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TheStreet Open House

Satya Nadella Needs to Pull a 365 at Microsoft

Stock quotes in this article: MSFT, GOOG

NEW YORK (TheStreet) - Microsoft (MSFT) CEO Satya Nadella's success or failure will most likely hinge on Office 365 and Windows Azure - both of which could transition the company from desktops and large IT data centers to mobile devices and cloud computing. However, Nadella will most likely focus on trying to change customer and investor perceptions about the company's existing status quo. 

Instead of some radical change, for instance a spinoff of Xbox, the wildly successful console business, and Bing, which has a web search partnership with Yahoo! (YHOO), Nadella is more likely to try to weave more coherent ties between Microsoft's growing range of assets.

In that sense, he won't likely pull any major U-turns or 180's in his first days at Microsoft. Those expectations are underscored by what is already in motion at Microsoft.

The company, arguably, already has seamless software offering that can succeed in a mobile world. Office 365 combines all of Microsoft's traditional strengths in productivity with the ability to connect to mobile devices and cloud infrastructure. Windows Azure, meanwhile, represents years of investment in cloud infrastructure that now may increasingly generate revenue and profits for the company.

One of Nadella's most important challenges will be communicating the strength of Microsoft's big bets on the future like Office 365 and Windows Azure to customers and investors.

On a Tuesday afternoon webcast, Nadella said he would spend the bulk of his initial time as CEO speaking with customers, partners and investors. That indicates that communications will be an early priority of Nadella's, and possibly an area where he may succeed where the company has previously failed.

Credit Suisse analysts said it best in arguing that Nadella will essentially have to "pull an Adobe" in accelerating a shift to the company's best software, Office 365. [TheStreet argued in 2013, Adobe would be a smart acquisition target for Microsoft.]

Other parts of the Microsoft empire that Nadella inherits may prove more problematic for the long-time insider, and especially for a first-time chief executive.

Outgoing CEO Steve Ballmer's acquisition of Nokia's (NOK) handset and mobile product business, for instance, locks Nadella into what may prove to be one of the biggest tech sector merger integration's in years.

In a letter to employees, and on a webcast announcing his hiring, Nadella referenced the integration Nokia's businesses as a key strategic initiative for Microsoft. That indicates Microsoft has no plans on turning back on the merger or discontinuing its efforts to enter the consumer hardware market.

Given Google's (GOOG) recent plan to sell Motorola Mobility after losses within the unit and falling revenue, one wonders whether Microsoft has saddled its incoming CEO with a gargantuan merger that has unclear prospects at success.

When announcing the deal, Microsoft said Nokia's 32,000 worker strong operations would cut the company's 2014 earnings per share by 12 cents in 2014, and possibly generate profits in 2015.

Those forecasts may be a hard benchmark for Nadella to accomplish.

Still, Nadella's best attributes appear to center around his ability to integrate disparate assets in a way that makes sense to users. Xbox Live, a product Nadella oversaw for many years, perfectly capitalized on a shift in the console marketplace to online gaming.

If Nadella can instill that kind of coherence behind Microsoft's more traditional professional software, he may be exactly the right person to lead the company in a period of transition. That is especially so since Microsoft is doubling down on mobile hardware. The acquisition of Nokia's phone and tablet offerings, for instance, will be considered a success if it can better highlight the strengths of Office 365 and Azure to businesses and consumers.

Failure might entail consumers' belief that other software is superior, cheaper, and easier to use or all of the above. Adoption of Office 365 on Apple (AAPL) or Google devices could also also be a Pyrrhic victory for Microsoft given its investment in Nokia.

Analysts don't expect Nadella to radically shake up status quo, even if that appears to be investors' greatest hope for the company. The re-introduction of co-founder Bill Gates as a more active member of Microsoft underscores such notions.

"We view Bill Gates' new role as helpful even if it reinforces the view that the structure of the company will not change near-term," Jefferies analysts said. "Nadella will likely be a "tweak the model" CEO rather than a "transformational" CEO," Deutsche Bank analysts said.

"We do not believe that Microsoft's strategy will change just because Wall Street wants to squeeze out short-term earnings growth through divestitures of Xbox and Bing and massive layoffs. Let's not forget that the board, now under Mr. Thompson's Chairmanship, has previously deliberated on the devices & services strategy and ratified it, leading to the Nokia acquisition," Bank of America Merrill Lynch added.

Gates said on Tuesday he believes he will be able to devote about a third of his time on Microsoft as a technological advisor to Nadella. Perhaps that may be most helpful in helping to make Microsoft's product offering more coherent, a strength of the company when it was run by Gates.

For his part, Nadella indicated that the company will be more focused in the future - even as it continues to expand its product offering. Nadella said that Microsoft would focus on building more "specificity and focus" on what the company can uniquely offer to customers.

If Microsoft has invested smartly in building out its mobile and cloud offerings in recent years, that may be exactly the right mentality that the company needs in a time of transition.

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