Microsoft’s Future Is Now in the Hands of Satya Nadella

“Our industry does not respect tradition — it only respects innovation.”

– Newly appointed Microsoft (NASDAQ:MSFT) Chief Executive Officer Satya Nadella in an email to employees.

Big leadership changes are afoot at Microsoft. On February 4, the company announced Chief Executive Officer Steve Ballmer would be replaced by an insider — Satya Nadella, Microsoft’s executive vice president of cloud and enterprise. His appointment is effective immediately. Meanwhile, Bill Gates — who founded the tech giant with Paul Allen in 1975 — will step down as chair and become a technology adviser to Nadella, a 22-year veteran of Microsoft. His place will be filled by current board member John W. Thompson. This change suggests that Gates will be taking on a bigger role in product development at Microsoft.

Nadella’s appointment is a key indicator of the company’s plans for the future. His expertise is in enterprise; before assuming his role as chief executive officer, he held leadership roles in both enterprise and consumer businesses. As his Microsoft biography states, after joining the company in 1992, he “quickly became known as a leader who could span a breadth of technologies and businesses to transform some of Microsoft’s biggest product offerings.”

It was under his leadership that the software maker made the move to the cloud, developing one of the largest cloud infrastructures in the world to support the company’s search engine Bing, its gaming platform Xbox, and its Internet-based delivery of software for Microsoft Office. Furthermore, it is Nadella’s plan to leverage the company’s software strength in pursuing greater competitiveness in the technology world.

MicrosoftNadella“During this time of transformation, there is no better person to lead Microsoft than Satya Nadella,” Gates stated in the press release announcing the new appointment. The transformation to which Gates referred was announced by Ballmer last summer. In July, the then-chief executive explained that the company would be pursuing a “far-reaching realignment” that will “enable [Microsoft] to innovate with greater speed, efficiency and capability in a fast changing world.” The reorganization was essentially the company’s admission that Microsoft had to become more focused in order to capture consumer dollars, which are increasingly being spent on mobile devices rather than personal computers. That trend has put the company’s main source of income — Windows — in jeopardy. In a July interview, Nadella was supportive of the reorganization plan, which was meant to allow Microsoft to adapt more quickly to changes in the market. “It’s not like our old structure didn’t allow us to do some of this,” he told the New York Times. “The question is whether you can amplify.” The question for technology analysts is how will Nadella approach the question of devices like smartphones and tablets.

“Satya is a proven leader with hard-core engineering skills, business vision, and the ability to bring people together,” added Gates. Ballmer, who announced his resignation on August 23 of last year, gave his support for the appointed, noting that he has “had the distinct privilege of working with the most talented employees and senior leadership team in the industry,” and that “their passion and hunger for greatness will only grow stronger under Satya’s leadership.”

Nadella is taking the helm of Microsoft at a critical juncture. At one time, the company dominated the technology industry, but since 2000, competition from rivals like Apple (NASDAQ:AAPL) and Google — companies better positioned to profit off technology’s turn to mobile computing — has left Microsoft playing catch up amid the epic decline of the personal computer market. Gates built the company on the principle that if the software was designed well enough, success would follow. That strategy worked for decades, but now devices are a key part of innovation.

Still, Gates’ increased presence at Microsoft is important; adapting to market changes quickly may be necessary but it is not innovation. Geoffrey Moore — author the technology-marketing tome Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers — believes the Microsoft co-founder’s high standards and attention to detail place him, like Apple (NASDAQ:AAPL) co-founder Steve Jobs, among the greatest technology visionaries. “The more time Bill spends on product development, the better,” Moore told Bloomberg. “He and Steve Jobs seem very different on the outside, but at their core they were very similar. They both see things that others don’t see, and they’re both very demanding.”

“Microsoft is one of those rare companies to have truly revolutionized the world through technology, and I couldn’t be more honored to have been chosen to lead the company,” Nadella said in a Tuesday statement. “The opportunity ahead for Microsoft is vast, but to seize it, we must focus clearly, move faster, and continue to transform. A big part of my job is to accelerate our ability to bring innovative products to our customers more quickly.” Yet, while Nadella emphasized the importance of innovation to the company’s future direction in his first email to employees as chief executive, it could seem to shareholders that Microsoft picked the safer choice with its appointment.

