Microsoft's search case study summary

20

IntroductIon

On February 4, 2014, Satya Nadella became CEO of Microsoft. Nadella, a native of Hyderabad, In- dia, was only the third CEO in Microsoft’s 39-year history. Cofounder Bill Gates was CEO from Mi- crosoft’s establishment in April 1975 through Janu- ary 2000 when he passed the reins to Steve Ballmer. Gates remained chairman though until February 2014. The Gates years were characterized by dra- matic growth as Microsoft expanded from a small start-up to become the largest and most dominant software company on the planet, in the process making Gates the world’s richest man. The founda- tions of Microsoft’s success during this period were its two monopolies: the Windows operating system, which at its peak was used on 95% of the world’s personal computers (PCs), and Office, which had a 90% market share in 2012.1

Microsoft continued to expand both revenues and profits under the leadership of Steve Ballmer. During his tenure, revenues expanded from $25 bil- lion to $70 billion while net income grew 215% to $23 billion. One area that did particularly during the Ballmer years was the Windows server business, a division that Nadella ran prior to becoming CEO.

Servers sit at the center of networks of PCs, and are used to perform a variety of functions including da- tabase hosting, file services, Web services, print ser- vices, and applications services. Microsoft makes a version of Windows, Windows Server, which runs servers. The Windows server business was a $20-bil- lion division by 2014. Microsoft gained share from competitors such as IBM, which promoted the rival Linux operating system. By 2014, 75% of servers built around Intel microprocessors used Windows Server as their operating system, as did around 50% of all servers.2 The Linux and Unix operating sys- tems took the number 2 and 3 spots.

Despite impressive growth, Microsoft’s stock price stagnated during the Ballmer era. This reflected a growing concern that Microsoft had lost its leader- ship in the computer industry to three firms, Google, Apple, and Amazon. Google had grown dramati- cally during the 2000s on the back of its dominant Internet search business. Along the way, Google had developed an operating system for smartphones (Android) and laptops (Chrome) that were now chal- lenging Windows on computing devices, a category that had expanded beyond traditional PCs to includ- ed smartphones and tablets. Google was also offering a “cloud-based” suite of productivity tools, Google Docs, which competed directly with Office.

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C-152 Case 20 Microsoft: From Gates to Satya Nadella

Apple, a firm that was nearly bankrupt in 1997, had done more than any other company to expand the definition of computing devices to include smartphones and tablets. Apple had introduced the first version of its smartphone, the iPhone, in 2007. Differentiated by elegant design and ease of use, two Apple hallmarks, the iPhone was a sensation that re- defined what a smartphone should look like and do. Apple followed the iPhone with the 2010 introduc- tion of the iPad, a tablet device that created an en- tirely new computing category, and one that canni- balized sales of laptop PCs. Both devices ran Apple’s iOS operating system, further reducing the relevance of Windows.

As smartphones and tablets gained popular- ity, more and more computing was being done us- ing these mobile devices—accessing applications and data stored on servers “in the cloud” rather than on a traditional PC. According to Microsoft’s own esti- mate, by mid- 2014, while 90% of traditional desktop and laptop PCs still used Windows, only 14% of all computing devices (a definition which included PCs, smartphones, and tablets), used Windows.3 Although under Ballmer’s leadership Microsoft had tried to grow its share by introducing a Windows smartphone and the Surface tablet, these offerings failed to gain traction. By 2014, Windows Phone had less than 3% of the global smartphone operating system market, while Apple’s iOS held 15.2%, and Android 81.1%.4 In the tablet market, Android had a 65.8% share, Apple’s iOS had 28.4%, and Windows tablets had 5.8%.5 Mi- crosoft was assumed to be losing significant amounts of money on its phone and tablet businesses. To compound matters, after three decades of sustained growth, PC sales were declining: PC sales fell by 4% in 2012 and by 9.8% in 2013, although demand stabilized in 2014.6

Amazon, the world’s largest Internet retailer, was challenging Microsoft from another direction. By the mid-2000s, tens of thousands of servers were being grouped together into “server farms” located in the cloud to host high-traffic Internet websites. Google had built server farms to host its Internet search busi- ness, Microsoft likewise had server farms for its Bing search business and MSNBC Web offerings, and Am- azon had built server farms to host its large online retail business. In 2005, Amazon leveraged the knowl- edge and capacity it had accumulated building server farms to start a new business, Amazon Web Services