Nadella steers Microsoft away from 'devices and services' July 16 2014

Major job cuts loom, including in former Nokia business, as CEO puts cloud first, and chases new productivity

By Caroline Gabriel

Microsoft CEO Satya Nadella has issued a manifesto for his company's future, clearly indicating a shift away from devices - a move which is likely to be underscored by upcoming job cuts.

The missive - a 3,000-word email to employees, but also made public - raised alarm bells for the former Nokia business, and those will soon become louder. Microsoft is expected to make swingeing job cuts within the next few weeks, which are likely to hit the handsets activity hard, and just to rub salt in the wound of bad timing, Nomura analysts also expect the firm to take a charge of at least $1bn "to mitigate the risk of the Nokia acquisition" - finalized, of course, less than three months ago.

Not that Nadella is suggesting axing hardware like Surface or Xbox, but we can expect a slowdown in any new moves to expand the mobile range, especially the Nokia family. The document places the cloud platform Azure - which Nadella formerly headed up - at the heart of the company, and in a pointed strike at his forerunner, Nadella writes: "While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy."

Nadella wants Microsoft to become the "productivity and platform company for the mobile-first and cloud-first world", he writes - and by productivity, he looks "beyond solely producing something to include empowering people with new insights". He argues that people are "swimming in a growing sea of devices, apps, data and social networks" and need applications and gadgets that can make sense of that, for instance by dividing work and personal data intelligently.

However, under all this vision there are plenty of old Microsoft favorites being dusted off for the new era. We might have hoped Nadella would be bold enough to turn his back on hardware altogether, given the limited success of Surface and the conflicts with OEM partners. But he insists that Surface Pro 3 "is the world's best productivity tablet" and that "we will build first-party hardware to stimulate more demand for the entire Windows ecosystem".

This is, however, a shift away from older Microsoft claims that it would take significant tablet and handset market share over time. Instead, like Google with Nexus, it is focusing on making new markets, stimulating interest and showing what can be done, and then stepping back for OEMs to ramp up the volume.

Nadella wants to stop talking about individual devices, or even about mobile, and to create 'experiences' which are common across all kinds of screens, gadgets and connections. "While today many people define mobile by devices, Microsoft defines it by experiences," he says. "We're really in the infant stages of the mobile-first world. In the next few years we will see many more new categories evolve and experiences emerge that span a variety of devices of all screen sizes."

The CEO acknowledges that achieving his goals will need "fundamental cultural changes", including management and organizational shake-up, which will prompt groans in many quarters, given what a short time has elapsed since Ballmer's last big restructuring. One of the critical aims of the latest shake-up will be to address criticisms, from the Microsoft board as well as many customers and partners, that development times are too slow for the rapidly changing needs of enterprises, consumers and the mobile world. "Every team across Microsoft must find ways to simplify and move faster, more efficiently," Nadella writes. "We will increase the fluidity of information and ideas by taking actions to flatten the organization and develop leaner business processes."

Flatter structures and streamlined processes usually mean significant layoffs too, and Microsoft's stock leapt to $42.47 on Tuesday morning on Wall Street anticipation of these efficiency drives.

The uptick was prompted by a research note from Nomura's Rick Sherlund, which predicted "bold moves and organizational changes" as well as increasing his earnings forecast from $45 to $50 for the fiscal year. He expects Microsoft to take a $1bn-plus charge related to changes in strategy following the Nokia acquisition - probably connected to major cuts to the 25,000 workforce that came with that transaction.