Microsoft Corporation: Satya Nadella Backtracks on Steve Ballmer's Vision

Once upon a time, Steve Ballmer wanted Microsoft to become a devices-and-services company. New CEO Satya Nadella has a different idea in mind.

Jul 11, 2014 at 11:00AM

Msft Core

Source: Microsoft.

Ex-Microsoft (NASDAQ:MSFT) CEO Steve Ballmer had a vision. It was one where Microsoft transitioned to become a powerful "devices-and-services" company. That was a clear attempt to compete more effectively with Apple (NASDAQ:AAPL), which specializes in devices, and Google, whose forte is services.

At the time, operating segments that could be considered as devices or services comprised just 17% of revenue, underscoring how much of a transition this would be for the software giant. Just a few months later, Ballmer would implement a major restructuring in line with this vision, complete with reporting changes with how Microsoft's results are presented to investors.

Current CEO Satya Nadella has just issued an open letter to all Microsoft employees, and the times are a-changin.

If Ballmer can't do it, Nadella can
While devices and services will certainly be crucial to Microsoft's future, Nadella is now putting his own mark on the company's strategic direction. Ballmer's push to become a devices-and-services company likely stemmed from his hatred of Apple. Ballmer wanted to beat Apple at its own game so badly that it's possible he lost sight of where Microsoft's core strengths are: productivity in the enterprise. Nadella wants to fall back on those strengths.

More recently, we have described ourselves as a "devices and services" company. While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy.

At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

Of course, competing with Apple and Google is inevitable, but at the same time Microsoft should cater to its advantages. Office remains the absolute gold standard in productivity software, and the business segment was by far the largest generator of operating income under the old reporting structure. It's harder to tell now, since Microsoft's reporting is no longer organized by product.

There are four operative words in how Nadella describes Microsoft's core: productivity, platform, mobile, and cloud. Only one of those (platform) necessitates direct competition with Apple and Google. The other three (productivity, mobile, and cloud) have more room for cross-platform strategies when necessary. Prioritizing "every person and every organization on the planet" suggests that Microsoft is including users on rival platforms.

By focusing more on making cloud-based productivity offerings available everywhere, Nadella seems to recognize that there are some situations where Microsoft's interests are aligned with rivals. Office for iPad is a perfect example of this. While Office for iPad technically strengthens Apple's tablet, it also gives Microsoft a whole new avenue to grow Office 365 subscriptions and solidifies Office's dominance.

This type of open-mindedness is precisely why investors are excited about Satya Nadella. Shares have gained 15% since he became CEO in February, and are up 30% since Ballmer announced his retirement last August. That optimism is not misplaced.

Can Microsoft compete with the iWatch?
Apple recently recruited a secret-development Dream Team to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out... and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends and owns shares of Apple and Google (A and C shares). It owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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