How Microsoft made it through 50 years

In 2005, Microsoft’s leaders were starting to get worried. Windows and Office were doing well, but the company’s lead software architect, Ray Ozzie, warned them that an emerging trend threatened Microsoft’s very existence.

“A new business model has emerged in the form of advertising-supported services and software,” warned Ozzie in his famous memo. “This model has the potential to fundamentally impact how we and other developers build, deliver, and monetize innovations.”

Ozzie wanted Microsoft to get ready for the web-based world and cloud computing, fearing the company would otherwise be left behind. In the years after Ozzie’s memo, Google started to build an online competitor to Office with its Google Docs web service that it was selling to businesses and offering free to consumers. But the idea of moving Office to the cloud remained controversial internally. Doing so would upend Microsoft’s traditional method of selling software — and potentially eat into short-term profits in a big way.

“It was a gutsy call, it wasn’t a popular call at Microsoft at that time,” says Rajesh Jha, executive vice president of Microsoft’s experiences and devices group. Steve Ballmer, then Microsoft’s CEO, decided to go ahead with it, moving Office to the cloud and launching Azure fully in 2010.

Office 365 launched initially in beta, and Microsoft faced challenges transforming Office for the web. “The early days of Office 365 were rough,” admits Jha. Microsoft had to perform the painstaking transition of moving apps that were built for a different architecture and era to the cloud and make that scale properly. “I remember Steve [Ballmer] talking to me and saying ‘I’ve got your back, go fix this stuff.”

It was the type of change that Microsoft has navigated time and time again over its 50-year history, an epoch marked by success, pivots, and failures. It’s easy to think Microsoft would be embarrassed by the launch of Windows 8, the performance of the Zune, and its failure in smartphones — surely, the company wishes those things had done better. But earnest attempts at something new are the whole point.

“We’re still around and leading things because we accept change,” says Steven Bathiche, head of Microsoft’s applied sciences group, in an interview with The Verge. “That’s the pearl about Microsoft that’s kind of unique with a company as old as ours, in an industry that changes as rapidly as ours.”

Microsoft turns 50 years old today. The company was founded in 1975 by Bill Gates and Paul Allen as Micro-Soft. A lot has changed since then, but in many ways, the company’s core business model and ethos remain the same: make software that everyone needs and get it installed everywhere.

Gates and Allen began that strategy with Altair BASIC, a BASIC interpreter for the Altair 8800 — a computer made by MITS, rather than one they made themselves. After making an interpreter for one computer, they started bringing it to every other PC maker that would take them. Following the success of Microsoft BASIC, the company would repeat the strategy with MS-DOS, and eventually Windows and Office.

But building those must-use platforms has taken a lot of experimentation, and Microsoft has often had the right idea at the wrong time — and missed out on major markets as a result.

Microsoft had SPOT smartwatches decades before the Apple Watch and Windows XP-powered tablet PCs years before the iPad. One of the company’s biggest misses was mobile. Microsoft has experimented with so much hardware and software over the years that it should have been in the ideal position to be the primary alternative to the iPhone. Instead, its platform burned out, and the company wasted billions on the acquisition of Nokia in a fruitless attempt to catch up.

Still, Microsoft insiders say it’s these experiments that have teed up many of the company’s eventual successes.

“We used to do these invention sessions with Bill [Gates] which was a lot of fun,” says Bathiche. “I was pretty young when Bill was around so I’d come in as this mad scientist and show him all this cool stuff we were doing in hardware and software, and I think he really appreciated that.”

Some of those experiments would unlock touch computing and cloud advances, helping pave the way for Microsoft’s own laptops and tablets. Other hardware and software experiments led to the Xbox, Microsoft’s best example of combining software and hardware into a successful consumer product. At its heart, Xbox is about enabling developers to build compelling games with software, and it was originally dubbed a “Windows entertainment project” and developed by members of Microsoft’s DirectX team to fend off the threat of Sony’s PS2 console in the living room.

Other Microsoft projects have taken a more roundabout route to becoming successful products. One major case that Bathiche mentions is Cortana, the voice assistant first designed for its phone platform. The assistant didn’t catch on as an alternative to Siri and Alexa and was eventually shut down.

“The Cortana days, that was really difficult,” admits Bathiche. The project required Microsoft to develop technologies around local compute and to optimize for Arm chips. “So that project, even though I kind of failed on enabling that sort of solution, I took all those technologies that we developed as a team and applied them to Windows and Surface.”

