What could Microsoft CEO Satya Nadella have done in just 10 months to convince shareholders he's worth the $84 million pay package they approved earlier this month?
Quite a bit, it turns out, but it remains to be seen how his actions will pan out for the company over time, and in fact that long view was taken into account in his compensation bundle. It doesn't allow some hefty stock grants to vest fully until 2021, and how much he ultimately gets is linked to how well Microsoft fares over that time vs other big corporations on the S&P 500.
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Still, Nadella has made some bold moves since taking over from Steve Ballmer Feb. 4 that have set in motion what could prove to be significant changes for the company and its customers. Here's a look at some of them and suggestions about what to look for to determine how much success he's having.
Less expensive licensing
Under Nadella Microsoft made Windows 8 available for free to makers of devices with screens that are nine inches or smaller, a program it refers to as Windows for the Internet of Things. The move in April has had results, with such devices now shipping from Acer, Dell, HP, Lenovo and Toshiba priced at as little as $99.
Before that, though, Microsoft also reduced the price of Windows 8.1 licenses by 70% to makers of PCs of any size bringing the price to about $15 per device. The cut amounts to an acknowledgement that other inexpensive computing devices such as Google Chromebooks based on Android are selling briskly. Microsoft needed to do something to make it possible for device makers to produce similarly inexpensive machines based on Windows.
The inexpensive tablets have resulted in a lot of sales to consumers, but not as many to businesses, says Jitesh Ubrani, an analyst with IDC, other than as companion devices to a full laptop for, say, a salesperson.
Just a handful of vendors make these inexpensive Windows devices vs. a massive number selling similar Android devices, he says. Windows is a much larger operating system than Android, requiring 32G vs. 4G to 8GB for Android, meaning the hardware to support Windows costs more than to support Android. So it's harder for manufacturers to sell Windows devices as inexpensively as Android devices and make a profit.
Nadella introduced another free wrinkle called Windows 8.1 with Bing. It comes free to equipment manufacturers so long as the computers they install it on ship with Bing set as the default search engine in Internet Explorer. Some of these devices also come with Office or a one-year subscription to Office 365, another freemium to herd users toward paying Office 365 subscriptions.
Release of Windows 10 is already looming on the 2015 horizon, and if the lessons learned from Windows 8 are included, they should go a long way toward making it more attractive to the average user who just wants to get the machine to work without having to learn a new interface.
Microsoft is so confident that it's fixed these problems that it makes the claim that there is "no learning curve" for users of Windows 10 if they have used Windows 7.
That's quite a bold claim for Nadella to endorse given the tepid reception Windows 8 and 8.1 have gotten so far. Things were so bad for Windows 8 that Microsoft undid some of the newness of it when it released Windows 8.1. It was a well calculated bid to lure users of Windows 7 to the newer operating system whose touch-first user interface was intimidating to mouse-and-keyboard customers.
Perhaps most significant, Windows 8.1 can boot directly to the desktop, which is different from the Windows 7 desktop but very familiar compared to the former Windows 8 default to the Start screen.
If it hopes to hold onto Windows' claim to being the world's most prevalent operating system it's got to come up with a successor to Windows 7 that the world can embrace. A lot is riding on Windows 10.
Office 365 incentives
In addition to the perks already mentioned above, under Nadella Office 365 now comes with unlimited storage in OneDrive, the cloud repository for storing and sharing documents. This is a feature for both consumer and business versions of the service, making it a significant offer for businesses looking to reduce capital and operational expenses. By contrast iCloud offers 5GB for signing up for the service.
Office 365 is free to students when universities buy it for faculty and staff. Students can keep using it for a year after they graduate and can buy their own four-year subscription for just $79.99.
Microsoft said in the spring that going forward Office 365 will have features that on-premises Office will never have because they require too much processing. For example, this fall the company has introduced Delve, a machine-learning application available only through Office 365 because it requires machine learning that in turn requires massive processing that only the cloud can provide. So if a user has a meeting scheduled Delve will parse the agenda, gather relevant documents and compile information about other participants automatically, freeing up the user from having to do that prep work.
Delve is an ongoing rollout and it remains to be seen whether it and other Office 365-only applications will be enough to attract long-term customers.
