By Jay Greene
REDMOND, Wash. -- Microsoft Corp.'s annual executive retreat is
an exclusive affair for company bigwigs -- 180 with the title of
distinguished engineer, corporate vice president or higher -- and a
rare opportunity to plot strategy and socialize with bosses who
could green light projects and advance careers.
Satya Nadella decided to shake things up. At last year's
meeting, the first he fully planned after taking over as chief
executive officer in 2014, he broke with tradition by inviting new
chiefs of companies Microsoft had recently acquired, according to
an executive who attended.
Some Microsoft senior leaders complained to Mr. Nadella, saying
the new hands didn't have the titles or tenure to attend the
two-day event at Suncadia Resort, a mountain getaway 80 miles east
of Seattle. Their presence breached the protocol established by
Microsoft's two former CEOs, Bill Gates and Steve Ballmer. Another
half dozen newcomers attended this spring.
In response to one executive, Mr. Nadella said, "We're doing
this because of the insights they bring."
Mr. Nadella's point was clear. The tech world has left
Microsoft's desktop far behind, and the 41-year-old software giant,
which has struggled against more-nimble rivals such as Apple Inc.
and Alphabet Inc.'s Google, has to shed its "not invented here"
bias and overwhelming focus on engineering.
Under Mr. Nadella, Microsoft is shaping up to be the only
pre-internet tech giant to escape the decline of its legacy product
-- the Windows PC operating system -- and emerge as a leader in the
new era of cloud computing.
Mobile devices and web-based, on-demand computing have
diminished one-time titans such as Intel Corp. and International
Business Machines Corp. Even early internet giants Yahoo Inc. and
AOL Inc. have been unable to keep pace with the shift to mobile
computing.
Microsoft's transformation has been bumpy as the new culture
clashed with the old. Some longtime employees said the legacy was
being disrespected. Newcomers weren't shy about challenging their
way of thinking.
Its insular atmosphere long stifled new hires who came up
through the ranks of other companies. These days, acquired
companies' CEOs are given freedom to point out failing strategies
and are running workshops for executives on innovation, and the
company is embracing open source, once regarded as a "cancer."
"We did not get everything right about our culture, especially
around learning from others," Mr. Nadella said in an interview.
"Otherwise, why would we miss big trends?"
New voices from acquisitions adding to Microsoft's
decision-making include Javier Soltero of mobile email and calendar
app maker Acompli, Chad Fowler of task-management mobile app
Wunderlist and Nat Friedman of Xamarin, a maker of open-source
software development tools.
These are among the executives from the 36 major acquisitions
Mr. Nadella completed in his first 2 1/2 years as CEO -- almost
triple the 13 Mr. Ballmer made in the previous 2 1/2 years.
Microsoft closed the largest purchase in its history last week,
a $26.2 billion deal for the professional social network, LinkedIn
Corp. Mr. Nadella aims to extend the reach of Office products and
its Dynamics business software with LinkedIn's professional
networking, the company said.
LinkedIn also brings executives with experience building a
popular web service, something Microsoft has struggled for years to
do. "The culture he's trying to create is very aligned with
LinkedIn," said the company's CEO, Jeff Weiner, who plans to
continue in his role after the acquisition.
Mr. Nadella is himself an insider, a 24-year veteran of
Microsoft, originally from Hyderabad, India, who worked his way up
through online services, business software and cloud computing,
which provides web-based computing power and storage.
The company's history is littered with deals that failed because
the company was intent on promoting its own products instead of
offering customers what they wanted. Billions of dollars evaporated
following the purchases of Nokia's handset business, bought to
boost its mobile operating system, and digital advertising giant
aQuantive, picked up to help Microsoft's efforts in that area.
With deep roots in engineering, Microsoft built products more
often than buying them. "When they did buy, it was because of a
grumbling self-acknowledgment that they were behind in some
technology," said Ray Ozzie, who served as Microsoft's chief
software architect after it bought his collaboration software
startup in 2005.
Mr. Ozzie left Microsoft in 2010 and founded another startup
that developed collaboration technology, this time for mobile,
which Microsoft bought last year. He said Mr. Nadella recognizes
"that Microsoft doesn't have a birthright to win in every
category."
During Mr. Ballmer's CEO tenure, from 2000 to 2014, annual
profit grew to $22.07 billion from $9.42 billion, and revenue
soared to $86.83 billion from $22.96 billion. But sales of the
Windows PC operating system steadily declined and now account for
less than 20% of the company's total revenue, from roughly 33% in
2002, and the stock price was stagnant.
"An absolute, utter crisis is a much easier tool to use to
galvanize change," Mr. Nadella said.
Besides Apple and Google in mobile computing, Microsoft faced
competition from companies such as Salesforce.com Inc. and Amazon
Web Services, which pioneered new businesses in on-demand access to
software and computing power. The cloud-based services threaten
Microsoft's legacy software products, which customers license to
install on their own computers.
Mr. Nadella snapped up Revolution Analytics and Metanautix to
help cloud-computing customers make sense of the giant amount of
data they accumulate. He bought Sunrise Atelier and VoloMetrix to
add mobile calendar features and email analytics tools to its
cloud-based Office 365. He bolstered Microsoft's security offerings
with Secure Islands and Adallom.
Revenue from commercial sales of Office 365 jumped 54% in the
latest fiscal year ended June 30. Azure, Microsoft's
cloud-computing service, more than doubled sales in the period,
although it is still one-fifth the size of Amazon Web Services,
according to research firm Gartner Inc.
