Forget Windows; Microsoft is now all about the cloud

The OS is no longer the heart and soul of the company, and Microsoft knows it.

In the space of less than a week in late April, two events made one thing very clear about Microsoft: The company is now pursuing a cloud-first strategy, with Windows taking a back seat. And that will continue as far into the future as the eye can see.

The first event was the April 26 release of Microsoft’s earnings report for its third fiscal quarter, which ended March 31. A close look shows that cloud revenue has become the company’s driving force, outpacing money the company gets from its onetime cash cow, Windows.

Precise figures on total cloud revenue versus total Windows revenue don’t exist, because Microsoft doesn’t break things out that way. But the earnings report nonetheless shows the direction in which the company is moving. Microsoft divides itself into three major segments: More Personal Computing, which encompasses Windows, devices, gaming and ads; Productivity and Business Processes, which includes Office, LinkedIn and Dynamics; and Intelligent Cloud, which is composed of servers and cloud services. More Personal Computing revenue clocked in at US$9.25 billion, Productivity and Business at $9.01 billion, and Intelligent Cloud at $7.9 billion.

Windows resides in the More Personal Computing segment, the revenue leader, but don’t let that deceive you. A closer look tells the real story.

As I said, there’s no breakdown of Windows versus cloud, but Microsoft did say the Azure public cloud’s revenue boomed 93% year over year. The previous quarter it grew 98% year over year. And Microsoft also said that what it calls its “commercial cloud,” made up of Azure, Office 365, Dynamics 365 and other cloud services, brought in $6 billion in revenue in the third quarter, which was up 58% year over year. The More Personal Computing segment was up far less — only 13% year over year.

Also notable in the third quarter: Windows and Devices chief Terry Myerson left the company. You can be sure he didn’t depart because Microsoft was going to devote more attention to Windows.

Keep in mind, also, that a lot of Microsoft products are now essentially cloud-based, so there’s even more cloud revenue at the company than first meets the eye. Microsoft Office, for example, is increasingly a cloud service, with the company pushing Office 365 heavily over the client version of the Office suite.

The second event of note came four days after Microsoft released its earnings report, when it rolled out the next major update to Windows, the Windows 10 April 2018 Update. But this event was most notable for being a non-event. Windows updates used to be big, publicity-heavy affairs, with Microsoft spending plenty of money and lavishing lots of love on new features for the operating system. But as this latest update shows, those days are over. The update itself was underwhelming, with only one new feature of any note. It’s called Timeline and it lets you review files and apps you’ve been using over the last month and resume activities you had earlier undertaken. But Timeline is half-baked, because it only works with Microsoft applications. As for publicity, there was practically none, apart from a low-key blog post by Yusuf Mehdi, corporate vice president of the Windows and Devices Group.

Beyond that, Windows has essentially become a cloud service. Gone are the days of big-bang releases that need to be installed from physical media. Now when you get Windows 10 on a new PC, it auto-updates over the cloud. Think of it as cloud-based Windows as a service.

There’s plenty more evidence that Windows is taking a back seat to the cloud across the company. In mid-April, Microsoft announced its Azure Sphere platform for connecting internet of things (IoT) devices to the cloud. That platform isn’t based on Windows, but instead on — take a deep breath, old-school Microsoft true believers — the open-source Linux operating system. Azure Sphere, Microsoft says, is available for free to any company that makes IoT controllers. And, Microsoft added in a blog post, it is also “open to additional software innovation by the open source community and open to work with any cloud. In short, it represents a critical new step for Microsoft by integrating innovation across every aspect of technology and by working with every part of the technology ecosystem, including our competitors.”

That would have been heresy in the far-off days when Bill Gates ran the company, and even in the more recent times when Steve Ballmer was at the helm. Under both leaders, Windows was the blunt-force hammer used to smash competition. But those days are gone. Competitors no longer fear Windows. And so Microsoft is rebuilding the company to be cloud-first, turning Windows into just another cloud-based service. It’s the right thing to do, not just for customers, but for the company to thrive as well.

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