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QZ&A

Microsoft CEO Satya Nadella on his toughest challenges and biggest competitors

FILE- In this Wednesday, Nov. 28, 2018, file photo Microsoft CEO Satya Nadella listens to a question as he sits in front of the Windows logo during the annual Microsoft Corp. shareholders meeting in Bellevue, Wash. Microsoft on Friday, Nov. 30, surpassed Apple as the world's most valuable publicly traded company. Under Nadella Microsoft has found stability by moving away from its flagship Windows operating system and focusing on cloud-computing services with long-term business contracts. (AP Photo/Ted S. Warren, File)
AP Photo/Ted S. Warren
“Really falling in love with small, new things.”
By Kevin J. Delaney
Published Last updated This article is more than 2 years old.

In a rare move, Microsoft in January invited a small group of senior journalists to spend a day at its Redmond, Washington, headquarters to meet with top executives and try some technology the company had yet to release.

CEO Satya Nadella addressed the group twice, once during the morning in a living room with couches and a second time at the end of the day in a product demonstration area. He spoke off the cuff, for close to two hours in total, and fielded questions from the journalists on a broad range of topics.

Nadella discussed what defines Microsoft, what has been hardest for him over his past five years as CEO, who he sees as the tech company’s biggest competitors, and how he thinks a phase of intense globalization is over. It was an important, inside glimpse into what’s on Nadella’s mind, and how he sees the future of Microsoft, the tech industry, and the global economy.

Below are extended highlights from the two conversations on these and other topics, edited for length and clarity.

Microsoft’s identity

We’re in the business of empowering people and organizations all over the planet to achieve more. I mean to me, it’s the reason Microsoft exists.

Our business model fundamentally is about creating more surplus outside us.

We started as an end-user company, then quickly transformed into an IT company, and that made our end users unhappy because basically you are sort of serving a different master. So there are some unintended consequences of even your core identity, but nevertheless, even from a software sensibility, we think about institutions as much as people because we ultimately think that people want to build institutions. And there’s complexity there—it’s easy to sort of gloss over it and say it’s all about one versus the other. But the multiple constituency thing is essentially an important balance to strike, not easy to achieve.

Our business model fundamentally is about creating more surplus outside us. We will only be long-term successful if people are making more money around us. It’s the core idea of the company I joined 27 years ago.

Kevin J. Delaney/Quartz
Morning meeting.

Microsoft’s consumer business

People say, hey, you used to be a consumer company, now you’re an enterprise company. The reality is what is considered ‘consumer’ today is very broad, and what is considered ‘consumer tech’ is very broad. Uber is a consumer tech company. Amazon, the retail side, is a consumer tech company. And so we’ve got to be careful that just because we are a tech company doesn’t mean we get to participate in every consumer category. What is it that we can uniquely do? I feel like at Microsoft, we made a bunch of mistakes by saying let’s just enter every category just because we are a software company. Sometimes it’s sensible to do so because they’re big, but at the same time, if you don’t have to have some unique thing to contribute, you usually fail.

That said there are two, two and a half, three things that we’re doing which are purely consumer. One, Xbox, that’s purely consumer. Although by the way, in all of the businesses where we are, there is a nexus between the consumer side and the enterprise side. For example, now Azure is becoming a fairly big destination for a lot of game-development houses just because we are taking all of the high-level services that are part of Xbox and making them available as path services on Azure. So that’s kind of one other side of how we’re connecting the dots. The other [consumer product],  Microsoft 365, it’s sort of got one side of consumers. And the other side is enterprises.

Just because we are a tech company doesn’t mean we get to participate in every consumer category.

Surface is doing well because ultimately people do have an emotional connection with the device they use. It needs a brand. It needs, that last fit and finish, the design ethos. And so therefore we’re committed to our Surface business in the categories that we can compete in, whether it’s the large screens, the laptop form factor, the two-in-one. We will be in the hunt, even, for what’s the next big turn in the device form factor, which is mass market. Even if it starts niche, we’ll go after those. So I would say Surface as a brand, what we’re doing with Office 365, or what we will soon be talking about as Microsoft 365 consumer subscriptions—those would be completely consumer businesses.

And don’t forget we actually have a big ad business. The ad business that we have is in the context of both news and Bing. One of the things that we want to do is to say, okay, what’s a way to change the game even in there?

And so we have this collection of businesses. We have significant strength, in our commercial side. But we have a sizable footprint on our consumer side where we will double down on those. But being very mindful of entering categories where we can do something unique.

Question: Are you still committed to retail? Microsoft retail?

