinking processes and leadership types is what keeps Microsoft multi-dimensional and democratic.
Let us read out the numbers once again just to bring home the current cloudburst of Microsoft's success.
Felix Richter writes in Statista.com that Microsoft reported results for the first quarter of its fiscal year 2019, beating analyst expectations across the board. We quote, "Revenue was up 19 percent to $29.1 billion and net income jumped 36 percent to $8.8 billion, as the company continues to capitalize on its very successful cloud business.
Commercial cloud revenue reached $8.5 billion for the three months ended September 30, putting the poster child of Microsoft’s strategic transformation on an annualized revenue run rate of $34 billion. One year ago, in fiscal Q1 2018, the commercial cloud segment had passed an annual revenue run rate of $20 billion for the first time, reaching that milestone ahead of the ambitious timeline Microsoft’s CEO Satya Nadella had set in the spring of 2015." Unquote.
Microsoft’s commercial cloud business, says the piece, consisting of Office 365 commercial, Azure, Dynamics 365 and other cloud properties, has seen blockbuster growth over the past few years. It now accounts for nearly 30 percent of Microsoft’s revenue. As Felix quips. "Not bad for a business that didn’t exist a couple of years ago."
Another Statista piece adds that in 2018, Microsoft generated 110.36 billion U.S. dollars, a record year in terms of revenue for the company.
The Bill Gates effect
It does not come as a surprise at all that while Bill Gates no longer heads the Microsoft Corporation, his company continues to function like a well-oiled machine without micromanagement. As the Statista piece says, "The company continues to show extremely strong results around the world, with versions of its most famous product, the Windows operating system, consistently leading the home operating system market. The Microsoft Office suite also remains the most widely used office software around the world with few comparable competitors in sight." Unquote
From 1975 until 2006, Gates was actively involved in defining the company's product strategy but he has evolved too along with Microsoft. He has never had famous social skills and was known to have combative meetings with senior managers but slowly, from being an active software developer, he began to ease into the role of a manager and executive. Someone who liked programmes not just because they made money but because they saved time and energy.Perhaps his biggest masterstroke has been his ability to delegate the company's future to young turks like Nadella who are furthering his expansive vision for a more efficient world focussed not just on competitiveness but also on personal growth.