News broke recently that software giant Microsoft Corporation (NASDAQ:MSFT) is preparing to undergo a reorganisation that will completely shift the core focus of the company. This is likely as part of an effort to slowly move away from its software sales businesses and provide a boost to its burgeoning enterprise cloud services.
It is no secret that Microsoft’s software sales business has been stagnating over the past few years. Partly due to the weak growth in the Personal Computing market, and partly due to the rise of cloud-enabled solutions, traditional buy-it-once software services are falling by the wayside. The proliferation of mobile computing devices on the consumer side and cloud-based services on the enterprise end have been marginalising the PC software market for years now. In fiscal year Q3 2017, Microsoft’s revenue from its personal computing unit fell by 7% to $8.8 billion. This came as part of an ongoing trend of gradual decline, as the revenue from Personal Computing had dropped by 5% to reach $11.8 billion in the previous quarter as well.
In contrast, Microsoft’s “Intelligent Cloud” Services, which includes their flagship Azure cloud platform, saw an increased revenue of $6.8 billion in FY Q3 2017. This represents a significant growth of about 11%. In fact, server products and cloud services performed well across the board, with Azure registering a massive 93% growth in the third quarter of the fiscal year 2017.
With this data in mind, it is no surprise that CEO Satya Nadella is looking to shift Microsoft’s focus from software to cloud and business services. According to a Microsoft memo, this is part of an effort by Microsoft to help customers with “digital transformation”. Now, by focusing on industries like education, government, retail, health, manufacturing, and financial services instead of products, Microsoft aims to address specific needs of its customers better.
However, the unfortunate flipside is that this reorganisation will likely involve massive layoffs and job cuts. TechCrunch believes thousands of employees could lose their jobs across the world. This could mark another sordid saga of massive job cuts involving Microsoft, like last year when they cut almost 5000 jobs. The situation was similar in July of 2015 when Microsoft made 7,800 job cuts related to their failed forays into the smartphone market.
That is not to say that this is an indication of a company in trouble. Like we have already established, Microsoft’s cloud services are rapidly gaining traction and bringing in more revenue. Gartner recently even put their Azure platform as one of the market leaders for infrastructure-as-a-service. Providing and selling cloud services doesn’t quite require the same amount of manpower as traditional software services. This move by Microsoft is most likely an attempt to reduce costs and improve revenue per employee.
