Satya Nadella's tough job

Business Standard Editorial Comment  |  New Delhi  February 5

Why Microsoft's new CEO might be the right pick

The announcement that Satya Nadella will take over as chief executive officer of the software behemoth Microsoft brings to an end the Steve Ballmer era at the company, one marked by false starts and apparently good ideas that went nowhere. In the years since Bill Gates gave up control, the company has continued to be profitable, but is widely seen as having lost its technological edge. Yes, its profit per unit of sales is double that of consumer-facing Google, and also double that of corporate systems giant IBM. Late in January, Microsoft announced its results for Mr Ballmer's last quarter in charge, and pleasantly surprised analysts with its most profitable quarter in history. Mr Nadella, thus, will inherit a company in robust financial health, a testament to Mr Ballmer's skills as a manager.

But Microsoft's outwardly rosy appearance conceals major problems. Most of its profitability stems from good work with corporate customers. In the last quarter, overall commercial revenue grew 10 per cent year on year, and comprised $12.67 billion of a total revenue of $24.52 billion. Much of the remainder, too, consisted of "legacy" revenue - income from customers finally upgrading from the old Windows XP operating system to one of the Windows 8 versions. The problem with this is that Microsoft has been consistently unable, under Mr Ballmer, to woo consumers rather than enterprises. Why is this dangerous? Because, as the story of the iPhone and BlackBerry shows, in the end enterprises respond to what their employees prefer. It may take time, but it happens. Give up the technological coolness that appeals to consumers, and eventually a corporate-focused business can also wither away.

Mr Nadella's first priority, thus, is likely to be to restore some sense that Microsoft has a technological vision. In a world in which control of hardware is increasingly important for a software company, the question is whether the strategies of the Ballmer era will be jettisoned, or whether they will be tweaked. A PC-first approach when global computer sales fell 10 per cent in 2013 is certainly too risky. But Microsoft's elegant Surface tablet was - perhaps because it was priced too high - such a failure that the company had to take an embarrassing write-down on its unsold inventory in 2013. Meanwhile, its high-profile purchase of Nokia has not yet paid off. Mr Nadella will need to make Windows Mobile appealing enough to consumers and thus to other phone manufacturers that many are willing to switch. True, Windows Mobile has made decent inroads in low-cost markets and even in some parts of Europe. But unless it matches more of the features and applications available on Google's Android and Apple's iOS ecosystems, Microsoft's mobile business will continue to struggle.

Mr Nadella comes to this task with certain advantages. Most obviously, he has worked on some of Microsoft's more cutting-edge technological services in the past. Cloud computing, Mr Nadella's bailiwick, has done well under Mr Ballmer, with millions of people subscribing to the cloud-based Office 365. Windows Azure, which allows the hosting of applications in the cloud, has also seen excellent growth. And Mr Nadella, unlike Mr Ballmer, is a man with street cred among techies. If it comes down to inspiring developers to work with Microsoft - crucial when it comes to creating applications ecosystems, for one, as well as pushing programmers into creating content for newer versions and interfaces of Windows - then Mr Nadella might be the man to do it.