This article first appeared on Medium. All data and insights sourced from the Draup Platform

As early as the start of 2011, Microsoft were largely a consumer-focused business. They were still widely known as the developers of the Windows OS and 44% of their total revenue in 2011 was sourced from their consumer facing products. At the time, Cloud Computing and Smart Devices were on the rise and the company recognised that the upcoming changes would drastically affect their future. They had a major decision to make. In their 2011 10-K, they mentioned the following,

“Microsoft is delivering experiences that seamlessly connect PCs and mobile and other devices through the cloud. We are devoting significant resources to consumer cloud offerings like Bing, Windows Live, and Xbox LIVE.”

At the time, Microsoft was trying to drive growth by incorporating innovative trends into their existing money makers — Windows, Bing and Xbox. While Microsoft had recognised the presence of disruptive trends and were reacting accordingly, the products they were focusing on contributed to a smaller % of their total revenue than their other offerings. For example, their enterprise focused business units contributed to 25% and 32% of their overall revenue as opposed to 13%, 27% and 4% for their consumer business segments. Fast forward to 2014 and under the leadership of Satya Nadella, Microsoft announced a restructuring and pivot to three new focus areas,

Productivity & Business Processes Intelligent Cloud More Personal Computing

Post Nadella’s restructuring, Microsoft’s Business Segments became a lot more streamlined and were all contributing a similar percentage toward the overall revenue. The 2014 restructuring also points to shift away from consumers and towards enterprises as 2/3 business segments catered primarily to enterprises. In this article, we will examine this transformation and try to illustrate how exactly it occurred.

Increased Chatter in Earnings Calls

At Draup, we have built ML models that can identify the intentions/focus areas of companies using their investor relations call transcripts. In the last 12 years of doing these calls, Microsoft’s mention of Enterprises rose above their mentions of Consumers exactly when Nadella took over the reigns of the company. There was also a significant spike in 2011 when the company introduced the revolutionary Azure platform.

In 2011, Microsoft’s two favourite products to talk about were Office and Windows. Since then, Office has continued its evolution into Office 365, a cloud-based platform and a vital part of the Microsoft ecosystem. Azure also grew from nothing into Microsoft’s biggest money maker and another key component of Microsoft’s future. The introduction of Cloud Computing technology into these products ensured that Microsoft was in a great position to capitalise on the Digital Transformation revolution that a large percentage of businesses underwent.

In comparison, mentions of consumer facing products such as Windows, Microsoft’s primary focus in 2011, have dropped by almost 80% since 2011. Bing, Surface, Skype and Xbox are also impacted by this seismic shift and saw their mentions last peak in 2011.

To dig deeper into the fall of Windows, we analysed the sentences that mentioned and tagged them according to the polarity of the language. Windows is at the heart of Microsoft and as a result the language is largely positive in nature. However, since that interesting year, 2011, Microsoft have started tempering their expectations of this product line and we have seen some negativity sneak into their language. The magnitude of negativity is still minimal but the fact that it starts at 2011, the same time that Azure and Office 365 begin their growth trajectories is very significant.





Increased Investment and M&A Activity

Microsoft’s M&A activity is the clearest signal that the company was planning a major restructuring. When Satya Nadella became CEO of Microsoft in 2014, he kickstarted the move away from consumer products. Nadella’s tenure began with a period of heightened M&A activity and his first full year in charge, 2015, saw almost as much M&A activity from Microsoft as the previous 3 years combined.

This trend continues when we look at the investment amounts (where disclosed) for each of these acquisitions. The percentage of total dollars spent on Enterprise acquisitions makes a significant jump in the Nadella era. This was primarily driven by the massive LinkedIn acquisition, but, the fact that this trend continues for the next 2 years means that it stands as a statement of intent from the company. The last 3 years have also seen Microsoft make 0 consumer product acquisitions.

The two biggest acquisitions of the Nadella era have been the massive $26 billion LinkedIn deal and the equally significant $7.5 billion GitHub acquisition. These have essentially given Microsoft access to data on a large percentage of the global workforce via LinkedIn as well as the top contributors to latest innovations in tech through GitHub. Put these two together and they could have visibility into most organizations’ deepest kept secrets. In any case, Microsoft have made themselves indispensable to the Enterprise ecosystem.

Microsoft has also invested in various smaller players in the Enterprise software ecosystem. Much like their M&A activity, the profile of companies Microsoft invested in has also seen significant change in the years since the Satya Nadella takeover. Prior to the Nadella era, Microsoft predominantly invested in consumer software notably mobile applications and video games. Since then, they have focused more on enabling businesses and moved towards areas like productivity and communication tools.





The Future

Microsoft has gradually invested money and effort into pivoting their business towards serving the enterprises of the future. Nadella has already done an excellent job of reorganizing the business as they moved from their era of personal computing dominance to the current cloud and mobile-first period.

However, Nadella’s biggest challenge will be to ensure that Microsoft can maintain this momentum as they move into the AI and Mixed Reality era. As a result, in March of 2018, Nadella began another restructuring of the company that will see the company focus its operations around two main divisions: “Experiences & Devices” and “Cloud + AI”. This will allow them to drive growth in the Cortana and Azure platforms and their respective ecosystems.

The new strategy will also seek to integrate consumer platforms with the enterprise ecosystem. For example, their next big play could come in the realm of Mixed Reality and there is some noise coming out of Redwood, and specifically Nadella himself, surrounding Microsoft HoloLens’ disruption potential in the Enterprise ecosystem. In fact, they have already launched an enterprise edition of the HoloLens that aims at disrupting screens in the workplace and is currently being trialled by the likes of AutoDesk, NASA and Volvo.