Yeah. In fact, we’re very committed to retail not just even in terms of the sales throughput, there for our services or whatever devices, but also it’s become a very great place for us to reach even a lot of small businesses, a lot of education customers. That’s one of the places where we get a lot of new people being introduced to Microsoft. So it’s an important channel; it’s not the only exclusive channel, but for sure.

What unifies Microsoft’s different products and services

It’s one thing, in fact. It’s fascinating, it’s interesting, right? At my last earnings, I think I even talked about this—it’s that intelligent cloud, intelligent edge. Nothing you saw doesn’t reinforce that core platform. All of what we described as Microsoft 365 is a workload on it. All of what is gaming and where gaming is going with game streaming is a workload on it. Dynamics 365 is a workload on it. HoloLens [Microsoft’s AR headset], for example, is an edge device for Azure. Architecturally, that’s what it is. It’s a whole bunch of services that are cloud and edge runtimes, and it is the best rendition of an Azure edge. The unifying investment for us is rebuilding this distributed computing infrastructure, which has got a cloud and an edge. It’s really built for the next generation, the logic tier or next generation already around data and AI. And then the experience will be these new user experiences that are multi-sense, multi-device.

Microsoft’s ambition to be ‘Netflix for games’

I’m really investing quite a bit in gaming, and the simple idea is, we have as much of a shot to build a subscription service as anybody else. So we describe it as, shorthand, Netflix for games. We have a structural position in that we have both a console business as well as a PC business, which happens to be in fact bigger than the console business when it comes to gaming. And the idea is to aggregate those sockets with a subscription service. We won’t be the only one. There will be competition, [and] just like with other content there may be a few subscriptions that’ll be successful. So we want to go after it. The good news is we have a huge back catalog, we have our own games. We bring not only the users, we bring a social network in Xbox Live. We bring content, and we’re going to go after it. And of course, streaming is another element to it because then getting, plugging an Xbox controller even to an Android phone and playing a triple-A game, that’s feasible. Now the question is, when is the cost curve on it going to be viable?

What has surprised or flummoxed him since becoming CEO

There’s a lot of things that have flummoxed me. I think the broad contours of what it is that we wanted to get done, in terms of finding that sense of identity, having a worldview of where is technology going and then picking things that we can uniquely do and going after them, we’ve been fairly consistent. But in the details, a lot has changed, and a lot we have had to deal with.

One of the things that I am grounded on—and any company that has had a lot of success will ultimately go through—is that there’s no such thing as a perpetual-motion machine. Everything has a beginning and an end. And then you have large franchises that have run out of steam. To reinvent yourself is hard work. I like to remind my team, we’re, you know, for all of our quote-unquote ‘transformation,’ we’re very early on. If you think about the number of products that are all about new value prop, new business models, we are one-third of our way through and we have a long way to go. So I think it’s just that difficulty, that’s why I’m always on the lookout. Most of what you read about is sort of the celebration of the new hyper-growth and amazing success. Obviously they’ve created something from nothing or what have you, but I’m always looking for inspiration in pockets where people are in where all the currents look like this. [Nadella slants his arm downward.]

And so the changes that we’ve had to make, I would predominantly point to with Windows, how to re-conceptualize it was much tougher. Because think about it, it’s sort of a big, big business for us with very, very high margins, and to be able to face up to the realities around it. But at the same time knowing that there’s a place under the sun for Windows, it’s just not the same as it was before. That has perhaps been the hardest experience for us.

Kevin J. Delaney/Quartz
Expanding on things during the afternoon.

Is Windows an obstacle to consumer love of Microsoft’s new hardware?

We have had this feature in Windows called Instant On forever. It was like maybe in Windows 2000, or God knows when, but bottom line is we were sort of like a classic software company. We felt like, yeah, we got it done; it’s built and it’s done. Except it never worked. And we had to build our own hardware. In fact, Surface not only brought all the design aesthetic, and recognizing that people have a real emotional connection with their machines and devices that especially they use and they carry and what have you—that was by itself a big revelation. And so we really understood it for the first time, even though we had done things like Xbox and others.

But, more importantly, we really started building Windows, understanding that there are a lot of pieces where hardware docks with software in a deep way. Interestingly enough, we were learning the same lessons obviously on the cloud side at scale too. So that’s the journey we’re on. But I feel actually in that place we were much better about making Windows and Windows 10 as more of a continuous updatable service.

It was never built for that. The original conception of Windows was not that. And so we’ve had to reengineer.

I don’t think of Windows in isolation. You would have thought in Microsoft, you would have gotten to figure this out a thousand years ago—which is we don’t think of Windows and Office as just separate entities anymore. For example, I’ll give you a security use case: When Windows Defender sees a piece of malware, that signal propagates to Microsoft 365, so then we can take any piece of malware that’s maybe hiding in your inboxes as social engineering attacks, and purge it. So that signal propagation, that ability to use the socket and the service and work them together for a user, those are the kinds of things that we’re doing.

