Nadella’s success at Microsoft probably depends on Gates

Microsoft has a new CEO in former cloud and server chief Satya Nadella and readers have been asking me what this means? Certainly Nadella was the least bad of the internal candidates but an external selection would have been better. Whether it works out well or not probably comes down to Bill Gates, who leaves his job as chairman to become Nadella’s top technical advisor.

You might ask why Nadella, whose technical chops are easily the equal of BillG’s (and a lot more recent, too) would even need Gates in that advisory role? I believe the answer lies in my recent column where I argued that the best new Microsoft CEO would be Gates, himself, because only he could stand up to departing CEO Steve Ballmer.

Ballmer still owns 333 million Microsoft shares, has a huge ego, and that ego is likely to be invested at first in bullying Nadella toward following line-for-line the devices and services strategy Ballmer came up with last year that so far isn’t working too well. If Nadella wants to veer very far from that path by, for example, getting rid of Nokia or making Microsoft an enterprise software company, only Gates will be able to stand between the two men and, frankly, spare Nadella’s job.

This promotion is at best a compromise. My understanding is that the Microsoft board really wanted Alan Mulally from Ford to come in and clean house for a couple years before handing a much leaner company over to a younger successor. It would have been a smart move. But Mulally didn’t want to have to deal with either Gates or Ballmer. Why should he? Mulally’s price for returning to Seattle, I’ve been told, was for Gates to give up the chairmanship and Ballmer to leave the board entirely. Ballmer wouldn’t budge (with $12+ billion in Microsoft shares I might not have budged either) and so Mulally wisely walked.

Let’s assume, then, that Nadella comes into his new job with some immunity to Ballmer so he can make at least a few dramatic changes. What should those be? I’m not going to give the guy advice here but I will say what I expect to happen.

The Xbox isn’t going anywhere. Those who have suggested Microsoft sell its console game platform aren’t thinking that process through very far. What Microsoft needs more than anything else is to be in markets where it can be first or second in market share. Xbox qualifies there and so the company can’t and won’t sell the division even if Nadella transforms the rest of the company into enterprise software.

Speaking of enterprise, that’s where the money is, as IBM has been showing for the last 15 years. Pundits who have been suggesting Microsoft drop consumer Windows to $20 don’t understand that doing so would undermine the larger enterprise market at $100. Rather than chase a waning market it is better to stand firm on consumer and chase the still-growing enterprise. Readers should understand this is me speaking not as a consumer but as a pundit, so this is as much about Microsoft’s corporate health and anything else.

Nadella was Microsoft’s cloud guy and has to know that business is a quagmire of low margins and dubious returns. I’m not saying Microsoft doesn’t belong there because the cloud has become vital in different ways to every part of its business, but I am saying that Microsoft will not survive as mainly a cloud company.

Nokia is a crap shoot tied to the success of Windows Phone, which I don’t think is even possible. Microsoft can’t afford to be number three and losing money, especially while they are making $2 billion per year already from Android royalties. I think Nokia will eventually be resold much as Motorola Mobility was sold by Google.

No devices, then -- at least not inherently mobile ones -- for that devices and services strategy. Ballmer won’t like that.

What Microsoft should do with Windows Phone is kill it and embrace Android. This probably sounds odd to some, but Microsoft is fully entrenched in enterprise and the future success of enterprise will depend on the company’s ability to seamlessly integrate all its data center offerings with mobile clients. They can do that by being successful with Windows Phone except that won’t happen or they can embrace Android and do whatever it takes to make Android work beautifully in a Microsoft environment. This would leverage a Microsoft strength and take advantage of an Apple weakness as the latter company proudly ignores the enterprise in favor of individual users.

Microsoft’s route to success in mobile, then, is by becoming the next Blackberry.

I think most of these things will eventually happen and at least one or two of them will start under Nadella. Whether he survives the inevitable Ballmer backlash is something I can’t know.