Exclusive: CEO Nadella talks Microsoft's mobile ambitions, Windows 10 strategy, HoloLens and more

Microsoft CEO talks about his thinking around product differentiation and being ahead of the curve in this Q&A with Microsoft watcher Mary Jo Foley.

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Minutes after he left the Worldwide Partner Conference stage after delivering a keynote for 14,000-plus resellers, integrators and other Microsoft partners on July 13, Microsoft CEO Satya Nadella sat down with me in the backstage green room for a 30-minute interview.

His appearance at the annual partner show followed by just a few days the latest of his "hard choices" kicking off Microsoft's fiscal 2016. Last week, Nadella announced Microsoft would be cutting 7,800 employees, most of which are in the hardware and devices unit. Despite the fact that he committed to continuing to make up to two new Lumia handsets in the value, flagship and business segments each year, moving forward, many company watchers considered last week's moves as signifying Microsoft's abandonment of Windows Phone and concession of the mobile market to its competitors.

I asked Nadella about his plans for continuing to compete in the phone/mobile markets; his expectations for Microsoft's HoloLens augmented-reality technology; and his partnership plans, in particular with regards to Microsoft's long-time nemesis, Google.

I've edited this transcript for clarity and length.

MJF: You just got off the stage. What do you hope partners take away from your keynote this morning?

SATYA NADELLA: I really mean this when I say I want us to be a very mission-driven company in the choices we make and the things that we do and how we do it, because the lesson learned for me has been to not conflate or mistake a particular goal with a particular technology and your mission.

When I joined the company in '92 it was about the PC in every home and on every desk. Guess what: We achieved that. And a company has to outlast any given technology paradigm and any ambitious goal. And so for me this going back to what is it that drove Bill (Gates) to build even the BASIC compiler or the interpreter to what we did in terms of inventing productivity or democratizing client-server computing.

That's where I come back to this notion of empowerment. When I even think about the three broad ecosystems out there in the world, we are the only ones who both (consumer and business). Because of what we do in our economic model, we are fundamentally focused on saying it's about our customer's product. IT can be a student writing a term paper or a big enterprise driving their own differentiation of productivity. Both of them are the things that we as an ecosystem care about. And that's what grounds me on what choices we make, what markets we participate in, how we do it.

In this world we have these three big ambitions (reinvention of productivity and business processes; building the intelligent cloud; more personal computing). Of course they're grounded in real product today, But it's also beyond what we're delivering today, beyond the brand names of today. Where are we going? That's where the morning's keynotes were all about and that's what I'm focused on.

MJF: That's a great jumping-off point to one of the things I want to talk about. After last week a lot of people I'm talking to -- partners and customers -- are really worried about your prospects in mobile. You just said not to conflate the technology with what you're going to do next. So, does Microsoft cutting back on the number of Windows Phones you make mean you are getting out of the mobile market?

NADELLA: Not at all. Quite frankly I think it's sort of about the lens through which you view what's happening. I view the mobile opportunity, even today in its broadest sense, and in the future, as being richer.

First, I want to be able to be present on every mobile endpoint. That's a very explicit core goal. It's not (just) the notion of having our application endpoints, Skype, Outlook, Wunderlist, Sunrise, on every one of the two billion devices. We want to have Microsoft experiences, because to me that's a platform play. It's not like, oh, they're just application endpoints. Guess what is behind those applications? It's One Cloud. It's Office 365, either for the consumer or for the enterprise. There's MSA (Microsoft Account) in there.

So to me it's very important to think of our operating system more broadly than some old definition of an operating system. So we want to be in every device, not only have our application endpoints on every device. I want the identity management. It's not MSA alone, it's Azure Active Directory. It is managing those devices, securing those devices in terms of data protection. These are all core capabilities that we have.

Then on top of that, to me, one of the great structural pieces is we don't have with Windows is this problem of Mac OS/iOS. I'm not in some quest to say let me try and replicate Mac OS and iOS or iOS and Mac OS. We don't have the Chrome versus Android. We are Windows, from Raspberry Pi to HoloLens. And when you saw the demo of HoloLens today, to me it's part of my mobility strategy. When the person was using Autodesk and Maya on the desktop and just moved to a 3D model and interacted, they weren't using their phone.

If anything, one big mistake we made in our past was to think of the PC as the hub for everything for all time to come. And today, of course, the high volume device is the six-inch phone. I acknowledge that. But to think that that's what the future is for all time to come would be to make the same mistake we made in the past without even having the share position of the past. So that would be madness.

