New CEO Satya Nadella Needs to Make Microsoft More Like Google

Satya Nadella needs to refocus and support the company’s formidable R&D talent to restore the software giant to greatness

About two years ago, Microsoft’s research arm described something amazing in a blog post. It had developed a contact lens equipped with a tiny chip that could measure blood sugar by analyzing tears. No longer would diabetes patients need to prick their fingers to check insulin levels. And instead of intermittent reports, a person would receive a steady stream of data and get warnings when they were needed most. “The team envisions a way to automatically display important information—including abnormal glucose or insulin alerts—in the lens wearer’s view,” Microsoft researchers wrote in the December 2011 post. “It could alert the wearer when their glucose levels indicate that they should stop eating, or remind them when it’s time to eat a snack.”

Microsoft earned a few pats on the back in the press for this announcement. But that reception was nothing compared with what Google basked in last month when it unveiled—wait for it—a contact lens that can measure blood sugar levels. Hundreds of stories celebrating Google’s innovative thinking appeared, many portraying the lens as a natural extension to Google Glass. “Google doing amazing things,” wrote one commenter on the company’s blog post about the invention. “Again.”

The projects sound similar because they came, in fact, from the same guy: Babak Parviz was a researcher at the University of Washington who’d teamed up with Microsoft on the original project. He later took a job at Google, spearheaded the Google Glass project, and then reintroduced the contact lens concept this year. Parviz may have been right to move his work to Google, where science experiments often get the energy and resources needed to turn ideas into actual products. When it comes to envisioning and delivering the future, Google is the company people now seem to look to most.

Of all the questions facing Satya Nadella, Microsoft’s new chief executive officer, the most pressing is whether the company still wants to be an arbiter of technology. In the 1970s, Bill Gates, Microsoft’s co-founder and former CEO, promised there would be a PC in every home. Over the decades, he delivered on that vision through force of will and daring business deals. From there, Microsoft introduced the world to smartphones, tablets, wearable devices, ubiquitous voice recognition, smart homes, and scores of other ideas.

For the last few years, though, Microsoft has mistimed or failed to execute well on many of these products or simply given up. All too often, its creative thinking has been stifled by its focus on the cash-spinning Windows franchise and infighting among division chiefs. Google, meanwhile, has gotten even more aggressive in inventing or acquiring technologies. In many ways, Google has become the company Microsoft always hoped to be.

Google has developed self-driving cars and launched an effort to get Android into automobiles. It’s snapped up dozens of robotics companies, including Boston Dynamics and Meka Robotics, acquired artificial-intelligence startups such as DeepMind Technologies, and spent $3.2 billion on the smart-home appliance maker Nest. At the same time, Google gives its in-house researchers large budgets and their own designers and marketing teams and treats projects as independent product lines.

Microsoft has invested in all of these areas as well. The problem has been that, for all the work the company’s researchers do, they’re not getting the buy-in from management to turn their discoveries into products. “The same kinds of thoughts are on my mind and everyone’s minds,” says Peter Lee, the head of Microsoft Research. At about $10 billion per year, Microsoft’s annual research and development budget makes it one of the biggest spenders in tech. (Google’s R&D budget is $8 billion.) Microsoft employs 1,000-plus researchers just to tackle scientific endeavors, write papers, and invent mind-bending technology for future products without a lot of commercial demands. “The priorities were clear when I was there,” says Kurt Akeley, the former general manager of Microsoft Research in Silicon Valley and Asia and now chief technology officer at camera maker Lytro. “You were brought in first and foremost to do excellent research.”

While Microsoft wants its scientists to focus on research, it has urged them to take a stab at more practical work, too. And the company has an impressive list of successes, although they may not always be eye candy. Microsoft Research, for example, has done some of the key work to turn boxed software such as Office into a service that can be delivered via the Web. Nadella, as the head of Microsoft’s cloud computing strategy and data center software, has firsthand experience with these efforts.

The company’s researchers have also driven breakthroughs in the Bing search engine and, most notably to consumers, with the technology behind the Xbox Kinect movement-tracking software—a huge leap forward in computing interfaces. “All of these things have been major efforts out of research in collaboration with our product groups,” Lee says. “All of them make billions of dollars.”

Microsoft’s R&D failures, however, have received far more attention. The company acquired smartphone maker Danger in 2008 for $500 million, a deal that resulted in the Kin phone that hardly anyone remembers today. Google acquired mobile phone startup Android and now dominates the smartphone market. In robotics, Microsoft beat most of its rivals to the punch years ago, shipping an entire suite of software that helped developers and researchers build smart machines. The software did OK, but it was overtaken by an open-source rival. Microsoft doesn’t even promote it now.

In the automotive arena, Microsoft has a partnership with Ford, while Google has software deals in place with General Motors, Honda, Audi, Hyundai, Tesla, Kia, BMW, and Toyota. And the smart home? Gates has been living in one for more than a decade, but you’ll need to buy that clever thermostat and smoke detector from Google.

Researchers who’ve worked at Microsoft’s labs say they’re saddened by the company’s lack of will to back unconventional ideas. “It frustrates me,” says Lyndsay Williams, a former researcher at the company’s sprawling labs in Cambridge, England. In 1997, Williams worked on a phone with touchscreens, accelerometers, and eye-tracking capability but says she couldn’t get Microsoft excited about the technology. She also helped develop the SenseCam, a wearable camera that would automatically take photos, documenting the wearer’s life. Microsoft still touts the product on its Research website. Google just began selling Google Glass alongside prescription lenses. “It is a shame really,” Williams says. “To me, Google is now my favorite company. They bring out so many useful pieces of software for people.”

Microsoft insiders argue that the company is at a different stage in its life cycle than Google, whose share price has risen from $85 to more than $1,130 in the past 10 years. The search giant, with its “Don’t be evil” slogan and young, risk-taking co-founders, is often allowed to make massive gambles without investors pushing back at all. Days after the company’s $12 billion deal to buy Motorola Mobility and get into the smartphone hardware market blew up in late January, Google’s shares surged to an all-time high.

Will the contact lens turn into an actual, money-making product? Who knows? For Microsoft, such scenarios do not exist. Every time it hints at a forthcoming, risky product, investors question why the company is “wasting” money outside its core business-software market. “Right now, Google has a path with its shareholders and the press and the public to invest significantly in some pretty far-out ideas,” Lee says. “It would be a shame for Google not to take advantage of that.”

The latest management shake-up at Microsoft is an opportunity for Nadella. Steve Ballmer is gone, and Gates has given up his role as chairman, though he will remain on the board. Those looming, bigger-than-life personalities from Microsoft’s past have been pushed to the side. It will take guts, but Nadella could seize on this moment, tempt the public with a couple of the company’s boldest ideas, and then deliver on them. This may be his one chance to reset expectations with investors and consumers. Microsoft should let the world know that it not only cares about participating in the future but also intends to invent it.

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