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The One Thing Satya Nadella Needs To Realize About Microsoft

MSFT is an enterprise company...and is very good at it, too.

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As Satya Nadella takes over as Microsoft (MSFT) CEO, this is the only thing he really needs to remember: Microsoft is not a consumer technology company.

microsoft-stock-msftOh sure, it sells a lot of stuff to consumers — Xbox, Windows phones, PCs, the Surface tablet, etc. — so people think it’s a consumer technology company.

It competes with Google (GOOG) and Apple (AAPL) and so people want to compare it to those companies. But the truth is that Microsoft is completely different.

Microsoft is an enterprise technology company.

Just look at last quarter’s earnings report. The commercial groups’ earnings (or as they call it, “gross margin”) grew by 10%. The consumer groups’ earnings contracted by 14%. And, the consumer groups’ earnings are about half the size of the commercial, or enterprise, groups.

Nadella should be pounding the table at every chance he gets to say that Microsoft is an enterprise company, not a consumer technology company.

As Microsoft has grown, it’s struggled to define itself. This is partly because former CEO Steve Ballmer didn’t want to make Microsoft an enterprise company. And since Microsoft was struggling in consumer technology, it was silly to make it a consumer-focused company.

Why didn’t Ballmer want Microsoft to be all-in on the enterprise? A former employee told us that he didn’t want Microsoft to become IBM, which he considered to be an irrelevant company.

Nadella shouldn’t have this concern. He should make enterprise the focus on his tenure, and make it exciting. There should be no doubt in anyone’s mind as to what Microsoft is working toward: Complete domination of enterprise technology.

Now, this doesn’t mean Microsoft should spin out Nokia (NOK) , Xbox, Bing, or any of its consumer facing businesses. They are all very useful for Microsoft.

But, a lot of pundits obsess over Microsoft’s consumer tech businesses. In particular, they look at Microsoft’s failure in the smartphone market and the collapse of consumer PC sales and want to write Microsoft’s obituary.

They say Microsoft must get better at Windows PCs and it must get better at selling mobile phones. It needs to be more like Google and Apple, they say.

There is no doubt that Microsoft wishes it was selling more smartphones and more PCs to consumers.

But does it need those businesses to succeed?

Last quarter, Microsoft’s consumer PC sales fell 20%, but enterprise PC sales were up 12%. As a result, the company’s revenue was up 14%, and EPS was up 3%.

Is this a one-off quarter? An anomaly? No. This has been going on for a while, and Microsoft is doing just fine.

This doesn’t mean Microsoft can just abandon its consumer businesses. They’re all really important for the long term of Microsoft.

There’s a trend in technology called the “consumerization” of IT. Essentially, people are bringing the gadgets they use at home into the office. So, iPhones and Android phones are invading Microsoft’s enterprise territory.

As a result, it needs to continue developing consumer facing technology like Nokia phones and Surface tablets.

As for the Xbox, it’s not essential for Microsoft.

Bing isn’t essential, but Microsoft swears the technology used in Bing has been helpful for its servers group.

Either way, who cares?

Self-driving cars aren’t essential for Google. Neither is Google Glass. Or contacts that check on glucose, or balloons that deliver Internet, or clean energy, or a lot of other side projects in development at Google.

Yet, Google is applauded for pursuing these projects.

Article printed from InvestorPlace Media,

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