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Xbox needs to be top of the agenda for new Microsoft CEO

Column Nadella needs to work on growth in mobile and gaming hardware
Thu Feb 06 2014, 16:41
V3 and The INQUIRER editor Madeline Bennett

THE APPOINTMENT of Satya Nadella as the new Microsoft CEO on Tuesday failed to send shock waves through the tech industry, confirming a widespread rumour that had been circulating since last week. He certainly ticks all the boxes for Microsoft based on the traditional pattern it follows when filling executive slots:

Worked at Microsoft for more than a decade - check
Background in software - check
Background in enterprise - check
Male - check
Over 40 years of age - check

Nadella's credentials all point towards the firm's future direction as a software house. His most recent role was heading up the Cloud OS platform team at Microsoft, which is used to power all of the firm's cloud services such as Office 365 and Dynamics, and also consumer services including Xbox Live and Skype.

But while the experience with products such as Skype and Xbox Live might indicate a consumer focus, Nadella is very much a corporate man. As executive vice president of Microsoft's Cloud and Enterprise group, and before that vice president of the Microsoft Business Division, the new chief executive will have spent lots of his time focusing on how to keep business customers parting with their IT budgets.

The trouble is, the world has moved on from this model. The advent of bring your own device and cloud computing means that it's the individual and not the business who holds the power over what software and products are used within a company - and Windows is no longer the operating system of choice. Firms are currently clinging on to some semblance of control over the apps and devices in use within the workplace, but many have already given up and are rushing to offer support for all the different products their employees are using anyway.

This shift is highlighted by Microsoft's recent set of financial results for the period ending 31 December 2013, which show that consumer licensing is on the decline, as fewer individuals choose Windows over alternative options such as Android, iOS and Chrome.

Conversely, Microsoft is showing gains in the hardware side, especially with its popular Xbox One console. The firm sold 7.4 million Xboxes into the retail channel from October to December last year, and overall consumer and device revenue grew by 13 percent to $11.9bn. Okay, so this is less than the $12.7bn brought in by the enterprise side of the business via products like System Center and cloud services - but that side is growing at a slower rate of 10 percent.

Despite the growth in the consumer and hardware side, it’s hard to believe that Nadella will be showing much love to the gaming part of the business. During his briefing to customers and partners on Tuesday, Nadella made it very clear that software, cloud and mobile are his key focus areas, and the hardware brands that did get a name-check - Nokia devices and Surface tablets - were mentioned as being useful supports for Microsoft's software, rather than key parts of the business in their own right.

Phil Spencer, corporate VP of Microsoft Studios, took to Twitter on Tuesday to put a positive spin on the Nadella appointment, in the absence of any Xbox remarks from the new chief himself.

"Congrats to Satya Nadella on becoming new Microsoft CEO. Good leader, good guy and will be a great CEO," he tweeted. "I know Satya. He's been a good supporter of Studios and Xbox. Microsoft LT [leadership team] understands Xbox is a very important consumer brand for us."

It's only been a few days since Nadella has taken the reins, but so far there hasn't been the slightest hint from him to support Spencer's tweets.

Nadella certainly would have been a smart choice as CEO five years ago, helping transition the company to the cloud. But his software-first focus could hamper the firm's potential for future growth in the current market. Yes, there's an argument that hardware is a commodity and nobody makes money out of PCs or printers any more - it's the services that go around them that offer the revenue potential. But for mobile and gaming hardware this isn't the case.

Apple and Samsung have both shown that there are still billions to be made if you can develop covetable mobile products, but so far this objective has evaded Microsoft. The firm has its Windows Phone platform, which has seen some growth. It has also bought Nokia's devices business to benefit from its Lumia range, which has also seen some success - but the numbers are still far below those enjoyed by Apple and Samsung.

On the tablet side, Microsoft was keen to show off more than a doubling in revenues for its Surface product in its recent set of results - from $400m to $893m quarter by quarter. Sorry to rain on Redmond's parade here, but it's worth noting the $11.5bn in iPad sales Apple made over the same period; and Apple's quarterly revenues at $58bn, compared with Microsoft's $24.5bn. Again, clear evidence of the money on the table for savvy mobile vendors.

And then there are innovations like 3D printing and the internet of things, which could well see the advent of a new range of hardware that will have people rushing to upgrade their current devices or invest in new ones.

Nadella is right to target the enterprise and the cloud for his software push, as that's where the money is. But there are still plenty of consumers out there willing to spend their cash on smartphones, tablets and games consoles. To give Microsoft the best chance of boosting its revenues, a broad view is required encompassing all the firm's assets, rather than a narrow focus that overlooks gems like the Xbox. µ


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