Those technologies, from optimizing Cortana to getting Windows Phone to run on Arm chips, helped with Microsoft’s work with the Surface Pro X and the early AI-powered experiences in Windows. “That’s going to set us up for the next decade,” says Bathiche.

That history speaks to why Microsoft CEO Satya Nadella has been so aggressive when it comes to AI.

One of Microsoft’s most significant deals under Nadella has been its partnership with OpenAI. Microsoft originally invested $1 billion into OpenAI in 2019 to become the exclusive provider of cloud computing services to the AI research lab. It then extended that partnership in 2023 with an additional $10 billion investment, just months after ChatGPT launched and became the fastest-growing app in history.

This investment has fueled Microsoft’s ongoing AI transformation, amid fears that Google was years ahead of it in scaling up AI efforts. For Bathiche, this new AI era illustrates patterns that allow companies like Microsoft to take advantage of the constant change in compute ability and build new experiences or new device form factors.

“When we had the first computers they would load a very specific program and that’s the only thing they could do,” says Bathiche. Microsoft saw the opportunity early on to build Windows as a way for developers to talk to PC hardware easily and create apps with a GUI on top. Then the internet was a layer on top of that, which changed how software could be delivered.

“Now we’re on the next layer, which is the agent layer,” says Bathiche, describing intelligent software that acts autonomously on behalf of a user. “That’s the exciting one we’re trying to figure out.” Microsoft has always developed software by compiling an app like Word, and then everyone gets that same piece of software, whether it was delivered via a CD-ROM or over the internet. Microsoft is now trying to build software that adapts on the fly.

“The race is on to compile that piece of code uniquely, individually, for every person on the planet. The reason is that these AI agent experiences we’re talking about are really about deep personalization and understanding and customization,” says Bathiche.

This push toward unique and personalized software through AI has driven compute needs like never before, and Microsoft’s Azure AI teams are constantly having to adapt to new models or new hardware that unlocks even more AI capabilities. We saw that recently with Microsoft’s quick adoption of DeepSeek’s R1 model into its Azure AI Foundry.

“All of the systems that we’ve built for 50 years need to apply to AI agents,” says Asha Sharma, corporate vice president of Microsoft’s AI platform. “For Azure AI Foundry we’re thinking about how we evolve to become the operating system on the backend of every single agent.”

Microsoft envisions a world where AI agents will work alongside you as digital colleagues and collaborators. “I think a lot of the systems we’ve built for 50 years will be critical infrastructure for the digital workforce,” says Sharma. “We need to think about having not just human understandable interfaces, but machine understandable interfaces.”

Part of winning this AI battle will be down to Microsoft’s own models, and using competitor models wisely. Microsoft unveiled its own Muse AI model recently, which has been trained on the Xbox game Bleeding Edge to generate gameplay. Nadella stressed the importance of Microsoft’s own AI work during a recent employee town hall meeting, saying, “When I think about what we’re trying to do with Muse, that’s the bar. You go do fundamental research, you bring out a model, and then translate it into a real breakthrough feature in Copilot.”

Beyond digital colleagues and Xbox changes, Microsoft is also hinting at fundamental ways AI could live in the physical world. “I believe that some of our AI agents in the future will be embodied agents that are able to make plans and take actions on behalf of users in physical environments,” says Ashley Llorens, corporate vice president and managing director of Microsoft Research. “Not just the same very carefully engineered environments that we have many robots in today, but in many of the semi-structured environments that people live and work in. One of the challenges there is teaching AI how to reason over the relationships between objects and environments in time and space.”

AI-powered robots might sound like science fiction right now, but Microsoft is increasingly focused on robotics, healthcare, and even quantum computing, so anything seems possible for its next 50 years. Since Microsoft’s mobile miss, I’ve always gotten the feeling that the company is wary about missing the next big thing, so I’m fully expecting it to pivot if the AI era slows down.

Microsoft’s resilience and its ability to predict what’s next — like Gates in the early days of Microsoft or Ozzie in 2005 — have defined the company’s existence over the past 50 years. Moments of potential demise have forced Microsoft to make big bets that weren’t always successful but did lead to change.

Now, Microsoft has gone all in on AI. Its efforts might even contribute to the “singularity,” a point in time when artificial intelligence exceeds the abilities of humans and, perhaps, even our control. What that will look like is anyone’s guess. But if the AI hype bubble bursts and it’s more a Windows Mobile flop than an Azure hit, I’m sure of one thing: Microsoft will adapt to meet the challenge.