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Satya Nadella’s Microsoft: A Look Ahead

Posted on Monday, Feb 10th 2014

Last year, Microsoft (Nasdaq: MSFT) CEO, Steve Ballmer announced his plans to retire from his position at the head of Microsoft. Since then, the market has been speculating as to who would step next into the shoes to become the third CEO of the tech giant. The question was answered recently, when Microsoft announced the ascension of Satya Nadella to the post of CEO.

Expectations from Nadella 

Microsoft may have become one of the world’s most valuable organization under Ballmer’s guidance, but recently they have been caught, so to speak, with their pants down, on multiple trends: Mobile, Social, Cloud, Big Data, and Online Advertising. Microsoft cannot be faulted for lack of trying. Within mobile, they recently acquired Nokia’s phone business and also introduced rather successful Surface tablets. Within the Cloud, their Azure cloud service has been gaining ground, albeit at a much slower pace than that of the dominant player – Amazon Web Services. Within Online, Bing has managed to carve a little market of their own, accounting for 18.1% of the market share last October. But all this growth has been rather slow. Other tech giants like Apple, Google, Salesforce.com, and Facebook have taken over in the race to delivering a better, user-friendly mobile, cloud, and social experience.

There are several factors in favor of Nadella. He is an internal candidate and will find it easier than any external candidate to deal with a convoluted organization like Microsoft. Unlike Ballmer, he is known to be a products-focused person rather than a sales person who manages to lead without all the loud fanfare that accompanied his predecessor. As part of the various offices he has held at Microsoft, he has helped them move to Internet-based computing and improved the cloud software with Microsoft’s programs for internal corporate networks. He has also had the vision to ensure that Microsoft’s offerings integrate with rival programs and has kept differences aside to enter into a strategic relationship with Oracle competing database software on Microsoft’s Windows Azure cloud service.

Nadella’s primary mission will be to help Microsoft develop a solid position in at least a few of these areas. He comes with a deep expertise in cloud, and given the importance of cloud in the IT market today, it may be a reasonable bet for Microsoft. According to a Gartner report, by 2016, the majority of IT spending worldwide will be on cloud-related projects. IDC projects public IT cloud services market worldwide to grow from $47.4 billion in 2013 to over $107 billion in 2017. Microsoft should look at improving their market share within this space.

With Nadella at the helm, I would expect Microsoft to step up its pace on the cloud front. Today, there are several cloud and big data companies which offer interesting services and good financing trajectory. I would expect him to probably roll up a good 15-20 of those that have a coherent story together, and position Microsoft as a solid player in enterprise/SME B2B software. Considering that this is in Nadella’s comfort zone, I think that this is what he will do. Microsoft definitely has the cash to purchase some listed companies as well and well-thought out acquisitions could help them compete with the likes of Oracle and Salesforce.com. Both Oracle and Salesforce.com recently made multi-billion dollar acquisitions in the online marketing space. Last year, Oracle bought Eloqua and Responsys  and Salesforce.com bought ExactTargetMarketo is the next big player in the market which could make a good target. If Nadella wants to focus on Big Data and Analytics, then Splunk could be a good target, which is seeing strong growth in the market. If they are scouting for unlisted companies in the segment, there are the likes of Actian and Tidemark, to name a few to choose from.

Another key ask from Nadella would be to drive Microsoft to glory within the mobile space. Microsoft may have acquired Nokia to increase the share of their phones, but it is not going to be easy. During the recent quarter, Nokia’s phone sales continued to decline. Even their star product Lumia failed to impress and despite the holiday season, phone sales fell from a quarter ago. Microsoft’s own analysis reveals that they would need to sell at least 50 million phones to make that unit profitable. Compare that with the 30 million phones that Nokia sold last year.

Within the phones, it is not just hardware that is lacking, Microsoft also needs to up the effort to attract developers around their mobile platform. Worldwide, Android is the preferred OS for developers building mobile apps, followed by the iOS and HTML5. Windows is ranked fourth within the space. The number of apps available for Windows phone is rising fast. Also major apps like Facebook, Twitter, and Yelp are now available for Windows. But most of these apps have been launched with some non-essential features like creating groups and making in-app purchases disabled.

Nadella will surely have a tough yet essential task to improve the developer ecosystem around the Windows mobile platform, especially focusing on Nokia.

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