The Empire Reboots
Microsoft founder and former C.E.O Bill Gates and newly appointed C.E.O. Satya Nadella, at Microsoft’s campus, in Redmond, Washington.
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n some ways, Bill Gates, Microsoft’s founder and first C.E.O., and Satya Nadella, a longtime employee who last February became the company’s third C.E.O., are alike. They are both engineers, and they are both businessmen. In the language of the Myers-Briggs personality test, designed to measure how people perceive the world and make decisions, they both strike others as NTs, meaning they are highly rational seekers of knowledge. So perhaps they’ll work together seamlessly to run Microsoft, helping it meet the huge challenges it now faces. Gates devoted most of his time and energy during the last six years to his $40 billion philanthropic effort, the Bill & Melinda Gates Foundation, but when Microsoft announced Nadella’ s appointment on February 4, he decided to devote 30 percent of his time to Microsoft.
There’s a sense in the world outside Redmond, Washington, that Microsoft’s best days are behind it, that the sprawling colossus, which employs more than 100,000 people, doesn’t know what it is, or even what it wants to be. Gates and Nadella are adamant that’s not the case, and they are both adept at the sort of big-picture corporate-speak designed to persuade people that the company not only has its act together but also has a vision. In their view, this new world of unlimited computing power, where your devices can connect you anytime, anywhere, should rightfully belong to Microsoft. They even have a catchphrase: “Re-inventing productivity.”
When I ask them what excites them most, Nadella looks at Gates. “You want me to start?” “Sure,” Gates replies. This is, says Nadella, “a great world. It’s not lost on a few other people who are capable of exploiting that world. But the thing . . . what is scarce in all of this abundance is human attention. And whoever does the best job of building the right software experiences to give both organizations and individuals time back so that they can get more out of their time, that’s the core of this company—that’s the soul. That’s what Bill started this company with. That’s the Office franchise. That’s the Windows franchise. We have to re-invent them. . . . That’s where this notion of re-inventing productivity comes from.”
“Is software the most exciting industry in the world?,” Gates says, taking up the thread. “Absolutely. You know, when it comes to vision, speech, handwriting, screens that are going to be pervasive, that are going to let you navigate information in rich new ways, in ways that you understand your customer, what’s going on with your products. . . . We’re not even a third of the way towards empowering workers even to the dream that goes back to the start of the company.” He adds, “The opportunity is pretty incredible. And the original idea of having great software people and broad software products and Office being the primary tool that people look to across all these devices, that’ s as true today and as strong as ever.”
“The way I think about success is our relevance,” says Nadella.
Relevance, however, is exactly what Microsoft doesn’t have, according to its critics. “The Irrelevance of Microsoft” is actually the title of a blog post by an analyst named Benedict Evans, who works at the Silicon Valley venture-capital firm Andreessen Horowitz. On his blog, Evans pointed out that Microsoft’s share of all computing devices that we use to connect to the Internet, including P.C.’s, phones, and tablets, has plunged from 90 percent in 2009 to just around 20 percent today. This staggering drop occurred not because Microsoft lost ground in personal computers, on which its software still dominates, but rather because it has failed to adapt its products to smartphones, where all the growth is, and tablets. Even Microsoft’s new chairman of the board, a former IBM executive named John Thompson, told Fortune last winter that “there are some attributes to Microsoft today that do look vaguely like IBM circa 1990.” That is a particularly wounding comparison, because, as any tech person knows, IBM is the company that two decades ago an aggressive young Microsoft helped topple from the pinnacle of great technology companies.
COURTESY OF THE MICROSOFT ARCHIVES.
Around three-quarters of Microsoft’s profits come from the two fabulously successful products on which the company was built: the Windows operating system, which essentially makes personal computers run, and Office, the suite of applications that includes Word, Excel, and PowerPoint. Financially speaking, Microsoft is still extraordinarily powerful. In the last 12 months the company reported sales of $86.83 billion and earnings of $22.07 billion; it has $85.7 billion of cash on its balance sheet. But the company is facing a confluence of threats that is all the more staggering given Microsoft’s sheer size. Competitors such as Google and Apple have upended Microsoft’s business model, making it unclear where Windows will fit in the world, and even challenging Office. In the Valley, there are two sayings that everyone regards as truth. One is that profits follow relevance. The other is that there’s a difference between strategic position and financial position. “It’s easy to be in denial and think the financials reflect the current reality,” says a close observer of technology firms. “They do not.”
