Dynamic Business: Microsoft after the iPhone

Microsoft launched its Surface tablet in response to Apple's disruption of the market after it launched the iPhone. Photo / AP

It's taken a while but the tech giant is back on track following the launch of Apple's smartphone, writes Bill Bennett.

Disruption doesn't come much bigger than the iPhone. When Steve Jobs stepped on stage to announce Apple's smartphone in 2007, Microsoft was the world's second biggest company behind Exxon-Mobil. It was the leading technology company.

Steve Ballmer, Microsoft's CEO at the time, dismissed the iPhone, telling reporters it would never sell to business users because it doesn't have a keyboard.

In 2007 Apple's market capitalisation was half of Microsoft's. It took the company four years to beat Microsoft on revenue, profits and market capitalisation. Today, Apple is the world's most valuable company.

Thanks to the iPhone and the iPad PC sales stumbled. Not only was Microsoft no longer the largest technology company, it had gone from being a significant mobile player to being an also-ran. Analysts and industry pundits wondered if Microsoft had lost its edge. For a while even Microsoft employees had their doubts.

Microsoft New Zealand chief marketing and operations officer Frazer Scott worked for the company throughout this period. He says on one level disruption is business as normal in the technology sector. "Everything disrupts, all of the time. We've done our own share of disrupting too," he says.

And yet the arrival of the iPhone was on quite a different scale. It rocked the entire tech sector. Today Microsoft is back on track. Its market capitalisation is almost twice the 2010 level and a new CEO, Satya Nadella, has given the company renewed energy and turned its focus on some of technology's most exciting growth areas.

Scott says there are four technology megatrends that are changing the landscape and they are all still at a nascent stage: social media, mobility, big data or analytics, and cloud computing. Microsoft is a leader in cloud technology and one of those chasing mobility.

"There's also a move towards everything as a service. We talk of software as a service, platform as service and infrastructure as a service. But it doesn't end there. Spotify is delivering music as a service and Uber has disrupted the taxi industry with what amounts to transport as a service."

Before the iPhone most people would think of Microsoft as the PC software company or the Xbox company. They were only the most visible parts of the business. Much of Microsoft's revenues were earned behind the scenes servicing large corporations. Scott says: "90 per cent the business is stuff you don't see everyday."

Under Ballmer the company responded to the iPhone by first partnering with Nokia, then buying Nokia's smartphone division to make devices using a phone version of Microsoft's Windows software. It also developed and made the Surface, which sits somewhere between iPad style tablets and laptop computers.

Two years ago Ballmer told the world Microsoft was now a devices and services business. Under Nadella it has repositioned to concentrate on platforms and productivity. Scott says at Microsoft platforms means something others can built on, so Windows and Xbox are platforms, so is Azure Microsoft's cloud service.

Nadella came up through Microsoft's cloud operation.

Scott says cloud computing is not for the faint-hearted: "You need a huge amount of capital to get in the game and more to stay ahead." Last year Microsoft spent US$4 billion on cloud capital. He says that eventually there will only be a handful of global players and Microsoft aims to be one of them.

At the moment Microsoft is the second largest cloud player. It may be a long way behind Amazon's AWS in terms of market share, but Scott says the company is making money in the cloud; AWS has yet to turn a profit.

The new CEO has been quick to apply lessons learnt from cloud computing. Within weeks of taking the job he released iPad versions of Microsoft Office apps the company had been sitting on. They were well received by the market.

Since then, Microsoft has delivered free, full function iPad Office apps and Android versions. It now gives paying customers unlimited cloud storage accounts. Last month Nadella open-sourced -- that is, made the code available -- Microsoft.Net technology. The company also cut deals putting SAP on Azure and linking Office to Dropbox. It has opened itself up to the market, making its products more compelling in the process.

Scott says inside the company the most noticeable difference is the speed of change. "We're competing with people that were born in this market. They have shorter development cycles, more agility and tighter gross profit margins. We had to reinvent ourselves quickly."

This has already paid off. Microsoft shares have climbed 30 per cent in the last year.