The Office business segment and server units, fed by the
cloud-based products, have grown in importance as Windows has
slipped. Office, which includes word-processing, email and
spreadsheet software as well as other collaboration applications
such as SharePoint and Lync, accounted for nearly 28% of
Microsoft's sales in the latest fiscal year. Server products and
tools, which include Azure as well as corporate applications that
companies run on their own servers, generated more than 22% of
Microsoft's sales.
"In three years, they have turned from the backwater of IT to
being front and center," said Aaron Levie, CEO of cloud-storage
company Box Inc., which both partners and competes with
Microsoft.
The stock price hit an all-time high of $62.98 on Dec. 13, about
17 years after climbing to its previous high-water mark. Shares
closed Thursday at $62.58.
Mr. Soltero, who joined Microsoft after it bought Acompli in
late 2014, has been an internal advocate for change. "Sometimes I
feel like I'm just running around Redmond carrying a mirror,"
forcing a close examination of products and methods, he said.
"Let's be very, very, very, clear about what we're good at and what
we're not."
Acompli developed an email and calendar app for Microsoft
Outlook users on smartphones using Apple's iOS and Google's Android
-- platforms Microsoft had previously dismissed as it tried to
build a mobile franchise with its own Windows operating system.
Mr. Nadella soon put Mr. Soltero in charge of the entire Outlook
business, one of Microsoft's most widely used products. Last month,
he promoted Mr. Soltero again, to oversee product strategy for the
Office group, which includes Word, Excel and PowerPoint as well as
the Skype messaging and Yammer collaboration services.
"In the past, Microsoft assumed you had to be at the company 10
or 20 years to be in a leadership role," said Scott Guthrie,
executive vice president of the Microsoft Cloud and Enterprise
Group, who joined the company in 1997. "We consciously have
recognized, 'No, actually, that's wrong.' We want to have people
that have only been here six months."
It hasn't always gone smoothly. In January 2015, a few weeks
after joining the company, Mr. Soltero had harsh words for Office
group employees about Microsoft's complacency.
"Nobody was lamenting the absence of Outlook on the iPhone or on
Android prior to us delivering that product," Mr. Soltero said he
told several hundred employees in the Microsoft Executive Briefing
Center and a few thousand more watching online. "There was a
deafening silence in the room," he said.
In one PowerPoint presentation a year after he joined, he
pressed employees to not rest on past success in email software.
Microsoft's Outlook held more than 60% of the corporate email
market in the mid-2000s, according to the research firm Radicati
Group. These days, corporate email has migrated to web services,
and users can read email on mobile devices. In that larger market
Microsoft has weakened to have about a 55% share, according to
International Data Corp.
"The opportunity is huge and really ours to lose," he said he
told the group. "If we continue on our current course and speed, we
will become this" -- he showed a slide with a sad face on top of
the logo of Lotus Notes, a now faded email program that dominated
in the 1980s.
"It was meant to be a daring call to action," Mr. Soltero said.
He received emails accusing him of being "disrespectful of the
legacy" of the company. "I think the suggestion that we weren't
winning was a painful one for them to hear," Mr. Soltero said.
He said employees who didn't buy in to the new way of thinking
"self-selected" out of the Outlook group. He said he didn't know if
they found other jobs at Microsoft or left the company.
Microsoft extended its reach into devices that don't run Windows
by buying Xamarin, the San Francisco maker of open-source software
tools, in February. The tools let developers skilled with
Microsoft's C# programming language make products for Apple and
Android operating systems, as well as Windows.
Former CEO Mr. Ballmer had derided open-source software, which
is shared freely and whose programming instructions can be viewed,
modified and distributed by anyone, in a 2001 newspaper interview
as "a cancer," since it competes with Microsoft's software.
The landscape has since shifted: open-source software is
widespread, and if developers can't use Microsoft products to
create programs for the most popular platforms, rival programs are
readily available.
Mr. Ballmer, Microsoft's largest individual shareholder, said
earlier this year his position has evolved and that he "loved"
seeing the March announcement that the company would sell a version
of its SQL Server database software that is compatible with Linux,
a leading open-source operating system.
Mr. Nadella promoted Xamarin's CEO, Mr. Friedman, to corporate
vice president of mobile-developer tools, a top job in the business
that serves coders.
"I feel like I get to be a touchstone for open source," Mr.
Friedman said, adding he has used his connections in the
open-source world and Silicon Valley to help Microsoft.
Shortly after Microsoft acquired the German startup behind
task-management mobile app Wunderlist in June 2015, Qi Lu, a
Nadella lieutenant at the time, met with chief technology officer
Mr. Fowler. The Microsoft executive asked him to describe how he
would build Office if he were able to start from scratch.
"I rattled off a bunch of things off the top of my head...things
that we would have said over and over at Wunderlist and had baked
into our culture," said Mr. Fowler, who now manages the product at
Microsoft.
He talked about rapidly updating software rather than long-term
product cycles. He mentioned real-time synchronization between the
services that run on the web and the apps that run on mobile
devices, since customers have that expectation. And he said
applications, when users launch them, need to start
immediately.
Mr. Lu asked him to put his ideas on paper and shared them
widely in the company. He also asked Mr. Fowler to address a staff
meeting with thousands of employees and run workshops for
executives to explain his thinking.
"There's a thin line between hubris and confidence," Mr. Nadella
said. "I want us to be more on the confidence side."
Write to Jay Greene at Jay.Greene@wsj.com
(END) Dow Jones Newswires
December 16, 2016 10:22 ET (15:22 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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