Many people blame Microsoft’s predicament on Steve Ballmer, the big, bald, manic, fist-pumping sales guy who was Bill Gates’s longtime best friend and anointed successor, becoming C.E.O. in 2000. His contentious tenure ended more abruptly than most people expected when he stepped down last February, after announcing he would do so in August 2013. After a five-month search for a new C.E.O., which Fortune called a “textbook example of how not to do CEO succession,” and which at first focused on candidates who didn’t work inside the company, Nadella, who has spent 22 years at Microsoft, was chosen. Until then, his name was barely known in the outside world. As one former Microsoft executive puts it, “He was flying commercial a year ago!”
Not the least of the board’s problems in finding a new C.E.O. was that there weren’t a lot of outsiders who wanted the job. Gates and Ballmer are both aggressive personalities. They stopped speaking to each other as a result of the bad blood surrounding Ballmer’s resignation. But both were then still sitting on the board, ready to second-guess each other and, perhaps, the new C.E.O.’s decisions.
The balance of power between Gates and Ballmer is not as obvious as it may seem. At Gates’s current clip of stock sales he will be out of Microsoft by the end of the decade. Meanwhile, Ballmer has sold very rarely, and so the consigliere now owns more of the company than the founder. Indeed, Ballmer’s 333 million shares, worth some $15 billion, make him Microsoft’s largest individual shareholder, with a 4 percent stake.
In July, Ballmer announced his $2 billion purchase of the Los Angeles Clippers basketball team from the embattled Donald Sterling; in August he abruptly announced his retirement from Microsoft’s board, citing his “multitude of new commitments.” These days Ballmer, the man who once referred to Microsoft as his “fourth child,” is working out of a 40th-floor condominium some 20 minutes from the sprawling campus he once presided over, having meetings with basketball greats. “I’m kind of moving on,” he says. It will make Nadella’s job a little bit easier.
But being Microsoft’s C.E.O. may still be the toughest job in business.
The Gospel According to Ballmer
Ballmer, as you might expect, has his own way of scoring his tenure, and it is not the Valley’s way. He was an applied-math-and-economics major at Harvard, and he likes to quantify things. In his new office he pulls out a chart that tracks the profits of the top 25 technology companies from 2008 through 2013. Back in 2008, Microsoft was the most profitable company, earning 15 percent of all the profits generated. In 2013 it was the second-most-profitable company (after Apple), earning 12 percent of all the profits generated. In technology “it’s easy to glorify the products produced and the reputations won, not the money made,” he says. Indeed, under Ballmer, Microsoft’s profits grew almost threefold, to $21.8 billion.
“Steve will never get the credit he’s due,” a former executive says. “He was brilliant—brilliant—in finding ways to harvest more money from Windows and Office.”
But Ballmer is willing to acknowledge his mistakes. “I probably under-shifted to one or two things, and I feel bad about that. I don’t feel bad about social networking. Good for Facebook, great, but I don’t feel bad [that we missed it]. I feel a little differently about search, and a little differently about phones. We should have done better. I feel worse about phones than I do about search.”
What Ballmer calls his “biggest mistake,” though, is neither phones nor search. It was a software project called Longhorn, and it happened early in his tenure. Longhorn, which Microsoft began working on in 2000, was supposed to be the next generation of Windows. Gates, who served as Microsoft’s chief software architect from when he stepped down as C.E.O., in 2000, until 2006, led the project. “It was a foolishly ambitious project, more ambitious than could be built,” says a former Microsoft executive. Gates is a big-picture technologist, not a product person—and he couldn’t or wouldn’t listen to the engineers who were telling him that what he wanted couldn’t be done. Worse, Longhorn basically failed just as Apple released Tiger, which did what Longhorn aspired to do. Microsoft had to start over from scratch three years into it. Renamed “Vista,” the operating system was released late, lacked key features, and had many failings that enraged customers.
“The worst work I did was from 2001 to 2004,” says Ballmer. “And the company paid a price for bad work. I put the A-team resources on Longhorn, not on phones or browsers. All our resources were tied up on the wrong thing.” Who shoulders the blame is a matter of debate, but the fact is neither Ballmer nor Gates stopped the failure from happening, even as almost everyone else saw it coming.
Ballmer likes to note that the lines of authority were not clear, which is part of what makes thinking about his tenure complicated: “Before I became C.E.O., I felt pretty completely responsible for the company,” Ballmer says. “And I didn’t feel completely in charge until Bill left [entirely in 2008].” It is a well-known part of Microsoft history that Ballmer and Gates fought bitterly during the first year of transition. Among other things, when an engineer was displeased with Ballmer, he’d go to Gates. Some Microsoft employees from that era refer to Ballmer and Gates as “Mom and Dad,” and recall that no one knew which parent was in charge.
