In just one week, Microsoft’s new CEO Satya Nadella has completely changed Microsoft’s business model operates. In the process, the new Microsoft has become more innovative and able to take advantage not only of current and upcoming customer trends, but has set its strategy on long-term growth.

Only a few weeks ago, I wrote an article on whether new CEO Satya Nadella was the right man to reinvigorate the innovation capabilities at Microsoft to keep them relevant as they lose market share and revenue from their core products of Windows and Office. I concluded that he had the exact leadership capabilities required, and this past week he proved me right, in stunning style.

On 27 March 2014, he held a press conference at which the new, fully touch-enabled Office for iPad was announced, and it has already proven to be one of the most popular Apps in the Apple App marketplace with more than 12 million downloads. It is free to use to view documents, but requires an Office 365 subscription to edit them. What’s interesting is that this release came before the touch-enabled version on their own Windows platform, something unheard of in previous Microsoft regimes.

Microsoft’s strategy is “Cloud First, Mobile First” – Satya Nadella

Then, at their annual Build Conference on 2 Apr 2014, he announced that all versions of Windows, including PC, tablet and phone versions, would be free for devices with a screen of less than 9 inches to consumer manufacturers, to help challenge Google’s free Android operating system for smaller devices.

What many of you may not realise is that Android device manufacturers actually have to pay a patent fee to Microsoft for some of its technologies, so it will now actually be cheaper to manufacture a Windows phone or tablet than an Android one.

Finally, it also made many of its developer tools (which programmes use to make software and apps) open-source, like it’s C# and .Net platforms, and made it easier to develop Apps between all Microsoft devices (PC, tablet, phone, Xbox). This has gained a lot of support in the developer community.

So what does it mean? Have Microsoft given up making people pay for software?

What has happened this week is one of the most radical changes to a major company’s business model in a long time.

Microsoft has just gone from a business model based primarily on selling products, licenses (IP) and devices to one selling ongoing services and subscriptions.


Let me go through why each of these changes is so significant, and why it puts the company is a very strong position to continue being a successful innovator in the next decade (about as long as you can predict for a tech company). I would in fact argue that it puts it closer to the level of Google, and that it could surpass Apple again in that time:

  1. Release of Office for iPad: Microsoft has given away a superior version of its product on a platform it doesn’t own. Previously, it had not released it to try and give customers a reason to buy it’s own tablet platform, the Surface. The new strategy shows that Microsoft is willing to enable it’s customers to access their products in the way they prefer. How does Microsoft benefit? Simple: Office 365 Subscriptions. To edit documents, you need to have a subscription to Office 365 (which is how the majority of new customers get Office on PCs now), which costs a monthly fee instead of paying hundreds of dollars up-front to own the software. This means that every iPad owner who uses Office on their device could be worth more than $100 a year to Microsoft. This is predicted to bring in billions of dollars annually as both individual users and big corporates accelerate using the service. It also enables them to interact more directly with their customers, thus achieving several of the 10 Types of Innovation.
  2. Giving away Windows licenses for free on small devices: Microsoft desperately needs to catch up with both Apple and Android. Last year, for the first time more iOS devices were sold worldwide than PCs. And this has hurt the sales of Windows PCs, as people are less likely to upgrade their desktop or laptop, instead purchasing a powerful new tablet. Being able to manufacture Windows devices with small screens for free will significantly increase the number of devices on the market (especially in rapidly developing markets like China, India, Africa and South America where price is a crucial factor). It is also a factor when considering the development of wearable devices with even smaller screen sizes, where price will be an even bigger issue (although many of these will forego a full-blown operating system for more stripped-down tech, like ones based on JavaVM). However, even if there are millions of new users of Windows devices, if Microsoft doesn’t get a license, how will they benefit? Through the use of additional services on their platform, like Cloud storage (based on their Azure platform), App and media sales (much like iTunes) and encouraging them to sign up for other services like Office and Xbox Live. Not to mention the ability to target them with appropriate advertising as Google does.

Much like IBM’s change from a hardware manufacturer to a services and consulting provider over the past two decades, Microsoft’s Board Members and Leadership realised that customer expectations and competitor capabilities were shifting their traditional business model. In order to continue growing, it needed to change it’s strategy, and that required a clear vision on what the future was and their role within in. When looking for their next CEO, Microsoft’s Board Members decided that their strategy would be “Cloud First, Mobile First”, which is why they chose Satya Nadella, with his background running the “Azure” Cloud division in the company. So by the time the new CEO came on board, he already had leadership support behind the strategy.

It goes to show that one of the most fundamental capabilities for a company to achieve ongoing innovation success is leadership with not only a vision, but a strategy of innovations to get them there and a willingness to execute even if it means changing the company. Microsoft seems very well positioned, with a new focus on giving the customer what they want in the way they want it and adding value to the customers’ lives. Google is still and will continue to be a serial innovator, using its vast profit from advertising to explore new products and research projects.

It is Apple I am more concerned about. They’re still growing revenue at an astounding rate as they expand into markets like China, and have more cash reserves than most countries. But you get the feeling that their ability to push themselves with new breakthrough innovations has stalled somewhat since Steve Jobs passed away. Their fundamental business model as a designer of high-end electronics and retailer of media and apps is solid. But for long-term growth, they need to be able to adapt to what the new customers desire, and as a design firm their company ethos is around building a walled community of experiences within which everything is perfect. This could be its current strength and eventual downfall. After all, it is the most adaptable companies that innovate and survive long-term.

Do you think that Microsoft has made the right choice, or are they too far behind Google and Apple to be rescued? Let me know in the comments below, and don’t forget to get my weekly Innovation Insights newsletter along with my report on the Secrets of Ongoing Innovation Success.