05-17-12ceosummit_ballmer_PageMicrosoft CEO Steve Ballmer has been known to drop significant hints about the company’s future in his annual letter to shareholders, such as last year when he declared Microsoft officially a “devices and services” company — signaling the evolution beyond software that has culminated, most notably, with the plan to acquire Nokia’s smartphone business.

His new letter, released on the company’s website today, is expected to be his final one as Microsoft’s CEO, and it continues the theme with an interesting nuance. Ballmer explains that Microsoft will make money by “leading with devices and enterprise services.”

prod_ArcTouchSurface_WebYes, the company needs to offer consumer services, but in Ballmer’s view of the world, those portions of its business are merely the appetizer.

He writes in the letter, “As we go to market, we will primarily monetize our high-value activities by leading with devices and enterprise services. In this model, our consumer services such as Bing and Skype will differentiate our devices and serve as an on-ramp to our enterprise services while generating some revenue from subscriptions and advertising. Enterprise services continue to be an area of great strength, growth and opportunity as businesses of all sizes look to Microsoft to help them move to the cloud, manage a growing number of devices, tap into big data and embrace new social capabilities.”

On a related note, Microsoft this afternoon announced a series of updates for its enterprise products with new capabilities for cloud services.

This builds on Microsoft’s traditional strength in enterprise software and servers. Ballmer’s letter expands upon remarks that Ballmer made at the company’s recent meeting with financial analysts. Here’s what he said there.

How do you monetize high-value activities? Amy (Hood, Microsoft’s CFO) talked about the three bubbles: devices, consumer services, and enterprise services. The two that are most easily monetized, in fact, are devices and enterprise services. Consumer services, as we say, are tough. Other than phone companies, there really aren’t many technology, large subscription consumer services, and outside of Google and maybe Facebook it is hard to find a business that is significant that is ad-funded. So we look at these three bubbles, if you will, as places to land these high-value services, and ways to monetize these high-value services.

It might seem like a subtle thing, but it does differentiate Microsoft from many of its competitors, and it could free the company up to compete more aggressively on price in the consumer market. That dovetails with a recent Bloomberg News report saying that Microsoft has expressed a willingness to license Windows Phone to HTC for installation on Android phones at little or no cost.

The big caveat, of course, is that Ballmer is on his way out as CEO. The company’s current leadership says it expects the next CEO to stay the course on the broader strategy, but that seems impossible to know for sure until the new person is in place.

For context and more details, here’s the full text of Ballmer’s letter.

TO OUR SHAREHOLDERS, CUSTOMERS, PARTNERS AND EMPLOYEES:

This is a unique letter for me — the last shareholder letter I will write as the CEO of the company I love. We have always believed that technology will unleash human potential and that is why I have come to work every day with a heart full of passion for more than 30 years.

Fiscal Year 2013 was a pivotal year for Microsoft in every sense of the word.

Last year in my letter to you I declared a fundamental shift in our business to a devices and services company. This transformation impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses.

This past year we took the first big bold steps forward in our transformation and we did it while growing revenue to $77.8 billion (up 6 percent). In addition, we returned $12.3 billion (up 15 percent) to shareholders through dividends and stock repurchases. While we were able to grow revenue to a record level, our earnings results reflect investments as well as some of the challenges of undertaking a transformation of this magnitude.

With this as backdrop, I’d like to summarize where we are now and where we’re headed, because it helps explain why I’m so enthusiastic about the opportunity ahead.

Our strategy: High-value activities enabled by a family of devices and services
We are still in the early days of our transformation, yet we made strong progress in the past year launching devices and services that people love and businesses need. We brought Windows 8 to the world; we brought consistent user experiences to PCs, tablets, phones and Xbox; and we made important advancements to Windows Server, Windows Azure, Microsoft Dynamics and Office 365. We are proud of what we accomplished this year and continue to be passionate about delivering better devices and services more quickly.

To increase innovation, capability, efficiency and speed we further sharpened our strategy, and in July 2013 we announced we are rallying behind a single strategy as One Microsoft. We declared that Microsoft’s focus going forward will be to create a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.

Over time, our focus on high-value activities will generate amazing innovation and new areas of growth. What is a high-value activity? Think of the experiences people have every day that are most important to them — from communicating with a family member and researching a term paper to having serious fun and expressing ideas. In a business setting, high-value activities include experiences such as conducting meetings with colleagues in multiple locations, gaining insight from massive amounts of data and information, and interacting with customers.

Microsoft will enable these types of high-value activities with a family of devices — from both Microsoft and our partners — as well as with our services.