“He didn’t know how to let me be C.E.O., and I didn’t know how to do it,” says Ballmer. At the urging of both their wives and Microsoft’s board of directors, the two men patched things up at what Ballmer calls a “really awkward, terrible dinner” at the Bellevue Club in early 2001. It was like My Dinner with Andre, Ballmer says, referring to the 1981 film in which two old friends slowly realize they have radically different worldviews. They officially made up, and Gates turned the company over to Ballmer. “I’m not going to need him for anything,” Ballmer told The Wall Street Journal when Gates finally left completely. “Use him, yes, need him, no.”
Inside Microsoft, there isn’t one simple take on Ballmer’s tenure, or as a former executive tells me, “In some ways the way people think about Bill and Steve is almost a Rorschach test.” For those who romanticize the Gates era, Microsoft’s current predicament will always be Ballmer’s fault. For others, it’s not so clear. “He left Steve holding a big bag of shit,” the former executive says of Gates. In the year Ballmer officially took over, Microsoft was found to be a predatory monopolist by the U.S. government and was ordered to split into two; the cost of that to Gates and his company can never be calculated. In addition, the dotcom bubble had burst, causing Microsoft stock to collapse, which resulted in a simmering tension between longtime employees, whom the company had made rich, and newer ones, who had missed the gravy train.
There is one thing everyone agrees on, which is Ballmer’s genuine love for Microsoft. “He cares more about Microsoft than anyone in the world, including Bill,” says a former executive. Some people found it inspiring, but perhaps, in business, it is possible to care too much. Certainly there were also disadvantages to Ballmer’s approach. “I am a salesman by nature: I want you to actually agree with me. Don’t just come on the voyage with me. Believe,” he told a crowd at Oxford University last winter, his voice rising to a bellow. “Oh, you don’t believe? I’m going to keep trying to get you to believe.”
“Emotionally volatile” is a not uncommon description of Ballmer. His passion can tip over into what a former executive calls “religious zealotry.” Challenge was betrayal. “His view was that anyone in the company who used the iPhone was a traitor,” says this person. “His dad worked for Ford, and that meant you had Ford in your garage.” (To this day, Ballmer drives a Ford Lincoln.) And Ballmer, partly due to his sheer physical presence, is intimidating when he is not pleased. People tended to acquiesce rather than risk his wrath. One person even likens the result of what he calls “Ballmer’s ability to drive sub-optimal human behavior” to the state of affairs in Afghanistan.
Ballmer might be a complicated character, but he has nothing on Gates, whose contradictions have long fascinated Microsoft-watchers. He is someone who has no problem humiliating individuals—he might not even notice—but who genuinely cares deeply about entire populations and is deeply loyal. He is generous in the biggest ways imaginable, and yet in small things, like picking up a lunch tab, he can be shockingly cheap. He can’t make small talk and can come across as totally lacking in E.Q. “The rules of human life that allow you to get along are not complicated,” says one person who knows Gates. “He could write a book on it, but he can’t do it!”
But he combines that with flashes of insight and humor that leave some wondering whether he can’t do it or simply chooses not to, or both. His most pronounced characteristic shouldn’t be simply labeled a competitive streak, because it is really a fierce, deep need to win. The dislike it bred among his peers in the industry is well known—“Silicon Bully” was the title of an infamous magazine story about him. And yet he left Microsoft for the philanthropic world, where there was no one to bully, only intractable problems to solve.
Today, the public Bill Gates seems polished, without many traces of the badly groomed enfant terrible of Microsoft’s early days, who would rock when he spoke and eviscerate an underling who gave him an answer he didn’t like. Many people credit his wife, Melinda, for the improvements. “Bill is smart enough to construct himself as a human being with Melinda’s help,” says someone who has known him for decades.
But Gates, though he tries, still can’t always maintain the construct privately. Admirers say that this is only to be expected from someone who has had no adult supervision since his teenage years, and who, because of his sheer genius, has never had to play by the rules most of us are forced to learn. A loose generalization might be that those who see Gates in situations where he is not the one in control are less forgiving. “He was so publicly and so early in life defined as the brilliant guy,” says a person who has observed him. “Anything that threatens that, he becomes narcissistic and defensive.” Or as another person puts it, “He throws hissy fits when he doesn’t get his way.”
Microsoft’s culture was confrontational from the start. But what worked so well when the company was young and small carried the seeds of future problems. About both Gates and Ballmer, a former executive says, “Their passion too often crossed the line into abuse. That’s terrible when you become the role model that others are trying to emulate. Maybe Gates and Ballmer could get away with it. But when people three levels down are acting that way, it is not pleasant.”