How it feels when your stock is rising, or declining

I’ve always felt that you pick up the worst of bad habits when everybody’s celebrating you.

There’s no question if your stock is high or your stock is going up, there’s no question that you have a better hand because everybody around you gives you more permission. There’s no question. But that’s not something that I take for granted. If anything, I measure myself, I measure the people around me and our products and teams, whether we can actually weather storms. I’ve always felt that you pick up the worst of bad habits when everybody’s celebrating you. Revenue and profit just keep showing up and you are just not being prepared for what is eventually not going to happen. I grew up through both of those cycles.

And so having gone through that, I’m sort of much more very, very focused on saying, look, none of those franchises we have built is going to last forever. The question is, how are we going to keep at it? Start by being relevant to customers. If you are relevant to customers, you may have a chance of being able to build some profit over time. And then measure ourselves. In fact, we have some metrics which we use to track what is new. And really falling in love with small, new things is how we’re measuring ourselves. When the stock goes down, do we lose permission? The question is, what we as a company do at that time is what’ll matter the most. Because fair weather is one thing. Which is when you’re in the arena, you’ve got to be in the arena and you can’t be like looking and saying, okay, I wish I had perfect conditions.

Question: Can you explain those new metrics? 

Take robotic process automation, my new favorite thing. I’m in love with what we are doing. There used to be a guy I worked for at Microsoft who had said, you know, Microsoft, we had this habit of planting trees and then coming the next morning uprooting them and say, why is it not growing? And so we stopped doing that. You get to plant trees. But [we’re] celebrating, like where are we, what is the leading indicator of some long-term success? Is there real usage? Are you building something for some new user who’s going to love this?

Microsoft’s real competitors

Consumer tech has become much broader than what it was when we competed against Apple in the 80s or the 90s or even the 2000s. There’s a lot more players, lot more segments, lot more categories. We picked a few categories that we want to compete in, and obviously we’ll pick a few more whenever given the opportunity that fits with our mission. Overall the tech industry has got a lot of well-capitalized players, whether it’s the US or China or even elsewhere—and so it’s vibrant competition, is how I look at it, and they are backed by different business models. Each one has a different reason to build what is aggregators or platforms, and I kind of look at it and say, you know, it’s fine.

For me, one of the biggest shifts is this: my main competitors in the previous client-server era were, sans Apple, Oracle, IBM, VMware maybe, Sun or Sony and what have you, right? And so now it’s like really the primary competitors for me at a broad platform [level] and what we do are Amazon, Google, and Alibaba. Interestingly enough, Amazon, Alibaba, Google are all aggregators predominantly and have a platform business. And they’re a platform business mostly with small aggregation plays and so it’s an interesting dynamic. So that’s how I see it. And that’s why you hear from me that worldview that says, ‘Man, I’d better make sure that a lot of the world succeeds’ because that’s the only way for Microsoft to succeed.

Question: Do you see Alibaba as a global competitor, or China-specific?

Today, predominantly China. Capability-wise, why not? I mean anyone who is doing well in a large country like China can get outside.

Economic nationalism

This economic nationalism, it’s not like some transitory phase by which the US and China do a deal next week and then everything’s back to normal. It’s done. The globalization phase is over as at least we know it. And all over the world it’s going to be much more complicated. Tech, the industry at large, has been very lucky that we’ve had unfettered access to markets all over the world without necessarily contributing to the local economies. As a guy who grew up in a country that was colonized by a multinational, I’m always cognizant of that, right?

Which is this thing about showing up and saying that I’ll collect rent and there is no local contribution, no local prosperity you can point to. I learned this the first week I was at Microsoft and even today I see that whenever I visit a community in the United States or abroad, I look, how many partners are there? How many people do they employ? What is their revenue growth? And unless and until we can point to it, I just don’t see how you have a long-term stable business all over the world. So that’s a little bit of our orientation at least as a company.

For a multinational company, we have to accept that unless and until you’re really adding economic surplus in every country you operate in, truly, that is measured by employment, measured by taxes you pay, measured by essentially all of the prosperity around your activity that gets created locally—if that is not true, I just don’t see how, the world just kinda says, let’s just go back to this thing. Globalization was fantastic except that it hollowed out the middle in many parts, not just in the United States, all over the world. And in, given that, I think everybody’s going to be sort of looking to say, okay, how do I get back?

