Despite Reports, Microsoft is Not Shedding Departments - The UpStream

Following an email from CEO Satya Nadella stating that hard choices would need to be made, Microsoft has made a lot of announcements about changes to the structure of the company. Unfortunately, the details of those changes seem to have been misunderstood by many in the press. In some cases, the people writing about the topic seem to have not actually read the press releases from the company at all. Because of this, I feel it is important to set the record straight, so let's get started.

Advertising Business

It has been reported by many institutions that Microsoft has sold its online display ad business to AOL. Unfortunately, except for the names of the companies and departments, nothing else is accurate. In fact, Microsoft has expanded its online display ad business by entering into a 10 year sales and search partnership with the content creator. Microsoft will provide AOL with search for their platforms, powered by Bing, while AOL will serve as the sales force for Microsoft's advertising service.

This partnership provides AOL with a fully customized advertising platform for their sites, like Huffington Post and Engadget. It also provides AOL with recurring revenue from sales of advertising services to other sites, all without having to build or maintain the technology. What Microsoft gets is a dedicated sales force for its advertising business, a guaranteed revenue stream from AOL's own advertising needs, and a new outlet to build the reputation of its Bing search capabilities.

At a time when Bing is quickly gaining ground on Google, partnerships like this are essential. Apple uses Bing as its search provider within iOS and OS X, and even powers Siri with Microsoft's data. Adding AOL, another major content producer and recent addition to the Verizon family, will help them edge ever closer to Google in search popularity.

Phone Business

Nadella was openly against the purchase of Nokia right from the beginning. He famously spoke out against it even as he was being considered to replace Ballmer as CEO of the company. As soon as he was given the job, he publicly changed his tune, though it was no secret that he still personally thought that producing phones was outside of Microsoft's core competency. Because of that, early into his tenure, the Lumia team was cut by a lot.

This week, it was announced that a $7.6 billion write-off was being filed as a result of the Nokia purchase. In addition, 7,800 employees would be cut form the company, mostly coming from the Lumia team. Many tech sites have reported that this signals the end of Windows-powered phones, which is obviously laughable. Microsoft is betting big on the One Microsoft philosophy, which includes Windows devices of all sizes, including smartphones.

What this does indicate is that the Lumia team was far too big for the plans that Nadella has. It is likely that, like the successful Surface line, Microsoft's new intent is to produce a small number of flagship Windows-powered Lumia devices whose intent is to push other manufacturers to try big things in the market. Before the Surface line, the idea of a convertible was insane, while today nearly every manufacturer of computers offers one. It is unlikely that this push would have happened if it weren't for the Surface.

With the idea of producing only flagship devices, the design and implementation teams do not need to be large; certainly not large enough to produce all of the phones that Nokia was making. With that type of shift comes layoffs, which is what was announced this week.

The shift from flooding the market with lots of Lumia phones to producing only industry spec flagships would put Microsoft into an interesting middle ground between Apple and Google's philosophies. On the one extreme, Apple gives its customers absolutely no choices and controls every aspect of the ecosystem: a philosophy that once nearly collapsed their company and today leaves them in 2nd or 3rd place, depending on the country. Google, on the other hand, controls absolutely no aspect of the ecosystem, except for the platform name. Devices can be of any size, shape or quality, can look or function in any variety of ways, and have a huge discrepancy in user experiences. This model has put Google in 1st place worldwide, but it also opens users up to any number of issues.

Microsoft has positioned themselves in the middle for the tablet space and are likely aligning their Lumia business with this move. Microsoft would control the ecosystem and offer a set of devices that set a standard, while licensing their platform for other manufacturers to expand the ecosystem. It is an interesting gamble, but one that could pay off huge if successful.