Many people liken the relationship between Ballmer and Gates to a marriage. “It is like couples that get divorced and hook up again,” says someone who knows both men. “Trying to explain the relationship from the outside is a waste of chronology.”
At the root of Gates and Ballmer’s friendship, famously begun when both were Harvard students, was a deep respect for each other’s intelligence. “I have a high-bandwidth relation with Steve,” Gates would often say, which was his highest praise, while Ballmer has said that he dropped out of Stanford Business School after one year to join Gates because he was “the smartest guy I knew.” Even today, Ballmer says that Gates has “more C.P.U. and more storage than anyone I know.”
Ballmer was Gates’s best man when he married Melinda, in 1994, and, an early Microsoft executive says, in the old days, when Microsoft was run by a small executive council, there were a few people who rose to the status of first cousins—but the family was Bill and Steve. “Everyone else was a hired hand,” this person says. In 2006, Ballmer described the relationship in his own way to the Pittsburgh Post-Gazette. “I think brothers tend to argue a lot, and somehow they stay brothers and stay connected,” he said. “I think Bill and I have figured out how to do all of that.”
The Inside Story
No one will ever know for sure what would have happened to Microsoft if Gates had stuck around. But there is a special reverence accorded the founder that will never be accorded his successor, and even if Gates wouldn’t have been the solution, Ballmer became the problem. As the billions of dollars he invested in new ventures failed to show any return, even investors who thought Microsoft should be trying to keep up got increasingly dissatisfied. Then there was another set of investors, who wanted Microsoft to slim down and pay out its cash hoard to them. Ballmer, who likes to use the phrase “the tyranny of or” to describe the horror of being forced to choose between alternatives, wanted to preserve all his options. He wasn’t willing to give up on the idea that Microsoft could “build new muscle,” as he likes to put it, and catch the next wave, and he wasn’t about to tell investors what they wanted to hear. There was even a period when he refused to meet with them, and their dislike of him became visceral.
Ballmer often said that he wanted to stay as C.E.O. until his youngest son graduated from high school, in 2017. But he says today that that changed. “I always think more like a shareholder than a paid C.E.O.,” he says, pulling out his performance review from 2010, in which he told the board that his target departure date was “no less than three years, but no more than five”—in other words, between 2013 and 2015. “I had to have a few glasses of wine before I could hit send,” he admits. He says that he even began interviewing outside C.E.O. candidates at firms ranging from Amazon to Apple to Oracle. While Ballmer won’t give me names, another person who is familiar with events corroborates that the two had started looking. But there was a problem: they couldn’t find anyone.
At the same time, the pressure was building. The heavily hyped next iteration of Windows, Windows 8, which launched in 2012, was regarded as a flop. Microsoft’s second-largest shareholder, the powerful but behind-the-scenes mutual-fund giant Capital Group, was quietly agitating for change. ValueAct, a hedge fund that had taken a $2 billion stake in the company, wanted a board seat too. There was clearly a feeling that the board had been neutered for long enough. But there was no sign either inside or outside that change at the top was imminent.
Indeed, Ballmer seemed to have no intention of leaving when he announced a massive reorganization of the entire company in July 2013. Behind the scenes he had also begun negotiating an acquisition that was meant to transform Microsoft. He had become convinced that the company had to make hardware too. The reason why goes back to his chart. The two companies which have seen the greatest increases in the share of profits they take are Apple and Samsung, particularly Apple, whose share of the technology industry’s profits leapt from 7 percent in 2008 to 21 percent in 2013. To Ballmer, the message was clear, and so, in December 2012, he began talking to the Finnish smartphone-maker, Nokia, whose C.E.O., Stephen Elop, had worked at Microsoft. There was a defensive reason for the deal as well as an offensive one. Nokia was pretty much the only company left that was making Windows phones. If Nokia went under, what would happen to Microsoft’s phone business?
But on August 23, 2013, came the stunning announcement that Ballmer would retire. Unlike most big companies, which announce a new C.E.O. when the old one departs, Microsoft said it was just starting a major search for a new C.E.O. The story everywhere, from Wall Street to the Valley to Redmond, is that Gates told Ballmer to go, or as a former executive puts it, Ballmer “would be C.E.O. for as long as Gates supported him.”
But there is another version of the story. On the board, the Nokia acquisition, according to several sources, became increasingly controversial as the clock ticked. Ballmer told a friend that he wouldn’t have pursued it at all had the board not initially encouraged it, so he was surprised by the growing discord. At the same time he became utterly convinced that Microsoft had to buy Nokia. As he says today, “This is one you fall on your sword for.”