As we go to market, we will primarily monetize our high-value activities by leading with devices and enterprise services. In this model, our consumer services such as Bing and Skype will differentiate our devices and serve as an on-ramp to our enterprise services while generating some revenue from subscriptions and advertising. Enterprise services continue to be an area of great strength, growth and opportunity as businesses of all sizes look to Microsoft to help them move to the cloud, manage a growing number of devices, tap into big data and embrace new social capabilities.

Executing and accelerating
In the past year we took many bold steps forward in executing on our strategy.

First, we are well underway in implementing the new organization structure announced in July. The teams are working together in new and exciting ways. The key change we made is deceptively simple but profoundly powerful: Instead of organizing our teams around individual products, we’ve organized by function, including, for example, engineering, sales, marketing and finance. It ensures we have one strategy and work as one team with one set of shared goals.

Second, in September we announced we are purchasing Nokia’s Devices and Services business — including its smartphone and mobile phone businesses; award-winning engineering and design teams; manufacturing and assembly facilities around the world; and teams devoted to operations, sales, marketing and support. This is a signature event in our transformation and will bring together the best mobile device work of Microsoft and Nokia. It will accelerate our growth with Windows Phone while strengthening our overall device ecosystem and our opportunity.

Third, in September, we also announced a new segment-reporting framework. We have five new reporting segments tightly aligned with our focus on delivering innovative devices and services for both our enterprise and consumer customers. This framework was designed to give valuable insight into our progress in the key transformations we are undertaking in our businesses to drive long-term growth.

As I think about what’s ahead, I’m incredibly optimistic about what Microsoft will deliver. We are accelerating as we bring to market Windows 8.1 PCs and tablets with our partners, Surface 2, Xbox One and new phones; advance our enterprise services including Windows Server, Windows Azure, Microsoft Dynamics and Office 365; and innovate on new high-value activities.

Moving forward
With the decisions we’ve made this year, the strategy we’ve put in place, the organization we’ve designed, the world-class talent we have, and the devices and services we are creating, we are well-positioned to deliver growth and world-changing technology long into the future.

We have seen incredible results in the past decade — delivering more than $200 billion in operating profit. I’m optimistic not only as the CEO but as an investor who treasures his Microsoft stock.

Working at Microsoft has been a thrilling experience — we’ve changed the world and delivered record-setting success — and I know our best days are still ahead.

Thank you for your support.

Steven A. Ballmer
Chief Executive Officer
September 27, 2013

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Comments

  • Guest

    Steve has been claiming his investments were the right ones for the future since 2000. But here we are more than a decade later and there’s little evidence he was right. MS has in fact experienced an epic reversal of competitive position during his time as CEO. So, while he might finally be right this time, the record doesn’t make that likely.

    Let’s hope the next CEO promises less but delivers more.

  • Walt French

    “…award-winning engineering and design teams…”

    “award-winning” = code-phrase for “those were the good old days, huh?”

    • Get a life

      Your incessant negativity for all things MS-related gets truly boring. The fact that you apparently don’t know what you’re talking about only makes it worse:
      http://press.nokia.com/corporate/551/award-winning-nokia/

      • Walt French

        I would never suggest that Nokia wasn’t capable of first-class engineering.

        In fact, I have posted positive comments about Microsoft hardware, too. Aside from the goofy kickstand design that doesn’t work on most airplane tray tables: fine hardware, no complaint.

        My snide remarks were purely about the fact that those awards are consolation prizes for a company whose employees’ talents are squandered and their careers jeopardized because top management doesn’t know who the customers are, what they want, how to reach them and how to support them.

        Yes, as Ballmer emphasizes, they are superb in the Enterprise. Large businesses have no complaints. It is in the consumer products, suddenly de-emphasized by these remarks, that Microsoft has not laid the foundations for successful business, and so has wasted billions of shareholder dollars and its reputation with prospective customers.

        Those failures are obvious and piling up. They are shareholders’ real concerns, not whether some organization thought Nokia’s designs were fresh, their cameras were superb or reception well better-than-average. Yes, Nokia had some fine days, fine products, a leading company around the globe. As of today, Microsoft is merely fumbling about how it will have anything of the sort in its devices business.

        • Get a life

          Well, except you did.
          Oh, and thanks for proving my point about the knee-jerk negativity towards MS. But it really wasn’t necessary. Nobody who reads any MS-related forum can avoid you. You seem to make a career of trolling all of them.

          • Walt French

            Most curious to see a “guest” pseudonym blast somebody who will stand behind the “tough love” as I do.

            My comments are all wondering why Microsoft, whose systems I have exclusively coded for since 1987, and which were used exclusively on the company I CEO’d, has chased so ineffectually behind Apple and Google for over a decade—ever since they essentially achieved the Gates vision of a PC on every desktop. Ballmer took over at the top.

            My observations are 100% fact based. If I note where they have done poorly, versus the work that everybody knows they do well, why that’s just what’s interesting enough to comment about.

