“Some of the biggest businesses we’ve built might not be as relevant going forward,” admitted Microsoft CEO Satya Nadella during an employee-only town hall last week. Nadella was responding to a question about the perceived change in culture inside Microsoft, but his answer revealed a lot more about his own fears over Microsoft’s future in this AI era. “Our industry is full of case studies of companies that were great once, that just disappeared. I’m haunted by one particular one called DEC,” said Nadella. Digital Equipment Corporation once ruled the world of minicomputers with its PDP series in the early 1970s, but it quickly faced competition from IBM and others that made it irrelevant. It also made some strategic errors by betting on its own Virtual Address eXtension (VAX) architecture instead of the emerging Reduced Instruction Set Computing (RISC) architecture. Nadella’s first computer was a VAX, and all he wanted to do when he was growing up was work at DEC. “Some of the people who contributed to Windows NT came from a DEC lab that was laid off,” said Nadella. “I think about that, and I think about what it takes for a company not to just thrive at one time, but to continue to actually have the smartest, best people who are going to only work if they’re going to have the opportunity to get both great economic rewards and great job opportunities.” Nadella’s cautionary tale came in response to a UK employee who said the company had recently “felt markedly different, colder, more rigid, and lacking in the empathy we have come to value.” I’ve spoken to dozens of employees over the past few months, and they all told me that morale inside Microsoft is at an all-time low. If there’s fear at the top of Microsoft, then employees will undoubtedly feel that through the constant rounds of layoffs and change. It’s why I said in July that Microsoft risks creating a culture of fear. While Nadella didn’t fully address the perceived cultural shift inside Microsoft, he did say the company’s leadership team “can do better and we will do better.” He didn’t explain how Microsoft would actually do better, though. “Here we are in our 51st year as a company, and if you look at a set of metrics we are thriving. But at the same time, when I think about the degree of difficulty that is ahead, for us to navigate what is a changing industry, a changing tech sector, and changing economics, we have some very hard work ahead of us,” Nadella said. That hard work has a lot to do with “renewal” and change, according to Nadella. And renewal seems to mean stark changes and layoffs. It took Nadella a few weeks to address the 9,000 layoffs in July, with a similar missive that discussed the “difficult process of ‘unlearning’ and ‘learning’” in this AI era. “We can keep the values we have and make sure we live up to that, while at the same time recognizing that capital markets have one simple truth: there is no permission for any company to exist forever,” Nadella said during his town hall appearance last week. “You earn the permission every day by doing socially useful things in the marketplace that is valued. That’s the hard part.” That is definitely the hard part, as Microsoft’s 50-year history has proven. Microsoft missed the mobile shift in what cofounder Bill Gates once described as his “greatest mistake ever.” The software giant is still thriving despite getting left out, but Nadella is clearly determined not to miss the next big thing. Microsoft thinks that’s AI right now, whereas less than a decade ago it was chasing augmented reality computing and holographic communication. Now, there’s a real fear from the top that Microsoft has to lead in this AI era or risk becoming irrelevant. Elon Musk has already joked about simulating Microsoft with AI, and it’s not inconceivable that some of Microsoft’s biggest products like Office, that keep businesses hooked to its software and services, could eventually go away. AI models are already capable of generating spreadsheets, slide decks, and documents without the need of Excel, PowerPoint, or Word. “All the categories that we may have even loved for 40 years may not matter,” Nadella said last week. “Us as a company, us as leaders, knowing that we are really only going to be valuable going forward if we build what’s secular in terms of the expectation, instead of being in love with whatever we’ve built in the past.” Microsoft still generates around one-fifth of its annual revenue from productivity software, but Nadella said that “some of the margin that we love today might not be there tomorrow.” It’s a stark warning to Microsoft employees that a platform shift is underway, and one that is already causing big changes inside Microsoft. “At a time of platform shifts, you want to make sure you lean into even the new design wins, and you just don’t keep doing the stuff that you did in the previous generation,” Nadella said during an earnings call earlier this year. “You would rather win the new than just protect the past.” Microsoft promotes Windows and business Copilot chiefs Shortly after Microsoft’s town hall last week, Rajesh Jha, Microsoft’s head of experiences and devices, announced some interesting promotions. “I’m thrilled to share that Charles Lamanna and Pavan Davuluri have been promoted to President,” said Jha, in a memo to Microsoft’s experiences and devices team, seen by Notepad. Lamanna and his Business and Industry Copilot (BIC) teams moved closer to the Microsoft 365 Copilot side of the company in June, and he has quickly been consolidating Microsoft’s various business Copilot offerings. This promotion puts him closer to Microsoft’s senior leadership team, and I honestly wouldn’t be surprised if that’s the next step for Lamanna at Microsoft. “His vision has grown market share and set new standards for AI-native business models,” said Jha. “This well-deserved recognition reflects his leadership, his sustained record of innovation, and the impact in shaping Microsoft’s enterprise AI strategy and future of work.” Davuluri’s promotion to president comes just over a year after he became Microsoft’s Windows and Surface chief. “This well-earned recognition for Pavan, reflects the breadth of his leadership, his track record of innovation, and his impact in shaping the future of Windows, Surface, and Microsoft’s client experiences and computing stack,” said Jha. The pad I’m always keen to hear from readers, so please drop a comment here, or you can reach me at [email protected] if you want to discuss anything else. If you’ve heard about any of Microsoft’s secret projects, you can reach me via email at [email protected] or speak to me confidentially on the Signal messaging app, where I’m tomwarren.01. I’m also tomwarren on Telegram, if you’d prefer to chat there. Thanks for subscribing to Notepad.