Microsoft stays in-house, taps Nadella as new CEO

Bill Gates steps down from board chairman, will advise new chief exec on 'shaping technology and product direction'

Microsoft today ended its five-month CEO search where it began as it named insider Satya Nadella its third-ever chief executive.

"During this time of transformation, there is no better person to lead Microsoft than Satya Nadella," said Bill Gates, Microsoft's co-founder and former chairman, in a statement before the market bell Tuesday.

But the new chief executive was not Microsoft's only announcement today.

Gates will step down as chairman of the board -- a position he has had since the company's founding -- and take the new title of "Founder and Technology Advisor," Microsoft said, confirming numerous leaks that Gates would spend part of his week at the company advising Nadella on "shaping technology and product direction."

Board member John Thompson, a former CEO of Symantec and the one who led the CEO-search committee, will become chairman.

Nadella, 46, and a 22-year veteran of the company, was promoted from his position as executive vice president of Microsoft's Cloud and Enterprise group, the division responsible for some of the firm's fastest-growing services and most-profitable products, including the Azure cloud computing platform and SQL Server.

Before taking control of Cloud and Enterprises -- one of the new groups created when former CEO Steve Ballmer shuffled the company in a massive reorganization -- Nadella led the Server and Tools Business division, which in 2012 was Microsoft's second-largest unit by revenue. Prior to that, Nadella served stints in the company's online and Office groups.

Microsoft took a little more than five months to name its new CEO, a process kicked off last August when Ballmer abruptly announced he would retire within the next year.

Although outside candidates were early favorites -- including Ford Motor CEO Alan Mulally, who took himself out the race in December -- the board's focus increasingly shifted toward someone already at the Redmond, Wash., company. In November, for example, Gates said the next CEO needed "a lot of comfort in leading a highly technical organization and have an ability to work with our top technical talent," words that were interpreted to point to not just a technologist, but one very familiar with the firm.

Nadella had been rumored to be one of those top internal candidates for months, with his name often accompanied by that of Tony Bates, once the CEO of Skype and now the head of business development. Also reportedly in the running was Stephen Elop, the former CEO of Nokia. Elop will return to Microsoft -- where he ran once ran the Office franchise -- after it wraps up the acquisition of the Finnish company's handset business this quarter.

"This will be an enormous job for Nadella. He has experience, but I wonder if he has the amount of experience to take on a behemoth like Microsoft," said Patrick Moorhead, principal analyst with Moor Insights & Strategy. "He has had a lot of success in areas where Microsoft has done a real good job like Server and Tools, but no experience in areas of major pain, like consumer."

Analysts and pundits have closely followed the twists and turns of the CEO selection process because Microsoft is at a crossroads, trying to catch up in mobile even as traditional PCs -- the source of much of its revenue -- have fallen out of favor with consumers and its bet on Windows 8 has so far failed. In 2012, Ballmer announced a strategic change-up, one that aspired to make the company a seller of devices and services rather than one that relied on its decades-long expertise in software.

From its most recent earnings statements, Microsoft has made little progress in that turn, as its highest-margin groups are those that sell software, and subsidize the money-losing or less profitable device-based groups.

In 2013, Ballmer reorganized the company and kicked off the $7.4 billion purchase of Nokia, moves that Nadella will back.

"Today we're focused on a broader range of devices," Nadella said in an email to Microsoft's employees. "While the deal is not yet complete, we will welcome to our family Nokia devices and services and the new mobile capabilities they bring us."

He will also continue the pivot to devices and services, as well as maintain the company's philosophy that it can serve two masters, consumer and commercial. "We have picked a set of high-value activities as part of our One Microsoft strategy," Nadella told workers. "And with every service and device launch going forward we need to bring more innovation to bear around these scenarios."

Choosing an internal candidate was always the easy, conservative choice, according to experts like Peter LaMotte, an analyst with Levick, a Washington, D.C.-based strategic communications consultancy. "It's important that they find someone who continues the brand perception of the company," LaMotte said in a November interview. "Imagine the problems if they bring in someone totally counter [to the brand]."

Nadella was not only already at Microsoft but is also a technically-savvy executive more in the mold of Gates than Ballmer, who started at Microsoft in sales. According to numerous reports, Gates was closely involved in the winnowing of candidates, and Nadella's choice, along with Gates' commitment to advise Nadella, confirms that.

To some, Gates was too involved, as many sell-side Wall Street analysts had hoped that others on the board would overrule Gates and bring in someone from outside. Those analysts pinned hope on someone with more experience running a major company, even if that meant they were not well-versed in software, someone who would shake up the company, perhaps sell off poor-performing assets, like Xbox, or even split the company into consumer and commercial entities, all to boost the price of the stock, which has been mired for years.

Previously, some suggested that if Microsoft picked an unproven insider -- like Nadella -- they would be tag-teamed with a more experienced executive, perhaps from the board. Gates' renewed focus, even if only part time, proved those rumors right as well.

But Moorhead thought it was still a good idea. "Nadella will need to be augmented by someone with a lot of consumer experience and success," Moorhead said.

Whether Gates is that person is unclear. Gates has been away from Microsoft since 2008 and in his time as CEO showed little finesse for consumer products.

Ballmer, for one, was excited at Nadella's promotion. "I am pumped for the future of Microsoft," he said in a separate statement.

Then Baller urged on the troops he no longer commands. "Stay focused and keep moving forward," said Ballmer. "I am excited about what we will do. Satya's appointment confirms that."

Copyright © 2014 IDG Communications, Inc.

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