Before Satya Nadella took over as CEO, Microsoft (NASDAQ: MSFT) had become a slowly dying relic trapped in the past.
The company was not in any danger of going out of business, but it was no longer an innovator. Windows still powered most computers, but rivals including Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) had taken over the tablet and smartphone spaces with iOS and Android respectively.
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When Nadella was named CEO in February 2014 he inherited a bit of a mess. On top of the company missing the tablet and smartphone markets, which ended a near monopoly for Windows, the company had angered some of its core audience with Windows 8. The operating system (OS) was optimized for touch-based devices, and it dropped many familiar features, including the well-liked "Start" button. In addition, the new CEO had to sort out what to do with the company's $7.68 billion acquisition of Nokia's smartphone business.
Basically, Nadella inherited a company that had made a lot of mistakes while operating under a reality that no longer existed. Microsoft needed a reset -- and its new CEO was able to pull one off.
What did Nadella do?
The biggest change the new CEO made was admitting that the market had changed. Where Windows once had a near-monopoly in the OS space, with Apple having only a small share, computers overall had become less important. Many functions once performed solely on Windows-based machines had migrated to iPhones, iPads, and Android-powered phones and tablets.
Microsoft did a number of things to combat that, including making its popular software like Office and Skype platform-agnostic. That allowed consumers to use Word, Excel, and other programs on any devices they owned. He also largely moved Office to a subscription-based model, rather than an ownership-based model. That gave the software suite a lower entry-level price point, allowing it to take back market share from largely inferior, but free, Office-like alternatives.
Nadella also made tough choices like essentially killing Windows Phone and writing off the Nokia investment. He also addressed the failure that was Windows 8 by killing it off, symbolically skipping to "10" for the next edition and restoring many of the features consumers missed.
In addition, the CEO has not merely fixed the mistakes of the past, he has also led his company into the cloud. That has changed the company's trajectory, which Nadella noted in his remarks in the Q4 earnings release. "Innovation across our cloud platforms drove strong results this quarter," he said. "Customers are looking to Microsoft and our thriving partner ecosystem to accelerate their own digital transformations and to unlock new opportunity in this era of intelligent cloud and intelligent edge."
What's next for Microsoft?
Nadella has Microsoft's needle pointing in the right direction. He has given up the battle in smartphones, but has won back some of the high-end tablet market with Surface. He has also grown cloud revenue, and taken steps to make Windows a player in the internet of things (IoT) alongside Android.
Nadella does not have all the answers, and he will stumble. That said, he has shown that as a leader he's willing to pivot and make changes on the fly. Microsoft is heading full force into augmented and virtual reality, for example, two unproven spaces. Those bets may pay off or they may fail, but as a shareholder, it's comforting to know the man in charge will evaluate and adapt. That's a big change for a company that had become stuck in an outdated reality.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel B. Kline owns shares of Apple and Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy.