Long Seen as Tech's Sleeping Giant, Microsoft Is Reaping the Rewards of Its Stealth Approach

As children, we're told patience is a virtue, that slow and steady wins the race. But in Silicon Valley, where the "build fast, break fast" ethos guides companies, being a turtle is a sin. With this backdrop, Microsoft, that lumbering giant nestled among the forests of the Pacific Northwest, took the financial and tech worlds by surprise in late November by briefly surpassing Apple as the most valuable company on the New York Stock Exchange. With a market cap of $812.93 billion, it was the first time in nearly a decade that the Redmond, Wash.-based tech company had squeezed ahead of its Silicon Valley rival. Apple—which had become the first company to reach the $1 trillion mark earlier this year—wasn’t in second for long. (It was less than a day.) However, the rankings shake-up was enough to make everyone wonder: How did Microsoft, the parent of Clippy and the Zune, become hip enough to unseat, if momentarily, the King of Cool? Microsoft's story has had more ups and downs than its iconic Windows hilly home screen. Rising to power in the 1990s before being hit by the dot-com bubble and a major antitrust case, the company missed the mobile boom of the aughts. Meanwhile, its Bing search-engine business was dwarfed by Google, while Apple ate away at both the smartphone and PC markets and Facebook defined social media. While many wrote off Microsoft as nothing more than that nerdy guy in those old Mac vs. PC spots, the past few years of hitting refresh have led Microsoft into an entirely different company and culture. Analysts and investors say 2018 was the best year Microsoft has had in a decade. Over the past year, Microsoft has acquired 15 companies, ranging from cloud-computing and gaming to artificial intelligence and open source. Its tablets and laptops have received rave reviews. According to Gartner, Microsoft shipped 602,000 PCs in the third quarter of 2018—up from 591,000 in third-quarter 2017—and placed them in the top five vendors in the U.S. (Fourth place went to Apple, which shipped 2.02 million during the same period.) Software, including its Azure cloud and Teams workplace chat, have posted large gains, with Spiceworks predicting Teams will capture 41 percent of market share by 2020. And somehow—in a year full of industry headwinds and obstacles for two of its biggest competitors, Google and Facebook—Microsoft has remained steady. “Microsoft is excitingly boring,” notes Piper Jaffray analyst Alex Zukin. “And that’s a really big positive for investors because they’re not dealing with peak iPhone, peak social, macro or regulatory headwinds. They’re not dealing with lawsuits around misconduct. They’re able to stay below the radar because the trends that they’re playing at are decades-long trends. They’re not a flash in the pan.” [kickout id="1"] Past and present employees say the company has undergone a radical transformation of culture and mission. It's no coincidence that, as next month marks the five-year anniversary since CEO Satya Nadella took over Microsoft from Steve Ballmer, Nadella’s focus on empathy—a stark contrast to other tech CEOs that are often seen as emotionless, out of touch or profit driven—is viewed as the driving force behind the company's reversal. That focus on empathy applies to everything from internal mindset to client relations to competition. And, yes, even to marketing. According to Microsoft CMO Chris Capossela, the company has spent the past year focusing on its “fans” to better understand them across verticals. And that doesn’t always mean fans in a consumer mindset kind of way, but rather doubling down on existing customers rather than trying to take market share away from Microsoft’s competitors. He says the company has spent more time listening to its customers this year than in the past decade. With so many different fan bases to monitor, this approach has led to refinements across multiple products. Microsoft has created an adaptive controller for Xbox gamers with disabilities, for example, and designed the Surface Go with a smaller form factor to accommodate women who asked for a device that fit in a purse. “You need to have people who understand how to talk the language of a gamer, and how to talk the language of a chief security officer,” he says. Perhaps counterintuitively, the boost in the Microsoft brand over the past year has not meant an increase in its marketing budget. In fact, the company has spent less money over the past few years, investing $1.5 billion in 2017, $1.6 billion in 2016 and $1.9 billion in 2015. Kathleen Hall, Microsoft’s corporate vp of brand, advertising and research, says the company has evolved over the past year from being product led to blending storytelling with engineering. “I think the point is we have a very good balance between selling products and selling value and commitments,” she says. “And I think that’s the yin and yang that works with us.” Positioning Microsoft as a collaborator has been a key selling point. According to Capossela, "The days of being beholden to one company’s tool chain are completely gone." As a result, Microsoft has shifted toward becoming a more open, collaborative environment for both its own products and those of outside developers. And it's begun scattering