The memo is a statement of Microsoft's principles, focusing on Office at the expense of Windows, and aimed at eliminating the "legacy tech debt" now bedeviling its customers.
The client-server world that made Microsoft powerful is gone, Nadella's memo states. Replacing it is a "mobile-first and cloud-first world," in which customers use simpler devices, with data and most software hosted remotely.
Before becoming CEO earlier this year, Nadella had headed Microsoft's Cloud and Enterprise group, focused on moving customers to its Azure cloud. Microsoft's Office 365 has helped move customer data to Azure, but most of their applications are still on client-server networks running older Microsoft technologies.
This old way of looking at technology is hurting customers' ability to compete, and leading those that do get the message toward offerings from rivals like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL). Nadella's plan is to use its Office productivity tools as a wedge to push customers to the cloud, and use that to expand into areas like the Internet of Things.
The new strategy positions Microsoft mainly as a business software company, a more direct competitor to IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ), in a move that could make it easier to spin-off consumer-oriented operations like the Xbox division and Bing search engine down the road.
The one disquieting aspect of all this is Nadella's continued faith in devices like the Surface and the Windows Phone, which have failed to take hold in the market. His refusal to dump such losers could drive his whole strategy into the ground.
Nadella's memo talks about cloud "generating and consuming data," not just processing it or maintaining it. It defines productivity as relating to "people, teams and business processes," not just words and numbers. It talks about data as originating from sensors as well as keyboards, and from social networks outside a company as well as business data inside it.
Nadella also took apart Microsoft's culture, which has been heavily compartmentalized and, until the Department of Justice ended its anti-trust actions a few years ago, focused more on objections to new ideas than opportunities. He called it "courage in the face of opportunity." Another way of saying the same thing: just say yes.
How should investors evaluate all this?
As noted at the top, Nadella's new strategy is going to advantage applications like Office over operating systems like Windows. The cloud is going to be Microsoft's corporate operating system, with Windows stripped-down and withering away wherever its bloat interferes with customers' ability to get things done.
Ives is predicting a new round of mergers in technology, with big companies like Microsoft acquiring smaller companies to fill out their corporate visions. Based on Nadella's statement, look for Microsoft to seek applications, cloud platforms, and business tools over the next six months.
Nadella's statement shows a clear intent to focus on what is working in technology. It now needs to be followed by dumping what doesn't. If you see some large lay-offs in the next two months, you will know the company is on the right track, and that the optimism of financial analysts is justified.
Disclosure: The author is long AAPL, GOOG, GOOGL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.