Microsoft’s move from Windows to the cloud pays off

SEATTLE — Satya Nadella is today the chief executive of a reinvigorated Microsoft that is reaping the rewards of a bet-the-company push toward web-based software and services.

Microsoft stock hit all-time highs in December, a reflection of investor confidence in Nadella’s pivot away from flagging consumer services such as 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 in 2016, 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.”

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

The goal wasn’t to emulate Amazon. 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.

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-theshelf versions of Windows Server.

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

Microsoft did have a model for what would work.

In 2008, Server & Tools chief Bob 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.

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

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.

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

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.

Now, Microsoft’s Azure has gained traction in the past two years by using an old tactic: building off the company’s relationship with business-technology buyers.