At the Microsoft board meeting in late June 2013, Ballmer announced he had a handshake deal with Nokia’s management to buy the company, pending the Microsoft board’s approval, according to a source close to the events. Ballmer thought he had it and left before the post-board-meeting dinner to attend his son’s middle-school graduation. When he came back the next day, he found that the board had pulled a coup: they informed him they weren’t doing the deal, and it wasn’t up for discussion. For Ballmer, it seems, the unforgivable thing was that Gates had been part of the coup, which Ballmer saw as the ultimate betrayal.
Ballmer erupted in a fit of rage. He told the board in no uncertain terms that if they didn’t approve the Nokia deal he was out. “That was my best idea,” he says today. “If we’re not going to do it, then you need to get someone else who will have the next big idea.”
The board told Ballmer they wanted him to stay, he says, and they did eventually agree to a slightly different version of the deal. In September, Microsoft announced it was buying Nokia’s devices-and-services business for $7.2 billion. Why? The board finally realized the downside: without Nokia, Microsoft was effectively done in the smartphone business. But, for Ballmer, the damage was done, in more ways than one. He now says it became clear to him that despite the lack of a new C.E.O. he couldn’t stay. Cultural change, he decided, required a change at the top, and, he says,“there was too much water under the bridge with this board.” The feeling was mutual. As a source close to Microsoft says, no one, including Gates, tried to stop him from quitting.
Now, what ranks among the tech world’s most famous partnerships, and a deep friendship, may be at an end. In an emotional good-bye to employees, a video of which was obtained by a tech Web site, the Verge, a crying Ballmer does his trademark high fives and fist pumps to the tune ofDirty Dancing’s “(I’ve Had) The Time of My Life.” He didn’t mention Gates. “Like all great romances, the last chapter hasn’t been written,” says someone who knows both men. Maybe it hasn’t—but now there’s nothing to force them back together.
The discord between Gates and Ballmer, both of whom were still on the board, did not make for a pleasant search for a new C.E.O., although, in truth, it might have been difficult anyway. Just consider the other ingredients: Disagreement over whether the new C.E.O. needed to be an engineer. Disagreement over whether or not an outsider was needed. A board that felt it had been in thrall to the former C.E.O.’s for far too long now wanting to exert its own control. A former C.E.O. who could not brook not being in control of what he still considers his company. And the incredible difficulty of finding a person who both could and would want to run Microsoft.
Initially, there was some consensus around Alan Mulally, then C.E.O. of Ford, who is regarded as a turnaround expert. But Mulally felt that he should not be required to go through a formal process of interviewing for the job, according to several sources, and the board began to have doubts. It wasn’t until January that Mulally formally announced that he would stay at Ford, but sources say he had been out of the running for a long time before that. The board had also been interested in Steve Mollenkopf, the chief operating officer of Qualcomm, but less than 24 hours after Bloomberg News reported that he was a candidate, Qualcomm responded by naming him its C.E.O. Another potential candidate was Paul Maritz, a former top Microsoft executive who had gone on to key jobs at other technology companies. But in ex-Microsoft circles, the story is that Maritz felt that Microsoft was too far behind in too many critical battles, and would have to slim down and make choices. When Gates disagreed, Maritz concluded he wouldn’t have the freedom to do what he wanted.
As the search wore on, the stress increased. “I’m not sure there was disagreement about any one thing,” says a close observer. “I think it got competitive . . . and Bill can’t stand losing. It makes him more unhappy not to win than anyone I’ve ever seen.” At one point, some on the board felt that a fellow board member, John Thompson, a former IBM executive and then C.E.O. of Symantec, wanted the job. Gates said, with some emotion, that he would not support Thompson, and that Nadella would be a better pick. (A source close to Microsoft says that Thompson never “put his hat in the ring.”) Among the internal candidates, Ballmer pushed for Kevin Turner, the former Walmart executive who is Microsoft’s C.O.O. and runs the sales force. But eventually Nadella emerged as the top internal candidate.
There were still some on the board who wanted to bring in an outsider. Hans Vestberg, the C.E.O. of the Swedish telecommunications company Ericsson, was under consideration—but Vestberg kept delaying meetings, and some on the board concluded that he wasn’t that interested in the job. At a meeting on January 19, the board finally decided on Nadella. In the end, “they all agreed on the one thing that mattered,” says a source close to the board.
