With a new leader in place at Microsoft, and Bill Gates injecting his two cents, Microsoft (NASDAQ:MSFT) could ramp up its product strategy, gain back its momentum, and again be an innovative industry leader. If successful, no doubt the stock price will reflect it accordingly. Microsoft, the powerhouse of the 80s, 90s, and early 2000s, lackluster of late, is making the right moves. But not so fast and not so easy. Many challenges do exist for the new CEO, Satya Nadella. Some of those challenges are external with regard to customers, competition, markets and demand. Some internal, with existing division heads protecting their ground and shareholder demands at play. One curve ball, perhaps not seen coming, are activist investors who want a strategy change for products deemed a "drag" on operations and a distraction to the company. The word streamline may become commonplace within the walls of the Redmond, WA, company and selling enterprise software to businesses could take shape as a new mission statement. The history of Microsoft under Bill Gates and subsequently Steve Ballmer has been to develop products and market to the consumer base, as well as corporate IT departments. There is no guarantee that historical pattern will continue.
Taking the helm at the 38-year-old company may not be dissimilar to what Bill Clinton described within the presidency that things happen all at once. Nadella's CEO honeymoon may be short and he may come to understand what Clinton meant by that description.
A leader matters, sets the tone, perception and reason to follow a company. They capture the interest of the public and stakeholders. Microsoft needs to be hungry again, innovative again, and steely competitive. Nadella, with Gates injecting his superb knowledge, may be the impetus behind a popular comeback of Microsoft. Widely known is that Microsoft missed key technology opportunities in the last 10-12 years under Ballmer. To say they have not kept pace would be an understatement. They flat out missed the importance and technology behind web search, the move to mobile from desktop, and key product design that captures the imagination of the public. Yet they remain a powerful company well positioned with significant resources to stage a comeback. Make no mistake, this is their chance. The third set of keys to Microsoft have been handed to Satya Nadella, a 22-year engineering veteran of the company who is widely liked and known for being a thoughtful and passionate leader. Bill Gates, company founder, has stepped down from the Chairman position and will become a technology adviser to Mr. Nadella, this being the request of Nadella.
To read the statement that Bill Gates made recently, "During this time of transformation, there is no better person to lead Microsoft than Satya Nadella," says much, and an underlying message perhaps of recognition that the company needs to change and change big from the Steve Ballmer years. In a statement, Mr. Nadella said, "Microsoft is one of those rare companies to have truly revolutionized the world through technology, and I couldn't be more honored to have been chosen to lead the company." Perhaps it is reading too much into his choice of words, but the sentiment regarding revolutionized indicates past tense. Remember Netscape? They truly revolutionized the browser world too and then Microsoft Internet Explorer ate their lunch.
Nadella, 46 years old, has been in key positions at Microsoft. He led Microsoft's cloud computing division, working with data center management and cloud platforms for software administration, managed Microsoft's internal servers and cloud platforms, and oversaw search product Bing which has been showing gains of late against Yahoo (NASDAQ:YHOO). It is notable that Nadella comes from the engineering cloth as Bill Gates was, versus Ballmer who was sales based.
Notable indeed and the underlying potency of the planned transformation of Microsoft is the move for Gates from Chairman to that of technology advisor. Gates of course has been touring the world making a significant difference in education, healthcare and more, via his Bill and Melinda Gates foundation. This experience has provided a better perspective of many things, including how technology, distribution systems and product can affect the lives of individuals and the well being of an entire country. This perspective will be invaluable for Microsoft in ways that an insider could not contribute.
Interesting enough is that Microsoft hasn't so much failed to innovate or recognize the advancement of progressive technology in the world and industry around it, but it has failed to execute on key product development that captures a place in the game where their competitors have climbed to. They have not had the edge on their products, or given the public the perception that they have either. Too too long in the desktop mentality, the company was late to the game in mobile. Recognizing its deep hole in search, it tried to buy Yahoo, but that deal fell apart, essentially leaving it with Bing. Bing hasn't began to penetrate Google's (NASDAQ:GOOG) stronghold on search, but it is holding its own and lately making slight inroads into Yahoo's market share. According to comScore, Bing expanded its market share to 18.1 percent in October 2013, from 17.9 percent in the summer and 16 percent in 2012. Google still commands a dominant share of the U.S. search market at 66.9 percent.
