MSFT Microsoft Corporation

By Jay Greene 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 3, 2018).

Microsoft Corp. tried through the years to compete in a range of buzzy consumer businesses, but it was Chief Executive Satya Nadella's focus on selling humdrum yet fast-growing computing services to companies that allowed it to reclaim the title of world's most valuable company.

Microsoft unseated Apple Inc. for the top spot, closing Friday with a market cap of $851.36 billion, nearly $4 billion higher than the iPhone maker. To get there, Microsoft also had to outpace Amazon.com Inc., Facebook Inc. and Google owner Alphabet Inc., once red-hot tech titans that have been roiled by congressional hearings, investor concerns about growth and caustic tweets from President Trump, controversies Mr. Nadella largely has avoided.

The resurgence -- Microsoft last wore the most-valuable crown in 2003 -- can be traced to Mr. Nadella's vigorous pursuit of web-based services known as cloud computing, which had threatened to undermine Microsoft's own business selling productivity and data-center software companies and people installed on their own computers.

"They built a strategy for the cloud when the cloud was really starting to emerge," said Matt McIlwain, managing director of Madrona Venture Group, a Seattle firm that invests in cloud startups. "Enterprises started embracing the cloud just as Microsoft was starting to get it right."

Microsoft's first ascent up the market-cap mountain was powered by its ubiquitous Windows operating system and Office productivity software, and the aggressive leadership of co-founder Bill Gates. The CEO leveraged his Windows monopoly to move into new markets, a strategy that launched battles with regulators in the U.S. and abroad.

Settling those matters led to new rules for Microsoft's conduct that slowed the company's growth. Its stock stagnated for a decade. Since Mr. Nadella took over as CEO five years ago, Microsoft's shares have tripled, buttressing the statuses of Mr. Gates and former CEO Steve Ballmer -- still two of Microsoft's biggest shareholders -- as some of the world's wealthiest individuals.

At The Wall Street Journal's WSJ Tech D.Live conference in November, Mr. Ballmer said enterprise business powers Microsoft today. Mr. Nadella took a company with good profit streams and technology "to whole new levels," he said.

Microsoft's Azure cloud business has been key, with revenue climbing more than 76% every quarter since the company began reporting the metric in October 2015.

"I think Satya has done a great job," Mr. Ballmer said. "I think that's fantastic and as a shareholder I think it's double and triple fantastic."

Mr. Nadella has sought to change Microsoft's culture. On his watch, it has taken public positions on contentious issues, calling for regulation of facial-recognition tech and responsible use of artificial-intelligence software. He moved away from some of Mr. Ballmer's bets, dismantling the company's mobile-phone business, and prioritized working with partners in the cloud and elsewhere, putting popular Microsoft apps on Apple's iOS and Google's Android software.

"They've succeeded under Satya because they have developed a different persona," said Bob Muglia, a former Microsoft executive who is now CEO of Snowflake Computing Inc., a data-warehousing service.

Amazon still dominates the cloud. The online retail giant last year held a 51.8% share of the world-wide cloud-infrastructure market, according to the market-research firm Gartner Inc. Microsoft is second, with 13.3% of the market.

Wall Street expects the cloud to keep booming. Gartner estimated the world-wide market for cloud-infrastructure services like the ones Microsoft and Amazon sell will grow to $63 billion in 2021 from $23.6 billion last year.

Amazon is aware of Microsoft's presence. At the Amazon Web Services annual conference Wednesday in Las Vegas, Amazon cloud-computing chief Andy Jassy told attendees that Amazon is pulling in more actual dollars than Microsoft, even if its rate of growth is slower. And he introduced a new service that lets customers run Amazon's cloud-computing offerings in their own data centers, taking aim at Microsoft's area of strength.

Also contributing to Microsoft's rebirth is productivity software, which helped Microsoft gain the most-valuable crown nearly two decades ago. The commercial version of Office 365 -- a cloud-based subscription version of the traditional Office software -- is among the fastest-growing pieces of a segment that accounts for roughly a third of Microsoft's revenue.

Microsoft was once the dominant force in tech, and its use of that power led the U.S. to sue to break it apart. But in recent years, regulators and legislators haven't focused as much on Microsoft.

Microsoft never built a successful social network like Facebook that could generate concerns over data security and misinformation. It is a distant second to Google in web search, escaping scrutiny over data harvesting. Its Surface computer and Xbox gaming units are a small enough part of its business that they don't appear to be jeopardized by the trade battle between Washington and Beijing, or a lightning rod for criticism over U.S.-based manufacturing.

Microsoft's foray into selling smartphones was a failure -- the company ultimately took charges that exceeded the $9.4 billion Microsoft paid for Nokia Corp. That costly period years ago ended up insulating Microsoft today from a slowdown in the smartphone market that has hammered Apple's stock in recent weeks.

Write to Jay Greene at Jay.Greene@wsj.com

(END) Dow Jones Newswires

December 03, 2018 02:47 ET (07:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.