Microsoft had a lot to brag about when it announced its first-quarter 2015 financials yesterday. The company boasted of higher gross margins and revenue, big gains in hardware and cloud sales, and -- most important -- a success story in its ongoing reinvention as a cloud services outfit, in both its business and consumer operations.
Even the fall in profits incurred by restructuring expenses and the acquisition of Nokia didn't sink the boat. But it showed that Microsoft's struggle to come up with compelling mobile products for consumers and business may not be as easy as giving everyone Windows everywhere.
As far as the cloud goes, Microsoft showed its businesses are solid and growing even more so. Microsoft reported a 128 percent year-over-year growth for Azure and its other commercial cloud services, including Office 365 for business. Home users of Office 365 (now numbering 7 million, Microsoft says) also edged up 25 percent over the last quarter.
In some ways the Office 365 figures are more significant than the Azure numbers, since they hint that one of Microsoft's most intractable customer groups -- users of the desktop, on-premises Office suite -- can be transformed incrementally into cloud users, and from "transactional purchasing to annuity" (read subscription) customers. Microsoft has made wise moves in that area, such as offer more granular Office 365 subscription deals for small businesses. The basic Business SKU, which includes the full Office desktop apps, is now $8.25 per user per month for up to five devices per user.
Microsoft claimed Azure is allowing the company to "[grow] revenue from existing on-prem customers who have adopted Azure services," and to enable those customers to create new kinds of business. In discussions with the press during the earnings call, Microsoft CEO Satya Nadella noted that Azure's growth has been driven in big part by such hybrid use, as well as by the new business models Azure has enabled. He also cited the Internet of things as a growth driver, with Azure as a supporting back end for machine learning and analytics services.
For Windows, the coming holiday season and months thereafter are pivotal. For the first time Microsoft is rolling out full-blown Windows devices available in mobile form factors for high double- and low triple-digit prices, thanks in part to no-cost licensing for smaller Windows devices. Microsoft is hoping to regain some of what it has lost in PC market by turning tablets into replacements for some PC sales. Microsoft hopes people will see its new Windows offerings less as "companion devices" and more as low-cost, basic-use Windows systems. But with tablet sales flattening out, that could be a tough order to fill. (Another downside -- which Microsoft noted in its earnings call -- was lower IP licensing revenue.)
Even as mobile remains Microsoft's Achilles' heel, Nadella and company remain optimistic that the Nokia acquisition, plus the next generation of Windows, will be a solid base on which to build a mobile empire. So far, it's been all groundwork and drudgery: "The focus of the quarter [for mobile] was on positioning the business for the future," said Nadella in the call, "and we remain committed to reaching breakeven in fiscal '16."
The first test for Microsoft's mobile strategy will depend on how Windows 10 premieres across all devices. Clues of how the OS will incarnate on phones have surfaced, such as Microsoft's device-branding strategy -- it's "Windows," not "Windows Phone," which hints at greater continuity between all versions of Windows, and mobile as a form factor rather than a feature set.
The good news: If Microsoft can get its mobile game in motion, it will be able to tie that back into its cloud business, which is already primed and waiting for people to build appealing products on top of and in front of it. It would be one of the industry's grandest ironies if Microsoft itself is unable to capitalize on its cloud success with mobile.