seeds in everyone else’s fields, positioning the company as the antithesis of the so-called walled garden that other Silicon Valley giants such as Apple and Facebook have become known for. By acquiring GitHub, the software development platform, last year for $7.5 billion, Microsoft sent a strong nod to developers that wish to work beyond the ecosystems of Apple and Android. Then, in October, the company announced plans to mirror Android apps on devices that use Windows. Another platform where Microsoft is thinking outside of Windows is with its Cortana voice assistant. Unlike Apple’s HomePod, Amazon’s Echo or Google’s Home, Microsoft has not yet released its own smart speaker. Instead, it’s integrated Cortana into the Xbox One while also partnering with Harman Kardon to place Cortana inside the Samsung subsidiary’s smart speaker. For the Xbox, Microsoft also recently added Alexa, giving the gaming console two smart assistants to choose from. (It also recently redesigned the Cortana app for iOS.) "We live in a world that’s not a zero-sum game," Capossela says. "You're not going to have one cloud provider that wins it all … and once you realize that about the entire tech industry, it becomes much easier to embrace companies that might have formerly been seen as a competitor.” That mindset also will be subtly on display this week at the Consumer Electronics Show in Las Vegas, where large and small companies alike showcase their products and services to some 175,000 attendees. Microsoft often opts to take a backseat at CES, working with partners such as Dell, Lenovo, HP and others to highlight both enterprise software and consumer hardware. [kickout id="2"] Azure, Microsoft's own cloud business, has been a major area of momentum—a key example of how that mentality of collaboration across platforms has paid off. Last year, financial records showed the company’s commercial cloud business totaled $23 billion, surpassing its $20 billion goal, with Azure adding more than 500 capabilities in the past year. According to the company’s first-quarter 2019 earnings, commercial cloud revenue was $8.5 billion, up 47 percent year over year. Zukin says chief information officers at prospective companies feel comfortable with Microsoft because many businesses are already using its existing products, making any integration with an organization more familiar. Meanwhile, Amazon Web Services (AWS) is increasingly being seen as a potential threat because of Amazon’s tendency to compete in a far wider array of industries—including retail, banking and grocery, to name just a few. “More and more in boardrooms, there’s a question of, ‘Should we be putting our stuff in Amazon’s cloud because that funds the other [business verticals] where they’re competing with us?’” Zukin says. According to Synergy Research Group, AWS still had 40 percent of the market share, compared with the 65 percent shared by the trailing three: Microsoft, Google and Alibaba. However, the market-share gain by AWS seems to be slowing. In third-quarter 2018, Amazon only had a 1 percent market share gain, while Microsoft grew by 2.5 percent. Bing, Microsoft’s search engine, also continues to grow, even while largely shadowed by Google. Microsoft’s business may be a tenth of the size, but it still had a “fantastic” 2018, says eMarketer analyst Eric Haggstrom. Ad revenue increased from $3.7 billion to $4.5 billion in 2018, with Bing being integrated into Microsoft services ranging from Office 365 to LinkedIn. Perhaps one of the most consumer-focused changes has been Microsoft’s gaming and personal-computing hardware, which has received plenty of praise from industry reviews this year. The Surface Go, for example, has come a long way since its debut in 2012. When Microsoft struck a reported $400 million deal with the NFL in 2013 to make it the official tablet of the league, some announcers and coaches still called it an iPad. “It’s come so far and is so reliable that we always want to have a backup system in place, and we’re potentially now talking about not having a backup system,” says David Lynch, vp of sponsorships for the NFL. “We’re contemplating if we even need one because it’s that good.” Jon Marshall, an industrial designer at Pentagram, says that along with the Surface series, he’s been especially impressed with the design of products such as the Xbox and HoloLens. Until recently, he says, Microsoft always felt like it was trying to follow in the footsteps of Apple or HP, but since 2015 it has begun to have a design “language form” of its own. That also relates to software, which he says now integrates well across devices. “They’ve set out on their own path,” says Marshall. “They execute very well in a suite of materials that belongs to them now, and I’d very much like other brands to do that.” Dave Meeker, chief innovation officer of Isobar, says Microsoft had lost its way by focusing more on sales than on products—bloating its operating system with old code and focusing on sales rather than on services. But he says it’s clear that’s now changed, and he praises the company for its open-source approach. “They have broken those chains, and I look at them now and I’m excited about their stuff,” Meeker says. “And I think there are others that have been in the industry for 20-something years that feel the same way.”