After speculation that Microsoft Corp. might pick Alan Mulally or Hans Vestberg (or even bring back Bill Gates) as chief executive officer, Bloomberg News reported last night that the company's board is poised to select Satya Nadella, the company's enterprise and cloud chief.
An internal candidate with decades of experience at Microsoft does have the virtue of being safe. The question for shareholders is whether he can do better than Steve Ballmer, the current CEO, at translating the company's impressive earnings growth into market-beating returns for investors. Someone who bought shares in Microsoft 10 years ago and reinvested the dividends would have made about 79 percent, while someone who invested in the Standard & Poor's 500 Index would have doubled their money, according to data compiled by Bloomberg News.
For all the spurious comparisons with Apple Inc., Microsoft has managed to do very well without caring too much whether regular people like its products. In the six months ended Dec. 31, the commercial and "corporate and other" divisions together brought in about $9.4 billion in operating income, while the devices and consumers division brought in about $4.8 billion. (Here is a good rundown of what those categories mean.) In other words, big companies are roughly twice as important to Microsoft as consumers.
But those divisional breakdowns don't reflect which products make and lose money. We can, however, get a clearer sense of where the company's most valuable assets reside by looking at its results in the fiscal year ended June 30 -- before Ballmer's recent reorganization. The Microsoft business division, which develops the Office productivity suite, generated operating income of $17 billion. Next was the Windows and Windows Live team, which brought in $8.9 billion, followed closely by the server and tools group, which earned $8.2 billion. The entertainment and devices division, which makes phones and game consoles, was responsible for $834 million in operating income. (The online services business, which includes Bing, Skype and MSN.com, lost $1.3 billion, while "unallocated and other" lost $6.9 billion.)
Ballmer has made valiant efforts to change this balance, investing in consumer products as varied as game consoles, mobile devices and search. With the notable exception of the Xbox game console, however, those efforts have yet to pan out. Those failures may have been disappointing, but they haven't been fatal, because corporations still spend trillions of dollars on information technology solutions.
So where does Nadella fit in? Right now he is in charge of the company's Web-based computing services such as Windows Azure and Windows Server, as well as tools used by Microsoft developers. Before that, he ran Microsoft's server business and, according to Microsoft, "led the transformation of the business and technology from client-server software to cloud infrastructure and services." Nadella also ran the research group for Microsoft's online services business and had a senior role in the team that makes Microsoft Office.
It's hard to know from this background alone what Microsoft's board expects Nadella to do, but one possibility could be a shift away from Ballmer's willingness to experiment with money-losing ventures and a renewed focus on building the infrastructure that powers big businesses and the Internet. That isn't as sexy as competing against new technology darlings such as Facebook Inc. and Google Inc., but it may be just what shareholders need.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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