When Microsoft announced on February 4 that Nadella would be the new C.E.O., the company also announced that Bill Gates would step down as chairman of the board. The new chair would be John Thompson. “He [Gates] used up his chips with these people” is how one close observer sums up the situation.
The funny thing is that Gates, who has been passionately committed to his foundation, didn’t step away from his former company. Instead he decided to step back in. Not for roughly one-third of his time, Gates says. “We say 30 percent,” he corrects. “He deeply believes he can bring something to Microsoft that no one else can,” says someone who knows him well.
Will Steve Ballmer go quietly? He did go, but it remains to be seen how quiet he’ll be. He says he has seven big things he’s doing, including learning Hebrew, getting in shape, figuring out his civic duties, running the Clippers—and managing his stake in Microsoft, which he says is 65 to 70 percent of his net worth. He has no intention of selling, partly out of loyalty and partly because he thinks that Microsoft is a good investment. “I want to be a good shareholder,” he says. “I’m not going to be active for the sake of being active, but I’m not going to be passive and just sell when I don’t like something, either.” At the same time, he says he’s very conscious of the lessons of the past. He’s met with Nadella a few times but always off the Microsoft campus. “It’s not like I have an allergic reaction [to the campus],” he says. “But I am giving him space.”
The Nadella Era
‘It’s my 37th day, but who’s counting?” That’s how Nadella, who is just 47 years old, began his remarks at a March Microsoft retreat, where he spoke to the company’s top 100 or so executives for the first time about his worldview, about his view of Microsoft, and about the path forward. One longtime executive was struck by Nadella’s balance. “He is intense without being intimidating,” this person says. “He is totally positive without being Pollyanna.” But this person was most struck by what Nadella didn’t do. “It would have been so easy to throw the previous administration under the bus,” he says.
Nadella, despite his long career at Microsoft—and his similarities to Gates—is in fundamental ways a break from the past. He has had his executive team read Nonviolent Communication.(The title speaks for itself.) He’s a genuinely nice person, with a wide smile that cannot be faked. He is liked by people who have worked for him, by his peers, and by those who were above him. “Everyone likes Satya,” says one former Microsoft executive. “You cannot dislike Satya. Bill loves him. Steve loves him. Satya is clearly a morally good person.” “You want to get behind him,” says Greg Sullivan, who is the director of the Windows Phone division.
He looks the part of a modern technology C.E.O., certainly more than Gates does now or than Ballmer ever did. In Apple’s famous 2006 commercial, in which the staid, uninteresting guy is the P.C. and the hip, cool one is the Mac, Nadella would play the Mac. He is fit, with closely cropped hair. He wears black-rimmed glasses and has even been seen in a hoodie. In his short tenure, he has already used a metaphor with overtones of Zen to explain to the troops what he wants (“a team of rowers working together at the highest level”). One of the reasons the board chose him, according to someone familiar with the process, was that he was an “insider who had the best of what an outsider could bring.” He actually talks to people outside the company, from competitors to venture capitalists. This is unusual in a company that people describe as insular. “You talk about the rise and fall of empires or families or anything; being insular is the best way to sort of kill yourself,” says Nadella.
He likes to ask, “How would the world be different if we weren’t here?” One ex-Microsoft executive who was not a fan of the company’s old corporate culture says, “He’s obviously a Microsoft loyalist. But he is open to challenging the status quo.”
He quotes Nietzsche and other philosophers, but his real love is poetry, because “poets can take perhaps any philosophical point or any point of life and can compress it into a few lines,” he says. T. S. Eliot and Keats are among his favorite poets, and he also enjoys Urdu poetry. “Growing up in India, once you started engineering school you really don’t have any liberal-arts education,” he says. “Somehow I got hooked onto saying, Look, the one good way to renew yourself is to read good literature and good poetry . . . and I think my mom’s been a great influence on it.”
Nadella was born in Hyderabad, India. His childhood was an exercise in managing dissonance. “My mom was a professor of Sanskrit, and my dad was a Marxist economist. They were two very contrasting personalities,” he says. “They had their ideological wars, and I got to ignore both of them. It was a fun upbringing, I would say.” (Both his parents still live in India.)
Nadella moved to the United States in 1988 and got both a master’s degree in computer science at the University of Wisconsin-Milwaukee and an M.B.A. at the University of Chicago’s Booth School. When he first arrived at Microsoft, in 1992, he worked on the business side, helping to oversee Office, and then ran research and development for the company’s online services, which included the troubled search engine, Bing. After taking over that business, he became the head of something called Server and Tools, which sold Windows-based software and services to help big corporations manage their technology needs, in early 2011. That made him one of five executives reporting directly to Ballmer.
