Over 10 years ago, in mid-2013, I wrote a fairly critical column about Microsoft Inc for The Edge Singapore. At the time, the software giant was in the process of acquiring Finnish cellular phone maker Nokia for US$7.2 billion. It seemed comical that a fading software firm was betting that its fortunes could be turned around by buying a sinking cellular handset maker.
Microsoft’s once lofty stock, which had traded at over US$119 a share in late 1999, was by then languishing at around US$32 a share. Back then, it was run by Steve Ballmer, a college buddy of founder Bill Gates, who was adamant that Nokia would help his firm oust iPhone maker Apple Inc from its perch as the world’s most profitable smartphone company.
Within months, Ballmer was gone — ousted as the CEO of Microsoft and replaced by India-born Satya Nadella, the then head of the software firm’s cloud division. The incoming CEO wrote off the entire US$7.2 billion Nokia investment, fired all of the 18,000 people in its mobile handset division and refocused the company towards a “cloud-first, mobile-first” future, prioritising cloud computing services and mobile as the default option for delivering IT services. Microsoft was facing an existential crisis when its board reached out to Nadella and handed him the leadership baton. It needed an extreme makeover. The big question at the time was: Will Microsoft become the next IBM, the one-time champion and perennial laggard, or did it have what it took to reinvent itself?
Fast forward to 2024: On Jan 31, Microsoft shares touched an all-time high of US$415.31 ($558.22) and the software giant is now the world’s largest listed company having overtaken Apple again just days earlier. If you had invested in Microsoft shares in mid-2013, you would be sitting on 13-fold returns, before counting dividends. Just to put that in perspective, the US benchmark S&P 500 index is up 197% over the same period while the tech-focused Nasdaq 100 is up 455%. Microsoft is now almost twice the size of Amazon.com and Nvidia Corp in market value.
From its pinnacle at the start of the tech bubble in 1999 to early 2014 when Nadella was picked to lead it, Microsoft missed just about every major shift in personal computing — Internet, mobile, social media — and saw Apple, Google Inc (now Alphabet) and Facebook Inc (Meta Platforms) overtake it. It was hamstrung after a decade of investigations by the US Department of Justice (DoJ) and the Federal Trade Commission (FTC). The FTC first examined Microsoft for possible collusion due to its partnership with IBM. The DoJ in 1994 accused the software firm of inducing PC makers to execute anti-competitive “per processor” licences where it was paid royalty whether the PC was sold with the Microsoft operating system or one made by a competitor. In 1997, the DoJ asked the court to stop Microsoft from bundling its Internet Explorer browser with its Windows OS. In April 2000, a US federal judge hearing the anti-trust case called the software maker an “abusive monopoly”. Microsoft eventually settled with the DoJ in 2004 after signing a consent decree and agreeing to a set of principles that guided the company’s future development of the Windows desktop platform. The consent decree expired in November 2009.
Yet until 2014, Microsoft was too scared to move as it saw smaller, more nimble garage-based start-ups like Google or dorm room-based enterprises like Facebook evolve into cash-rich tech giants. In 2006, Microsoft introduced a portable music player to rival Apple’s iconic MP3 player, the iPod. Zune was clunky, ugly and too late to the party. Microsoft sold less than two million of the Zunes compared with the 450 million iPods that Apple sold until their sales were discontinued. It wasn’t just music players; Microsoft routinely botched up its operating system software. A particularly bad one was Windows Vista, which was first unveiled in 2006. Users would install it on their PCs and then spend hours uninstalling it, only to install an older version of Windows. It was a marketing and branding nightmare.
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Rebuilding Microsoft
Nadella embarked on rebuilding Microsoft in the post-consent decree era. He repositioned it, engineering a cultural shift to stop playing defence and once again go on the offence. Fifteen years after the DoJ’s anti-trust case, Microsoft was ready to declare that enough was enough. The lumbering, sleepy giant was ready to go toe-to-toe with Apple, Google, Amazon, Facebook and others which had for years lured away its best talents and were making new technological breakthroughs. When he took the reins as CEO, Nadella announced that it was time to “rediscover the soul of Microsoft, our reason for being”.
Microsoft reorganised itself, giving many of its units more autonomy to move fast and break things, akin to younger start-ups. According to a Harvard Business Review study, instead of protecting its assets, Microsoft went on the offence, ceding big investments in existing tech and looking to jump into emerging opportunities. “The opportunity ahead for Microsoft is vast but to seize it, we must focus clearly, move faster, and continue to transform,” Nadella told Microsoft employees at the time.
Under founder Bill Gates, the firm’s primary objective had been to put “a PC on every desk and in every home, running Microsoft software”. Nadella reoriented the firm towards “empowering every person and every organisation on the planet to achieve more”. He initiated a comprehensive hardware strategy making sleek Surface laptops, desktops and tablets. The company even opened Apple-like stores in malls across North America to sell its PCs and accessories and to rebuild its brand. Nadella also supercharged Microsoft’s gaming business by acquiring gaming studios and gaming software developers. But its biggest pivot was the move into the cloud. Amazon’s AWS was the dominant player in cloud infrastructure before Nadella took over. Although Microsoft remains No 2, its Azure has been slowly closing the gap. It now has a 22% share of the total market compared with 33% for AWS.
