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What Lies Ahead for Microsoft's New CEO Satya Nadella?

By John Casteele – Feb 5, 2014 at 11:01AM

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Satya Nadella has been confirmed as the new CEO of Microsoft. While it remains to be seen how his time as CEO will differ from Steve Ballmer, there are already a few hints as to how he might tackle some of the problems that the company now faces.

It's official: former cloud and enterprise head Satya Nadella has been selected as the new CEO of Microsoft (MSFT -0.59%). This doesn't come as much of a surprise if you followed the rumors that began circulating last week, even though it was previously thought that Microsoft's next CEO would come from outside of the company. With 22 years of experience, Nadella certainly knows Microsoft's company culture well.

Microsoft currently faces stagnation in its core PC market, poor acceptance of its Windows 8 operating system, apparent "second best" status in the current gaming console war, and minimal market share for its tablet and smartphone offerings. Nadella will have to face all of these issues and try to come up with a winning strategy that catapults the company back to its competitive best. Is he up to the task, or will Microsoft continue along the same path it's been following under Steve Ballmer?

No respect for tradition
In a letter to Microsoft's employees, Nadella states that "our industry does not respect tradition — it only respects innovation. This is a critical time for the industry and for Microsoft. Make no mistake, we are headed for greater places — as technology evolves and we evolve with and ahead of it." One of Microsoft's biggest problems in recent years has been its reliance on adding to what has come before, churning out the next Windows or Office instead of branching out into new directions.

Microsoft R&D creates wonderful concepts, but few of them make it to production and the company is left behind while competitors such as Apple (AAPL -2.12%) and Google (GOOGL -0.90%) are viewed as innovators by releasing products such as the iPhone, iPad, and Google Glass. Would the Courier tablet, for example, have been a success if it had made it to release?

There's no way of knowing how the Courier would have been received, of course, because it didn't fit in well enough with the company's existing core products and was killed early in 2010. By the time the Surface tablet and third-party Windows tablets reached the market in 2012, Apple's iOS and Google's Android had already had years to establish customer bases in the tablet market.

The Gates factor
After stepping down as CEO in 2008, Microsoft co-founder Bill Gates remained with the company as chairman of the board. Most of his time was spent focusing on the Bill and Melinda Gates Foundation, but his influence was still felt at Microsoft during the Ballmer years. Even during the recent CEO search, some potential candidates were reportedly worried that he would second guess their every move and his presence in the background would make him somewhat of a "shadow CEO." Nadella has no such worries, however.

Nadella has asked Gates to take a more active role with the company again, acting as a "Technology Advisor" to assist with the development of new technologies. Given that Gates will reportedly work one day a week, the role will likely have him putting a critical eye to new products that are under development instead of working directly on products himself. This could be a positive for the company, prompting teams to put more effort into developing the "must-have" qualities of their projects before they face the "Gates test." Products with no clear purpose or that just seem like more of the same will have a much harder time winning Gates' approval.

A tighter focus
One thing that may be different about Nadella's Microsoft is that it will likely have a stronger focus than the company has had in recent years. While Microsoft has been branching out in different directions to try and find success in different niches, Nadella's introductory letter makes it clear that he sees the company as a software and services company first and foremost. Particular focus will be placed on mobile platforms (including Windows Phone) and cloud-based services (which could include Office, given how closely the Office 365 subscription service is aligned with SkyDrive.)

There had already been some speculation that certain segments such as Xbox might be spun off from the company, and Nadella's selection has only intensified that. He made no specific mention of the console or gaming at all in his introductory email, but he did mention that we live in a "software-focused" and "mobile and cloud-first" world. The Surface and mobile hardware division purchased from Nokia (NOK 0.85%) last year might eventually find themselves being spun off as well, though they would need to be made profitable first.

The new Microsoft
Though it's still early, the signs point to Nadella's Microsoft being significantly different than Ballmer's. Nadella seems to have a vision for the company, and his statements and the return of Gates as Technology Advisor hint that his vision involves leaving behind the Microsoft of the past and focusing on new products that accent the company's existing software mainstays. With rumor hinting that we'll get the first info on "Threshold" (which purportedly is being developed as Windows 9) at the Build developer's conference in April, we should be seeing our first glimpses of Nadella's new Microsoft sooner rather than later.

John Casteele owns shares of Apple, Google, Microsoft, and Nokia. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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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