The new world of computing is a radical break from the past. That’s because of the growth of mobile devices and cloud computing. In the old world, corporations owned and ran Windows P.C.’s and Window servers in their own facilities, with the necessary software installed on them. Everyone used Windows, so everything was developed for Windows. It was a virtuous circle for Microsoft. Now the processing power is in the cloud, and very sophisticated applications, from e-mail to tools you need to run a business, can be run by logging onto a Web site, not from pre-installed software. In addition, the way we work (and play) has shifted from P.C.’s to mobile devices—where Android and Apple’s iOS each outsell Windows by more than 10 to 1. Why develop software to run on Windows if no one is using Windows? Why use Windows if nothing you want can run on it? The virtuous circle has turned vicious.
Part of why Microsoft failed with devices is that competitors upended its business model. Google doesn’t charge for the operating system. That’s because Google makes its money on search. Apple can charge high prices because of the beauty and elegance of its devices, where the software and hardware are integrated in one gorgeous package. Meanwhile, Microsoft continued to force outside manufacturers, whose products simply weren’t as compelling as Apple’s, to pay for a license for Windows. And it didn’t allow Office to be used on non-Windows phones and tablets. “The whole philosophy of the company was Windows first,” says Heather Bellini, an analyst at Goldman Sachs. Of course it was: that’s how Microsoft had always made its money.
Nadella lived this dilemma because his job at Microsoft included figuring out the cloud-based future while maintaining the highly profitable Windows server business. And so he did a bunch of things that were totally un-Microsoft-like. He went to talk to start-ups to find out why they weren’t using Microsoft. He put massive research-and-development dollars behind Azure, a cloud-based platform that Microsoft had developed in Skunk Works fashion, which by definition took resources away from the highly profitable existing business. “Very gutsy” is how Marco Iansiti, a Harvard Business School professor who wrote case studies about Nadella, describes these moves.
At its core, Azure uses Windows server technology. That helps existing Windows applications run seamlessly on Azure. Technologists sometimes call what Microsoft has done a “hybrid cloud” because companies can use Azure alongside their pre-existing on-site Windows servers. At the same time, Nadella also to some extent has embraced open-source software—free code that doesn’t require a license from Microsoft—so that someone could develop something using non-Microsoft technology, and it would run on Azure. That broadens Azure’s appeal.
“Holding our breath until we turn blue is not going to change the world” is how a former Microsoft executive sums up Nadella’s moves. “It’s not the world we wished it were, or the world we thought it was. It is an example of Satya embracing the world as it is.”
Embracing reality is also a huge change at Microsoft, where some joke about the “reality-distortion field.” As one explains it to me, life under Ballmer, and to some extent even Gates, was “‘Let’s get on I-90 and drive to Hawaii! We’ve got beer, we’ve got snacks, it’ll be great!’But then you say, ‘Oh, wait, you can’t get to Hawaii on I-90.’They say, ‘Yes, you can! It’ll be great! Let’s go!’” As this person says, “It can be really good but also really freakin’draining.”
The holy grail for Microsoft would be getting developers to write new software for Windows again, putting Windows back at the center of a new virtuous circle. But it’s hard to see a path from here to there. Right now, Windows itself is fragmented: applications developed for one Windows device, say a P.C., don’t even necessarily work on another Windows device. And if Microsoft develops a new killer application, it almost has to be released for Android and Apple phones, given their market dominance, thereby strengthening those eco-systems, too.
Microsoft’s historical reluctance to open Windows and Office is why it was such a big deal when in late March, less than two months after becoming C.E.O., Nadella announced that Microsoft would offer Office for Apple’s iPad. A team at the company had been working on it for about a year. Ballmer says he would have released it eventually, but Nadella did it immediately. Nadella also announced that Windows would be free for devices smaller than nine inches, meaning phones and small tablets. “Now that we have 30 million users on the iPad using it, that is 30 million people who never used Office before [on an iPad,]” he says. “And to me that’s what really drives us.” These are small moves in some ways, and yet they are also big. “It’s the first time I have listened to a senior Microsoft executive admit that they are behind,” says one institutional investor. “The fact that they are giving away Windows, their bread and butter for 25 years—it is quite a fundamental change.”
“I’m pretty excited about what’s going on in Office,” says Gates, who describes his new role at Microsoft as “way more intense” than his old role as board chairman. “The open-mindedness to some new things is there. And you can say I should have pushed harder for that in the years before—anyway, now Satya’s putting resources on that.”