The presence of Gates, "devoting more time to the company" as stated by Microsoft, advising on technology, products and rethinking strategy will be key and an asset to Mr. Nadella. Reportedly Mr. Gates said that Mr. Nadella asked him to make the change in his duties at Microsoft from chairman to technical advisor.
In addition to what public stakeholders see and hear from CEOs, one of the most significant ways that a CEO affects a company is through its internal leadership methods. Providing critical inspiration yet setting a tone for demanding performance is not always easy. Microsoft has 100,000 employees, and layers of management, some with polarizing managers. Reportedly Nadella is known to have a low key style, a cerebral approach, and be a collaborative type leader, this being the opposite end of the spectrum of Mr. Ballmer's style who some have described as bombastic. Nadella is also known to be a listener, taking in information and knowledge from others before he sets a course of action. This approach was demonstrated by his dealings with the Microsoft Cloud division and meeting with outside developers to see how Microsoft can shape services to meet their needs. Nadella will have to be forceful to render his imprint, goals and objectives upon the company no matter what his personality or management approach has been to date.
If there is a front burner issue at Microsoft, Nadella has some things immediately on it that include the Nokia (NYSE:NOK) mobile handset deal orchestrated by Ballmer, and company reorg "One Microsoft" plan still in motion. Interesting enough, Google just pulled the plug on its two-year foray into the smartphone manufacturing business by selling its stake in Motorola Mobility to Lenova (OTCPK:LNVGY) (for $2.91 billion, paying $12.5 billion for the company upon purchase). One has to wonder if the Nokia acquisition is being rethought at this moment.
It is likely that under Nadella's leadership we will see Microsoft orient significant resources toward cloud based products and services, a targeted growing area but one with fierce competition. According to Synergy Research Group, the total cloud computing market hit $2.5 billion in revenue in Q3-2013, up 46% the same quarter of 2012. According to analytical firm Technology Business Research, Amazon's (NASDAQ:AMZN) cloud company AWS was on target to generate an estimated $3.2 billion in revenues in fiscal year 2013. Microsoft reported in its latest earnings data that commercial revenue grew 10 percent to $12.67 billion, recognizing big progress it has made in generating revenue from its cloud server products and services. Reportedly commercial cloud services revenue more than doubled.
According to financial information published about Microsoft, the net revenue in FY 2013 of the Windows division was $9.5 billion, representing a downtrend from $11.6 billion in 2012 and considerably off the $12.3 billion reported in 2011. It is thought that the decline was apparent on the consumer side sales, vs. business. Microsoft's laptop Surface reported a loss of $900 million. Search product Bing lost $1.3 billion but did show signs of improvement. Microsoft reportedly allocates around $10.4 billion to research and development. It is certain a healthy discussion is underway at Redmond as to what to allocate that R&D money to for upcoming years, whether business or consumer oriented projects.
It has been reported that some activist investors want Microsoft to shed its non-performing consumer products in favor of big ticket enterprise level products, another issue for Nadella. Along with his low key cerebral approach towards many issues, Nadella will have to have a strong backbone to content with the strength of activist investors and other contending parties in and outside of the company who demand change in the company and better financial performance. In the quarter ending December 31, 2013, Microsoft outpaced analysts projections by reporting revenue of $24.52 billion, an impressive 14 percent increase from the same period last year, and the stock price is currently trading at $37.52, with a 52-week range of $27.23--$38.98.
Interesting enough, there are some similarities with Microsoft and the situation IBM (NYSE:IBM) was in at one point over the last 30 years. IBM, a very mature computer company selling large "tabulating machines" as they were called (mainframe and minicomputers) to big business, introduced the IBM PC in 1981 as a way to bring computers to the mass consumer public. Eventually after increased competition eroded their profit margins on PC's and a new company strategy prevailed refocusing on the business side, IBM sold off its entire PC business to none other than Lenovo.
Perhaps the next tagline from Microsoft will be: Microsoft, expect change.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.