Microsoft CEO Satya Nadella on IT transformation, Amazon, and being a ‘Windows company’

Satya Nadella thinks his company can help make sense of it all.

On Monday, at Microsoft’s Ignite conference in Chicago, the chief executive will directly address those tech professionals who make sure email gets where it needs to go and that corporate databases keep chugging along. To them Nadella will issue a reminder that even though many dollars budgeted for technology are now flowing to marketing or other corporate departments, that doesn’t mean IT spending is down overall or that the need for tech specialists has evaporated. Quite the contrary.

Last week Nadella spoke with Fortune about Microsoft’s challenge in addressing this group about the company’s strategy and how he feels about its cloud computing competition. It’s the latest stop in a two-month itinerary that has placed Nadella in front of his company’s largest constituencies, from users of Microsoft business applications (at Convergence in March) to software developers (at Build last week).

For those readers wondering, Fortune did ask Nadella about reports that Microsoft (MSFT) may be the company behind a recent takeover offer for Salesforce (CRM), a company that has proven to be a rival and sometimes partner to the Redmond, Wash. company. He refused to comment.

The conversation has been edited and condensed for clarity.

Fortune: Microsoft’s theme of aligning IT with businesses is something you’ve talked about for years. So what’s new in the cloud era?

Nadella: It is all about empowering IT. And in some sense I look at it and say, you know, of course IT stands for information technology, but none of those other transformations for business users can really be achieved, especially in the context of the enterprise, if IT professionals don’t also think of themselves as key drivers of innovation and transformation. And that’s kind of the play with words that I’ve been thinking about a lot. IT really stands for innovation and transformation.

Many employees view IT as naysayers and gatekeepers. I don’t see that changing. Isn’t that what drove the bring-your-own-device [BYOD] stuff in the first place?

That’s right. And I think that is the challenge. One of the things that I’ve been really focused on, long before even becoming CEO, has been Enterprise Mobility Suite [Microsoft’s software to manage corporate devices]. The thing about bring your own device or bring your own service is, what happens to the information assurance of a company? Okay, so you move to another company. What happens to all the access you had as a person with credentials? Who is taking care of restricting all of that?

So I feel that there has to be the freedom for end users to be able to choose devices and choose services and yet the ability for IT to govern but not control. I think that transformation—from control to govern, from provision to enable—is what IT must go through. And quite frankly it’s not just about them not wanting to change. It’s also incumbent on us, especially as a massive provider to IT, to give them the right kind of solutions.

One of the things we’re talking about right now is Windows 10. We are making it possible for businesses to stay current with Windows as a service [as easily as consumers have been able to]. There are lots of technology elements to this—for example, there are things that we’re doing in Windows Update to still give IT a lot of governance around how patches are applied but solve some of the things that get in the way of IT being able to satisfy their customers.

So yes, you’re absolutely right. IT has to go from saying “no” to saying “yes,” but saying “yes” with assurance. And that I think is both a technology problem for us to solve and what we must talk a lot about and evangelize.

Many companies think that if they put more business applications in the cloud, they don’t need as many IT people. Maybe you don’t need a SharePoint expert or an Exchange expert. Is the net number of IT professionals shrinking at large companies?

There are always going to be people who are experts in security, or end-user devices, or collaboration, or databases. That’s not going to go away. But what’s the reason all of these professions come together? To help the business transform itself.
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You talk about shrinking budgets. So here is a fascinating phenomenon. Ask any company—it could be in manufacturing, packaged goods, energy, retail, what have you—what in their total digital technology spend is going up as a percentage of revenue. Then ask what is coming down. It’s what was considered past IT—maybe a bunch of fans, or servers. Even if you are predominantly an on-premise customer, you’re using the cloud quite a bit for development and testing new applications. You may be building a mobile or web back end in the cloud, but you’re not yet moving your ERP [“enterprise resource planning”] system to the cloud.

So in a sense they want more out of the same dollar for what they did yesterday. And then they want to spend more dollars for things that they’re doing that are new.

IT spend is not limited just to the IT department. It’s spread across marketing and human resources. One of the fascinating things I see is the amount of analytics spend. Power BI [a Microsoft “business intelligence” service], which we launched as SaaS [“software-as-a-service,” the industry term for a cloud-based application], I initially thought would be used by developers and maybe marketers. It turns out that HR departments all use Power BI because “people analytics” is a big deal. So in places where I traditionally would not have expected big IT spending, they are becoming big spenders of IT, because IT is everywhere.

Let’s talk about data, making really complex data sets, and making the ability to parse them available to mere mortals.

If you look at what has happened with our database business, at the core, with SQL Server…I mean, it’s just pretty hilarious for me to think about people who think of Amazon Web Services as a leader in data and not have an understanding of the democratization of data that we have done with our regular old database business—an $8 billion business that’s everywhere, in the core of the enterprise.

We just bought a company called Revolution Analytics. We are going to completely change what it means to do advanced analytics with our data solutions. We have machine-learning stuff that is about really bringing advanced analytics and statistical machine learning into data-science departments everywhere. We absolutely have this strength in Excel, but Power BI is a SaaS service that allows you to do these rich visualizations and dashboards and collaborate and share.

