Investors have lapped up Nadella's "mobile first, cloud first"
strategy to recast the venerable software maker as a "devices and
services" company, sending its shares up 9 percent since he took the
So far he has stressed the services side of the business, making the
momentous move to put Microsoft's Office suite on Apple Inc's iPad.
This was popular with Wall Street and more importantly with
consumers, who performed 27 million downloads in a matter of weeks.
But Microsoft is expected to unveil the third generation of its
Surface devices at an event on Tuesday, laying hints that it will
also introduce a smaller tablet, to address the fast-selling lower
end of the market dominated by Apple's iPad mini, Amazon.com Inc's
Kindle Fire, Google Inc's Nexus and Samsung's Galaxy range.
The devices side of the strategy has been a challenge. Microsoft's
Surface, launched in October 2012, has about 2 percent of the market
and has not made a dent on Apple's iPad. That fits with Microsoft's
3 percent global share in smartphones.
Given that tiny market, some investors believe Microsoft should not
waste time and money on the low-margin hardware business. ValueAct
Capital, which led the shareholder revolt last year which culminated
in previous CEO Steve Ballmer's retirement, has lobbied against
Microsoft's hardware effort, including its costly acquisition of
Nokia's handset business.
"Nadella is off to a golden start as CEO, although turning around
the tablet and mobile business over the next 12 to 18 months remain
his two key Herculean tasks," said Daniel Ives, an analyst at FBR
Capital Markets. "If the turbulence gets too rough on the tablet
and/or mobile segment, we can potentially see some strategic changes
on the horizon around the hardware business."
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Despite unspectacular sales, there are signs that Microsoft's
Surface Pro 2, which runs the full Windows operating system, is
starting to attract Microsoft's core business customers.
"There's certainly tons of interest in the Surface Pro as an
Ultrabook (lightweight laptop) replacement that has tablet
capabilities," said J.P. Gownder, an analyst at tech research firm
Forrester. "It is the No. 1 model I get asked about, it's going to
have a lot of eyes on it."
Even if the Surface never dominates the market, Gownder thinks
Nadella and Microsoft are right to persevere with hardware, if only
as a way of showing other device makers how best to make use of
"Microsoft would be nuts not to have devices in the mix. The danger
is in not exploring," said Gownder. The Surface "is an important
product to basically show what their overall vision is for Windows,
and also to offer businesses and consumers another choice."
(Reporting by Bill Rigby; Editing by David Gregorio)
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