Since I estimated on July 7 that
Firing people does not make a company an interesting investment -- growing faster than its markets, however, can be a great reason to buy a company's stock. Unfortunately, I do not see how Microsoft can accomplish that -- unless it creates new markets that get big fast or it can boost its successful cloud services business into a far bigger share of its total revenue.
And Microsoft should go even further than just cutting half of Nokia's employees, it should sell the business to Lenovo.
Before getting into the reasons for this, let's look at the Microsoft layoffs. According to the New York Times, 12,500 of the lost jobs are held by the 25,000 people Microsoft acquired from
The other 5,500 come from particularly poorly performing divisions of Microsoft such as "Xbox Entertainment Studios, a [150 person according to The Wall Street Journal] group in Santa Monica, Calif., that was dedicated to producing original television programming." The Journal also reports that Microsoft will cut jobs from its "advertising-sales businesses, marketing operations and engineering teams at Windows."
For reasons that elude me, Microsoft's stock has risen 25% since Satya Nadella became CEO. And I expect that to continue because of the role of hedge funds like ValueAct which succeeded in getting one of its executives onto Microsoft's board. ValueAct will push for changes in Microsoft's corporate strategy -- such as getting rid of Xbox.
But while this move and the layoffs will free up capital for other uses, the question that Nadella must answer is where to invest Microsoft's capital and talent in order to accelerate growth.
In theory, the best answer to Microsoft's growth woes is to create a new market that gets big fast. But it could also go after big established profit pools and invent products that take share from rivals. A look at Microsoft's current position in those markets reveals that this will be very difficult to achieve.
The problem for Microsoft is that it leads in markets that are growing slowly and lags in the others. For example, Windows controls about 96% of the desktop operating systems market, according to Net Application but that is shrinking -- PC shipments are expected to fall 10% by 2015, according to Gartner. It is in third place behind Oracle and IBM in databases.
One bright spot for Microsoft is its cloud services business. In the most recent nine months, Microsoft's "Commercial Other revenue increased $1.2 billion or 29%, due to higher Cloud Services revenue and Enterprise Services revenue. Cloud Services revenue grew $943 million or 104%, due mainly to higher revenue from Commercial Office 365."
Indeed Microsoft is achieving considerable success with the Cloud -- a market that IDC expects to grow at a 23% annual rate from $47.4 billion last year to $107 billion by 2017.
And Microsoft is growing over four times faster than this market with rapid customer uptick. On May 28, Microsoft’s management commented that its Office 365 -- the cloud version of Microsoft Office -- gained “1 million subscribers in the first 100 days of its launch and 4.4 million subscribers after a year in service."
Unfortunately, its success in the cloud is not enough to make a dent in its slow growth -- its $4.1 billion in cloud services revenue accounted for a mere 7% of its total sales -- unless Microsoft can shed those mediocre to lagging businesses -- like Microsoft SQL Server, Windows Phone, Bing, Xbox (estimated to lose as much as $2 billion a year) -- and invest in new products that will help it gain share in the cloud services business.
The big elephant in the room is whether Microsoft can succeed where Google failed -- making money in smartphones via its Nokia acquisition.
Microsoft should consider selling Nokia to Lenovo -- as Google did with Motorola in January for about $2.9 billion (taking a 77% haircut on its 2012 buy). The sooner it does that, the more money it can save on what is likely to be a failed effort to build Nokia's hardware into a popular platform for Microsoft software and services.
Rivals like Apple and Samsung are setting the pace and with a mere 3% share of the smart phone operating system market, Microsoft is in a very weak position from which to build.
Microsoft's best opportunity to boost growth is in the cloud -- to maximize that potential Nadella should break free from the chains he inherited from Steve Ballmer while investing in new cloud services.