Therefore, we have to be on the hunt for what's the next bend in the curve. That's what, quite frankly, anyone has to do to be relevant in the future. In our case, we are doing that. We're doing that with our innovation in Windows. We're doing that with features like Continuum. Even the phone, I just don't want to build another phone, a copycat phone operating system, even.

So when I think about our Windows Phone, I want it to stand for something like Continuum. When I say, wow, that's an interesting approach where you can have a phone and that same phone, because of our universal platform with Continuum, and can, in fact, be a desktop. That is not something any other phone operating system or device can do. And that's what I want our devices and device innovation to stand for.

Last week's announcement was not about any change to our vision and strategy, but for sure it was a change to our operating approach. The way we're going to go about it. I'm not going to launch a phone a day. I'm going to focus on a few phones that actually grab share that, in fact, showcase our uniqueness. When you have three percent share of that (phone market), but you also have a billion desktops, you have Xbox, you have innovation in HoloLens; you have Band. It's a graph. It's not any one node. It is the entirety of the device family. And I want to be able to think about our strategy, our innovation, and progress as one.

If anything, the thing that I'm signaling most to the investors, to the employees is let's stop this thing about trying to atomically dissect any one. They will all have a temporal current position and a future ambition. But it is one thing that we need to move on.

MJF: It sounds like you're saying that right now when people talk about "Windows mobile," (lowercase m), they only think it's the phone operating system. But you are saying it's much more than that. You're saying Windows mobile, going forward, is bigger?

NADELLA: That's why whenever I talk about Windows 10, I talk about mobility broadly across all of those devices. For sure there is a form factor today which is the below six or seven inches, which is powered by a very specific operating system instance of Windows 10, which is Windows Mobile. But what do you call that (device) when you use Continuum and then you're using applications on a big screen with a mouse and keyboard? It's Windows 10.

That's why I like to think about Windows 10 as not being bound to any one form factor. What is Alex (Kipman) doing with a HoloLens? It was a Windows 10 UAP (Universal App Platform). I think is what we need to do a better job of communicating.

In my case I have a Band. I have my phone. I have my Surface. I have my Surface Hub and I'll have a HoloLens. And that to me is all Windows 10. And I'll seamlessly move between all of these. I want the notifications to flow between all of these. I want my data and apps to flow between all of these things.

MJF: I saw (COO) Kevin Turner's mail about the moves you made last week, and he made a Surface analogy. He said now what we're doing with phone is more like what you're doing with Surface. Your phones are going to be more of like showcase devices for what Windows mobile can look like on a phone.

NADELLA: Correct. There's a little bit of a distinction because, in some sense, in the world of PCs, we are trying to create new categories like Surface did. Now every OEM has a two-in-one, which I celebrate, which is great. Surface Hub -- I'm sure next year there will be many OEMs with Surface Hub like devices. We will do HoloLens, and then, since the holographic computing platform is right there in Windows, there will be people who will build holographic computers beyond HoloLens. So I want all of that to happen.

If no OEM stands up to build Windows devices we'll build them. There will be Lumia devices. So I'm not afraid of saying, okay, it's all about the OEMs, or it's all about the ecosystem. It's about Windows. It is about the overall health of Windows and being grounded in any given day's reality, but having ambition of where the market is going versus being bound by current definitions.

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MJF: Does that Surface analogy break down, though? Microsoft built Surface but there were still many other OEMs building successful Windows devices. But with Windows Phones phones, that's not the case, right?

NADELLA: We will do everything we have to do to make sure we're making progress on phones. We have them. Even today Terry (Myerson, the head of Windows and Devices) reinforced, again, yes, we will have premium Lumias coming this year.

If there are a lot of OEMs, we'll have one strategy. If there are no OEMs, we'll have one strategy. We are committed to having the phones in these three segments. And I think the operational details will become clear to people as they see it. I want people to evaluate us on the phones that we produce, but not the inside baseball -- what are we doing to produce -- because that should not be relevant to our broad consumers. It may be relevant to people like you who are critiquing us. That's okay. But what matters to me is what customers care.

MJF: I'm curious if you see last week's decisions around Windows Phone affecting your universal app strategy. Some believe that if Microsoft makes fewer Lumias -- and Microsoft is making more than 95 percent of all the Windows Phones in the market -- doesn't that kill, or at least weaken, your universal apps play, which is key to Windows 10? Why as a developer do I now want to build an app that runs on Windows Phone if there's going to be even fewer Windows Phones?

