Microsoft’s Nadella Studies Startup Roadmap Amid Search

Microsoft Corp.’s cloud-computing chief Satya Nadella, one of the leading contenders for the top job at the world's largest software maker, took time in Paris last week to huddle with local startups like video-on-demand company Video Futur Entertainment Group SA.

It’s important to speak with startups because “the tech cycle is such that the small guys make it big and the big guys die,” Nadella said in an interview in Paris, where he was attending a technology conference.

Nadella, who has emerged as one of the candidates to replace Microsoft Chief Executive Officer Steve Ballmer according to people familiar with the matter, needs to bone up all he can on how to keep a decades-old technology behemoth from getting lapped by upstarts. The board will complete the search for Ballmer's successor in early 2014, lead independent director John Thompson wrote in a blog post yesterday.

Even if Nadella isn’t appointed CEO, he has said publicly that he “absolutely” intends to stay at Microsoft. That would set up the 46-year-old as a key lieutenant to whoever becomes the new chief, given Nadella’s 21 years at the company, where he has worked in everything from small business software to the Bing search engine to cloud services.

Re-engineering Microsoft

The task ahead for whoever gets the job is enormous. Microsoft is trying to weather a contraction in the personal-computer market, which forms its core business. Ballmer has overhauled the company to focus on hardware and Internet-based services, as a way to reduce dependence on traditional PC software. Competitors including Apple Inc. and Google Inc. have meanwhile stolen a march in mobile market share.

To survive, Microsoft must hunt for and embrace new concepts, Nadella said in a speech at the Paris event.

“It’s not as if there haven’t been at least four or five big changes that we’ve had to navigate over the last 30 years,” he said. “It will come down to whether we can do that.”

Finding a new CEO is proving daunting. Microsoft identified more than 100 candidates, spoke with dozens and has since focused on about 20 individuals. Several candidates have declined overtures or stepped out of the running, including Qualcomm Inc. executive Steve Mollenkopf, EBay Inc. CEO John Donahoe and former VMware Inc. CEO Paul Maritz, people familiar with the matter have said.

Building Azure

Should he make the final cut, Nadella has the chops to handle the turbulence facing Microsoft, said executives who have worked with him. Since taking over Microsoft’s server and tools unit in 2011 -- now renamed cloud and enterprise -- he has built the Azure cloud service into a credible rival to Inc.’s Amazon Web Services, they said.

Nadella boosted the unit’s revenue to $20.3 billion in the fiscal year that ended in June, up from $16.6 billion when he took over in 2011. He has revved up sales by leading Azure into the faster-growing portion of the market and collaborating with Microsoft competitors such as Oracle Corp. and Box Inc.

The business remains small compared with Amazon. About 39 percent of companies tapping the cloud to run applications use Azure, compared with 62 percent for Amazon, according to Forrester Research Inc. Even so, the market share has improved.

‘Real Contender’

“Three years ago, you would have written off any Microsoft cloud push as ill-fated, but Azure is now a real contender,” Aaron Levie, CEO of online storage startup Box, said in an interview. “That’s through aggressive pushing, working with and reaching out to competitors and constant innovation.”

Frank Shaw, a spokesman for Microsoft, declined to comment or to make Nadella available for an interview.

Nadella, who was born in India, has in the past listed Ballmer and Microsoft co-founder Bill Gates as big influences on his executive style. In a July interview with Deccan Chronicle, he also cited leadership lessons that he learned while playing for a cricket team at Hyderabad Public School, when his school captain took over for him because he was bowling poorly -- but then quickly gave him another shot.

“I will never forget that,” Nadella said. “What made him do that? Is this what they call leadership? These are the kind of questions I have since reflected on as I approach many of the things I do today leading teams.”

Nadella’s Rise

Nadella, who has a bachelor’s degree in electrical engineering from Mangalore University and graduate degrees in computer science and business, joined Microsoft in 1992 from Sun Microsystems Inc. He soon rose to hold leadership roles, including overseeing Bing engineering and technical strategy and taking charge of the small business applications push.

In 2000, Nadella managed a forerunner of corporate cloud services. Called bCentral, the business offered website creation and hosting, as well as services that let customers handle customer leads and accounting. The service shut down in 2004.

In 2011, Nadella took over the server and tools unit when Ballmer opted to replace veteran executive Bob Muglia. Nadella accelerated the move to Internet-based cloud computing and worked to better connect cloud software with Microsoft’s programs for internal corporate networks.

“It’s still very much a work in progress, but he’s made a lot of improvement in the connection between private cloud and public,” said James Staten, an analyst at Forrester Research.

Big Challenges

Nadella’s challenge with the server and tools business included unifying the different pieces of the unit. Those consisted of Azure, Windows Server, and programming tools, among other products.

Staten credits Nadella with changing the division’s culture, breaking down walls between products and pushing engineers to update software faster. He also spurred the group to add new features first to cloud versions of the products and only afterward to older products that companies install in their data centers.

To do that, Nadella had to deflect concerns about messing with the profitable older products and convince his team that cloud is the future driver of growth, Staten said.

Nadella is “adept at how to pick apart an issue quickly to get to the heart of the matter and marshal resources to change course,” Curt Anderson, who served as chief financial officer for the server and tools unit until July and is now CFO at Seattle startup Chef, said in an interview.

Silicon Valley

Throughout his tenure at Microsoft, Nadella has also brought in Silicon Valley executives such as James Phillips, former CEO of startup Couchbase, to meet with his team so they could learn what people are doing outside of Redmond, said a person familiar with Nadella’s management, who asked not to be identified because the meetings were private. Phillips later joined Microsoft.

Box’s Levie, whose company is based in Los Altos, California, said Nadella’s experience and outlook qualify the executive as a visionary who knows what Microsoft needs to do.

“You want a leader who understands the next generation of how this market is moving, not a leader that understands only how you got here in the first place,” Levie said.

Before it's here, it's on the Bloomberg Terminal.