Microsoft in 2016: Surging stock, new devices and a huge new AI team

Satya Nadella’s third year as CEO of Microsoft turned out to be a pretty good one.

Microsoft closed the year with all-time highs in its stock price as the company made noise in the cloud computing world, completed its biggest acquisition ever, washed its hands of some issues in the smartphone market, added huge new divisions, released new products and got Windows 10 on hundreds of millions of devices.

Most importantly, Microsoft is cool again. SNL even saw fit to get a couple digs in at Microsoft’s expense in a skit about a pair of gay robots.

GeekWire’s news team sat down recently for a conversation about the past year in technology, and what to expect in 2017. This week we’re presenting the discussion in a series of podcast episodes. Today’s topic: Microsoft.

Listen to the podcast below, download the MP3 here, and continue reading for highlights from Microsoft’s big year.

New directions: In September, Microsoft formed a new 5,000-person engineering and research team to focus on artificial intelligence products — a major reshaping of the company’s internal structure reminiscent of its massive pivot to pursue the opportunity of the Internet in the mid-1990s. The move created the fourth engineering division inside the company, along with the Office, Windows and cloud groups.

The new group will absorb some of the key product engineering teams from the previous Applications and Services Group, including Cortana and Bing. In addition, Microsoft says the new group will include Microsoft Research, the Information Platform Group, and the Ambient Computing and Robotics teams. The new division is competing against Amazon, Google, Facebook, Salesforce and many other rivals in an effort to lead the burgeoning field of artificial intelligence.

LinkedIn acquisition: Microsoft shocked the technology world earlier this year when it agreed to acquire business social network LinkedIn for $26.2 billion. After facing some regulatory hurdles, Microsoft was able to complete the transaction this month and in 2017 will begin integrating the social network into its products.

One analyst thinks the LinkedIn acquisition is going to put Microsoft on the path to becoming the first tech company to reach a market value of $1 trillion. We’ll be watching in 2017 to see how Microsoft integrates LinkedIn, and how much influence the Redmond tech giant intends to wield over the social network.

Competition in the cloud: Microsoft is in a heated battle with Amazon.com for cloud supremacy, and competitors have been falling left and right as the two top tech giants stake their claim. Azure has been a big part of Microsoft’s resurgence and it will be interesting to see if it can catch up to Amazon Web Services.

AWS’s share of the market for infrastructure and platform as a service as of June was over 30 percent, with year-over-year revenue growth of 53 percent, according to Synergy Research Group. Azure’s was over 10 percent, with revenue growth of 100 percent. IBM’s share was about 8 percent, Google Cloud’s was about 5 percent, and the remainder was collectively consumed by 12 or more companies.

Smartphone struggles: Microsoft has spent much of the last couple years pulling back from the smartphone market and retreating from its acquisition of Nokia’s smartphone division for more than $7 billion in 2014. In May, Microsoft cut 1,850 jobs in its smartphone division and took a $950 million charge related to the acquisition and then a couple months later reduced approximately 2,850 positions, mostly in smartphones and sales.

The Nokia deal was put together under former Microsoft CEO Steve Ballmer. Under Nadella, the company retreated from the strategy and said last year that it would narrow its hardware focus to flagship smartphones. Before announcing job cuts in May, Microsoft had already cut a total of more than 19,000 jobs associated with the Nokia acquisition.

But Microsoft doesn’t appear to be exiting the smartphone game entirely. Rumors have run rampant that Microsoft is working on a Surface phone, and Nadella himself confirmed that Microsoft wants to create the “ultimate mobile device.” Will that happen in 2017?

Challenging Apple: Microsoft made a big splash when it released the Windows 10 Creators Update, a new Surface Book laptop and the Surface Studio and Dial in October. These products are aimed toward artists, graphic designers and other creative types, groups that Apple focuses heavily on. It was an interesting move given Microsoft’s recent focus on enterprise software and products. Since the release, Microsoft has put out a series of ads for the devices with partners like Marvel Studios saying how great they are for creative endeavors.

Microsoft said November was the best month on record for consumer sales of Microsoft’s Surface devices, including the Surface tablets and Surface Book laptop. The company gave part of the credit to disappointment over Apple’s new MacBook Pro, saying that its MacBook trade-in program has been more active than ever.

Will Microsoft continue to try and eat Apple’s lunch in the creative arena, and how will the new Surface products stack up to the new MacBook Pro in 2017?

Windows 10 spreads: Last year, Microsoft set a lofty goal of having 1 billion devices running Windows 10 within two or three years of the operating system’s release. The company acknowledged that it probably won’t hit that threshold in that time frame, but the operating system is off to a pretty good start.

Microsoft announced in September that Windows 10 has been installed on more than 400 million active devices, and the number is sure to be higher than that today, more than three months later. That’s up from 350 million active devices as of July, prior to the release of the Windows 10 Anniversary Update, which was expected to spur new interest in the Microsoft operating system. In addition to traditional PCs and tablets, Windows 10 devices also include the Xbox One console.

Xbox battles PlayStation: The console wars between Microsoft’s Xbox and Sony’s PlayStation have been raging for years, but 2017 is sure to be a notable front in this battle. Sony recently released a slimmed down version of the PlayStation 4 as well as a more powerful model for hardcore gamers this year. The announcements of those consoles came just a few weeks after Microsoft released the streamlined Xbox One S.

In 2017, a new Xbox console, Scorpio will hit the market. Scorpio’s website says the device is coming out in time for the 2017 holiday season. Microsoft pitches Scorpio as the “most powerful console ever” with six teraflops — yes that’s a real thing — of graphic processing ability. Scorpio will be another huge milestone for Xbox, but for most of 2017 it will be up to the Xbox One S to compete with the new PlayStation models.