Satya Nadella brought Microsoft back from the brink of irrelevance
Satya Nadella, chief executive of Microsoft Corp., has earned a unique place among the tech barons who preside over today’s digital landscape.
The growing wealth and power of Big Tech over the last decade has been a defining feature of modern capitalism. Yet even judged by the standards of most of his peers, Nadella stands out.
By the end of November, the total return generated for Microsoft shareholders during his near-six year tenure passed $1 trillion. Contrast that with the moment when he took over as only the third CEO in Microsoft’s history, and the software company looked like it might be on the fast track to technological irrelevance.
This stunning exercise in wealth creation has occurred at a time when the purpose and power of large companies have come under more scrutiny than at any other time in a century. The single-minded pursuit of shareholder value is in question, and politicians and regulators are showing a new appetite for challenging the dominant companies of the age — particularly in tech.
So it is notable that Nadella has put Microsoft back at the top of the tech heap without attracting the resentment and anxiety provoked by some other tech leaders — or, for that matter, Microsoft’s own former self. The software company was once considered to be the model of the corporate bully, using its dominance over PC software to hold sway over the tech world.
The equanimity that has accompanied its recent rise is a testament to the new purpose at the heart of the company, as well as a corporate culture that reflects the personal qualities of a chief executive more given to humility than the intellectual arrogance the company was once known for.
It is still far too early to judge the impact of the new Microsoft that Nadella has been building. With control of one of the handful of cloud computing platforms that stand to dominate tech’s next phase, it is likely to wield significant influence over the future of business and society, whether for good or ill.
Nadella himself is well aware of the risks and claims to have set parameters for his company that will ensure that its impact on the world is benign. At a time when the tech industry’s reputation is moving in inverse proportion to its power, he is also keen to distance himself from the rest of the pack.
“There is no such thing as Big Tech anymore,” he declares, a reference to what he claims are key differences in business models between the leading tech companies that have put them on diverging paths. Proving that Microsoft has truly changed its ways and become a new type of tech giant will be the ultimate test.
One mark of Nadella’s success in 2019 has been how seldom his company has been in the headlines. With a focus on selling technology to businesses more than consumers, it operates largely behind the scenes, though it does reach consumers through the Bing search engine and email service, the Xbox games console and tailored versions of its PC software.
There are still plenty of controversies to navigate, from the Redmond, Wash., company’s tussles with the U.S. government over access to personal data hosted on its servers, to the housing shortages and other growing pains caused by its expansion in the Seattle area. Early in the year, it set aside $500 million to support more affordable housing in its home region, preempting similar moves by other Big Tech companies.
Wall Street’s growing confidence in the Nadella revival at Microsoft brought a more than 50% advance in its share price over the course of 2019, nearly twice the increase of the wider stock market. That took its market capitalization past $1 trillion for the first time, and a fifth of the way to a second trillion.
By mid-December, the increase in value on Nadella’s watch had stretched to $850 billion. Add the $150 billion of stock buybacks and dividends paid out over the same period, and the total shareholder returns generated under his tenure now reach into 13 digits.
That is still not as much as Tim Cook, his counterpart at Apple Inc., who has clocked up $1.27 trillion in shareholder value in eight years (reflecting an $870-billion advance in Apple’s stock market value over that period, along with nearly $400 billion in buybacks and dividends). But while Cook has proved himself the operational genius capable of fulfilling the potential of the company built by Steve Jobs, Nadella’s record has depended on engineering a more fundamental corporate revival.
“He brought in a new culture, a new enthusiasm,” says Michael Cusumano, a management professor at MIT. “Microsoft became an exciting place to work again.”
When Nadella took over, Microsoft was in danger of having missed almost every important new technology trend since the turn of the century. An expensive pursuit of Google in the search market had come up short, and social networking had passed it by entirely. Attempts to catch up with Apple and Google in smartphones came to nothing: One of Nadella’s first acts was to shut down the Nokia mobile business Microsoft had bought in a last-ditch gamble. And in cloud computing, a late start left it far behind Amazon.com Inc.
At the root of the problem was Microsoft’s addiction to the profits churned out by its PC operating system. The effort to keep Windows at the center of the computing universe handicapped engineers, hampering efforts to break into mobile and cloud computing.
Nadella responded by taking Microsoft back to its roots, looking to a period before Windows when its software tools were used by other companies to build their own technology.
“That fundamental notion that we build tools, build platforms so that others can build more technology, I think is more relevant, more needed in 2019 than it was in 1975,” he says.
At age 46 when he took over, the new chief was only 11 years younger than co-founder Bill Gates. According to MIT’s Cusumano, though, that was enough to free him from the company’s old dogmas: “He’s the next generation — he’s really part of the internet generation.”
As it chases Amazon in cloud computing, Microsoft was recently awarded a landmark U.S. Defense Department cloud computing contract worth up to $10 billion. Amazon, the favorite to win the work, has sued the Pentagon, claiming it lost the work because of political bias. And working with certain divisions of the U.S. government, including the military, has pitted Nadella against pockets of his employees who have publicly worried that their work would be used to kill or abuse people. But the fact that Microsoft was deemed capable of taking on the cloud computing project, even though it still lacks all the security clearances required, is a sign of the technical capabilities and massive new cloud infrastructure that Microsoft has amassed under Nadella.
Microsoft’s board did not turn straight to Nadella when it came to looking for a replacement for Steve Ballmer, instead pursuing a number of potential outsiders to fill the gap. Yet his undramatic elevation to the job in early 2014 was in keeping with a rise characterized by technical vision and quiet assurance.
Raised in Hyderabad, the future Microsoft boss failed an entrance exam to the prestigious Indian Institute of Technology but did earn an electrical engineering degree at Mangalore University before moving to the United States to the University of Wisconsin.
