Microsoft Faces 4 Big Challenges

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It's been an eventful few days for Microsoft, but new CEO Satya Nadella appears to have emerged with investors still on his side. Last week, he announced plans to lay off 18,000 workers. This week, his company announced earnings that would have been unequivocally strong had it not been for profit losses tied to its $7 billion Nokia Devices and Services acquisition, which accounts for two-thirds of the layoffs. Despite the tumult, and thanks to the quarter's stellar cloud and server revenue, Microsoft's stock has held steady since the job reductions were announced; within striking distance of $45 per share, it's also up 12% since Nadella took over.

But that doesn't mean Microsoft has nothing to worry about. The company had plenty of strong financials to crow about during the most recent quarter, but Nadella's popularity hasn't just been about numbers. It's also been about his willingness to admit that Microsoft faces an uphill battle in many markets, notably smartphones and tablets. By initiating layoffs, Nadella has taken a big step toward installing the 'challenger mindset' he says his company needs -- but many steps still remain. Here are four pressing questions Microsoft and its new CEO must still face.

[For more insight on Microsoft's device strategy, see Nadella's Windows 9 And Device Plans, Explained.]

1. Will Nokia fit inside Microsoft? Over the last week, Microsoft execs have gone out of their way to emphasize that the company is scaling down its device efforts. Yes, it will still make devices, because Windows Phone needs the help and because Microsoft wants devices that show off what its cloud services can do. But Nadella clearly knows some investors are leery of Microsoft's hardware ambitions, and he and other senior leaders have appeared determined this week to circumvent new concerns.

'We're not in hardware for hardware's sake,' Nadella said during this week's earnings call.

That sounds good -- but what does it mean for Nokia? Microsoft execs spoke optimistically this week about Windows Phone growth in emerging markets, but they conceded that low-cost (and thus low-profit) devices drove most of the sales. Nadella said that, to generate high-end demand, Microsoft will create devices that 'light up' Microsoft's digital services, such as Cortana, OneNote, and Office Lens. Will it work? Time will tell, but we'll know more after we see Microsoft throw its efforts behind a new flagship phone.

In the meantime, Microsoft will have to contend not only with Android, which is particularly dominant in the low-margin markets where Windows Phone has some traction, but also with the iPhone. Apple's smartphone could pose a particular challenge to Nadella's plan to situate Windows as the premier smartphone OS for productivity. Apple devices are already popular in the enterprise, could enjoy revitalized consumer growth when rumored phablet models arrive this year, and now have the backing of IBM's enterprise software and salesforce.

2. Will Microsoft's hybrid cloud synergies continue to click? Nadella's cloud-focused strategy looked particularly promising after this week's earnings report; Microsoft said commercial cloud revenue was up 147% year-over-year and is on pace for a full-year total of more than $4.4 billion. Moreover, execs said the cloud momentum -- which includes products such as Office 365, Azure, Exchange Online, SharePoint Online, Dynamics CRM, Lync Online, and Intune -- isn't cannibalizing its on-premises products.

'We don't see it as a zero-sum,' Nadella said this week.

Indeed, Microsoft also reported server products were up 14% from the same quarter last year. The implication is that hybrid cloud flexibility is helping customers to find the right balance

Michael Endler joined InformationWeek as an associate editor in 2012. He previously worked in talent representation in the entertainment industry, as a freelance copywriter and photojournalist, and as a teacher. Michael earned a BA in English from Stanford University in 2005 ... View Full Bio