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Satya Nadella
Satya Nadella

Microsoft has named longtime executive Satya Nadella as its new CEO — picking a respected internal candidate to lead the aging technology giant through a period of unprecedented change and challenges to its business.

The company also said that Bill Gates will step down as Microsoft chairman to serve as a technology adviser, “supporting Nadella in shaping technology and product direction.”

Gates, an icon of the personal-computer revolution who co-founded Microsoft with Paul Allen, will remain on the company’s board. The company was careful to characterize the change as Gates “stepping up” to a new role, saying he will devote more time to the company as a result.

John Thompson, the former Symantec CEO and Microsoft’s lead independent director, will take over Gates’ role as chairman of the Microsoft board.

“During this time of transformation, there is no better person to lead Microsoft than Satya Nadella,” Gates said in a statement. “Satya is a proven leader with hard-core engineering skills, business vision and the ability to bring people together. His vision for how technology will be used and experienced around the world is exactly what Microsoft needs as the company enters its next chapter of expanded product innovation and growth.”

Nadella, a 46-year-old engineer and business leader from Hyderabad, India, becomes just the third CEO in Microsoft’s 38-year history. He succeeds Steve Ballmer, who announced in August that he would be retiring after more than a decade as the company’s top executive.

In a statement, 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.”

He added, “The opportunity ahead for Microsoft is vast, but to seize it, we must focus clearly, move faster and continue to transform. A big part of my job is to accelerate our ability to bring innovative products to our customers more quickly.”

The announcement, made moments ago, follows a six-month search by the Microsoft board, which included a number of high-profile external candidates. The choice of Nadella, a 22-year Microsoft veteran, signals that the company will largely stick to the course laid out by Ballmer in his final years in the position — including the massive “One Microsoft” reorganization and the expansion beyond software into hardware and devices.

But Nadella came up through the technical side of the company rather than sales and marketing. That makes him less like Ballmer and more like Gates, in the eyes of some former Microsoft executives.

“They picked a product and technical person vs. a business person. That says they are going to work on linking things together from this last re-org rather than making a radical shift,” said venture capitalist Todd Warren, a former corporate vice president in Microsoft’s mobile business. “I personally think they need a technical leader, but someone with an ‘outside Redmond’ perspective.”

Nadella is a veteran of Microsoft’s computer server, business software and Internet search units, and has run businesses inside the company with as much as $19 billion in annual revenue. He was most recently the executive vice president leading Microsoft’s cloud computing and enterprise technology division.

However, Nadella has never been a CEO before, let alone the CEO of a company with 100,000 employees. And Microsoft will soon be growing even larger, to approximately 130,000 employees, following its pending $7.2 billion acquisition of Nokia’s smartphone business — a key part of Microsoft’s attempt to rebound in the mobile market.

Challenges ahead for new Microsoft CEO

Bill Gates will step down as Microsoft chairman but remain on the company’s board, while serving as a technology adviser helping Nadella on product strategy.

In fact, one of Nadella’s first challenges as the new Microsoft CEO will be leading the company through the integration of the Nokia business. The deal is the latest step in Microsoft’s transformation into a devices and services company — making not just software but also tablets, smartphones and other hardware.

That change creates new opportunities for Microsoft to control its own destiny, reducing its dependance on its longtime hardware partners, but it also translates into slimmer profit margins than Microsoft has historically enjoyed.

Microsoft, with $77 billion in revenue last fiscal year, is facing massive challenges to its traditional Windows PC business, thanks in part to the rise of Apple’s iPad and other alternatives to low-cost Windows PCs. Microsoft has been struggling to be relevant in consumer technology, particularly in smartphones and tablets, where the company is facing a massive uphill climb against Apple’s iOS and Google’s Android operating system.

But the company has continued to do well in enterprise technology — which is the area of Microsoft where Nadella has worked for many years.

People who have worked with Nadella praise his engineering chops, leadership skills and ability to listen and learn. He is known for quickly getting up to speed on business and technology challenges, and being willing to make difficult decisions based on his unvarnished assessment of whatever situation his team is facing.

“There’s no room for BS with Satya in the room,” said Ken Moss, a former Microsoft executive who is now vice president of eBay’s marketplaces platform.

Can an insider reinvent Microsoft?

However, Nadella’s elevation from inside the company promises to disappoint some shareholders who had been hoping that a new Microsoft CEO would come in from outside the company to shake up its strategy and possibly even spin off some lines of business.

“We do not want to see a continuation of the existing direction for the business, so it will be important that Mr. Nadella be free to make changes,” wrote Rick Sherlund, the Nomura Research analyst, in a note to clients last week after news of the selection started to leak. Shareholders are less likely to see “immediate gratification” from Nadella, Sherlund wrote, but he noted that Nadella and finance chief Amy Hood should be capable of “driving a new direction for Microsoft.”

satyaDuring an interview at LeWeb last year, Gigaom’s Om Malik quizzed Nadella on how he sees “traditional” software vendors such as Microsoft surviving in the new world of connected devices, cloud services and pervasive computing over the next 10 years.

“There is no such thing as ‘traditional,’ ” Nadella responded. “This business of ours doesn’t respect tradition. What it respects is whether you’re relevant and innovating in the future.”

Ballmer’s retirement announcement last August was a surprise, given the Microsoft CEO’s previous statements that he would stay at the company until his last kid went to college, in 2017 or 2018.

The announcement highlighted a lack of formal succession planning — kicking off an six-month search by Microsoft’s board. External candidates including Ford CEO Alan Mulally, Qualcomm COO Steve Mollenkopf, and Ericsson CEO Hans Vestberg among those rumored to be under consideration at different points.

Microsoft’s internal choices were limited by a series of top executive departures during Ballmer’s tenure, including former Windows chief Steven Sinofsky and Bob Muglia, who preceded Nadella as president of Microsoft’s Server & Tools Division. Paul Maritz, a respected former Microsoft executive who left the company in 2000 and went on to become VMware’s CEO, was initially rumored to be a candidate but later said he was “not up for that journey.”

Shareholders may give Nadella a bit of breathing room to start, thanks to Microsoft’s recent strong quarterly earnings, which were driven largely by the enterprise and commercial side of the business, helping to overcome continued weak sales of Windows PCs to consumers.

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