Companies
How Microsoft changed under Satya Nadella
Summary
- Approaching a decade as Microsoft CEO, Satya Nadella has aggressively diversified the tech giant’s revenues. He’s now taking that intent to artificial intelligence
On 13 October, Microsoft closed its $69-billion acquisition of game publisher Activision Blizzard, the largest in its history and one of the biggest tech deals ever. The deal, which took over 20 months to close due to regulatory hurdles, also underscores Microsoft head Satya Nadella's ambition to diversify the technology giant's revenues.
Acquisitions have been key to Nadella's growth strategy. Microsoft has made over 100 acquisitions since he took over in 2014—about twice its run rate over the previous two decades. This included multi-billion-dollar purchases such as LinkedIn and GitHub, which not only changed Microsoft’s profile but also helped it get some top talent. For example, its current technology head, Kevin Scott, came through its LinkedIn acquisition.
Activision's revenue contribution will be limited. In 2022, it had revenues of $7.5 billion, a fraction of Microsoft's $211 billion. However, it will strengthen its gaming revenues, and give Microsoft an edge over rival Sony. Strategic moves such as these helped push Microsoft's market capitalization from about $300 billion in 2014 to $2.48 trillion now.
Nadella also changed the way the company operated, helping it find its 'soul'—in hardcore engineering. When he became CEO, research and development (R&D) expenses were just above half of sales and general administration expenses. Now, it's over 80%. He also allowed the R&D team to directly pitch new products instead of going through a product team. All these were in sharp contrast to how his predecessor Steve Ballmer ran the business, with a strong focus on sales and marketing.
Cloud era
Ballmer saw the future of Microsoft in "a family of devices and services", and led Microsoft's acquisition of Nokia's devices and services division. When Nadella took over as CEO, he discarded that strategy, and instead focused on the cloud, a business he was heading earlier and whose potential he knew. While Microsoft's overall revenue grew 2.4 times between 2014 and 2023, its intelligent cloud business quadrupled to $88 billion, and is its largest segment now.
In 2022, Microsoft had a share of 21.5% in the global public cloud infrastructure market, second only to Amazon (40% share), according to Gartner. Microsoft also makes money from its slew of cloud offerings like its 365 line of productivity platform, including Word and Excel, which were sold predominantly as desktop apps. Offering them over the cloud made them independent of the Windows operating system, paving the way for deeper collaborations and partnerships.
Compete and collaborate
As a dominant player, Microsoft had been slow to open itself to collaborations and partnerships. Nadella pushed the company in that direction, which showed in two ways: its embrace of open-source technologies and the way it approached competition. Under Nadella, Microsoft started engaging deeper with open-source communities. It is now one of the top open-source contributors, along with Google, according to the Open Source Contributor Index.
In 2018, it acquired GitHub, the world's largest code repository, and kept it independent. It is partly because cloud technologies are mostly powered by open source and also because Nadella believed it made business sense to collaborate even with competitors. "I don’t primarily come at this from a zero-sum competition perspective," he said at Davos 2019. One of his first moves as a CEO was to launch Office for Apple iPad. Now, it is set to sign a billion-dollar deal for its productivity apps with Amazon, its bitter rival in the cloud infrastructure market.
AI boom
Nadella's biggest bet so far is on artificial intelligence (AI). Like other technology heavyweights, Microsoft has been investing in AI for years now. It owns 6,356 patent families in AI and machine learning as of 2022, against 3,500 in 2014, according to PatentSight. Along with IBM, it was one of the top two US patent-owning companies in 2022 (Alphabet was in the 2021 list).
However, the recent excitement around Microsoft's AI play is almost entirely due to its investment in OpenAI, a startup that garnered 100 million users in just two months. Microsoft has invested $13 billion in OpenAI and is integrating ChatGPT across its applications through 'Copilot', a productivity tool providing real-time assistance. In his annual letter published on Thursday, Nadella wrote: “This next generation of AI will reshape every software category and every business, including our own."
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