Why Microsoft CEO Satya Nadella Is Tearing Up the Windows Business

March 29, 2018, 6:28 PM UTC

Microsoft CEO Satya Nadella has no easy task steering the company well past the era of its personal computing dominance, through the current cloud and mobile-oriented period and into the AI and possibly VR driven future.

On Thursday, Nadella unveiled his latest overhaul of Microsoft’s organizational structure with several key themes emerging from the changes. The new setup aims to leverage Microsoft’s strongest businesses, like its Azure cloud service and Office 365 subscription software, while Windows gets deemphasized.

Back in 2015, Nadella reorganized to combine Windows software together with all of the company’s various hardware efforts, at the time including Surface computers, HoloLens VR gear, Lumia smartphones, the Surface Hub table display, the Band fitness tracker and the Xbox gaming system. The goal of the the newly created “Windows and Devices Group” was, in the CEO’s words, to “propel the Windows ecosystem forward” and “drive Windows as a service across devices of all types” to increase hardware sales.

But aside from Xbox, and arguably Surface, most of those hardware efforts remain tiny or have been eliminated (at about $4 billion over the past 12 months, Surface is substantial though still just a blip in the PC market). And Xbox’s success has had little or nothing to do with the various Windows-related efforts that emerged from the WDG in the past few years, like the Windows Universal Platform, which was aimed at convincing developers to write apps that would run on the company’s phone, PC and gaming platforms. And while Windows 10 has done just fine in the almost three years since it was released, underlying PC sales are sluggish at best.

The current reality facing Nadella is that Microsoft’s mobile strategy in hardware and software failed and tying everything to Windows for a boost didn’t help. But Microsoft’s Azure cloud business is booming, as is the growing revenue from business software subscriptions like Office 365 and Dynamics 365. In its most recent quarter, the three months ended Dec. 31, revenue from Office 365 increased 41%, Dynamics 365 rose 67% and Azure sales jumped 98%. At the same time, revenue from Windows commercial products dropped 4%, Surface computer sales gained 1%, and Windows sales for PCs rose 4%.

When One Door Closes…

The new idea for 2018 is to tie everything more closely to the cloud and the fast-growing Azure unit. The WDG is being disbanded and band leader Terry Myerson is retiring from Microsoft. When the WDG was formed under Myerson, he took over mobile efforts from Stephen Elop, who left the company. It will be interesting to see if Myerson’s directions are erased as quickly as he moved away from Elop’s failing strategy.

Much of the Windows software effort, called the Windows Platform Team, will move under cloud and enterprise software leader Scott Guthrie’s group, along with several AI initiatives. Guthrie also gets charge of AI speech, vision, augmented and virtual reality (what Microsoft calls mixed reality) efforts. Putting those teams, which face fierce competition from the likes of Amazon (AMZN), Google (GOOGL), and Apple (AAPL), together with Azure could help them catch on as cloud services.

Get Data Sheet, Fortune’s technology newsletter.</em></strong></p> <p>Microsoft (MSFT) investors also certainly would be thrilled if the Windows business could shift from one-time sales to recurring subscriptions as successfully as the company shifted its Office business. Microsoft said the reorganization, largely affecting its engineering groups, would not result in any change in how the company reports its financial results. On Thursday after the reorganization announcement, the company’s share’s gained 2% in midafternoon trading.

Nadella’s explanation for what he put under Guthrie was laden with industry jargon, but the point is to allow Microsoft to offer all kinds of apps and services via the cloud that will be usable on everything from mobile phones to corporate servers to future VR devices. “The purpose of this team is to drive platform coherence and compelling value across all layers of the tech stack,” the CEO wrote in an email to employees released by Microsoft.

…A Window Opens

Hardware devices and selling Windows for PCs shift to a new group called “Experiences & Devices” to be run by Rajesh Jha, who oversaw the Office software unit. Jha also gets Microsoft’s business helping corporations manage their mobile devices and software and a unit that developed new ways to interact with computers, like the HoloLens and XBox Kinect.

“Computing experiences are evolving to include multiple senses and are no longer bound to one device at a time but increasingly spanning many as we move from home to work and on the go,” Nadella explained in his email. “These modern needs, habits and expectations of our customers are motivating us to bring Windows, Office, and third-party applications and devices into a more cohesive Microsoft 365 experience.”

Finally, another key new unit that was largely overlooked in the coverage of Thursday’s announcement will be called the AI and Ethics in Engineering and Research, or AETHER, Committee. Its role will be to assess how AI capabilities are developing and establish rules and boundaries to ensure responsible use. Two early tasks will be to detect whether AI systems have accidentally incorporated biased points of view and to make sure all Microsoft’s efforts abide by the EU’s new General Data Protection Regulation.

“While there is great opportunity, ensuring we always act responsibly for our customers and partners will continue to be a hallmark of our work,” Nadella wrote.

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