NADELLA: Universal Windows apps are going to be written because you want to have those apps used on the desktop. The reason why anybody would want to write universal apps is not because of our three percent share in phones. It's because a billion consumers are going to have a Start Menu, which is going to have your app. You start the journey there and take them to multiple places. Their app can go to the phone. They can go to HoloLens. They can go to Xbox. You talk to somebody like Airbnb. It might be more attractive, given our three percent share on phone, for them to actually build something for the desktop and for the Xbox.

And by the way, when we hook them on that, we have a phone app. This strategy is path dependent, which is a term I use that means where you start is not where you end up. And therein lies a lot of the nuance. The fundamental truth for developers is they will build if there are users. And in our case the truth is we have users on desktop.

Why then make all these changes to the Start Menu with Windows 10? It's not because I just want to bring back the old. It's because that's the best way to improve the liquidity our store. Windows 8 was great except that nobody discovered the store. In Windows 10, the store is right there and done in a tasteful way.

I want that to translate into success for our developers. That's what's going to get them to write to the phone. If anything, the free upgrade for Windows 10 is meant to improve our phone position. That is the reason why I made that decision. If somebody wants to know whether I'm committed to Windows Phone, they should think about what I just did with the free upgrade to Windows, rather than -- hey, I making four more phone models of value smart phones.

MJF: How does making Windows 10 free show that you're committed to Windows Phone? I'm not quite following that.

NADELLA: Because all of this comes down to how are you going to get developers to come to Windows. If you come to Windows, you are going to be on the phone, too. Even if you want to come to Windows because of HoloLens, you want to come to it because of Xbox, you want to come to the desktop, all those get you to the phone. It's not about let's do head-on competition. That will never work. You have to have a differentiated point of view.

MJF: I have a HoloLens question. I've heard that when you first saw HoloLens -- back when it was Project Fortaleza -- you said we need to expand this beyond just gaming. Where do you think the initial demand for HoloLens is going to be? Is it going to be more in gaming, or is it going to be more in business and research?

NADELLA: For sure in the first version, it's going to be more about developers and enterprise scenarios

I did buy Minecraft to create a new genre of gaming for mixed reality. We bought Minecraft for many reasons: because it's the number one PC app; it's the number one console app; it's the number one paid mobile app on iOS and Android. I wanted a hit game even for the new medium of mixed reality. And we will have that. Gaming will always be a scenario and there will be other entertainment broadly. But, with the V.1 of HoloLens, I want us to push a lot more of the enterprise usage.

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In general Microsoft's approach will be always this dual-use focus, or this multi-focus. What we can uniquely do is bridge consumer to enterprise. That's in our DNA. That's why it's even in our mission statement of empowering people and organizations. I want every technology of ours to seek that out. In the HoloLens case, when I look at the interest, it's amazing how many are in hospitals, healthcare, retail. That's where I'm seeing the interest and we'll definitely go after it.

MJF: A question on partnerships. Since you've been the CEO, it feels like Microsoft is very different in how it's approaching partnerships. If you look at how (former CEO Steve) Ballmer dealt with companies like Salesforce and Adobe, and how you're dealing with them, it's very different. What is the difference in your philosophy here?

NADELLA: Microsoft, even during Steve's time and Bill's time, was a platform company. Rhetoric aside, and stylistic approaches aside, at the core I'm just doing what we have always done well. How many multi-billion-dollar software companies got built on top of Windows? Google wouldn't exist if they couldn't have built a browser for Windows, they couldn't have put toolbars on IE. We were the most open ecosystem on the planet ever.

We were always a platform company. I want us to be able to live that in our approach. That means Salesforce should extend Office, they should integrate, they should use Azure. Same thing with Dropbox, Box, Adobe. They should build great applications. It makes all the sense in the world for us to think about the construct fundamentally as non-zero sum. We may compete with many of these folks in some categories, but at the core we are a platform vendor. In fact, we have three platforms I like to talk about: Windows, Azure and Office. I like to think all three of these will be open for others to extend and, of course, we will construct them together.

MJF: In that vein and you're thinking about partnerships, do you think there's any hope you're going to have a partnership with Google where they build apps for Windows 10?

NADELLA: I would love to. It's for them to decide. I would love for them to have YouTube on Windows Phones. I would love for them to do their best work like they have with Chrome on Windows.

MJF: Is Microsoft actively talking with them about these things?

NADELLA: We'll talk to every developer. Some of these relationships with large players require a level of maturity, which I'm sure we will achieve with all players. I'm hopeful that there are more applications. After all, we now have our apps on Android, and that's good. And then we just hope that it's reciprocated and our users mutually benefit.