A unified operating system
Nadella has announced Microsoft is working on a single operating system, blending together Windows, Windows Phone and Xbox OS. He has made steps in this direction by merging the development teams for the three platforms into a single group. Details are sketchy but it will include common APIs, application development tools and the ability to reuse application code regardless of device. Applications would be sold in a common store.
The most concrete result so far is the announcement of universal Windows apps that can, with little modification, run on Windows tablets, PCs and phones, and that can be bought from a single Windows store. That vision is still a work in progress, although Windows 10 is rumored to support these universal apps.
The make-or-break factor is whether developers will get onboard with the project, something Microsoft has been wooing them to do.
If Nadella hasn't embraced Apple's iOS devices, he's at least acknowledged them, which is a big step toward making some money off them. Since he took over, Nadella has ushered in free Office apps for iPhone and iPad Word, Excel, PowerPoint, OneNote, Lync.
Free Office apps for Android tablets are coming early next year, and in the meantime Microsoft is revamping Office apps for Android phones so their user interface is more similar to that of Office apps for Android tablets.
These free apps don't come with the full Office feature set, which requires a paid Office 365 subscription. So it's the freemium model of offering some features at no cost in hopes they will spark a desire to pay cash for the full set.
Standing by devices
Nadella bucked the advice of a vocal group that says Microsoft should get out of the hardware business. He not only promised the company will stay in it, he expanded hardware offerings with the introduction of a wearable device.
He is standing by Surface Pro, the company's hybrid tablet/laptop designed to best realize the potential of Windows 8.1, despite its lackluster sales and a flagging PC market. He is also standing by the decision to sell Microsoft-made phones based on the company's purchase of Nokia. The deal was done when Nadella took over but he's pressing on with it, not by competing at the high end against Apple and Samsung but rather at the low end with entry-level smartphones aimed at developing nations where it's easier to get a foot in the door.
Critics of Microsoft say Xbox represents a distraction from Microsoft's main business mission, but Nadella isn't buying into that. In fact Windows 10 is said to include a gateway application to Xbox features. "We will continue to innovate and grow our fan base with Xbox while also creating additive business value for Microsoft."
This fall the company released yet another device, Microsoft Band, a health-monitoring wristband that is supported by a range of cloud services based in Microsoft Azure.
Under Nadella Microsoft has stepped up the pace at which it releases Windows updates to reflect a new urgency within the company to deliver new products and respond to customer requests faster, as he very publicly demanded in a memo to the company's employees. "We will streamline the engineering process and reduce the amount of time and energy it takes to get things done," he wrote.
In corporate networks any operating system changes require extensive testing to see whether critical business applications behave properly, and that concern generally overrides whether the operating system is the latest. So Microsoft is offering three options for receiving updates starting with Windows 10, due out next year: the rapid pace for consumers, the critical and security updates-only, and the middle ground where businesses can adopt new features without disrupting business.
This is a more risky move by Nadella because if the rapid updates aren't carefully tested, they could result in some angry customers, but the company seems aware of that. "As mentioned," according to the Windows blog, "with Windows 10, we are aiming to reduce the need for the time-consuming and costly wipe-and-reload approach to OS deployment. We know that app compatibility is critical for business."
Nadella signaled early on that he had definite plans for the company by making personnel decisions to clarify whom he trusts and whom he didn't need. The company's business development head Tony Bates and its chief of marketing Tami Reller both opted to leave the company within Nadella's first month as CEO.
Nadella reshuffled some of the remaining top executives to make clear whom he trusts. Scott Guthrie became head of cloud and enterprise business, Stephen Elop (the former head of Nokia, which Microsoft bought) was put in charge of devices and Phil Spencer was put in charge of Xbox.
He has successfully avoided fading into the shadow of the two previous CEOs, Bill Gates and Steve Ballmer. Gates stepped down as board chairman when Nadella took over as CEO and has been enlisted to advise Nadella on technology being developed within Microsoft. Ballmer stepped down from the board in August to spend more time on other interests.
While more than a quarter of Microsoft stockholders think Nadella is overpaid based on their vote to approve his compensation package, they have to be pleased with what his presence at the helm has done to the company's stock prices. It's trended upward since his appointment, and after more than a decade the price finally broke $50 last month. Nadella reported that revenues in the last quarter were up 24%. Despite the complaints, he seems to be delivering value to his shareholders.
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