The problem for Microsoft has never been making money; Steve Ballmer proved that beyond a doubt. Rather, the company's historic challenge (other than avoiding Justice Department dismembering) has been to convince investors that a fast- (or slow-) follower business model deserves increasing valuations. Put another way, Microsoft has tried to increase its own value by following with its own versions of innovations like smartphones and tablets. Wall Street's clear answer to date has been "No."
That was before the world got much more complicated.
One of my unspoken rules is never to publish what you can read elsewhere. So, having read a good part of the total press coverage on Nadella last week, I'll do my best not to repeat things you may have read elsewhere — with the exception of doing a deeper dive into the importance of mobile and cloud, his two main corporate interests, according to comments made to employees this week.
Here, the lesser-examined aspects of what Nadella faces as he takes on this new role, and Microsoft's biggest challenges, now that he has been selected:
1. The New Power Structure.
Nadella's selection came amid several other announcements, all of which initiate the first of several future steps in a new power structure at the company.
Veteran observers will recall how Bill Gates, upon leaving the CEO position, became Chief Software Architect under Ballmer. Last week, we saw a reprise of that tactic, bringing Gates back as a Technical Advisor. While he has said this will be a one-third-time-plus job, I am guessing that's on Gates' clock, where a 40-hour week is "half-time."
And, relatively new board member, John F. Thompson, will move from running this search to taking over as board chair, theoretically providing some additional power cover for Nadella during this shift. (One of the larger problems in the search — other than the made-to-fail tactic of pre-announcing candidates who then got better offers at home — was the question of how to work with Ballmer on the board and Gates as chair.)
I want to note that I do not know Nadella personally, although I hope to repair that soon. But it is important to make mention here of the importance of his personality (as is true for all tech companies) in making this new arrangement work.
It is not likely that an outsider would have agreed to, or been comfortable with, this structure.
The most positive benefits of it are retention of corporate institutional learning and skills, at-hand assistance for Nadella in what will likely be the weakest part of his game (running a major international firm) and complete continuity from day to day, with no surprises.
Some of this is also perceived by investors as a negative, which will be Nadella's primary challenge, just as it was Steve Ballmer's.
One of the more interesting questions that flows from the power structure changes just made: What will Nadella contribute to these changes? He seems prepared to make more restructuring announcements, and a key issue will be how these play to his strengths in enterprise, or corporate-level sales, and to the company's needs in consumer technology.
2. Today's Money.
Nadella is coming from running a high-performing section of the company (enterprise and cloud, servers and tools), with both revenue and profit growth. Picking him as CEO means the company need not fret over keeping these fires burning.
3. Satya the Engineer.
Having a tech person at the top of the company has to be great news for everyone. Steve Jobs once made the comment that tech company founders are tech guys, and the companies end up being run by sales guys (think Apple's John Sculley or Steve Ballmer). But it seems universally true that long-term successful tech companies have trained engineers at the top, supported by first-class operating people. The team of Bill Gates and Jon Shirley comes to mind, with too many other examples to mention.
With Kevin Turner staying on as COO, and Gates tasked with new products and services, it's clear that the search team came up with a formula — not just a person — to take the company forward.
Whether new tech vision comes from Nadella himself, or from Bill or others, the key issue that now gets fixed, to my opinion, is this: Nadella will have the background to evaluate future paths based on technology, and not just sales.
This could make all the difference in Microsoft's future.
As others have pointed out, it is likely also to help expand and strengthen the company's developer community, which was the backbone of its power and success from the beginning.
4. "Mobile First, Cloud First."
This mantra of Nadella's is both reassuring and surprising. Not long ago, Steve Ballmer initiated the new "Devices and Services" mantra to describe the firm — a term that Nadella pays homage to at the end of one of his new video appearances.
The problem? Microsoft is not currently leading in either of these new chosen fields. This implies two things: First, Nadella recognizes their importance and is willing to put some chips on the table, before he has won the hand (a big plus); and second, Nadella is planning on pivoting the company (or continuing Ballmer's recent pivot) toward mobile.
