Mary Jo Foley: What the heck is going on with Microsoft lately?

[Editor’s Note: We’re excited to welcome Mary Jo Foley as a GeekWire contributor. Mary Jo has been one of the sharpest watchers of Microsoft for many years, currently as Editor in Chief at Directions on Microsoft, an IT planning and advisory service. She’ll be offering her take for GeekWire periodically on the latest developments in Redmond, starting with this piece.]

Reorgs are a way of life at Microsoft. But the pace of them over the last couple of months has led many to wonder what the heck is happening in Redmond — especially when coupled with the company’s stock price having its worst quarter in years.

During the past couple of months, Microsoft has made a noticeable number of organizational changes:

• In February, Microsoft announced plans for Xbox chief Phil Spencer to hand the gaming reins to Asha Sharma. 
• The company reorganized its U.S. sales team the same month.
• In March, Experiences and Devices chief Rajesh Jha announced plans to retire, replaced by a handful of hand-picked execs.
• Microsoft is said to have just implemented a sweeping reorganization of its HR organization.
• And its cloud and sales teams allegedly are under spending and hiring freezes.

Is this just the usual Microsoft fiscal-year-end housekeeping, or is something different? A blip that will pass, or a new AI-centric reality for the Satya Nadella era?

It’s a mix of both, I’d argue.

The current wave of churn, at least in part, can be attributed to Microsoft’s corporate calendar. Its fourth quarter ends June 30 and new fiscal year kicks off on July 1. Microsoft often reorgs and does layoffs in the months leading up to this as a way to reset for the coming year.

The company also is taking actions to reduce hierarchy and make the corporate structure flatter, as are a number of tech companies, in the hopes of becoming nimbler.

A year ago, Chief Financial Officer Amy Hood proclaimed that Microsoft was “increasing our agility by reducing layers with fewer managers.” With moves like replacing 35-year veteran Executive Vice President Jha with a new gang of four, rather than just another single uber-boss, Microsoft is following through on those promises.

It’s not all mundane matters at play, however.

Thanks to AI, the way companies are prioritizing and following through on their strategies is different. Microsoft isn’t immune to the market’s jitters around capex overspending on AI when ROI still remains questionable. Its no-longer-exclusive partnership with OpenAI has people inside and outside the company worried, too, as does the fact that a whopping 45 percent of its unfulfilled Azure backlog last quarter was attributable to OpenAI.

Investor pressure on the company to keep its Azure business growing during a time of admitted capacity challenges also can’t be dismissed as contributing to the current churn. As a result, Microsoft travel budgets, new-hire spending, and investments in unproven areas are all on the chopping block.

Almost nothing (except towels, maybe) is immune from scrutiny with the goal of freeing up more dollars to pay for AI and cloud build-out.

But those reasons alone may not be enough to explain why Microsoft is looking like the least magnificent of the so-called Magnificent Seven tech leaders right now.

Microsoft continues to struggle in the consumer space, and not just with Xbox. Most of the company’s revenues have been and continue to be from sales to commercial customers. That consumer weakness is especially apparent when it comes to AI.

Microsoft recently disclosed only three percent of its Microsoft 365 customers are paying for Microsoft 365 Copilot. But its adoption rate for its consumer Copilot is even worse, and far lower than the rates for OpenAI’s ChatGPT and Google Gemini.

The decision earlier this month to remove AI CEO Mustafa Suleyman from his consumer AI product responsibilities and into more of a research role is Microsoft’s latest attempt to adjust its consumer bets.

Suleyman’s reassignment came later than some expected (and hoped), given the starts and stops with Microsoft’s consumer AI efforts. Mico, a ghost-like Clippy wannabe, seems to be in limbo. Microsoft’s push to make voice one of the main ways users interact with AI on their PCs, when people don’t talk to PCs like they do phones, seems to be falling flat.

Meanwhile, the Windows organization is trying to right the ship by backing out of some of its over-zealous AI plans. Instead of trying to force AI into Notepad and Photos, execs said they instead will focus on some top consumer requests, ranging from taskbar customization, to adding the ability to pause updates at will.

Microsoft shows no signs of giving up on the consumer space. Maybe new blood will find new ways to harness the company’s enterprise tactics to boost its consumer share? If not, there’s always the next reorg. …