Foley on Microsoft

Hardware's Role in Redmond Jumps from Understudy to Star

Merging the hardware team with the Windows team has made huge inroads to change the device focus of Microsoft.

• By Mary Jo Foley
• 01/29/2016

When Satya Nadella -- who will hit his two-year anniversary as Microsoft CEO this month -- began his campaign to refocus Microsoft on productivity and services, the company's hardware unit seemed a bit of an afterthought.

As I wrote in May 2015, hardware was designated as little more than a supporting player for Microsoft's software and services during the start of Nadella's tenure. Devices including Surface tablets, Lumia phones and the Microsoft Band (version 1) were all meant to help sell other Microsoft products. The Nadella regime seemed to care a lot less about trying to go head-to-head with Apple as a hardware maker for consumers than former CEO Steve Ballmer & Co. did.

In the months that followed last year's column, a combination of industry forces and internal Microsoft rejiggerings changed the landscape considerably. Consequently, hardware is taking on a bigger and more important role at Microsoft in 2016 than it has for the past couple of years.

After alienating many of its OEM partners with the one-two punch of Windows 8 and Surface RT, Microsoft officials went on a conciliatory mission to try to bring PC and phone makers into the fold. But thinner margins meant fewer big-name PC and phone makers were available for courting. And many of those still in the game were hedging their bets with Chromebooks.

In an attempt not to completely alienate its PC partners, Microsoft initially attempted to position the first Surface tablets as something akin to high-end reference designs more than head-to-head competitors with the products of its OEMs.

But then the Lumia phone line and manufacturing capabilities Microsoft acquired when it bought the Nokia handset business became part of Redmond's hardware war chest, too. Add in Xbox gaming consoles, the fitness Band, HoloLens augmented-­reality goggles and Surface Hub conferencing systems and it was apparent that Microsoft was back to being a fairly major hardware maker, despite Nadella's enterprise software and services mantra.

Microsoft's leadership team now seems to have come to grips with this reality. Last summer, Microsoft brought all of its premium Surface-branded hardware together into a single unit. Microsoft also merged its devices group with its Windows team. The combined Windows and Devices Group (WDG) is the biggest of Microsoft's three primary business groups, revenue-wise, though smaller than the Intelligent Cloud and the Productivity/Office team, profit-wise.

The unification of the hardware and Windows teams is likely to have a significant impact on how Windows 10 evolves. The hardware and Windows teams are doing more planning in tandem. Instead of building new Microsoft devices to showcase existing Office or Windows features, Microsoft is now prioritizing new Windows features (and likely Office and cloud ones) based on what kinds of devices are being built.

The Surface pen, Hello authentication technology and Continuum functionality for turning mobile devices into full-fledged compute systems are all examples of features that Microsoft will likely enhance with the coming "Redstone" updates to Windows 10 in 2016 as a result of their importance to the company's hardware platforms. If the Surface or HoloLens teams want or need a particular new capability, Windows will answer the call.

A renewed emphasis on first-party hardware is obvious on the retail front, too. Microsoft's brick-and-mortar stores originally played a big role in showcasing devices from Microsoft's various partners. But they've evolved into sales outlets for Surfaces, Lumia phones, Xboxes and (in New York City, at least) HoloLens, first and foremost. Yes, there are devices from third-party vendors in the stores, too, but they aren't front and center.

The bottom line: Microsoft might be evolving into more of an enterprise-focused company, much to Wall Street's delight, but it also is upping its hardware game in order to keep Windows relevant—and not just to help sell Office and its cloud services.