Microsoft should spin out its Windows and Office franchises to boost its cloud-computing effort, according to former executive Ben Slivka.
“The right thing probably is to bet the future on the cloud,” Slivka, previously general manager of Microsoft’s consumer and commerce group, told CNBC in an interview.
The Azure cloud infrastructure, which organizations use to power applications, has become a star inside Microsoft as it poses the most daunting competition to market-leading Amazon Web Services. The Azure unit’s fast growth has inspired investors to back the company in the modern era, decades after it came to dominate in operating systems and productivity software. Microsoft stock gained 51% in 2021, compared with about 27% for the S&P 500 index.
Slivka, who no longer holds Microsoft stock, said he wouldn’t want internal strife to get in the way of Azure developing further. He cited Microsoft’s history in building for mobile devices, where the company failed to outpace Apple and Google as smartphones took hold.
“People running the Windows business put the mobile OS people in a box and constrained what they could do,” he said. “They had their little Start button and all this other bull—-. Microsoft rebooted its mobile strategy three times. Finally cell-phone manufacturers and developers just gave up.”
In 2015 Microsoft wrote down $7.6 billion in assets related to its $9.5 billion Nokia devices and services acquisition. The company stopped supporting Windows 10 Mobile in 2019 after the company’s market share slipped below 1%.
Microsoft has been willing to part with small portions of its business in past years. The company offloaded Bing mapping assets to Uber in 2015. In 2016 it agreed to sell Nokia feature-phone assets to Foxconn and HMD Global for $350 million, and it spun out imagery company Vexcel.
Slivka formed the Internet Explorer team after joining Microsoft in 1985 and left the company in 1999. “I understand how important Windows is to Microsoft,” he wrote in a 1997 email to Bill Gates, a Microsoft co-founder and former CEO, that became a government exhibit in the U.S. Justice Department’s antitrust case against Microsoft.
He said the company is “not dying tomorrow” and doesn’t need to formulate a transaction imminently.
The pull-through effect
Few analysts seem to agree with Slivka’s point of view, however.
Windows and Office continue to enjoy leadership positions in their markets today, and those products help attract customers to Azure. In its latest annual report on the market, technology industry researcher Gartner said large companies go with Azure after building up trust in Microsoft over the course of many years.
“The goodwill Microsoft has built over time presents a very lucrative future still for Azure,” Wells Fargo analyst Michael Turrin said in an interview. “Part of me says Office is also the productivity moat, and keeping those things together also has a lot of power.”
At the same time, investors would love to be able to invest in a more streamlined public-cloud company, he said. Many in the tech industry and Wall Street have speculated about Amazon spinning out AWS, for example, although the company has repeatedly said it has no plans to do so.
Turrin estimated that Azure would exceed AWS in market share in 2028 in a November note initiating coverage of Microsoft with the equivalent of a buy rating. Turrin assigned a $3 trillion market value for the entire company at the end of 2023. He said Azure alone would be worth $1.5 trillion, and he figures that the division, like AWS, is profitable.
Wells Fargo itself revealed a plan to use Azure, as well as Google’s cloud, in September. Judson Althoff, Microsoft’s chief commercial officer, was quoted as saying in a statement that the software maker has “a longstanding relationship” with 169-year-old Wells Fargo.
Letting go of Windows and Office would have large implications on Microsoft’s position. Over one-third of the company’s revenue came from Office products and cloud services and Windows in the third quarter.
They’re highly profitable, too. Analysts at UBS in November estimated that if 12% of Microsoft’s total revenue will come from Windows, then it will contribute around 17% of the company’s total gross margin. Microsoft has been widening the gross margin of Azure for years, but analysts don’t believe it’s approaching Windows levels yet.
Microsoft declined to comment.