Microsoft, losing the mobile race, see its future in the cloud

Betting big on Internet services has paid off for Microsoft

If mobile and cloud are the two key technology markets of the future, it's good that Microsoft seems to have a handle on at least one of them.

When the company reported its quarterly financial results Thursday, something stuck out of its statistics: phone hardware revenue had dropped 58 percent year over year, something the company blamed on an "updated strategy." 

It's a nice little turn of phrase that belies Microsoft's shift in focus away from operating Nokia's devices business like the Finnish handset maker used to, with a wide range of phones. Instead, the company is building a leaner division that will only turn out a few different handsets. That leanness is meant literally: earlier this year, Microsoft cut the employment of 7,800 people, primarily in the phone hardware division. 

Meanwhile, the company's "Intelligent Cloud" business was the only reporting segment to grow revenue during the last quarter. Compute usage on the Microsoft Azure cloud platform has doubled year over year, and its revenue grew by 135 percent on a constant currency basis. 

Even looking outside the company's cloud segment, it's possible to pick up on additional cloud growth. Microsoft has 60 million monthly active users for Office 365 Commercial, and the cloud productivity service offering has 18 million consumer subscribers as well.

The trend of solely cloud growth is something that Microsoft sees continuing until at least next quarter, based on the company's predictions. Company CFO Amy Hood said on a conference call with financial analysts that the firm expects phone hardware sales to stay down year-over-year, even with a trio of new Lumia handsets launching in time for the holidays.

With all of that information on the table, it seems like CEO Satya Nadella's decision to sideline the phone hardware division and push a more friendly, pluralistic approach to the mobile and software market while simultaneously continuing to promote Microsoft's cloud capabilities was the right one, at least for the company's current situation.

After all, Windows on mobile devices occupies a marginal part of the market at best, and there's not really a lot of hope in sight for the company's mobile ambitions in the near term. Windows 10 Mobile is supposed to arrive in November along with new Lumia devices, but the operating system's app ecosystem could best be described as anemic.

On the flip side, Microsoft is well-suited to take advantage of its strong position in both the productivity market (with Office 365) and the server software market to push its cloud capabilities as a major component of its business going forward.

During the earnings call, Nadella pointed out that all of the company's services feed into its cloud strategy. Enterprise IT managers deploying Office 365 can turn to Azure Active Directory for identity management, and once they're into Azure's platform offerings, are then more likely to use other services from Microsoft's cloud. That's a positive sign for the company's growth as a cloud player if it's able to convert paying customers into using more services going forward. 

It'll be key for Microsoft as it continues to compete in the cloud, since the firm is locked in a tight battle with major competitors like Amazon and Google both for existing large enterprises (where Microsoft is strong) and newer startups that may be more likely to turn to one of its competitors. 

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Blair Hanley Frank

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