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Now, Microsoft is using artificial intelligence (AI) to close that gap and even edge out AWS. It has made big, bold bets in AI as it tries to disrupt Amazon and Google, the two players known to have a big AI footprint. Among its most audacious bet is the US$13 billion investment for a 49% capped economic interest in OpenAI, the world’s most valuable AI start-up, which was the first to unveil an AI chatbot, ChatGPT, a year ago. Clearly, Microsoft has been a beneficiary of some of the AI glow. Azure is gaining market share as OpenAI and others use its servers to train their large language models. Moreover, Copilot, its homegrown chatbot, is helping boost its Office platform. Microsoft recently announced that it would add a dedicated Copilot key to its Windows laptops and PCs. It is also using AI in its Bing search engine to challenge Google’s huge dominance in search ads. Brent Bracelin, software analyst for PiperSandler, recently described the launch of Copilot as an “iPhone moment” for Microsoft, comparable to the transition to the cloud that started in 2008.
Microsoft operates in three key business areas — Productivity and Business Processes, which includes Microsoft Office, LinkedIn, as well as enterprise accounting and sales software suite Dynamic. The other key business segment is called “intelligent cloud”, which encompasses its cloud infrastructure business Azure and other enterprise cloud services. Another is its “more personal computing” business includes operating software Windows and also the devices business, which churns out Surface laptops and tablets as well as Surface Studio desktops, game consoles like Xbox series X and the HoloLens mixed reality headsets. It also covers its gaming business including the Game Pass subscription service, and Bing, which has a 9.2% share of the search market compared with dominant search engine Google’s 83.4% share. (Microsoft Advertising, its equivalent of GoogleAds, grew revenues by 8% last year.)
Microsoft breaks down its revenue by key products and services. Server products and cloud services make up nearly 39% of its total revenues. Microsoft Office products and cloud services are about 23% of overall revenues. Windows makes up around 10% of total sales while gaming is over 7%, as is LinkedIn, which accounts for 7% of its total revenues. Bing makes up just 5% of the company’s revenue stream. Enterprise and partner services account for about 3% and Dynamics, a set of enterprise accounting and sales software, also about 3%. Devices make up 2%.
Shopping binge
Microsoft has been on an acquisition binge over the past 16 years. The shopping spree has cost nearly US$200 billion. Let me list some of the big ones. In 2007, the software behemoth bought aQuantive Inc, a digital marketing services firm, for US$6.3 billion. In 2011, it bought Skype, a video communications firm for US$8.5 billion. Two years later, it purchased the cellular phone division of Nokia for US$7.2 billion. In 2014, Microsoft paid US$2.5 billion to buy Swedish video game developer Mojang Studios, the firm behind games like Minecraft. In 2016, it bought professional social networking firm LinkedIn for US$26.2 billion. In 2018, it acquired software development start-up GitHub for US$7.5 billion. GitHub’s Copilot chatbot is now at the core of Microsoft’s aggressive AI strategy. In 2020, it bought another gaming software firm ZeniMax Media Inc, which owns Bethesda Game Studios, for US$8.1 billion and in 2021, it purchased speech recognition and AI software firm Nuance Communications Inc for US$19.7 billion.
Last year, Microsoft acquired Activision Blizzard Inc, the iconic firm behind video games like CandyCrush, Call of Duty and World of Warcraft, for US$68.7 billion ostensibly to accelerate the growth of its gaming business across mobile, PC, console and cloud. Combined with its own portfolio of popular games like Minecraft, Halo and Doom, the Activision purchase has helped catapult Microsoft to the world’s third-largest gaming company by sales, behind China’s Tencent Holdings and Japan’s Sony Group Corp.
What’s next? Some tech industry insiders believe Microsoft is likely to be the first listed company to reach a US$4 trillion valuation. A 34% increase in its share price over the next two years would get it across that line. The software giant is expected to report US$73.3 billion in net earnings for its current fiscal year ending June on US$244 billion in revenues. That is expected to grow to US$99 billion in net profits on US$276 billion in revenues in the next fiscal year.
Microsoft’s ability to capitalise on AI to boost its revenue streams in cloud, productivity software and gaming — even as it reins in the soaring cost of generative AI — will be key to getting there. “We expect capital expenditures to increase materially ... driven by investments in our cloud and AI infrastructure,” Microsoft CFO Amy Hood said on its quarterly earnings call on Jan 30. “AI adoption is picking up steam, helping sustain double-digit organic revenue growth, says Brent Thill, an analyst at Jefferies & Co in San Francisco. Thill says the software giant is far ahead of its competitors and AI is helping it gain market share. “Microsoft is sitting at the nexus of the technological shift toward an AI-first IT stack,” Goldman Sachs said in a report last week.
The software giant remains a formidable cash machine. UBS estimates net cash on Microsoft’s balance sheet is likely to grow to US$131 billion by June next year and to US$218 billion by June 2026 even as it continues to buy back more of its own and boost its dividends.
Assif Shameen is a technology and business writer based in North America