But as Nadella points out in a different video, "mobile" does not necessarily mean "phone". It also includes a lot of wireless connections in the booming Internet of Things, a term which describes the growing connectivity of objects. In other words, there is a lot of mobility in the future of the enterprise.
Even so, on almost every level, the question of how Microsoft lives in a world increasingly driven by wireless tablets and phones is something that will ultimately determine the company's path. The Microsoft that fails to gain serious market share in smartphones and tablets is a radically different company, with a radically different future, than the Microsoft driving smartphones and tablets.
Microsoft has moved over the last few years from being a company that was increasingly serious about security (releasing Windows Security Essentials and Windows Defender, after years without such products) to one that now seems obsessed with it. This is good, because Windows, as the largest computing platform, is automatically the largest cyber target.
The company, under general counsel Brad Smith, has for years supported stronger IP protection and fought global piracy. The recent opening of Microsoft's Cybercrime Center adds another dimension of commitment to this critically important struggle.
This is a huge market opportunity for Microsoft, and one which, technically, unifies the consumer and enterprise markets. Nadella seems to understand this: In one of his first in-company interviews, he terms the importance of cross-platform security "non-negotiable."
For this reason, I would expect to see some powerful statements from Nadella in the first half of this year on security, its increasingly important role and other things the company is doing to earn corporate and consumer trust in everything from credit cards and online transactions to NSA-proof communications and enterprise security.
The CEO switch comes at a time when there are large power shifts on a global economic scale, and changes in the competitive landscape, not to mention Steve Ballmer's apparent shift toward the consumer side of the equation with the purchase of Nokia.
For Microsoft, and for Nadella, the competition is in flux, which makes doing a major pivot toward consumer a higher risk, but with possibly higher reward.
Let's break down the new mobile landscape: Steve Jobs is out of Apple, Samsung is running out of things to copy and Hewlett-Packard is not obviously clear on what it will be someday. Dell is now private, Lenovo is buying up all the dead U.S. parts it can find, and Huawei, ZTE and Xiaomi are growing in the phone business thanks to the size of the domestic Chinese market.
So, how does one describe the new competitive playing field? Cisco and IBM seem to be getting it wrong, and Google just got rid of the last paying piece of the phone business. There aren't a lot players left who talk about innovation.
When Gates used to talk about innovation, it seemed he might actually be talking about "incremental improvement on my competitors' products," whether they be from WordPerfect, Lotus, Novell, Apple, or someone else. But I have a feeling that when Satya talks about innovation, he will actually be trying to invent something new to the entire industry.
If this is true, it could easily put Microsoft ahead of the competition in what has rapidly become a price-driven game led by copy experts.
7. Mobile Devices.
Microsoft now has a whole village full of Nokia employees leasing back their HQ building in Espoo, and (on some level) waiting for instructions.
Let's list the companies known for creating new phones (rather than just copying others) that are still in the mobile business:
- Motorola? Just sold to Lenovo.
- RIM/ Blackberry? RIP.
- Sony? RIP.
- Ericsson? RIP.
- Sony/Ericsson? RIP.
- Google? Sold Motorola, after scraping off the patents and sharing them with Lenovo.
- Apple? Yes.
- Microsoft/Nokia? Yes.
- And 50+ smaller regional companies.
You could do a similar calculation with tablet hardware.
(Since these two platforms are the most strategic parts of the computer business, it's surprising that so few other publications are writing about the destruction of the inventing companies, or the resulting harm to their countries.)
How will Nadella and Gates make the Windows Phone a success? How will the Windows Nokia team? This is one of the most important questions facing Microsoft today. As a platform company, it doesn't have the Google luxury of just walking away.
While the MS phone and Surface have had good growth percentage figures lately, their market share remains too small for most charts.
8. Indian Employees, Asian Leadership.
Microsoft has been hiring thousands of employees in India since the 90s, and it's predictable that this group is overjoyed at Nadella's success. I don't know how to calibrate this issue of pride, but it will likely provide an additional intangible benefit to the company. (Nadella's home town, Hyderabad, is the location of Microsoft India Private Ltd headquarters.)
