How Mi­crosoft emerged from the dark­ness to em­brace the cloud.

Houston Chronicle - - EXTRA TECHNOLOGY + GADGETS - By Matt Day | Seat­tle Times

THE win­ter of 2010 brought some of Mi­crosoft’s dark­est days.

Bing, the search en­gine Mi­crosoft built to chal­lenge Google, was burn­ing cash with lit­tle to show for it. Smart­phones for the first time sur­passed the per­sonal com­puter, Mi­crosoft’s com­fort zone, as the world’s most pop­u­lar computing de­vice. The must-have tech gad­get that hol­i­day sea­son was Ap­ple’s new iPad.

Mi­crosoft, a com­pany at the cen­ter of the tech­nol­ogy world for decades, watched the fu­ture pass it by.

Steve Ballmer, Mi­crosoft’s chief ex­ec­u­tive, couldn’t af­ford for that to hap­pen to the com­pany’s sprawl­ing busi­ness-soft­ware em­pire.

In a sur­prise move, Ballmer re­moved Bob Muglia, the leader of the com­pany’s fast-grow­ing Server & Tools divi­sion. Muglia’s de­par­ture in 2011 was the last in a string of ex­its that saw much of Mi­crosoft’s brain trust de­part.

“It was re­ally dreary,” Muglia said of the mood at Mi­crosoft then. “You ba­si­cally saw a com­plete self-de­struc­tion of the se­nior lead­er­ship team.”

But out of that chaos, the nadir of Mi­crosoft’s lost decade, the com­pany found a re­birth in cloud computing.

Six years later, Satya Nadella, the man Ballmer tapped to suc­ceed Muglia, is the chief ex­ec­u­tive of a rein­vig­o­rated Mi­crosoft that is reap­ing the re­wards of a bet-the-com­pany push to­ward web­based soft­ware and ser­vices.

Mi­crosoft stock hit all-time highs in Novem­ber, a re­flec­tion of in­vestor con­fi­dence in Nadella’s pivot away from flag­ging con­sumer ser­vices like smart­phones and to­ward busi­ness soft­ware de­liv­ered on the web. A com­pany that for much of the 2000s tried in vain to fash­ion it­self in the model of Ap­ple or Google found a bet­ter tar­get in its back yard in Ama­zon.com.

Seat­tle-based Ama­zon grew up as an on­line re­tailer, but the com­pany a decade ago pi­o­neered the busi­ness of rent­ing com­puter power and other tech­nol­ogy in­fra­struc­ture over the in­ter­net. Its Ama­zon Web Ser­vices unit, with sales of $11 bil­lion in the most re­cently re­ported 12 months, has a wide lead in that arena, an­a­lysts say.

Mi­crosoft has pushed hard to catch up, spend­ing bil­lions on new data cen­ters and rewrit­ing its soft­ware for de­liv­ery via the web.

Those in­vest­ments are start­ing to pay off. Mi­crosoft’s sales of web-based computing in­fra­struc­ture brought in about $2.3 bil­lion dur­ing the last year, an­a­lysts with RBC Cap­i­tal Mar­kets es­ti­mate.

That’s a small por­tion of Mi­crosoft’s to­tal rev­enue, and the ser­vice likely isn’t prof­itable yet. But it rep­re­sents a vi­tal new line of busi­ness for a com­pany that re­lies on a stag­nant PC mar­ket.

“There’s a re­al­iza­tion that the con­ven­tional wis­dom about Mi­crosoft was

wrong,” said David Smith, an an­a­lyst with re­searcher Gart­ner. “They saw the tremen­dous suc­cess that Ama­zon was hav­ing, and they adapted be­cause of that.” GATES’ IN­VOLVE­MENT

Mi­crosoft’s cloud-computing work started in earnest in 2006, the same year Ama­zon launched Ama­zon Web Ser­vices.

The goal wasn’t to em­u­late Amaing zon. In­stead, fol­low­ing the ill-fated en­gi­neer­ing ef­fort that put to­gether the Win­dows Vista op­er­at­ing sys­tem, a

small team of se­nior en­gi­neers started work­ing on stitch­ing to­gether the plumb­ing be­hind Mi­crosoft’s on­line ser­vices, from Hot­mail to search.