It means structuring, simply, a business model that allows you to create for every dollar you make, multiple orders of dollars beyond that in our channel, broadly speaking. What are the local startups? What are the local ISVs [independent software vendors]? What are the the local SIs [systems integrators]? What’s the total employment of digital skills inside of the companies? Because in a world, the great opportunity is if tech sector is not just about the tech companies producing some gadgets or even cloud services. British Petroleum is a tech company because they want to do a lot of stuff going forward, which is digitally driven, they’re going to employ a lot of AI in building it We are looking at the competition for the AI talent. It’s no longer just about getting in the tech community or even with the financial services. It’s with everybody. The Github acquisition to me was fundamentally driven by that, but I sort of said, okay, what’s the next big community of users in every business? It’s going to be developers.

And in fact the Linkedin data was what showed us that the number of developers outside of the tech sector is growing faster than in the tech sector, so this is developers and these are software engineers being hired by anybody who is in the non-tech sector. They’ll have the biggest growth market. So you then extrapolate that. It seems like it’s impossible to get into a computer science class, a computer science major in 2019. It’s just because everybody wants to be a major. So that’s a supply problem which will get solved.

Question: Can you provide a concrete example of how your behavior has changed going into some market to adapt to these new economic realities?

If anything, it’s not the change in behavior. It’s sort of like really reinforcing the behavior we always had. What I mean by that is take the service providers we’ve had or the cloud-solution specialists we have had. By making sure you are investing in building that footprint out. So that platform sensibility we added with Microsoft 365 or with Azure, we had in the client-server era. It’s becoming more important for us to invest in it. That’s kind of it. And it shows up in practical terms, like even the investments we make in our training, of people, whether it’s in the company or whether it’s in the channel, are pretty significant.

Nadella returned to the topic later in the day.

Maybe I sort of overstated it when I said globalization has ended, I think that what is needed is a new equilibrium for globalization. That’s probably a better way to phrase even, because we do need it. It’s hard to just put the genie back in the bottle and say, hey, you know, think about all those value chains that were created are just going to go away. The reality is those value chains have to be reconfigured in ways that lead to a new equilibrium where every country feels like they have a stake in the new world order, so to speak. That’s the key challenge. And we need to go through that gut-wrenching process of creating that. And I don’t have the answer to that. I wish I knew. It’s not one trade deal away. I don’t think it’s even China and the United States. I think it’s everybody.

What do I think about China? I think that China is going to be a very important part of the world economy, that China is going to be bigger than what it is today, 10 years from now, 20 years from now. I think every one of us has to just accept and grow up to understand that hey look, that world is going to be different than the world that is there today. And so I’m not much into all this ‘Thucydides trap‘ and rising power. I believe that it’s 2019 and everybody’s sort of read history. Yeah, maybe sometimes it repeats itself, but I think we need more global enlightenment this time. It’s not like enlightenment happens in the West and then the rest of the folks can get colonized. I think that now it’s more about, let the entire world figure out an enlightened way to say, “What is a way for us to prosper?”

Here is an interesting thing: I think for 50 years the world was growing at what, three and a half points, that was sort of the GDP growth. Half of it came from labor, half of it from productivity. I was looking at some data, I think it just came from McKinsey, and the G20 just demographically is going to be challenged, so the labor productivity is not going to be there. So you need real technology innovation, and even with technology innovation, if you just do a plug number, like what happened in the last 50 years, you just plug it in, I think you get to something like two points. So we are in trouble, I think, just from a pure economic growth. We also are in bigger trouble because if economic growth is not leading to equitable growth, then we have sort of unstable societies and this is in China or in the United States, in your opinion, in any part of the world. So I kind of feel like it’s not about any one country. We better figure out this inequity thing and economic growth thing together. That’s sort of what I hope we get to talking about.

Question: Some people make a credible case that from the Chinese perspective, they’re very much oriented toward what’s best for China, particularly when it comes to technology. And the US companies like yours tend to look at themselves not as American companies per se, but as multinationals, and that creates the argument that there’s an advantage on one side. How do you look at that?

Let’s face it, we are a multinational company with a global mission that is based in the United States, driven, headquartered in the United States. So we’re an American company that happens to have global mission. So we are not confused about that. And the responsibilities that come with it. We’re a great beneficiary of, in some sense, the trust the world has in America and American institutions. So I’m completely grounded in it. I think it is in our self interest to think about how do we create more trust in our systems, in our institutions, in our companies and our way of doing business. So the world counts on us, we prosper, and so does the rest of the world. If we construct all of this to be zero sum, I think that it’s not just going to work. And if China or any one country thinks that they can do with protectionist regimes, I think it’s not in their interest to. And that’s kind of what I would say is for sure, I’m all for president Trump to make sure that he’s getting the best trade deals for us as a nation with every trading partner. No challenge, no issues with it. But as a multinational CEO, what I want is to be able to make sure that we can participate in every country and create surplus in every country, but at the same time realize that this is our country of origin.