Nadella will have to take a more nuanced, technical view of these markets and products than Ballmer did. Observers will recall Steve essentially shut down all the consumer units at Redwest during his first weeks in office.
I think everyone on the new A Team now understands the importance of the consumer market to Microsoft's future, but what they will do about it remains an open question.
10. Satya Himself.
It has become obvious over that Nadella is extremely well-liked inside Microsoft. Somehow, he has managed to put together the ambitious attributes that brought him a 22-year record of success at the firm, with an almost unique ability to remain a good listener and sensitive to others.
It would not be too much of a stretch to suggest that his personality provides a perfect solution set to the many simultaneous equations involved in having many bosses, and a company that just yesterday was based on the principle of warring factions.
11. Getting Out of the Bubble.
Microsoft's greatest problem, and now Nadella's, may be getting out of the Redmond Bubble. (It's worth noting that his first self-appointed task is to tour the global company universe of customers and employees.) Inside the bubble, it is possible not to see product flaws and competitive failings. It is possible to listen to engineers rather than users. It is possible to think that just by releasing a me-too product, it will sell.
It probably isn't too much to suggest that Satya Nadella might be called the "Best of Microsoft," in the sense that he is personally committed, passionate about his work, technically brilliant, persistent, competitive and consistently successful, and he works well with others. He is definitely the kind of leader you'd want building your cloud or enterprise software.
Even if we give Nadella the benefit of the doubt, for now, on the other challenges of running a global technology firm, there remains a single large issue to be resolved.
Just saying there is no separate consumer market does not make it so.
The world, along with 32,000 Microsoft / Nokia employees, is going to be waiting to hear what the real plan is now, going forward, for Windows Phone, for Nokia hardware and software, and for Microsoft in the consumer space.
If Nadella is the perfect guardian of the old Microsoft, and the perfect pioneer of the new enterprise, how will he (and Gates) address this issue of capturing consumer market share in smartphones and tablets?
Here is the fascinating pivot moment: Apple is not inventing new things, so even though it has large share, it is done as a competitor in the long term. Google just sold its Motorola division to Lenovo. Samsung doesn't know it yet, but its huge Tizen OS effort, a new platform designed with Intel's help, to supersede Android seems to be headed for a non-launch. Nippon Telegraph and Telephone (NTT) pulled out just last week.
Who, among inventors, is left? There are increasingly two parts to the mobile equation: the devices and the ecosystem (which includes cloud support and app stores). If we discount Apple, the current leader, who are the threats?
- Google, now out of the smartphone hardware business, and likely soon to be out of the tablet world as well.
- Amazon, #2 in tablet sales worldwide and about to move into retail and other verticals.
Inside Microsoft's Redmond Bubble, it would be easy to focus solely on cloud: It drives everything and that's where the apps reside and besides, all phones look like iPhones anyway — just a big piece of black glass real estate.
But there's a problem with this, as Google is learning from Samsung, and as Samsung, just this quarter, learned from the Chinese companies coming over the hill: The only way to sell cloud services and apps is through device sales.
Samsung is trying to cut off Google by introducing (with Intel's help) a new OS to supersede Android. If it happens, Google will take a hit, but it will not be the end of Google.
But if Microsoft fails to gain real traction in the mobile marketplace, its role as a platform company will be threatened.
Sure, any phone can access Expedia or Redfin on any cloud these third parties pick that week. But that's a non-platform, open systems approach that Gates has never been interested in.
There is little question that Satya Nadella is capable of taking Microsoft to the next levels of play in his areas of past recent expertise: cloud and enterprise. If the company is to retain its dominance as a platform company, he will also have to find a way to expand the company's mind and market share in the consumer-driven mobile universe.
This article is an excerpt from Strategic News Service's Global Report on Technology and the Economy, ©2014, and is not available for reproduction.
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