A road show and lis­ten­ing tour en­sued, with a crew of six en­gi­neers pil­ing into a mini­van to learn from Mi­crosoft’s web-fo­cused units in Sil­i­con Val­ley.

Back in the Seat­tle area, the team set up a skunk-works lab in Mi­crosoft’s Build­ing 28. It didn’t ad­ver­tise its work to col­leagues, most of whom were plug­ging away on pack­aged soft­ware re­leases.

“We hid,” said Yousef Kha­lidi, an en­gi­neer who was among the first to join the project. “The idea of mov­ing away from shrink-wrapped soft­ware was, at the time, rad­i­cal.”

It wasn’t long be­fore Bill Gates asked to re­view the team’s work. The co­founder’s of­fi­cial role at the com­pany was lim­ited to a board seat, but he still kept a close watch on Mi­crosoft.

Ray Ozzie, Mi­crosoft’s chief soft­ware ar­chi­tect, said the team wasn’t ready.

Gates wouldn’t take no for an an­swer. He in­sisted, meet­ing the team in a small con­fer­ence room one Fri­day morn­ing and grilling it on its progress.

The fol­low­ing Mon­day, Gates called an­other meet­ing. The project was great, he said, but he wanted the team to go pub­lic with its work.

Overnight, the mis­sion had changed from build­ing tools for Mi­crosoft em­ploy­ees to cre­at­ing a new prod­uct for cus­tomers.

Bol­stered by the ad­di­tion of a few dozen em­ploy­ees, the team spent years build­ing the first ver­sion of what was called the Win­dows Azure cloud-computing plat­form. It launched in 2010.

The ini­tial prod­uct wasn’t very good. Azure was dif­fi­cult to use, and de­spite its “Win­dows Azure” brand­ing, it couldn’t run off-the-shelf ver­sions of Win­dows Server.

The team’s big­gest bet — that busi­nesses were in­ter­ested in us­ing web­based tools to build new and fu­tur­is­tic ap­pli­ca­tions — proved to be a dud. Most com­pa­nies wanted the cloud to repli­cate some­thing they al­ready did.

“SOME­THING BIG GO­ING ON”

Mi­crosoft did have a model for what would work.

In 2008, Server & Tools chief Muglia and Andy Jassy, the leader of Ama­zon Web Ser­vices, or AWS, struck a deal.

Some AWS cus­tomers wanted to run Mi­crosoft’s soft­ware on Ama­zon’s in­fra­struc­ture. Muglia agreed to add Ama­zon to a pro­gram for com­pa­nies that rent Mi­crosoft tools to their own cus­tomers, and pay Mi­crosoft at the end of each month based on how much they used.

Ama­zon at the time wasn’t telling in­vestors much about how AWS was do­ing. Mi­crosoft, though, had its own in­di­ca­tor: the large and grow­ing num­ber of Mi­crosoft prod­ucts Ama­zon was pay­ing for ev­ery month.

“We knew that there was some­thing big go­ing on there,” said Bob Kelly, a for­mer Mi­crosoft ex­ec­u­tive.

Mi­crosoft and Google by then had launched com­pet­ing ser­vices, but it was up­start Ama­zon that was cap­tur­ing the most cus­tomers.

NEW HEAD OF TEAM

Nadella took over Server & Tools in 2011 with a man­date to push harder on cloud computing, col­leagues say.

It didn’t mat­ter whether cus­tomers were ready for web-based tools, the think­ing went. The in­dus­try was go­ing that di­rec­tion, and Mi­crosoft could try to lead or risk get­ting left be­hind.

“Very quickly, the world changed,” said Kha­lidi, who leads Azure’s net­work­ing teams to­day.

Nadella placed Scott Guthrie, a ca­reer Mi­crosoft en­gi­neer­ing man­ager, in charge of the Azure team.

One of Guthrie’s first moves was to gather Azure’s lead­ers at an off-cam­pus re­treat for an ex­per­i­ment: He asked them to try to build an ap­pli­ca­tion us­ing their own cloud ser­vice.

It didn’t go well. Some fea­tures didn’t work, and some man­agers failed to com­plete the on­line sign-up process to use Azure. “We didn’t have ev­ery­thing quite right,” Guthrie said.