If the Gordian knots that lie ahead faze Gates at all, he doesn’t show it. He says his next meeting is with “one of the genius guys who’s really pushing this idea that when you write an application you don’t write an application for this thing and then another application for that thing and another application for this thing. When you fire up the meeting-room application, everybody’s machine has a part of this meeting-room application.” His idea is that once you’ve launched—call it Meeting Room Plus—you can do everything that needs to be done, from sharing notes to videoconferencing, without having to pause to open something else up. “On that one, I think we’ll take the lead,” says Gates. “That’s a very cool thing, and it does kind of trump what’s come before.”
“I think that’s a great way to think about it,” says Nadella. “Let’s say we walk into this room. There are cameras there that recognize each one of us, automatically log us into a shared whiteboard, rendezvous the machines you have, a phone or a tablet, so that you can share things.”
So far, in Wall Street’s eyes, Nadella can do no wrong. Microsoft’s stock has risen 30 percent since he became C.E.O., increasing its market value by $87 billion. “It’s interesting with Satya,” says one person who observes him with investors. “He is not a business guy or a financial analyst, but he finds a common language with investors, and in his short tenure, they leave going, Wow.” But the honeymoon is the easy part.
Ballmer has given a piece of advice to Nadella: “Be bold and be right.”
In September, Microsoft announced its first major acquisition under Nadella: Mojang, the maker of the phenomenally popular game Minecraft, for $2.5 billion. “And a couple million third graders just asked: ‘What’s Microsoft?’” tweeted Dave Pell, an investor who writes a newsletter called Next Draft. Indeed. Although fans are worried Microsoft will mess up their game, the deal gets Microsoft access to a whole generation that didn’t even know the company existed. And, in another sign of change at Microsoft, the company says it’s committed to keeping Minecraft available not just on its own devices, but on all platforms, from Android to iOS to Sony’s PlayStation. Nadella has also presided over some changes to the board, replacing three longtime members with fresh faces, and adding a new seat.
But as well respected and well liked as Nadella is—and as different as his style is from Ballmer’s or Gates’s—there are still questions about how radically different his Microsoft will be. Within the company, it has almost become a cliché that he was the “safe pick”: that he will stick with the status quo, whether in keeping the consumer businesses or in reshaping Microsoft’s executive ranks, which, as several people point out to me, are filled with employees who thrived under Ballmer. “He’s not Genghis Khan when you might need Genghis Khan,” says another former Microsoft executive about Nadella. There’s a Game of Thrones- like feeling inside Microsoft right now as people wait to see who will stay and who will go. But most of Ballmer’s senior executives still have their jobs
The biggest question of all, though, is what Bill Gates’s resumed presence at Microsoft means. Can he add value, given his age and how long he’s been away from the technology world? And, above all, who is the real C.E.O.? On this, Ballmer has another piece of advice for his successor. “Satya needs to be in control,” he says. “He needs to feel and know that it is his, that he owns the decisions.”
Gates and Nadella are sanguine about this. “When you say, ‘Well, Bill’s going to review something,’or ‘We’re going to have a discussion with Bill on something,’the energy it creates is just not replicable,” says Nadella. “I mean, you’ve got to just accept the fact that the founder has a different class, a different status. And, quite honestly, I want to take advantage of that. . . . Because one of the first things it does for the people who show up to Bill’s office is they bring their A-game.”
When I ask what happens if they disagree, Gates says, “Satya runs the company, so he gets to decide.” He says that he has learned from his experience with Ballmer, and from running his foundation, that he does “not have the full picture. So I get to give input. And if I say to Satya, ‘Hey, this project needs 10 or 15 people,’I’ll bet I’ll get it, but it’s up to him.”
“The thing you’ve got to remember is I grew up in a Microsoft where Bill and Steve were there,” says Nadella. “If there’s anything that I know it’s how to get stuff done with Bill around.”
Obviously, it is too soon to tell how this will all work, at least in part because Nadella is, probably deliberately, not an easy person to read. Take his recent decision to lay off 18,000 employees, most of them from the newly acquired Nokia. While he says it is just the normal aftermath of a big acquisition, others see it as a much broader dismantling of Ballmer’s broad strategy to move into hardware.
When I ask Nadella if he’s capable of being Genghis Khan, he ducks the question. “Stylistically I think we’re all made differently, but, for me, making hard calls, quite frankly I may do it with a very different style.”
Introducing Ballmer at Oxford, his friend Peter Tufano, the dean of the business school there, said, “When we write the history of business for the 20th century and the 21st century, there is going to be a whole chapter on Microsoft.” Of course that’s true. In the next few years, we’ll know if that chapter is celebratory—or a cautionary tale.
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