His twenty-two years at Microsoft have given him an intimacy with the company’s sprawling business. Plus, his expertise in cloud development and enterprise software suggests that Microsoft’s intent is to focus on where it has been successful. Growth in commercial services gave the technology company a strong 2013; with Nadella as president, revenue in Microsoft’s server business soared to to $20.3 billion in the fiscal year ended in June, an increase from the $16.6 billion it reported when he took over in 2011. In addition, fiscal second-quarter results showed that revenue from the company’s commercial cloud services rose 107 percent from the year-ago quarter.

“He’s an enterprise guy,” Bernstein Research analyst Mark Moerdler told MarketWatch. “The real opportunity for Microsoft is in that they are moving to more cloud and subscription services. And here’s a guy who does that.” It was an appointment approved by Mason Morfit, the president of activist shareholder ValueAct Holdings, who is set to join Microsoft’s board next month. Nadella is “clearly the best choice to lead the company,” he told Bloomberg.

The appointment of Nadella may suggests that Microsoft is not looking for a radical departure from the past. To some analysts there is little in Nadella’s public career with Microsoft suggests that he would push the company to be a trend-setter rather than a trend-adopter. In an April 2013 interview with the New York Times, he explained that the key component in Microsoft’s ability to grow its business in the future was whether it could become a successful player in what he called the “new paradigms” of computing, like cloud computing. “I think that with any new paradigm there will always be a couple of new players who come at it,” he continued. “But to me, the thing that is perhaps more interesting and challenging, and gets me excited, is, hey, how can we renew ourselves?”

But the fact that leadership has been concentrated in the team of Nadella and Gates means that Microsoft both wants to accelerate new product development while leveraging its software might. Like Ballmer and Gates, Nadella described Microsoft as a company in need of a transformation. “The opportunity ahead for Microsoft is vast, but to seize it, we must focus clearly, move faster, and continue to transform,” Nadella said in a statement.

In interview included with Microsoft’s chief executive announcement, the new chief executive explained that he planned to “ruthlessly” remove obstacles that prevents the company from innovating, and to focus that innovation on things Microsoft can “uniquely” do. He noted the opportunities are “unbounded” in a world that is increasingly becoming a “software-powered world,” but the company must seize the opportunities that allow Microsoft to take advantage of its heritage as a productivity company. It is his intention that Microsoft will be the “do more company,” meaning a company that enables people to do more. Microsoft has the talent, the resources, and the perseverance to be successful, he concluded his first interview as chief executive. Those qualities, combined with the fact the world is more of a “software-powered world” delivered in devices and services, means to Natella that Microsoft has “the best platform to change the world.”

Still, there is a lot for Natella to worry about. Smartphones have been a particularly difficult competitive arena for Microsoft. The smartphone industry has heard rumors — very tentative rumors — that partnership between Microsoft’s Windows Phone mobile platform and Nokia’s (NYSE:NOK) Lumia handset has begun to gain on the competitive smartphone industry dominated by Samsung and Apple. Evidence that the market may have room for a device that is not powered by Google’s Android or Apple’s iOS was delivered in the third-quarter by the research firm Gartner, whose summary of the smartphone industry noted that, “The winner of this quarter is Microsoft which grew 123 percent.”

The news release further explained that Microsoft yet-to-be-completed acquisition of Nokia’s devices and services business will serve to “unify effort and help drive appeal of Windows ecosystem.” But the Windows Phone-powered Lumia has to make up a lot of ground before it can be considered a true contender for the smartphone crown. The fact that Android surpassed 80 percent market share in the third-quarter of 2013 confirms that reality, as did Nokia’s fourth-quarter earnings, which showed a 29 percent, year-over-year sales decline in its soon-to-be-sold handset business. Currently, Microsoft’s software is on fewer than 4 percent of smartphones sold globally. Plus, some analysts on Wall Street believe Microsoft is too big to be competitive and therefore should sell business like Xbox and Bing.

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