Founded on April 4, 1975, by Paul Allen and Bill Gates, Microsoft is a multi-national technology company that develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers and services. The company rose to prominence in the late 80’s and early 90’s on the back of its flagship products, the Windows OS and the Microsoft Office Suite, both of which revolutionized the personal computer industry. Throughout the 90’s and into the very early 2000’s, Microsoft was highly regarded as one of the world’s most innovative companies, but that innovation quickly turned into stagnation as the company and its products matured.
Microsoft’s business model has historically relied on just a few key products, which accounted for the vast majority of the company’s revenue. The first, and by far the largest source of revenue, has been the licensing fees it charges for use of the Windows operating system and the Microsoft Office suite. Additionally, the firm also derived a much smaller fraction of its revenues from the sale of its hardware products, such as the Xbox and Surface Pro, as well as ad sales on its search engine Bing.
Moving forward, however, new CEO Satya Nadella realized that Microsoft would not be able to survive in the current market if it continued with its former strategy and still compete with tech giants like Apple and Google. The paid software market has become far more challenging with the introduction of low-cost/no cost alternatives from the likes of Google. Furthermore, the rise of mobile phones and tablets has come at the expense of the PC market. Recognizing these trends, Satya has begun to implement a business model, one that emphasizes product integration and a “freemium” software package. Essentially, Microsoft will give away most of its prized software for free on all tablets and smartphones, with the hope that this will drive consumer engagement creating a halo effect with firm’s other product offerings.
For example, Microsoft wants its customers to interact more with its current product offerings. In 2015, the firm’s Chief Marketing Officer, Chris Capossela explained this concept while at Microsoft’s Convergence conference: “Rather than using Skype on Sunday night to phone home, you are using Skype for messaging 15, 20, 30 times every single day. That’s engagement.”
In order to facilitate the company’s business model change it was also forced to retool its operating model. The firm will now focus more on innovation, empowering its employees to think outside of the box and take risks, something that was lost during the Steve Ballmer era. To drive this home, Microsoft spent $11 billion in 2014 on R&D. This empowerment is best captured by the company doubling down on its most risky project to date, HoloLens, a headset which will bring hi-definition holograms to life using Windows.
In addition to the employee empowerment, Microsoft has also refocused on consumer engagement. The firm has increased its brand presence, both online and in the physical world with the expansion of its Windows Stores. The company has also focused on product integration, both internally and externally. Internally by making sure that its product offerings worked together seamlessly, and externally by offering its software products on competing platforms like Google’s Android and Apple’s OS. This added level of consumer engagement is intended to make its customers feel more at home on the Microsoft ecosystem.
The changes that Mr. Nadella has implemented at Microsoft have been praised by both consumers and investors. The company is enjoying a resurgence in its brand value, now ranking as the world’s second most valuable brand worth $69.3 billion, up over 30% in the last two years. Microsoft also reached another milestone, beating Apple at its own game, hardware. In October of 2015, for the first time ever Microsoft’s Surface tablet out sold Apple’s IPad. In addition to the consumer response, Satya has also excited investors. Since taking over the CEO role on February 4th 2014, Microsoft’s stock has risen, 56%, increasing shareholder’s wealth by about $137 billion. I would say Satya’s steering the ship in the right direction.