Microsoft's Nadella is on a mission to make Windows matter again

The CEO of the world's largest software maker, who celebrates one year on the job today, is changing Microsoft from the inside out -- because he has to.

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Satya Nadella, a 23-year veteran of Microsoft, celebrates his one-year anniversary as the third-ever chief executive of the company on Wednesday. Getty Images

If former Microsft CEO Steve Ballmer saw Windows as a cash cow that just needed to be milked, Satya Nadella seems to view the software as a workhorse straining to pull the company out of its rut.

Nadella, who celebrates his one-year anniversary Wednesday as Microsoft's third-ever chief executive, has been working quietly and steadily to convince developers and consumers that the world's biggest software company -- and its Windows operating system for computers, tablets and smartphones -- is once again relevant.

He's got a tough sell.

Sure, almost 90 percent of all personal computers run some version of Windows. But by 2016, over 2 billion people -- or more than a quarter of the world's population -- will have a smartphone, according to eMarketer. And where does Microsoft stand in one of the fast-growing technology arenas in the world? In the shadows, with its Windows software for mobile devices holding a paltry 2.7 percent share of the market, well behind Google's Android and Apple's iOS offerings.

Nadella, who's spent the last 23 years at Microsoft, knows that the company's days as master of the tech industry are long gone. Now he's trying to make it relevant by pushing Microsoft into the age of mobile computing. For Nadella, it's a question of "renew" or die.

"You renew yourself every day. Sometimes you're successful, sometimes you're not. But it's the average that counts," Nadella said at the LeWeb conference in Paris, one month before being named CEO. "If you deal with scale where you stop innovating, then that's death .... We've had great successes with Windows, we've had great successes with Office. But it's just a question of what we do next."

What Microsoft did next was take a page out of Apple's and Google's playbooks -- emphasizing apps, not operating systems. But while those companies focus on making it easy for users to share information across devices, Apple and Google still force app developers to write one set of code for computers and another for mobile devices.

With Windows 10, the next version of Microsoft's operating system, due this year, developers are being promised the ability to write to a single code base. That could be the lure Microsoft needs to convince developers who want to write just once and create the apps that look and feel the same across computers, tablets and smartphones, regardless of what software powers the device.

"The best possible repeat of history for [Microsoft] would...be a place developers go to," said Gartner analyst Merv Adrian. Microsoft also needs to be "a company whose developer tools are perceived as being useful to everyone, not just on their own platforms."

The workhorse is plodding steadily forward.

Microsoft has begun offering pieces of its flagship Office software suite on competitors' devices, as in the case of Outlook for iOS. The company hopes that the more people use Microsoft products, the more willing they may be to pay for access to them everywhere. Josh Miller/CNET

To see the plan in action, just look at the pricing shakeups since Nadella took over. Microsoft last month announced that Windows 10, due later this year, will be a free upgrade for a majority of PC users. And Microsoft made its flagship Office software available at no cost to every iOS and Android user while also extending free licensing of its Windows Phone software to any manufacturer of Android devices with a screen smaller than nine inches.

If you don't want to use OneDrive, Microsoft's cloud storage service, you can use rival storage service Dropbox. Just last week, Microsoft made its Outlook email application available -- again, for free -- on iOS.

It sounds like craziness has taken hold in Redmond, Wash. But there's a method to the madness of offering all that free stuff. Microsoft hopes people will pay the annual subscription fee for Office 365 so they can use the cloud versions of Outlook, Word and PowerPoint on their Macs or PCs. That's become especially attractive as employees shift their activity between corporate and personal devices.

"The one attribute that characterizes Nadella's first year on the job is a steady hand," said Roger Kay, an analyst and founder of market intelligence firm Endpoint Technologies Associates. Kay believes Nadella has exhibited an ability to strongly communicate Microsoft's roadmap.

That includes his take on the video game business. Instead of jettisoning the Xbox division as some investors have demanded for years, Nadella put more weight behind it.

One of Nadella's first organization shakeups last year was to make Phil Spencer, former head of Microsoft's game development arm, in charge of the entire Xbox unit. The result has been a huge boon to Xbox sales as Spencer steered the division toward more serious gamers and away from mass-market consumers in what was a botched attempt to take over the living room. Last fall, Microsoft extended its gaming commitment by buying Mojang, maker of the popular Minecraft game, for $2.5 billion.

Under Nadella, Microsoft is accelerating some of its more outlandish technology, like its HoloLens holographic headset. Microsoft

Mobile hardware also is key to Microsoft's turnaround. After acquiring Nokia's handset division in April 2014 for $7.2 billion, Microsoft now takes in around $2 billion in revenue each quarter from sales of Lumia smartphones. Last quarter, Microsoft shipped more than 10 million Nokia units, and 40 million more lower-cost phones running Windows software licensed out for free. And while those numbers don't shine when compared to the 74.5 million iPhones Apple shipped in the last holiday quarter, the relatively stable business does more good than harm for Microsoft as a whole, analysts say.

"Microsoft is going to stay in the phone business as long they're not cratering," Gartner's Adrian said. "Not because they want to get to No. 1 or No. 2 in the phone business, but because as a market participant they learn a lot that extends to the rest of the company." Microsoft, for instance, can apply what it learns in the consumer market to the enterprise space -- and vice versa.

A Microsoft comeback is not a given. Such turnarounds are rare in the tech industry. "Change won't happen overnight" has become a common refrain among both Microsoft fans and skeptics. That's because the company's business has long relied on a small set of core sales drivers -- namely, the software and services it sells to businesses. That enterprise focus earned Microsoft more than half of the company's $86 billion in sales last year. Now it's the buffer Nadella needs for his turnaround efforts.

"Microsoft has a little bit of time. Yahoo had Alibaba financing all of [CEO Marissa] Mayer's experimentation while she figured out what she wanted to do with the company," Kay said. "Microsoft has their own built-in Alibaba, which is the commercial side."

But time is running out. Microsoft stock has dropped 15 percent since the company's not-so-stellar earnings report last week, erasing almost $40 billion in shareholder value. Longtime Microsoft analyst Rick Sherlund, of Nomura Securities, downgraded the company's stock, forecasting tougher times ahead for the company.

"We reduced estimates to reflect a significantly more challenging transition ahead, with difficult comparisons ahead for traditional Office and Windows," Sherlund told investors on January 27. "Our bigger concern is that with more difficult year-to-year comparison still ahead over the next two to three quarters and the stock near its high, there is little room in the shares for disappointment."

Disappointment could become the norm if Nadella can't change a company known for its inability to capitalize on industry-defining trends. Just look at smartphones, tablets, subscription music and TV services, social networking, mobile messaging ... the list goes on.

"Ballmer didn't have a sense of where Microsoft should go," said Kay. Nadella, with his steadier hand than the famously bombastic Ballmer, might have a better chance of changing the software behemoth's course.

Nadella knows the outcome for Microsoft if he can't renew the business.

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