            Because some people apparently think that Microsoft is superb at everything it does, so it can squander billions on badly-thought-out initiatives, and then squander MOAR BILLIONS on trying to dig itself out of its holes.

            Ain’t so, Anonymous Coward!

          • Get a life

            Blast? Because I called out your inaccurate criticism of Ballmer’s Nokia-related comment and provided proof it was unfounded? Or because I pointed out what anyone can verify for themselves, namely that you seek out almost every major MS-related news site on the web and that your comments are invariably negative? Look, if calling what you do “tough love” or “that’s just what’s interesting enough to comment on” helps you justify your unrelenting negativity where MS is concerned, go for it. But it frankly doesn’t seem like the actions of an otherwise well adjusted person who is just critical of the company’s direction.

          • Walt French

            Blast? Yes, by saying, “You seem to make a career of trolling all of them.” I occasionally feed trolls who try to take threads off-topic. Such as your complaints here: not about Ballmer, emotion-laden and without any fact on the topic of Ballmer’s performance. That’s pretty precisely the definition of trolling. My post was about Ballmer’s tenure at Microsoft, the direction he’s turned the company in 13 years, and the mess that the next CEO will get to deal with.

            And this also seems a likely spot to note that I don’t generally seek out MS-specific news bloggers (eg, @EdBott), for trolling or otherwise. Yes, I subscribe to Ars Technica — happy to get share in the mostly honest discussions there — but Disqus isn’t showing me how many of my 5000+ upvotes come from other sites than this, and I’m not remembering other “Microsoft-related” sites that I bump into very much.

            “Because I called out your inaccurate criticism…”
            Nope, you didn’t, so that wasn’t the reason I called your attack a blast. Nokia’s won awards? Fine. Nokia won all sorts of awards and had a great business before they got blindsided by Apple and fell into Microsoft’s tender clutches. But those awards are pretty sorry substitutes for a vital, thriving consumer business. Go ahead and show the inaccuracy of my noting that Ballmer calling out “awards” was essentially offering shareholders consolation prizes for marketplace failures.

            Meanwhile, lack of good engineering was not what crippled WP7 or WP8 sales (or WinRT sales either, for that matter). It was inept strategy, the sort of thing that the Board clipped Ballmer’s bonus for in each of the last two years. (PS: I don’t have a vote at the Board; that decision was independent of any negativity that I might express. It was, however, directly the opposite of whatever happytalk you are trying to peddle, that causes you to object to my observations.)

            Your first post was to discount the points I’ve made based on the fact that you’ve seen my honest name elsewhere. But I will not let that type of ad hom degenerate into ridiculous claims that you’re qualified to evaluate my psychological adjustment. Even if you had a scrap of training you obviously have none of the ethical background that comes with it; it is no business of yours; you have an extremely biased view as to what it comprises and in any case it doesn’t say a thing about how right I am.

            I am ready to engage on any factual claim you want to honestly rebut but you have only attacked my attitude — and that attitude is a result of the severe strategic shortcomings at Microsoft, not the cause of it (as indeed, it could not be).

            Go back to square one and make a positive statement about how those old awards will help Microsoft succeed where it has so far failed, failed enough to replace the CEO.

          • Ryan Parrish
  • Bill Schrier

    I’m glad Ballmer recognized that enterprise customers are Microsoft’s real strength with products like Windows, Office and even Surface. But that’s odd because Ballmer really screwed enterprise customers by releasing Windows 8 with the metro interface optimized for touchscreens. Most enterprise customers still have desktops without touchscreens and metro is hard to learn and use. Plus enterprises don’t want or need all the training costs associated with changing the basic interface. Would have been smarter to release Windows 8.1 first, with the good old start button interface and metro as an option.

    Ballmer is a great leader for a great Seattle-area company, but really missed key trends like the explosion of both mobile and tablet computing.

    • rohitharsh

      I think the strength in enterprise can only be maintained by having a strong presence in consumer. We already see consumer companies making a head way in enterprise (Google and Apple). So basically consumer is defensive play for MS but a very important play else it will be relegated to Server and Tools business.
      I am not sure any enterprise customer got screwed by W8. Most were rolling out W7 and will continue do so no matter what MS rolls out.

  • Bob

    Hmm…and here I thought Win8 had been an overall flop, especially on its primary target of tablets. The existing Windows PC base alienated by having a mobile UI they didn’t want forced on them. MS’s iPad-killer, which irritated its OEMs, was a massive fail. Thus resulting in a massive write off while casting doubt over the entire “devices” strategy. And Ballmer’s record of failure and destroying shareholder value, which has seen MS lose it dominance and the stock half its value since 2000, allowed ValueAct to successfully demand a board seat and perhaps not coincidentally result in Ballmer surprise early retirement.

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