In-Depth

What's in Microsoft's Tea Leaves for Fiscal 2018?

Expect a year of continued focus on Azure, Office 365, Windows 10, LinkedIn/Dynamics and the attempt to find a new niche in the mobile space.

• By Mary Jo Foley
• July 10, 2017

Longtime Microsoft watcher Mary Jo Foley, who is editor of ZDNet's "All About Microsoft" blog and writes the Foley on Microsoft column for RCP's sister publication Redmond magazine, is a regular speaker at the Microsoft Worldwide Partner Conference (now renamed Microsoft Inspire). This article is an overview of the topics she will cover in her "Reading the Tea Leaves" talk at Inspire in July in Washington, D.C.

The start of the new fiscal year at Microsoft often has been marked by late June/early July proclamations from the CEO, outlining the company's achievements and goals for the coming year.

Last year, CEO Satya Nadella opted not to release an annual "state of the union" missive to employees. As of this writing, it's not clear whether he'll do so this year. Regardless, I'm providing my own "CliffsNotes" version of the Microsoft "state of the company" as a way of looking back and projecting ahead. Spoiler alert: I won't be making any poetry or cricket references, nor forward-looking or aspirational statements. I also will not employ the horribly overused phrase "digital transformation" -- though Nadella & Co. most certainly will for the foreseeable future -- in my analysis.

First up, a quick review of recent history.

A lot has happened since Nadella's previous state-of-the-state message to the troops in 2015. His 2015 note established officially Microsoft's new and since-then oft-cited corporate mission statement: "To empower every person and every organization on the planet to achieve more." Nadella also doubled-down on Microsoft's "mobile-first, cloud-first" messaging, and made it clear that Microsoft, moving forward, would be heavily focused on software and cloud services, with devices like Surfaces, Xbox consoles and phones playing a supporting role.

Recently, at the company's annual Build developer conference, Microsoft made some subtle yet profound changes around the "mobile-first" part of its strategy. Microsoft already had given up on trying to unseat consumer phone giants Android and iOS, with executives claiming "mobile-first" meant "mobility of experiences" first. But at Build, officials took it a step further. Going forward, Microsoft would seek to make Windows desktop a key component of any/all mobile-phone/device scenarios. "Use Windows to make other devices better" is the company's newest marching order. Hoping to appeal to people who use PCs in tandem with Android and/or iOS devices, Microsoft is honing its cross-platform messaging, clip-boarding and handoff technologies.

As Microsoft's calendar 2016 and fiscal 2017 unfurled, Nadella and his team continued to beat the "cloud-first" drum, much to the delight of Wall Street. Microsoft hit regular milestones on the way toward its self-imposed $20-billion-by-2018 commercial-cloud run rate. The 'Softies divested themselves of practically all of the assets and people from the Nokia acquisition, in the name of stemming continued consumer-mobile losses. And officials consistently downplayed Windows during company earnings calls and conferences, highlighting instead what Microsoft was doing in the artificial intelligence (AI), mixed reality and Amazon/Google-compete fronts, which is exactly what analysts wanted them to do.

Microsoft also did continue to sell and support on-premises versions of many of its products, much to the relief of customers who were not ready to go all-in with the cloud. Microsoft released new versions of Windows Server, System Center, SharePoint Server and SQL Server. Officials played up the idea that doing so would unlock new hybrid-computing scenarios. However, they also made it clear that on-premises wares would be updated more slowly and with only a subset of new features -- a stick alongside the on-premises carrot.

How Redmond is building out its Microsoft Graph centralized application programming interface (API) is perhaps the company's most-overlooked achievement of the past year. When Nadella vowed in 2015 to "reinvent productivity and business processes," he was, no doubt, thinking largely about the Microsoft Graph.

The Microsoft Graph is the centralized Office 365 API into which more and more Microsoft business and third-party apps are tapping. The idea behind Microsoft Graph is to make applications smarter, so that they don't require a lot of interim steps to surface contextual data. By integrating with Microsoft Graph, apps will be able (with users' permissions) to access calendars to suggest meeting times, get data from an Excel file to update a chart with the latest information, and interact with Microsoft Teams, the company's Slack competitor.

