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Microsoft's Nadella Must Reach for the Cloud

Stocks in this article: MSFT AAPL FB

NEW YORK (TheStreet) -- One big question new Microsoft (MSFT) CEO Satya Nadella faces is whether the company will make the necessary investments in cloud technology. Whether Microsoft can do that is now in doubt, as activist investors led by ValueAct Capital press it to reduce costs.

Nadella had been heading the company's cloud effort, Azure, which has been aggressively cutting prices on cloud services to gain market share and adopting open standards through Facebook's (FB) Open Compute project.

The key figure for investors to watch is the capital-expenditure account. Last year, Microsoft almost doubled its capital spending from $2.31 billion to $4.26 billion.

Many companies may seek to avoid the cloud real estate race. If your goal two years from now is to have the lowest possible information-technology costs, it might be wise for you to rent that capacity once a glut appears.

But if you want to be controlling and defining the technology landscape two years from now, you don't have a choice between buying and building. You're going to be either working from your own data centers or spending money at your competitors' data centers.

When it comes to questions about the direction of technology and the imperatives required to stay on top of it, companies can't afford to listen to hedge funds. That's why companies such as Microsoft and Apple (AAPL) built their large cash hoards in the first place -- so that they could keep spending toward the next big thing regardless of what was happening in the underlying economy.

Hedge funds don't care what happens in the larger economy. They put money into a company and they want to get their money out, period, full stop. They don't really care about the fates of the companies they invest in, either. They care about their money.

Nadella has to be strong enough to resist this stupidity and invest ahead of growth in order to maintain the company's autonomy through the next technology cycle. He comes out of the right part of the company -- he can see that cloud is Microsoft's future.

The question is whether Nadella will be given the power to tell hedge funds they can either wait for the cloud real estate gold rush to play out or take a loss, because investing in cloud technology is necessary.

At the time of publication, the author owned shares in Apple.

Follow @DanaBlankenhorn

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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