Steve Ballmer faced plenty of critics during his tumultuous 14 years as Microsoft's (MSFT +1.02%) CEO. But during a Bloomberg interview at the tech giant's recent annual shareholder's meeting, Ballmer criticized two of CEO Satya Nadella's strategies. Let's discuss what Ballmer said and whether or not his points are valid.
Microsoft CEO Satya Nadella. Source: Microsoft.
1. Transparency in cloud growth
Back in April, Nadella declared that Microsoft could generate $20 billion in annual cloud revenues by fiscal 2018, which would be more than double its current annual run rate of $8.2 billion. However, most of those revenues come from SaaS platforms like Office 365 and Dynamics CRM.
Microsoft reports year-over-year growth rates of its core cloud segments, but doesn't disclose how much revenue each unit actually generates. Last quarter, it stated that Office 365 revenue rose 70% annually on a constant currency basis, Dynamics revenue rose 12% on the same basis, while Azure revenue doubled. But for total cloud revenue growth, Microsoft refers investors to its annual run rate.
That practice apparently frustrates Ballmer. "They should report the revenue, not the run rate," he told Bloomberg. For now, investors rely on third-party estimates of Microsoft's cloud revenues by segment. In October, Forrester Research estimated that Azure, the fastest growing segment, had an annual run rate of $1.6 billion. However, that puts it in a distant second behind Amazon's (AMZN 0.84%) comparable AWS cloud platform, which has an annual run rate of $7.3 billion.
Microsoft's choice to keep quiet about Azure's growth isn't unusual. Amazon didn't disclose AWS revenues until the first quarter of fiscal 2015, after its annual run rate exceeded $5 billion. Microsoft investors would certainly gain a clearer picture of the company's cloud growth if it reported its segments separately, but it could also reveal some weaker spots in the business.
2. The "universal apps" strategy
Nadella's core mobile strategy is to blur the lines between PCs, consoles, and mobile devices with a single OS and "universal apps" from a single app store. Therefore, developers who previously shunned Windows Phone due to its tiny market share might be more inclined to create apps that could reach all those platforms at once. Windows 10 users, who notice the seamless transitions between their PCs and mobile devices, might start replacing their iOS and Android devices with Windows 10 Mobile ones.
Source: Microsoft.
Ballmer told Bloomberg that this strategy "won't work" and that Microsoft needed to enable Windows 10 Mobile devices to "run Android apps." Earlier this year, Microsoft unveiled two "bridges" that helped developers port Android and iOS apps to Windows 10. But in November, Microsoft suspended the Android bridge, which limited developers to ports of iOS apps. Jumping through those hoops didn't appeal to many developers.
Supporting Android apps natively would simplify the process considerably. Microsoft could then follow the footsteps of Amazon's Appstore and cut Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Play out of the loop with its own Android app store. However, BlackBerry (NASDAQ: BBRY) also believed that running sideloaded Android apps and installing Amazon's Appstore would prop up its hardware sales. Unfortunately, those apps didn't boost handset sales, and BlackBerry now only controls 0.3% of the global smartphone market, according to Gartner. Windows Phone still controls about 1.7% of the market, but it could be tumbling down the same path.
Should investors care what Ballmer thinks?
Ballmer's criticisms of Nadella's strategies might seem ironic, considering how many critical mistakes he made as CEO. Under Ballmer, Microsoft passively relied on periodic upgrades of Windows and Office software instead of aggressively countering the growth of Google's Chrome OS and Drive. Ballmer mocked the iPhone when it arrived in 2007, and Microsoft waited three years before it launched its first multitouch mobile OS. Ballmer tried to rectify that mistake by buying Nokia's handset business, which resulted in a disastrous writedown earlier this year.
Despite those major blunders, Ballmer's points about Microsoft's cloud revenue reporting and lack of Android app support are quite valid. Microsoft can provide investors a clearer picture of its cloud growth by disclosing official Azure numbers, and Windows 10 Mobile might gain more users with native support for Android apps.