Because Cortana is lagging behind Amazon's Alexa and Google Now when it comes to functionality and availability, Microsoft needs a front-end AI offering to stay in the game. Microsoft Graph, which uses machine learning under the covers to get smarter about users' wants and needs, may provide an alternative path. By analyzing content, user interactions and activity streams to map the relationships among these technologies, Microsoft Graph is designed to surface the most relevant content appropriate for each user.

Microsoft's other big gun in the productivity and platforms space is LinkedIn. Microsoft announced plans to buy social-enterprise vendor LinkedIn in the summer of 2016 and it cleared regulatory hurdles around the acquisition at the end of 2016. Microsoft is in the midst of integrating LinkedIn products and services into the company's portfolio. The Dynamics ERP/CRM business and Microsoft ads business are expected to be among the biggest immediate beneficiaries of the $26.2 billion deal.

Microsoft's annual state-of-the-union e-mails are not just guidelines about products and strategy. They often are explainers regarding internal reorgs of various magnitudes that either just have occurred or are about to do so. [Editor's Note: Last week, Microsoft announced a significant reorg of its sales and marketing divisions.]

Among the shifts leading up to fiscal 2018 worth noting: Longtime Microsoft Chief Operating Officer Kevin Turner left the company at the end of July 2016. He was not replaced; instead, Microsoft divided up his role among several existing execs.

Turner's departure paved the way for the ascent of Judson Althoff, executive vice president of Microsoft's Worldwide Commercial Business group. Althoff was charged with overseeing Microsoft's Worldwide Commercial Business, which included the Enterprise & Partner Group (EPG), Public Sector, Small and Mid-Market Solutions and Partners (SMS&P), Developer Experience (DX), and Services. In January this year, Microsoft combined its EPG and SMS&P groups and created a new "One Commercial Partner" and "Microsoft Digital" businesses, in the name of unifying and simplifying Microsoft's cloud push. I'm curious to see if Althoff ends up carving up his empire further by consolidating groups to clear the path to the cloud.

On the Windows and Devices side of the house, moving users to Windows 10 remains Mission No. 1. The noticeably slimmed-down Windows and Devices Group chief Terry Myerson remains the head of the increasingly large group that includes Microsoft's Surface, gaming and Windows Server engineering teams. Monetizing the Windows business through optional subscription plans like Windows 10 Enterprise E3 and E5, incorporation of ads in Windows, Outlook Premium and Xbox Game Pass are all top of mind right now.

Since his appointment as CEO in February 2014, Nadella has focused intently on Microsoft's corporate culture. Though many of us jaded tech reporters roll our eyes (guilty as charged) when we hear terms like "growth mindset" and "growth hacking," Nadella is a big advocate of these concepts. He has said repeatedly he considers the most important part of his job as CEO to remake Microsoft's culture.

Microsoft's Chief Human Resource Officer Kathleen Hogan, at Nadella's behest, has been instrumental in Microsoft's cultural change. The concept that "we're not people who 'know it all,' but rather, we aspire to be a culture of people who want to 'learn it all'" is having its moment at Microsoft these days.

Expect to hear a lot more about Microsoft and its culture in the next few months, as Nadella prepares to promote his book "Hit Refresh: The Quest to Rediscover Microsoft's Soul and Imagine a Better Future for Everyone," which is due out in September. The book is about "how a company rediscovered its soul," according to the promotional blurb, and will touch on everything from how Microsoft changed its approach to industry partnerships, to how the company is "exploring the potential impact to society and delivering [a] call to action for world leaders."

Back here on Earth, I'm expecting Microsoft's fiscal 2018 to be a year of continued focus on Azure, Office 365, Windows 10, LinkedIn/Dynamics and Microsoft's attempt to find a new niche in the mobile space. Microsoft will focus its messaging on futuristic topics like AI, mixed reality and Minecraft, but the real story for the company and its partners will be how Redmond keeps the on-premises business rolling while working to transition more of its revenues to the cloud/subscription model.