A few years ago, Microsoft (MSFT) - Get Report faced the music and accepted that Windows Phone didn't have much of a future in a mobile landscape dominated by iOS and Android. It responded by drastically downsizing its phone business, as well as getting serious about becoming a top provider of iOS/Android productivity apps and developer tools.
With its latest annual restructuring, the software giant seems to facing the music again, this time for its Windows cash cow. Though by no means giving the world's most popular PC OS the Windows Phone treatment, Microsoft seems to be accepting that Windows no longer has the same central role in the everyday computing experiences of many consumers -- both due to smartphone/tablet adoption and the role now played by apps and cloud services that run across many different platforms.
Nine months after launching a reorg meant to better position Microsoft's sales, marketing and customer support teams to sell and support cloud apps and services (it featured major layoffs), the company has unveiled a reorg meant to overhaul its Windows and AI product development. This shakeup reportedly won't feature any layoffs, but it will see the departure of long-time exec Terry Myerson, who had been in charge of Microsoft's Windows and Devices Group. Myerson's group oversaw product R&D for the Windows and Windows Server operating systems, as well as Surface devices, the Xbox and the HoloLens AR headset.
Notably, CEO Satya Nadella indicates Myerson's responsibilities will be handed off to several different execs. Rajesh Jha, formerly in charge of Microsoft's Office Product Group, will "expand his existing responsibilities to lead a new team focused on Experiences & Devices." Microsoft Devices chief Panos Panay has been named the company's Chief Product Officer. And a "Windows platform" team responsible for creating a common platform for building Windows apps across devices will join the team responsible for Microsoft's Azure cloud platform.
That's not all. Scott Guthrie, previously in charge of Microsoft's large Cloud and Enterprise Group (responsible for Azure, business apps, server software and developer tools), will expand his responsibilities to lead what's called a "Cloud + AI Platform" team. A new AI Perception and Mixed Reality Team will now be reporting to Guthrie, as will a new AI Cognitive Services & Platform team.
The workers within these new teams were previously part of Microsoft's AI + Research team, which will continue to exist (just with fewer people). This shakeup says a lot about how Microsoft -- like Alphabet/Google (GOOGL) - Get Report and many others -- now views AI/machine learning work as an integral part of enterprise and cloud product R&D, rather than something that gets done in research labs and is later applied elsewhere. Nvidia (NVDA) - Get Report and Intel (INTC) - Get Report , each of which supply chips for AI-related work done inside Microsoft's data centers, can't complain.
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Some context for the Windows moves: Though having stabilized a bit in 2017, PC sales remain well below they were at several years ago, as both consumers and business take longer to upgrade their systems and direct more of their IT and electronics spending towards other fields. Research firm IDC believes 259.5 million PCs were shipped last year; that's roughly flat relative to 2016, but 26% below estimated 2011 sales of 352.4 million. PCs are hardly irrelevant, and still preferred by many consumers and office workers for a slew of activities, but the industry has clearly been in decline for much of this decade.
By and large, Microsoft has done a good job of propping up its Windows sales in this environment. But along the way, the company has found it necessary to rethink how Windows is monetized. Instead of relying solely on license fees, Microsoft is increasingly turning to ads (some are more intrusive than others) and Windows Store transaction fees, as well as the upselling of Office 365 and OneDrive subscriptions. And last year, the company rolled out Microsoft 365, a subscription package for businesses and schools that covers Windows 10, Office 365 and enterprise mobility and security tools.
It's unlikely that Microsoft will fully do away with Windows license fees -- many consumers and small businesses would undoubtedly balk at being required to pay for subscriptions. But there's clearly a trend towards leaning on them less going forward. Part of the incentive here is to keep PC costs down as more cost-sensitive consumers eye Google's Chromebooks or simply decide not to upgrade.
The other incentive is to find ways to indirectly monetize activity on devices other than PCs, courtesy of apps and services that work on a variety of devices. Office 365 and OneDrive are clearly a part of this effort, but so are things like Microsoft's efforts to create cross-platform gaming experiences that work across Windows and Xbox (and potentially also non-Microsoft software platforms).
That helps explain why Jha, who has been charge of Office products, is now in charge of end-user experiences on Microsoft hardware and software in general. And also why the Windows platform team is being merged with the Azure team. Creating more seamless and holistic user experiences across Windows, Xbox, Office and various other end user-facing Microsoft products, regardless of device, gives Microsoft a better chance to keep consumers loyal and grow its services and app subscription revenue streams.
There's always a measure of execution risk when a big reorg like this is carried out. But Microsoft has had plenty of experience since 2013 in launching shakeups meant to help the company skate to where the puck is going. And it's hard to complain a lot about what the results have looked like.