His first assignment after joining Microsoft in 1992 was to work on Windows. But his rise inside the company was defined by a new technology era. He made his name running the search engine Bing — an also-ran against Google, but still a lesson for Microsoft in how to build and run services that reach massive online audiences. He later took on Azure, the company’s nascent cloud computing platform.
In a company defined by intense rivalries, naked displays of ambition and cutthroat competition, Nadella’s unassuming and collaborative style stood out. It has been central to the new culture he has tried to bring to the company.
Empathy is a quality he prizes highly and tries to instill in Microsoft’s staff. He attributes his own to the experience of a first son who was born with cerebral palsy. It led to years of personal frustration, he has said, before he learned to be less self-centered about it.
He has promoted a new outlook for Microsoft workers, based on a “growth mind-set” that would involve constantly being open to learning and new ideas, rather than the “fixed mind-set” of the past — concepts taken from psychologist Carol Dweck. And he worked to break down silos, instead championing a “One Microsoft” approach that would unify the company.
“In the old days, this was the most internally competitive culture I have ever seen — everyone was fighting for their lives,” says Margaret Heffernan, a software entrepreneur who has worked on management issues at Microsoft. “The culture has changed radically.”
Nadella’s use of language has been key, Heffernan says. For people outside the tech industry, his use of jargon can seem stilted. But for those inside the company, simple messages, frequently repeated, have helped to cement the new behaviors.
The results are not always elegant.
“We have set aside some of our classic know-it-all behavior to at least start the journey, culturally, to say, ‘We’d better become learn-it-alls,’ ” the Microsoft chief says. He calls this adjustment “a hard thing,” given the company’s previous culture.
Peggy Johnson, an early hire to Nadella’s top management group, credits him with an unusual “consistency of message.” That has turned what might have been merely lip-service in another company into an engine for real cultural change. After spending an entire senior management meeting discussing diversity and inclusion, she says, Nadella went on to repeat the same themes exhaustively: “We never stopped talking about it. It wasn’t just a box-check.”
To some extent, the kinder, gentler Microsoft reflects a new era in tech in which the company can no longer go it alone and alliances in areas such as cloud have become more important.
“Satya realised that if we didn’t partner, we wouldn’t grow,” Johnson says.
Nadella himself is careful not to declare victory in the cultural overhaul. After all — as he admits — to do so would itself show the company had slipped back into a fixed mind-set. Instead, he says: “From ancient Greece to modern Silicon Valley, the only thing that gets in the way of continued success and relevance, and impact, is hubris.”
The way Microsoft exerts its resurgent power in the tech world will help to determine how Nadella is judged. That has made its battle with messaging upstart Slack Technologies Inc. a test of how much the company, once known for its highly aggressive tactics, has really changed.
Slack pulled off a successful stock market listing this year. But its shares have fallen back nearly 50% as investors have worried about a full-on attack from Microsoft, which has been promoting a service called Teams.
Slack CEO Stewart Butterfield complains about the way Microsoft has been throwing its weight around, accusing it of being “unsporting.” Teams has been included free of charge with Microsoft’s Office 365 service — a “bundling” technique that once got the company in hot water with regulators when used in connection with Windows. Butterfield says Microsoft keeps putting Teams in front of its Office users, even when they don’t want it: “If you disable it, they enable it for you. If you uninstall it, they reinstall it for you,” he says.
But he adds, grudgingly, of Microsoft’s tactics: “I would probably do the same thing myself.” And he also applauds Nadella’s transformation of the company: “I think he’s made a lot of good strategy choices.”
The Microsoft boss gives Butterfield’s complaints short shrift.
“The question he should ask himself is whether Slack would even exist if it was not for Windows, and his ability to distribute on Windows without Microsoft getting in the way,” Nadella says. Just because Microsoft competes on a particular service, he adds, it has not shut off access to its software platforms: “That doesn’t mean we’re locking up one layer to somehow disadvantage him.”
This, according to Nadella, highlights an important difference between Microsoft and other Big Tech members. It does not act as a gatekeeper, instead allowing developers like Slack to reach the Windows audience “without any tax collection.” He adds that his company’s rivals benefit from being able to freely reach their customers using Microsoft’s platforms: “Google makes more money on Windows than all of Microsoft. Tell me another platform where that will be true: none.”
He goes on to contrast the role of companies such as Microsoft with that of aggregators, which dominate a market by amassing far more content than rivals — like Google and Facebook Inc. in online media, or Amazon in e-commerce. Referring to how companies like these work, he says: “You commoditize supply. You’re even sort of commoditizing the demand, in some ways. That’s a very different dynamic.”
Nadella’s efforts to paint Microsoft as the responsible face of tech is already some years in the making. He was earlier than Silicon Valley rivals to warn of the potential pitfalls of AI — and also earlier to codify possible responses. Under Microsoft President Brad Smith, Microsoft has championed a “digital Geneva Convention,” setting out terms for managing future cyber conflicts.
“They’re taking a much more thoughtful approach to tech,” Heffernan says. “There’s a tremendous opportunity for someone to take these issues up and make themselves the good guys of tech.”
Ultimately, it will be Microsoft’s success as a platform supporting a wider range of digital activity that will determine its value — both to shareholders and to society at large. According to Nadella, regulators around the world will not stand in its way, no matter how large the company gets, as long as it generates more wealth for people who rely on its services than it does for itself.
“We have to create a local surplus in every country,” he says. “Bigness by itself is not a problem, as long as the surplus around it is broad. I feel like we’re on the right side of history.”
© The Financial Times Ltd. 2019. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied or modified in any way.
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