Satya Nadella should split Microsoft into three companies: Enterprise, Mobile and Entertainment

My first visit to Microsoft was in 1982, when it was still housed in a red brick building in Bellevue, Washington, and had fewer than 100 employees, if memory serves. You could walk the halls and easily spot Bill Gates, Microsoft co-founder Paul Allen, and other top executives.

Today's PC industry owes a lot to Microsoft, and the company's overall role in driving our industry has been enormous. But Redmond is facing challenges as computing goes mobile and previous cash cows, like Windows, are no longer making the grade. As a result, it was clear that the company needed to change its leadership from the top down. More importantly it needed to re-architect itself for a world of computing that is very different to the one it has known over the past 30 plus years.

The choice of Satya Nadella as the new CEO of Microsoft is a very important part of redesigning this pioneering software company. It underscores the fact that Microsoft's board understands that the company's future lies in business and enterprise, and that they looked for a leader who could keep them moving forward in this growing segment of their business. Microsoft is already a powerful player in servers, cloud, and IT software, accounting for two-thirds of company revenue. But it must innovate within this segment to stay relevant.

On the other hand, the PC business will never again be a growth market. Demand for PCs declined by 10 per cent last year and although we do see some increased demand for PCs in the next one to two years due to IT refresh rates starting this year, the fact remains that demand will stay steady at about 280-300 million a year going forward – and most likely will continue to decline in importance over the next five years, especially in consumer markets.

Where Microsoft is really challenged is in mobile, where the growth of smartphones and tablets continues to be strong. Competition from Apple's iOS and Google's Android, which together dominate the mobile market, makes it hard for Microsoft's Windows Phone and Nokia to gain a foothold. Although smartphones and tablets do cross over to business via BYOD, the role of mobile devices and especially its growth will be driven by consumers and Microsoft is still catching up on that front.

With this in mind, here is what I believe Microsoft needs to do over the next two years.

Within 18 months I believe the company needs to be broken out into three distinct divisions or possibly separate companies. One division should be focused on IT, Enterprise, Business and Cloud Software, and business-focused OS and services. The second division or company should be focused primarily on mobile, which includes smartphones, consumer tablets and wearables. The third company should be focused on entertainment and games, including the Xbox, smart TV, and the living room.

IT and Enterprise

As for the IT company, this group would have the charter of moving all of Microsoft's software to the cloud, stabilising the Windows OS PC business, innovating within server software and establishing a set of software-as-a-service solutions primarily for enterprise and SMB. I could even see it acquiring a dedicated services organisation to enhance its current software services and consulting practice. This group would be responsible for evolving the Windows OS for enterprise, consumers, and education as well as Office 365, but with full knowledge that the PC as an OS vehicle will never be a growth market again. This group would also oversee the Surface Pro business, although if it was smart, it would get out of the PC hardware game altogether and let its remaining PC customers handle that part of the business. Bing should also be run out of this group since it is a cloud service.

Mobile

The mobile division or company would be solely responsible for smartphones and consumer tablets. Like Google with Chrome and Apple with iOS, which have distinct operating systems for PC and mobile, this group should scale the Windows Phone OS up for use on tablets and optimise this OS for various size tablet screens instead of trying to push a PC OS down for use on smaller mobile screens.

However, even if it does this, it needs to fix a huge problem Windows has when it comes to software apps. Windows Phone and Windows 8.1 will never have the long-tail software apps that iOS and Android have today and in the future, and this puts Redmond at a huge competitive disadvantage. I believe that this group has to bite the bullet and find a way to bring Android apps into Windows Phone, thus giving Microsoft a fighting chance to compete with Apple and Google and their partners.

There are various ways to do this although the Bluestacks Android on Windows solution is the best that I have tested to date (and one I have long been preaching about). Of course, Microsoft's Nokia acquisition would be critical to this division and its hardware, which could run Windows Phone as well as Android. This group could also become involved in wearable devices and any other mobile-based hardware and software that shows market promise.

Entertainment

The Entertainment division or company would be highly consumer-focused and take aim squarely at the living room. The new Xbox One already serves as a set-top box for streaming services like Netflix as well as delivering games, but Microsoft could and should expand its role as a set-top box in the living room and tie it closer to the firm’s various consumer online services such as Bing and future consumer cloud apps. They could really kick this into high gear if they bought Roku and integrated it not only into Xbox One, but they also pushed to get the Roku box and technology into actual TV sets like Roku is doing today – making an even broader play to get Microsoft software, apps, and services into the home. This group could also oversee future work on the connected home and other IOE consumer related hardware, software and services.

I suppose this is a rather simplistic view of how Microsoft should proceed with ensuring a successful future, but doing all this under a single Microsoft umbrella is unlikely to work. By creating three distinct divisions, or setting them up as separate companies, each would have a clear set of goals, charters, and roles with a tighter focus, thus giving them more of a fighting chance to compete, especially against Apple, Google, and Samsung. I have no idea if this new CEO will go down this path but I do believe that if Microsoft doesn't do something drastic along these lines, Microsoft's overall business will continue to decline and its relevance in the future, especially in consumer markets, will be seriously in doubt.