I’ve been very, very focused on usage. I look at what’s happening in Office 365 by tenant, by service. All of that is dashboarded. So if one of the engineers on Office 365, say Exchange Online, has a dashboard I can go discover that usage. So it’s become, in fact, the lingua franca of how we make sense of big data inside the company and how we collaborate on it.

And it’s not just reports or dashboards. It’s live data. That means I can ask a natural-language question, get a response, do a rich visualization, and then share back. That, I think, is what I referenced before as data culture. Just because you have big data doesn’t mean you have insights or a better ability to pass judgment. So you’ve got to have this data culture. What does that mean? You are only going to have a data culture if you have the right kinds of tools. That’s what Power BI is about.

Most people see Amazon as the leader in core infrastructure. Over time it added higher level services and talked more to big companies like General Electric. What’s your take on the competitive landscape for big customers when it comes to cloud computing? Is Google a contender?

The enterprise market is never winner-take-all. If you look at the previous client-server era, we had a lot of success. So did Oracle, EMC, Cisco. And now, when you look at the current cloud era, you would say there is us, there’s Amazon, and there’s Google who have that hyperscale cloud. But really it’s Amazon, us, and maybe VMware who will translate the position that they had in the previous era to one in this new era.

I really am not focused on competing against Amazon in IaaS [“infrastructure-as-a-service”]. That’s not what it’s about. Take Azure Active Directory. It’s got 5 million entities—that means 5 million commercial organizations that have a relationship with Microsoft in the cloud and not on premise or with our licenses. None of that. They’re using Dynamics for CRM [“customer relationship management”] or ERP [“enterprise resource management”], Office 365, Azure, Enterprise Mobility Suite. That is representing 450 million individual identities within that 5 million organizational footprint.

To me what matters is having the right mix of SaaS value. I don’t think of my server business as somehow “old school” or “legacy.” I actually think of the server as the edge of my cloud.

We now have the ability to tie together the cloud and the server. That is a very unique capability that we have. So who am I competing with? Amazon has no capability to compete there. They don’t have a server. Nor does Google. Oracle doesn’t have the equivalent capability. So those are the places where we want to really excel.

I’m not claiming that we are the only guys who are going to succeed in the cloud. Others can succeed as well, just like in the previous generation. But the people who are on the right side of history, so to speak, when it comes to technology promise? You identified them right. There is Google, Amazon, and us. But who has the credentials with the enterprise? Who has the tenacity to stay constant with it? It’s not a fashionable thing to say you’re in the enterprise business for a few days and then move onto the next project.

I want to build our own public cloud at scale. We have over a million machines. I want to take the same software and—well, this is how we got to SQL [Server] 2016. It’s already running; it’s called Azure DB. We will now take that and reverse-integrate it into a server product. That’s the kind of capability that I feel will serve us well in the long run.

I don’t think we’ve actually mentioned Windows or Office once. Is Microsoft still a Windows company?

Windows is used by a billion and a half users. We see, on a monthly basis, 850 million machines that touch Windows Update. This is not even counting the machines behind corporate firewalls that don’t directly talk to Windows Update. So it’s a vibrant user base. And there are 300 million PCs, by the way, sold every year.

So Windows 10 is huge to me. It’s the beginning of a new generation of Windows. It’s not just about PCs. It’s about tablets and phones. It’s also about holographic computers and Surface Hub. It’s about [simple, versatile computers like] Raspberry Pi. Windows has gone way beyond the PC. It’s one core, one store, one platform.

So to me Windows is very much part of the cloud. But one of the fundamental things I believe is, it’s not just about one device. When I say “mobile first” or “cloud first,” to me it’s about the mobility of the app or the experience, not the mobility of the device. And if you believe that, then the control plane is really the cloud.

I actually talked quite a bit about Office 365 in this conversation. The fact that you didn’t think of it as Office is interesting. Office 365, that’s where Azure Active Directory gets all those organizational tenants from. It’s core to what we’re doing in Azure. It’s core to what we’re doing in Office. And guess what? When you log into Windows, you’re logged into both your Microsoft account and your Azure Active Directory. So the control plane is in the cloud. And those are the ways things come together.

If I’m a mobile developer, I can develop for Apple iOS, I can develop for Android, or I can develop for Windows. But there’s been strife with hardware makers and Microsoft. Why develop for you and not them?

I think they will choose to develop wherever they can make the most amount of money by reaching the most amount of users. At Build we said that we want them to write universal Windows apps [that work across devices]. There are many cases to be made for it. When you build a universal app, and you want a 10-foot experience, you can go to the Xbox. You want to innovate and build a holographic app, you can use the same application on a holographic computer like HoloLens. You can, of course, run it on our tablets like the Surface Pro 3.

So you now have these “Windows Continuum” features where those universal applications can gracefully move between a tablet and a laptop. It’s relevant for consumers, but it’s also going to be relevant in many industrial scenarios. Those are the kinds of reasons why developers will want to look at us and build for us. But we made it clear at Build that developers can use our back end and still target Android or iOS devices. They can have our Enterprise Mobility Suite and, if they’re an IT person, manage security, identity, device management, and data-loss protection across Android, iOS, and Windows. That’s a unique capability of ours.