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Nadella saddled with predecessors’ missteps

New Microsoft chief executive Satya Nadella will face a few hard decisions about the company’s mobile and software divisions.


Microsoft Corp. has finally updated its own code.

After a five-month search to fill one of the toughest jobs in the technology industry, the world's largest software maker looked inward to replace Steve Ballmer as chief executive. But whether Satya Nadella will embody change and break with the company's past missteps is still unclear.

Mr. Nadella, 46, is a pure Microsoft product. After 22 years at Microsoft, the Indian-born engineer and computer scientist has the company's red, blue, green and yellow squares tattooed on his biceps. But the man who likens clean computer programming to poetry knows full well that his company can no longer rest on its past PC successes.

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"Our industry does not respect tradition – it only respects innovation," he wrote in an e-mail to Microsoft's 101,000 employees. "The opportunity ahead of Microsoft is vast, but to seize it, we must move faster, focus and continue to transform," he added in a press release.

That's a big understatement – as big as the challenge that awaits Mr. Nadella, the third CEO in Microsoft's 39-year history. Bill Gates may have given over his chairman's seat to veteran tech executive John Thompson, but he will still loom large as the company's technology adviser, "supporting Nadella in shaping technology and product direction."

The naming of the Nadella-Thompson duo – an Indo-American and African-American at the helm of one of the world's largest companies – is a victory for the advancement of minorities in corporate America. But will they be able to revisit some of the most debatable decisions of the Gates-Ballmer era?

Refusing to make Microsoft Office applications freely available to people using devices that don't run on the company's Windows operating system, such as iPhones or Android-based Samsung phones, is one such decision. It is reminiscent of BlackBerry's long-standing refusal not to share its popular BlackBerry Messenger (BBM) service with non-BlackBerry users (a stance the Canadian company recently gave up). It is symbolic of a company that is fiercely protecting its Windows stronghold, even as it faces falling sales of personal computers.

Looking at Microsoft's results, though, most tech companies would still be green with envy. The company pocketed $21.9-billion (U.S.) in net profits in the year ended June 30, on sales of $77.9-billion. And Microsoft's stock has shot up 33 per cent in the past year.

But there is a sense that the profit machine that was built by installing the Windows operating system on virtually all PCs has been losing momentum ever since consumers and businesses started replacing their desktop computers with tablets and smartphones. And as Microsoft is trying to move out of its PC-centric world, it is beset by fierce competitors.

This leaves Mr. Nadella with a couple of hard decisions on what to do next.

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Luckily, Microsoft's corporate business is breezing along. Revenues, which do not rely on releasing the hippest new wireless gizmo, are growing at a healthy clip. It is prominent in cloud services, Mr. Nadella's former responsibility, which were 107-per-cent higher in the last quarter than they were a year ago.

But some of Microsoft's other initiatives are trudging along slowly. Microsoft invested heavily in its web sites, notably its search engine Bing, which has been inching forward. But Bing isn't markedly superior to its competitors, namely Google's search engine, which is holding on to its 67.3-per-cent U.S. market share, according to comScore's most recent reading. With Bing's 18.2-per-cent market share, one can't help but wonder if it is worth all the money (and trouble) Microsoft invested into its search engine.

Then there is the acquisition of Nokia's handset business, Mr. Ballmer's departing €5.4-billion ($8-billion Canadian) deal and Microsoft's ultimate push in the mobile business. The mobile device unit was cheap – for good reason. While Nokia has retained some of its former glory through the sale of its older phones in emerging markets, by its own admission, its smartphone sales prospects are bleak. In the third quarter, it sold only one smartphone for every 10 sold by Samsung Electronics.

In many ways, Nokia is a poisoned gift for Mr. Nadella. It is imperative for Microsoft to boost its mobile business, which is almost trivial (although, sadly, superior to that of BlackBerry's). In the third quarter, Windows smartphones held 3.6 per cent of the market, according to IDC. Integrating the Finnish unit swiftly – and cutting losses – will be key.

A failure would cast doubts on Microsoft's consumer strategy and bring back calls for asset sales or a break-up of Microsoft's businesses. Without mobile, there is little point in toying with the Xbox – especially since tablet and smartphone games pose a threat to console systems.

But the biggest challenge that awaits Mr. Nadella is broader in scope. It is proving that Microsoft can reclaim its technological edge and shed its image as the rich laggard that tries to buy its way into every new market that it missed.

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About the Author
Chief Quebec correspondent

Sophie Cousineau is The Globe and Mail’s chief Quebec correspondent. She has been working as a journalist for more than 20 years, and was La Presse’s business columnist prior to joining the Globe in 2012. Ms. Cousineau earned a master’s degree in journalism from the University of Illinois and a bachelor’s degree in economics and political science from McGill University. More


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