The Rise of Satya Nadella to CEO of Microsoft

White smoke came billowing out of a chimney in Microsoft’s headquarters in Redmond recently. After months of speculation, rumors, alleged leaks, and interviews, Microsoft had finally selected a new chief executive officer (CEO) to replace the outgoing CEO Steve Ballmer, who announced his intended “retirement” on August 23, 2013. His replacement: Satya Nadella. Who is this man and what will he do for Microsoft? Is he the right person for the job? In this opinion post, I’ll talk a little about Nadella, and I’ll share what I think the future may (or may not) hold for Microsoft, the shareholders, and customers of this important corporation.

Bye-Bye Ballmer

In January 2000, Ballmer was named as the second CEO in Microsoft’s history. Ballmer replaced the original CEO, Bill Gates, who intended to spend most of his time running the Bill and Melinda Gates Foundation. Note that Gates did stay on as Chairman of the Board of directors at Microsoft, and while he was not an out-front leader, he probably still had a strong position alongside Ballmer, his college friend, on what was considered a very weak board.
Ballmer took over as CEO during a very difficult time in Microsoft’s history. The US government was threatening to split up the company. The European Union (EU) was investigating. Bill Gates might be made fun of in the media as a nerd, but as IBM, Netscape, Novell, RealPlayer, and other companies have found out, he is an aggressive competitor – so much so that the United States and the EU found that Microsoft had used a monopoly position to conduct anti-competitive practices. We can argue that maybe Microsoft offered better products, but nevertheless, Ballmer took the controls of the ship in stormy weather, and brought her back to safe waters. Microsoft became a force in the enterprise, maintaining desktop dominance in business and at home, and even became a force for good in the community. Yes, Microsoft actually does a lot for social programs, start-up businesses, and students, and the company gives away billions of dollars’ worth of software and services every year for free to registered charities.

However, all was not well. The legendary stories of Steve Ballmer’s temper are, well, interesting! While profits remained high under Ballmer’s reign, the stock market wasn’t impressed. Microsoft’s soar-and-split days of the 1990s ended, and the share value remained relatively flat for a decade. Nothing Ballmer did worked, including the following:

• Declaring Linux to be a cancer that was to be ignored
• Underestimating the importance of the smartphone as the primary consumer device
• Overseeing the flops that are Windows Vista and Windows 8.x
• Bing has remained a distant second fiddle to Google
• Producing a tablet that has been a financial flop
• Letting Amazon steal the lead on cloud Infrastructure-as-a-Service
• Losing the consumer’s attention to Android
• One billion dollar acquisition after another (which was made fun of in prime-time comedy)

Sure, Microsoft remains a leading and very profitable player in the business, but the lost lead in cloud and consumer markets had shareholders concerned. Shareholders aren’t like normal business people – they like shiny things that grab their attention that might be irrelevant to profitability. See: The dot-bomb boom of 1997-2000, when launching any business with a modem had investors lining up like you had the only new-model iPhones for sale in the country.
Some shareholders protested loudly. Some commentators said that Ballmer needed to go, and that a person with an understanding of the newer “post-PC” market needed to take over.
If I had to summarize Ballmer’s reign over the last seven years in one word, then I would call it “stubborn.” Microsoft stuck to the PCs-everywhere vision until long after the world have moved to mobile devices. Early feedback on Windows Vista and Windows 8 was negative, but Microsoft stuck to its guns. On the positive side, that stubbornness has led to some successes such as Microsoft being a force in the data center and in Software-as-a-Service (Office 365).
Interestingly, Steve Ballmer eventually did cause a spike in Microsoft’s share value… by announcing his retirement. Some say that he personally, a large shareholder in Microsoft, personally earned over $1 billion that day.

The Search for a New Microsoft CEO

According to a statement from Microsoft, the search for a new CEO started before Ballmer’s public announcement of his retirement plans. The entire process reminded me of the Cleveland Browns (a beleaguered team in the American National Football League) recent search for yet another head coach. One leak after another had names in or out of the race.
Stephen Elop was an early favorite, thanks to some Nokia acquisition conspiracies. Elop has not impressed me since I first saw him empty the room at TechEd Europe 2009 as the keynote speaker. He led Nokia to acquisition by Microsoft. Maybe if he’d made the choice to switch to Android instead of Windows Phone, Nokia would have returned to a position of global market leader? Elop’s cause was not helped by some stories in the press that claimed that he would sell off businesses such as Bing and Xbox, two ranges for which Ballmer had been a strong advocate.
Julie Larson-Green was another early favorite with the bookies. I thought at the time that this was a guess by uninformed public audience. As Steven Sinofsky’s lieutenant, Larson-Green was as much responsible for Windows 8 as Sinofsky. In addition, she always seemed a little lost to me when she was speaking on stage. A CEO needs to have an authoritative presence to inspire shareholders that cannot see them working in person.
Tami Reller was another name that got some early attention. I think Reller was cursed by her association with the marketing of Windows 8. She has since moved to become executive vice president of marketing – and I have notice a considerable improvement in advertising by Microsoft in recent months.
Another internal candidate was Tony Bates, the former CEO of Skype. There was no way Microsoft could hire a CEO based on a person’s experience of running such a (relatively) small company.

