Redmond Renaissance: Microsoft’s Newfound Success in a Cloud-Focused World

In January 2021, Microsoft reported nearly $43.1 billion in revenue, which amounts to a 17% increase over its last quarter. This beat analyst expectations of a 10% increase and was driven by an increasing demand for cloud services, Windows licenses, and Xbox gaming during the pandemic. However, this success did not occur overnight. Microsoft’s boom was set in motion in 2014, when Satya Nadella first took over the company from Steve Ballmer and pledged to transform Microsoft from a company focused on Windows and personal computing to a diversified services and devices company more akin to Google than to Apple. At the time, Microsoft’s Nasdaq shares were hovering around $40, and Redmond was still reeling from a shaky Windows 8 launch and disappointing sales of Windows Phones. Under Ballmer, Microsoft had doubled down on adapting Windows to all devices and even selling Microsoft-branded hardware, such as Surface tablets and Nokia phones. However, its approach backfired as enterprise and home customers found Windows 8’s touch-centric features and controversial removal of core features (such as the Start Menu) confusing to navigate. Mobile customers also continued to gravitate to Apple’s iOS and Google’s Android because of their more robust ecosystem of apps, services, and accessories.

To say that Nadella fundamentally reshaped Microsoft’s strategy is an understatement. In his first five years, he replaced Redmond’s sputtering Windows-centric business with a diversified focus on cloud services that would allow Microsoft to survive the mobile industry’s eventual elimination of the Windows operating system monopoly. To that end, he doubled down on engineering investments in Microsoft’s Office platform and improved the user interface and cloud accessibility of documents and storage. He added classroom and team management software to Office’s portfolio and adopted a platform-agnostic model to ensure Android, iOS, and macOS users equal access to Microsoft’s productivity applications. And Nadella made a bet on Microsoft’s most important product of the 2010s: its Azure cloud platform. By directing money into server technology innovation, Microsoft morphed Azure from a side project into a behemoth cloud platform that could host content for billions of devices and websites. Azure is now second only to Amazon Web Services in users. And as more services from fitness classes to schools move online in the pandemic, Azure and Office 365 now account for $16.7 billion in revenue for Microsoft—nearly 34% higher than the earlier year.

Nadella’s bet on a diversified Microsoft has also paid dividends for its other core businesses such as Windows, Xbox, and Surface. By listening to what its core enterprise and enthusiast customers wanted instead of forcing user-unfriendly designs, Microsoft fixed most of Windows 8’s shortcomings with Windows 10, which saw the reintroduction of the Start Menu, streamlined settings and notifications panels, and frequent updates that transformed Windows into more of a service than an operating system. A similar mindset focused on user feedback aided Microsoft in retooling new versions of its Xbox and Surface tablets with better performance per price. As a result, Xbox revenues climbed 14% to $15.1 billion in early 2021 and Surface revenue increased 37% to $1.5 billion in 2020.

Redmond’s shift away from a Windows-centric business to a diversified cloud-focused model has resulted in record growth and decisive success, as Microsoft’s shares are now trading well above $200. With Nadella at the helm and more businesses turning to cloud platforms to conduct business amid a global pandemic, Microsoft’s wise decisions over the past decade will continue to set the foundation for its renaissance.