Microsoft and its new CEO are trying to catch rivals such as Apple, Google and Amazon, which are each building their own thriving ecosystems for mobile devices. At the same time, the company wants to expand its burgeoning business as a provider of software and services over the Internet.
Nadella, head of Microsoft's cloud computing business, was named Tuesday to be Steve Ballmer's immediate replacement. He is only the third chief executive in Microsoft's 38-year history.
The 22-year Microsoft veteran has enlisted the help of company founder and first CEO Bill Gates, who is leaving his role as chairman to serve a more hands-on role as an adviser at Nadella's request. Gates will spend a third of his time working on products and technology.
Nadella, 46, led the company's small but growing cloud computing unit, in which customers pay Microsoft to house data and run applications on distant servers connected to the Internet. Those services are a departure from Microsoft's traditional business of making software for installation directly onto personal computers.
In addition to growing that business, one of Nadella's first tasks as CEO will be to complete Microsoft Inc.'s $7.3 billion purchase of Nokia's phone business and patent rights — part of a plan to boost Windows Phone software in a market dominated by iPhones and Android devices.
"Going forward, it's a mobile-first, cloud-first world," Nadella said Tuesday in a video accompanying the announcement.
He said he would capitalize on Microsoft's experience making the industry's leading productivity software package, Office.
"We need to be able to pick the unique contribution that we want to make," he said. "That's where our heritage of having been the productivity company ... is what we want to get focused on."
Gates will remain on the company's board. The new chairman will be board member John Thompson, who led the search for a new CEO after Ballmer said in August that he planned to step down.
Thompson said Nadella was the board's "first and unanimous choice."
Nadella has "the right background to lead the company in this era," Gates said in a video message. "There's a challenge in mobile computing. There's an opportunity in the cloud."
The new CEO has been an executive in some of the company's fastest-growing and most profitable businesses, including its Office and server and tools business. In three years as server and tools president, he helped grow that business into one with $20 billion in annual revenue — about a quarter of Microsoft's total revenue in the most recent fiscal year.
For the past seven months, he was the executive vice president who led Microsoft's cloud computing offerings. Nadella's new cloud enterprise group has also been growing strongly, more than doubling customers in the latest quarter, although it remains a small part of Microsoft's current business.
Analysts hope that Nadella can maintain the company's momentum in cloud computing and business software while minimizing the effects of unprofitable forays into consumer hardware. It's a transition IBM Corp. succeeded in making in the 1990s, but that companies such as Hewlett Packard Co. and Dell Inc. have struggled with.
Microsoft shares fell 13 cents Tuesday to close at $36.35.
Nadella's appointment comes at a time of turmoil for Microsoft.
Founded in 1975 by Gates and Paul Allen, the company has always made software that powered computers made by others — first with its MS-DOS system, then with Windows and its Office productivity suite starting in the late 1980s. Microsoft's coffers swelled as more individuals and businesses bought personal computers.
But Microsoft has been late adapting to changes in the technology industry as PC sales declined. It allowed Google to dominate online search and advertising, and it watched as iPhones, iPads and Android devices grew. Microsoft's attempts to manufacture its own devices have been marred by problems, from its quickly aborted Kin line of phones to its still-unprofitable line of Surface tablets.
Analysts see hope in some of the businesses Nadella had a key role in creating.
Microsoft's cloud computing offering, Azure, and its push to have consumers buy Office software as a $100-a-year Office 365 subscription are seen as the biggest drivers of Microsoft's growth in the next couple of years. Both businesses saw the number of customers more than double in the last three months of the year, compared with a year earlier.
Nadella is a technologist, fulfilling the requirement that Gates set out at the company's November shareholder meeting, where the Microsoft chairman said the company's new leader must have "a lot of comfort in leading a highly technical organization."
Born in Hyderabad, India, in 1967, Nadella joined Microsoft in 1992 after being a member of the technology staff at Sun Microsystems.
Partly because of his insider status and the fact that both Gates and Ballmer will remain among Microsoft's largest shareholders and company directors, analysts are not expecting a quick pivot in the company's strategy.
But some observers hope for big changes that will help lift Microsoft stock, which has been stuck in the doldrums for more than a decade. Since Ballmer took office on Jan. 13, 2000, Microsoft shares are down a split-adjusted 32 percent, compared with a 20 percent gain in the S&P 500.
Many investors are "frustrated because it's been 10 years seeing one of the best brands in technology missing out on social, on tablets, on part of cloud, as well as the overall device market," said Daniel Ives, an analyst with FBR Capital Markets.
The upside to naming an insider is "he'll be able to hit the ground running," said Morningstar analyst Norman Young. "The downside, of course, is that he has very little to no experience on the consumer side of the business."
Ballmer credited Nadella with having a "remarkable ability to see opportunities in the marketplace" and steer the company toward them.
Nadella "has direct, hard-edged advice, but delivers it in a way that is constructive and collaborative," said Jerry Kennelly, CEO of networking technology vendor Riverbed Technology Inc., where Nadella is on the company's board. "He is very likable, but I can also see the steel in Satya. He is no wallflower."
Nadella will be well rewarded. Securities filings show he will have a target annual pay package of $18 million, as well as a one-time stock award with a value aimed at $21.8 million. But that could increase if the company performs well.
One area his tour of duty at Microsoft hasn't touched is its flagship Windows operating system for PCs. Windows 8 has not revived the PC market as expected, mainly because keyboard-and-mouse users have found it difficult to navigate the touch-first interface, which uses large tiles. Analysts expect Microsoft to merge its Windows Phone and Windows RT operating system for lightweight tablets into one system to appease software developers and consumers alike, while restoring some familiar navigation tools to the computer-based version of Windows.
His familiarity with consumer devices could also be tested quickly. Nokia is expected to unveil a phone that works on Google Inc.'s Android operating system at the Mobile World Congress conference in Barcelona, which kicks off Feb. 24. Whether Microsoft can close on its acquisition in time to change that is in question, but most observers view Microsoft as unlikely to continue helping a competitor in that way.
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Business Writer Michael Liedtke in San Francisco contributed to this report.
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