MJF: You just announced here at the show a new service and app called GigJam that seemingly creates a whole new application category. It crosses a lot of boundaries. I've heard you talk about Microsoft making fewer, bigger bets. So how does something like GigJam fit in here? Aren't you going off in a whole other non-established category?

NADELLA: It is about the core. It's one category. It's about productivity and business process. Think of it as a new module of Office 365. It's not bound to today's definitions of categories. It's not just a creation tool. It's not just a communications tool. It's not just a development tool. It's all of that. And it spans all devices. It's not bound to one device.

The notion is to be able to generate applications on the fly to adjust to the work that you're doing versus sending you off to five different apps, five different devices, and five different communications sessions. We brought all of that. That's a very revolutionary concept. If you think about the first time you saw Outlook, up to that point I had a contact management app, I had e-mail, and I had a calendar. Outlook took those three categories, came up with a new scaffolding, and since then, nobody has thought about these three things as separate on the desktop. So it's fewer, but big bets with growing addressable markets, not looking back.

MJF: We've heard stories about your decision that the Surface Mini -- that small, ARM-based tablet that nearly came to market last year -- was not differentiated enough, so you axed it. How do you decide what's differentiated enough when it comes to new devices?

NADELLA: What I want us to stand for is not have envy for somebody else's success. I want us to stand for what is it that we've done that customers actually care about. Why is this important for us to take to market? I actually don't even care as much about initial grand success in terms of volume or share. Does it meet a specific scenario that we have done very well for some set of plans? It's a shorthand for doing customer scenarios that are differentiated.

I want to be more customer-led. When we say customer-led, that doesn't mean just listen to customers about X and then do the same feature. It's about being able to anticipate what we can do to really differentiate their own lives. GigJam wouldn't have come from the thinking of let's look out there and see who is doing something.

That is how we created Microsoft. Nobody had done Visual Basic. Nobody had done Access. Nobody had done Outlook. We created categories or democratized categories. We either took something very complex and made it simple so that everyone in the world could adopt it, or created something where it didn't already exist -- where nobody came to us and said, this is what we want. Once we did it, everybody wanted it. That's the bar for devices and our software and services.

MJF: So back to phone, then. You've said one of the three categories of phones you want to make are "business phones." What's the differentiator for you there?

NADELLA: Businesses are actually the place where we're growing fastest among all our phone ones. Think about it. Some of the real (attraction) of Windows devices is management and security. The fact that your latest soccer app is not available, or some social networking app is not available is not much of an issue (in business scenarios). What matters to you is identity management, security, protection.

The other thing that matters is rapid application development. In our case, we take a Lumia device, you power up Azure App Services, and out come Universal Apps that automate workflows. I think that's unbeatable in terms of a value proposition. That's why we have something unique to contribute.

Those three segments, I picked them because we have something unique to contribute. For people who love Windows, we'll have a flagship device. It's not just a flagship device, but it also supports things like Continuum. For business customers, it's about custom apps they want to deploy onto those endpoints with management and security. For the value smart phone segment, I want to focus on where we can put Office and our communications and Skype, so it's more like a Skype and Office phone for the first time smart phone buyer. Those are places where I feel like, yes, that's a kind of uniqueness. Let's grow from there.

You've got to remember even the Apple regeneration started with colorful iMacs. So let us first get the colorful iMacs. I think with what we're doing with Lumia, we're at that stage. I want to do good devices that people like, and then we will go on to doing the next thing and the next thing.

MJF: Are you using a Windows Phone yourself?

NADELLA: Absolutely I do.

ZDNET: I heard you might use Talkman (one of the next expected premium Windows Phones) pretty soon.

NADELLA: I don't think I said that.

MJF: Not publicly, at least :)

NADELLA: This is the 830. Of course I'm using a Windows Phone, but that doesn't mean I'm not going to make sure that everyone I see with an iPhone here , I'm going to get them to download one of our apps. And that's our goal.

We had a CEO conference recently and I did a demo of all the things that we have on the iPhone so that they could all walk out with Wunderlist, and OneNote, and Outlook. By the way, Outlook client on the iPhone is the best Gmail client and the Exchange client on iOS. Now that to me also signals our mobility strategy.

MJF: So bottom line -- your mobility strategy is not just about phones.

NADELLA: It's about phones. It is about our apps on other end points. It is about EMS (Enterprise Mobility Suite). It is about new categories like HoloLens. In the full arc of time, that's what people really value. It's not about one mobile device that rules them all. That would be like saying there's one PC that's going to rule all as a hub.

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