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

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.

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  • Report this Comment On July 11, 2014, at 3:14 PM, marv08 wrote:

    Without judging which approach is better here, it confirms something many people pointed out last year: having an outgoing CEO define a restructuring and making major acquisitions is nonsensical.

    I am normally not that nosy, but I would die to see a spreadsheet summing up all cost caused by Ballmer's plans (meetings, marketing and branding strategies, consultants, HR game plans etc ad inf) that are now nothing more than food for the shredder.

    I am still undecided about Nadella, but so far he has not shared anything that can be called a strategy, and certainly not a single number defining a goal for anything. Releasing the Surface 3 without announcing at least a timeline for a "touch-first" version of Office fir it, while the iOS version is already available and the Android version about ready, is a confusing signal at best. On the other hand, showing off combined management tools for PCs and mobile devices (including third party stuff) was a good move. If they can deliver that in good quality, Blackberry and third party MDM providers will be left to smell their exhaust pipe in that segment.

    The clearest indicator for what they will target will (IMHO) be their plans for the 30k new Nokia employees. If more than 20% of them still have a job with MS in 24 months, it will be a miracle.

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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