Why did Microsoft just combine its Windows and Devices businesses?

In its latest corporate shakeup, Microsoft has moved its first-party hardware business into its Windows engineering organization. But why?
Written by Mary Jo Foley, Senior Contributing Editor

If it's summer, it must be time for another Microsoft reorg. And hot on the heels of the memo announcing the latest executive changes at the company, we Microsoft watchers are looking for clues as to the whys behind the most recent moves.

I'm seeing a lot of tea-leaf readers looking for the meaning behind Microsoft's decision to combine its Operating Systems Group -- which it's now again referring to as "Windows" -- and its Devices group under Executive Vice President Terry Myerson.

Some think the move is a precursor to Microsoft getting rid of some, and maybe ultimately, all, of its first-party devices, which include Surface, HoloLens, Lumia, Surface Hub, Band and Xbox. At the very least, the move MUST be signaling that Microsoft plans to exit the Windows Phone hardware business, some argue, given that business is just limping along.

Back in April, CEO Satya Nadella said there were potential cost cuts coming again to Microsoft's hardware unit. "We need to take further action to reduce our costs across devices as we execute on our Windows 10 first-party hardware plans," he warned during the company's last earnings call.

But I am doubtful that Microsoft is gearing up to exit making first-party hardware, given how many resources it's putting into HoloLens and Surface. Plus, with all the work Microsoft is doing around Windows 10 Mobile, the operating system for Windows Phones and small tablets, I'm also fairly skeptical Microsoft will dump its first-party Windows Phone hardware -- at least any time soon -- as there aren't many/any OEMs building flagship Windows Phone devices. The vast majority of Windows Phones sold remain Lumia devices made by Microsoft.

Instead, my take is Nadella is making good on what he said a year ago: That hardware at Microsoft, these days, has a supporting role. Microsoft is using its hardware to showcase its software and services.

Unlike former CEO Steve Ballmer, Nadella isn't trying to position Microsoft as a devices and services company. Under Nadella, Microsoft has returned to its roots and is, again, focusing on its strengths, which are software and services. And not just Windows and products that run on Windows, but also software and services for iOS, Android, Linux and more.

The Microsoft fitness Band, which, by the way, soon will be the company's only first-party hardware not (yet) running the Windows 10 core (it has firmware inside), is a prime example of why Microsoft is continuing to make its own hardware.

Microsoft Health, the core service around which the Band is made, builds on a bunch of Microsoft Azure services, including Application Insights, Azure DocumentDB (the company's NoSQL service), Azure HDInsight (Hadoop on Azure), Azure Service Bus, Azure Data Factory, Event Hubs (the Microsoft telemetry ingestion and processing service), Azure Stream Analytics (real-time stream processing) and Azure Machine Learning.

What's more valuable to Microsoft: The $200 people pay for a Band? Or the recurring revenues the company stands to make from services that power the Band? I'd say the latter.

Of course, there are also politics at play in any reorg. Stephen Elop, the former head of Microsoft's device business, has "retired" from Microsoft, according to Nadella's reorg memo, effective immediately. Elop's right hand woman, Jo Harlow, Corporate Vice President for Phones, who worked for Elop, also is leaving Microsoft, The Verge reported.

Elop's 2013 return to Microsoft from Nokia where he was CEO was controversial. Even though Microsoft bought Nokia's handset and services business, some were uneasy about Elop coming back to run not just that business, but also Xbox (especially given rumors that Elop was in favor of selling off Xbox and Bing). In spite of those controversies, Elop was in the running for the CEO spot vacated by Steve Ballmer.

Nadella was said to be initially opposed to Microsoft's purchase of Nokia's handset business. But that doesn't mean Nadella was anti-phone. In fact, Myerson, the new head of the combined Windows and Devices business, was formerly head of engineering for Windows Mobile/Windows Phone.

Microsoft is betting its future on cross-platform software and cloud services these days. Windows and devices are still very important to the company, but will likely become smaller pieces, going forward, of Microsoft's overall make-up.

Post-reorg, the new Microsoft senior leadership

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