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TheStreet Open House

As Ballmer Maps Out Cloud Empire, All Eyes on Satya Nadella

Stocks in this article: MSFTAMZNVMW

NEW YORK ( TheStreet) -- Microsoft ( MSFT ) CEO Steve Ballmer managed to get investors' full attention when he announced sweeping organizational changes that indicate the company is doubling down on its cloud delivery model after receiving mounting pressure to prove it has a clear execution path for one of the central pillars of its growth strategy. Long time Microsoft executive Satya Nadella is at the very heart of this strategy.

For investors, one of the most compelling aspects of this reorganization is that it aims to eliminate a significant frustration to the company's cloud efforts and other main goals: so-called "fiefdoms" among the various units that had constantly been battling it out for resources and lacking the much-needed "glue" required for collaboration. With the new model, each business within Microsoft will now be grouped by function, which should provide the company with a strong framework from which to expand and improve upon its cloud services through the unification all the related resources under the leadership of Nadella; another one of the most compelling features of this reorganization that Ballmer revealed.

Nadella, a 21-year Microsoft veteran with a background in electrical engineering, computer science, and business administration, has earned deep respect throughout the technology world for being a cloud and mobile visionary. Prior to his new role as Microsoft's executive vice president of the Cloud and Enterprise group, he was president of the company's $19 billion Server and Tools Business into which Windows Azure, a main competitor to Amazon's ( AMZN ) Web Services, was lumped into. Following the restructuring, Windows Azure remains under Nadella's purview and is now very close to being its own operating division in the company.

"Satya has led Servers and Tools and established Azure as a key provider in the cloud computing market," David Cearley, vice president and fellow at technology research firm Gartner Research, said over the phone.

"He's succeeded in establishing Microsoft as one of the main players in cloud computing. And so with that, I think he's well suited to expand those efforts and to try and drive Microsoft to a leadership position in cloud computing," said Cearley.

"Satya Nadella has done a tremendous job of growing and improving the business," Norman Young, a senior equity analyst at investment research firm Morningstar said in an email.

"Azure is his baby now and has been for the last year or two," said Young.

The analysts say that one of the most important messages Ballmer telegraphed about Microsoft's cloud strategy is that the company is serious about giving its key Windows Azure cloud platform as much flexibility as possible to make further inroads into the businesses of competitors such as Amazon Web Services, after having already taken market share away from VMware ( VMW ) at a growing pace over the past year. A few days ago Amazon announced yet another price cut for its cloud services since Microsoft has been broadcasting that it will match whatever price Amazon offers.

While investors are pleased with the restructuring move, they're now eager to watch the next step of the process unfold: the execution of its growth goals to their full potential.

"We thought they've always been uniquely qualified and probably the best qualified to take advantage of the move to the cloud because they've already got the applications layer, the operating layer and the server layer," said Pat Becker, a portfolio manager at Becker Capital Management, which owns more than 1.5 million shares of Microsoft. "But it's been at least up to now fairly disappointing with their execution. When you look across their products and all the assets they have, you see a way all this could tie together, but the speed of that happening -- the glue you see at Microsoft is not as strong as maybe it should be."

"It's so important that all the different assets work together, all the different aspects of Microsoft. We just want all this to be seamless," Becker said on the phone. But "I think that's what they're trying to address."

"Generally speaking I think they've listened to the shareholder base and they've been very proactive on the expense side," he continued. "Those are some of the things that originally got us interested in the stock and continue to keep us in the stock," he noted.

Becker said his company has owned shares of Microsoft for "some time" now, attracted by their discount to competitors despite clearly demonstrating the software giant's ability to maintain a strong balance sheet, generate a fair amount of cash flow, and grow earnings at 12% a year even in the face of execution and top-line growth improvement concerns.

-- Written by Andrea Tse in New York

>To contact the writer of this article, click here: Andrea Tse.

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