Over the past five years, Kipman and a team of Microsoft engineers, designers, and researchers have toiled in this windowless space to create a top-secret product that might be the company’s most ambitious since the 2010 release of the motion-sensing gaming device Kinect: an augmented reality headset codenamed Project HoloLens. The device—a kind of face-computer that looks like a pair of space-age sunglasses—is a bit like the Oculus Rift virtual reality headset. But while the Rift immerses its wearers in a completely digital environment, Project HoloLens weaves digital elements into the real world—a magical merging of the virtual and physical.

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Microsoft then…
Microsoft has had no problem with the outer circles. It has combined vision with breathtaking engineering to create a whole bunch of amazing prototypes. But they rarely make it to market. That’s because, over the past two decades, its culture has grown competitive and insular, more consumed with getting and protecting an edge than pushing into riskier new businesses. People were motivated to produce things they knew their managers would like, rather than take risks on new ideas that might fail. The company’s money-minting core offerings, Windows and Office, sucked up talent and attention while newer ideas got overlooked.
“In a mobile first, cloud first world, Microsoft missed the first and came late in the latter…”
Though Microsoft makes a lot of money—sales revenue jumped almost 12 percent to $86 billion last year—its core business is declining, a dynamic that was set in motion more than a decade ago, when nearly every enterprise owned and ran Windows-powered PCs and servers.
Microsoft’s fall stems from its attempts to lock users into its products by refusing to work with competitors. Lost in the hubris that can come with market dominance, the company launched a series of me-too hardware products, figuring loyalists would embrace them (Zune, Surface, Kin, etc.).
Consumers turned to better-designed devices that were plugged into other software ecosystems where Microsoft had no stake, rendering the company irrelevant. Meanwhile processing increasingly happened in the cloud, and businesses rented the software they used. Users began to shift more of their work to mobile devices, most of them powered by Apple’s iOS and Google’s Android.
“Silicon Valley wisdom says: big companies can’t reinvent themselves…”
Many have attempted to engineer comebacks, and the industry is teeming with failed empires that have evolved into middling businesses on the decline: BlackBerry. Hewlett-Packard. Yahoo. But Nadella finds inspiration in an example closer to home: Microsoft itself.
Step 1: Garage and tinkerers
As CEO, Nadella has restructured Microsoft to function more like the Silicon Valley companies that have eclipsed it. Nadella has streamlined these teams, cutting 14 percent of the staff. He has eschewed Microsoft’s traditional R&D cycle, in which products went through a testing phase after development, in favor of a fast-moving process in which these steps happen in tandem. To foster experimentation, the company opened Garage—a 32-chapter group of in-house tinkerers—to the public so outsiders could test Microsoft’s ideas.
Step 2: Cross-thinking and Developing
Nadella also revised Microsoft’s approach to research and development. The company has long spent upwards of 11 percent of revenue on this area, and it has had a reputation for investing in the type of blue-sky undertakings that may not see a commercial outlet. Nadella has pushed researchers to collaborate much more closely with engineers in other departments to help them get products out faster. The release of Microsoft’s Skype Translator, which translates multilingual conversations in real time, is an early success. Nadella calls Skype Translator “a moment of truth” because it required groups of people to work across divisions, combining features from the Skype folks, the Azure cloud-computing team, and the Office teams.
Step 3: Breaking down barriers
His predecessor, Steve Ballmer, described Microsoft as a devices and services company. Nadella has scrapped that, casting it instead as a company capable of working across any platform—even those controlled by competitors—to help people be more productive. He has made Office software available on Apple- and Google-powered tablets and phones and made Windows free to manufacturers of devices smaller than 9 inches. He has forged new partnerships with companies Microsoft once considered enemies and spent time with startups to learn how innovative business models work. And he paid $2.5 billion for Minecraft maker Mojang, so that a new generation will grow up on Microsoft’s software.
“HoloLens is about more than virtual reality…”

Project HoloLens is by far the boldest—and riskiest—move of the Nadella era. It’s not another me-too product but a truly unique experience. It’s also the kind of project that few besides Microsoft would undertake—a lavish, multiyear effort that builds on lots of in-house research, all in service of extending the reach of Windows. Nadella believes that Project HoloLens is nothing less than the emergence of the next computing interface, saying, “It’s like the first time you used Excel on a PC with a mouse and a keyboard.”

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