The team rewrote Azure, with a fo­cus on ease of use and the sort of tools Ama­zon was hav­ing suc­cess with. It also had to un­learn lessons from decades spent sell­ing out-of-the-box soft­ware.

In the old world, how a prod­uct per­formed was a cus­tomer-ser­vice is­sue, walled off from en­gi­neers work­ing on adding new fea­tures.

In the world of live web ser­vices, cus­tomer ser­vice be­came part of the en­gi­neer­ing work.

Nadella in­sti­tuted weekly meet­ings in which se­nior lead­ers spent hours delv­ing into how cus­tomers used Mi­crosoft ser­vices, as mea­sured by about 3,000 met­rics.

If a por­tion of Azure’s net­work fails in South­east Asia, for ex­am­ple, “We want to know why, and we want to know in an ex­cru­ci­at­ing depth what we are do­ing to make sure it doesn’t hap­pen again,” Guthrie said.

Rev­enue isn’t dis­cussed. “We fo­cus on cus­tomer met­rics, and what we find is when we im­prove them, our rev­enue keeps go­ing up,” he said.

Azure re­launched in 2013 with a set of in­fra­struc­ture ser­vices that per­formed many of the same func­tions as Ama­zon’s AWS.

SYM­BOLIC SWITCH

A month af­ter Nadella re­placed Ballmer as CEO in 2014, he signed off on a cos­metic, but hugely sym­bolic change. “Win­dows Azure” was re­named “Mi­crosoft Azure.”

Win­dows had been the cen­ter of Mi­crosoft’s uni­verse for decades. Prod­ucts had to play well with the op­er­at­ing sys­tem or else they wouldn’t last long.

Drop­ping “Win­dows” was strate­gic, a re­minder to po­ten­tial cus­tomers that Azure could run more than Win­dows. It was also sym­bolic of the cul­tural shift Nadella was try­ing to en­gi­neer as Mi­crosoft, for­merly hos­tile to soft­ware built out­side its walls, had de­cided to play nice with Azure.

“He said our busi­ness is cloud first, and we have to move away from the shack­les that they were tied to in Win­dows,” said Dave Bar­to­letti, an an­a­lyst at For­rester.

Mi­crosoft’s Azure has gained trac­tion in the past two years in part by us­ing an old tac­tic: build­ing off the com­pany’s re­la­tion­ship with busi­nesstech­nol­ogy buy­ers.

Most com­pa­nies buy one Mi­crosoft prod­uct or an­other. Jerin May, a busi­ness-tech­nol­ogy con­sul­tant with West Mon­roe Part­ners, says he sees that fa­mil­iar­ity pay­ing div­i­dends.

Mi­crosoft’s “com­mer­cial cloud,” which in­cludes sales of Azure, Of­fice 365 and other web-based busi­ness soft­ware, was on track in Septem­ber to bring in $13 bil­lion over a full year.

Nadella, Guthrie and Kha­lidi are typ­i­cal of the new Mi­crosoft: soft-spo­ken man­agers with deep back­grounds in en­gi­neer­ing. The com­pany re­tains its sprawl­ing bu­reau­cracy and pen­chant for meet­ings, but in­tro­spec­tion and data-driven anal­y­sis are in vogue.

Com­bat­ive­ness, par­tic­u­larly when talk­ing about the com­pe­ti­tion, is out.

Asked in an in­ter­view about the ri­valry with Ama­zon, Guthrie, who now leads Mi­crosoft’s Cloud and En­ter­prise group, tipped his cap to his the Seat­tle com­pany.

“We have a lot of re­spect for our friends across the lake,” Guthrie said. “Our ap­proach has al­ways been, when work­ing on Azure, let’s not sort of thump our chest and make claims. Let’s ac­tu­ally de­liver a bet­ter prod­uct.”

Mi­crosoft CEO Satya Nadella, tapped in 2014, leads a tech gi­ant that is reap­ing the re­wards of a bet-the-com­pany push to­ward web-based soft­ware.

Richard Drew / As­so­ci­ated Press file

bet-the-com­pany push to­ward web-based soft­ware.

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