I was in the camp that believed that Microsoft should hire an external person to come in, analyze the business, and shake things up. It seemed to me that Ballmer had spent the past decade ejecting coworkers with a strong independent vision, instead surrounding himself with those who saw the world through the same rose-tinted glasses.
The external name that got the most attention was the 68-year-old Alan Mulally, the man who kept Ford afloat by shaking up the then-stale car manufacturer. Ford, like every other major American auto corporation, was stuck in the mind-set of producing low-quality, fuel-inefficient, large-engine cars that no longer suited the market. Asian manufacturers were taking over in the United States because the market had moved on. The same was happening in many businesses for Microsoft. Mulally seemed like the perfect fit: Some stories said he was a mentor for Ballmer and that he had been an executive for Boeing, a neighbor of Microsoft’s in the greater Seattle vicinity.
A more recent name was Hans Vestberg of Ericsson. While I could see a telecoms services executive suiting the cloud services model that Microsoft is chasing, I never saw the fit for a phone/networking company that now has the same relevance as AOL or Yahoo!
Vestberg withdrew his name from consideration. So did Mulally. But were they really ever candidates? Was this just a ploy by them to get renewed or better deals from their current employers? Or (and this seems like a probable situation to me) was the possibility of having Ballmer (soon to be the largest individual holder of Microsoft stock) and Gates on the board going to restrict a new CEO in what changes he or she could make? Was the vacant CEO position a poison chalice, stuck with Ballmer’s cloud-and-devices vision?

Enter Satya Nadella

Indian-born Nadella has been employed by Microsoft for 22 years. His most recent positions had him run the Cloud and Enterprise and the Server and Tools groups. The latter is a $19 billion business that includes Windows Server, System Center, and Azure; in other words, Nadella has overseen the growth of Microsoft’s cloud OS, a service centric architecture for private, public and hybrid cloud computing, spanning software, infrastructure, and services. Previous to that position he was responsibile for a variety of online and enterprise businesses, giving him a broad experience of the Microsoft product portfolio.
Nadella was a strong internal candidate for the role, and he was declared the number-one choice by Microsoft when they announced that he was taking over as CEO on February 4 of this year. One of his first actions was to take to Twitter for the first time in nearly four years.

Was this a sign? Is Microsoft going to bring an end to the Redmond isolationism and listen to customer feedback while products are being planned, rather than waiting until it is released, stubbornly marketed, and deemed a failure? I really hope so!
Nadella has also made a few interesting comments. He believes that a person should never stop learning. He strikes me as a man who absorbs information and really considers all angles. When I’ve seen him speak, he struck me as calm and very intelligent, aware of everything that he was saying. One couldn’t say that for Fireball Ballmer, whose intensity is infectious, but could easily burn (see the previously mentioned chair-throwing incident).
The other early comment that resonated with me was Nadella’s reaffirmation that Microsoft is a software company. Software can change the world. Software empowers devices. A device without software is a brick. Microsoft is a great software company, not a great devices company. I don’t see Microsoft dumping the Surface or Nokia phone businesses, but I do see them uniting the heterogeneous platforms using Microsoft services and software.
It’s said that Ballmer vacated the office to make room for Nadella. As an observer and person that interacts with Microsoft, I have already seen changes. I can’t get into those details, but the early indicators are promising.

The Board

What of my fears of Gates and Ballmer handcuffing the new CEO? Those fears are somewhat alleviated, thanks to Gates retiring as the chairman of the board, replaced by John Thompson, a former CEO of Symantec. Instead, Gates is returning, part time, to a product development role in Microsoft. Ballmer will remain on the board, being joined soon by a representative of rebel shareholders, ValueAct Capital Management LP (who campaigned for change, including the termination of Ballmer as CEO). I’d like to be a fly on the wall for future board meetings!
Gates will spend two-thirds of his time with the Bill and Melinda Gates Foundation, and the remaining time working for  Nadella. Gates is returning to Microsoft during a very different time. The vision of a PC in every home is stale; now it’s a world of a phone or tablet in every pair of hands. The trick now is to put your software and services on those devices. Gates is a techie, and like Nadella, he believes in the power of software. I am a little tentative about this, but since Gates is still seen as a demi-god throughout the Microsoft world, I’m hoping that his fire will reignite and inspire. I hope that Nadella will have the freedom to shake things up, and not be stuck within Ballmer’s vision.

If I Could Ask Satya Nadella For One Thing

It will never happen, but if I could ask the new CEO one thing, I would ask for quality. It’s a small word packed with big meaning. There are three points where I see problems with Microsoft products across the entire portfolio:

• Simplicity: If there is one thing that Steve Jobs did for Apple, it was that he made their products easy to pick up and use – not just in isolation, but together (with the exception of the increasingly awful iTunes). The phrase “it just works” is true. It’s not the same with Microsoft products. Xbox and Windows Home Server should have “just worked,” but I found them to be a mess: My Roku teamed with a PC via Plex is much more reliable and trouble-free. Consumer products and services must “just work” to be embraced. There are just too many more-embedded alternatives available now.
• Testing: Product reliability has taken a huge slide in recent years. There are many reasons for this, which I don’t have time to go into here. Notably, Nadella’s Server and Tools division is not innocent in this, which is worrying.
• Completion: How many Microsoft products ship before being complete? This isn’t just a features thing (which I don’t want to underplay), but it’s also availability thing. Take Zune for example: When it was for sale, you couldn’t even browse the website outside of the United States. Features of Bing and Windows Phone only work in a few countries. Surface has a limited distribution in the retail channel that damages sales and pipeline prediction. It seems that Microsoft never learns, while Apple and Google continue to profit by being available.

It is going to be some time before we can judge the success of Satya Nadella as the new CEO of Microsoft. I am choosing to be cautiously optimistic. He has stressed that software, Microsoft’s strength, is a key to their future. This is good. But I’m also wary that Gates and Ballmer are still strong voices on a weak board, and Nadella was the leader of a division where quality has slipped. Only time will tell! I wish Satya Nadella all the best, even if he is a fan of the accursed Seattle Seahawks.