Behind the scenes of Nadella’s most difficult year – Business Insider

Three years ago, Satya Nadella pushed Microsoft to the forefront of the AI race and was “like a superhero,” one former Microsoft executive said recently.

In February 2023, after making an early bet on OpenAI, the CEO unveiled Microsoft’s AI-powered Bing search engine in front of a packed audience in a Seattle suburb, declaring war on Google’s search dominance. “The race starts today,” he said. A wave of praise followed. When Nadella helped lead OpenAI’s board through crisis later that year, Bill Gurley called it “a stunning shift in the company’s reputation.” CNN Business named Nadella CEO of the Year.

Inside Microsoft and across the technology industry, Mr. Nadella was hailed as a man of the future. Now his legacy is at stake.

Microsoft stock is down more than 24% from 12 months ago, far worse than the rest of the Magnificent Seven. Investors are increasingly skeptical that the company’s multibillion-dollar AI bet will materialize. Microsoft’s flagship AI product, Copilot, lags behind other AI tools such as ChatGPT and Claude. LinkedIn has come under fire for being flooded with AI-generated hustle porn. Xbox’s business is “not healthy,” the CEO said recently, citing layoffs and restructuring to justify the company’s record $69 billion acquisition by Activision Blizzard.

And internally, employees are questioning Microsoft’s plans to spend a record $190 billion this year on building AI infrastructure. As generative AI changes the way people work, create software, and consume information, three of the company’s core businesses are at risk: Microsoft 365, GitHub, and Azure. Investors will get a report on these issues on Wednesday, when the company releases its fourth-quarter results.

As AI adoption spreads across corporate America, software companies everywhere are fighting to fend off the so-called SaaSpocalypse. But the battle will be especially difficult for Mr. Nadella’s Microsoft, which made an early and big bet on AI to drive the company’s future. Now, the company’s north star may be in trouble.

For decades, Microsoft’s productivity software has been the default homeroom for knowledge workers to start their day. They opened Word to write, Excel to analyze data, and PowerPoint to create presentations. Now, millions of workers are starting to do all of this directly within AI tools. Gartner analysts predicted earlier this year that AI could disrupt traditional productivity suites like Microsoft 365 and Google Workspace in a $58 billion market transformation.

Microsoft executives point to the continued growth of Microsoft 365 and increased adoption of Copilot as evidence that customers still want Microsoft products at the core of their operations. “The M365 business is seeing a significant amount of new hiring and use of the M365 Copilot,” said one executive, noting that the company is specifically pursuing computing capacity to meet demand.

GitHub faces similar challenges. Since acquiring the software development platform in 2018, the company has held a dominant position among developers, gaining an early advantage in AI coding through GitHub Copilot. And that growth continues. The platform recently had its “best month ever,” executives told employees in company meeting comments seen by Business Insider, without specifying by what measure.

But as millions of engineers have adopted Cursor (which SpaceX recently announced plans to acquire for $60 billion) and Anthropic’s Claude Code, startups are pouring in. As Business Insider previously reported, executives are internally discussing the need to overhaul GitHub to better compete with AI-native coding tools. AI demands are also putting a strain on Github. GitHub has experienced dozens of major outages this year as AI usage continues to surge.

The company has also broadly struggled to keep up with demand for computing power. Despite the downturn, Microsoft plans to raise sales staff quotas by about 30% this year to sell its Azure cloud computing platform, according to people familiar with the changes.

While Azure remains Microsoft’s fastest-growing strategic business, company executives say it has become a constant balancing act. Demand for computing infrastructure is outpacing the company’s ability to build new capacity, forcing Microsoft to make difficult decisions about where its resources go. Despite $190 billion in capital spending this year, primarily expanding data center capacity for AI workloads, executives say the company remains constrained.

Earlier this year, Chief Financial Officer Amy Hood suggested Microsoft was prioritizing scarce computing resources for its own AI products before allocating remaining capacity to Azure customers.

“The first thing we’re doing is addressing the increased usage in sales and the accelerated pace of M365 Copilot and our first-party app, GitHub Copilot,” Hood said on Microsoft’s January earnings call. “Then we make sure that we’re investing in the long-term nature of R&D and product innovation. And then what’s left over at the end of the day goes toward servicing the capacity in Azure that continues to grow in terms of demand.”

Why would Satya prioritize Adobe growth over M365 growth?microsoft executives

If Microsoft had allocated the GPUs that came online in the first half of the fiscal year to Azure instead of its own AI products, Azure’s growth rate would have been more than 40% instead of 39%, Hood said. Microsoft previously reported fiscal 2025 Azure revenue of $75 billion.

The earnings report triggered one of Microsoft’s biggest post-earnings stocks to fall by more than 10%, as investors questioned the company’s slowing Azure outlook despite record AI spending and raised concerns that Microsoft was diverting capacity from cloud customers.

Executives who spoke to Business Insider said these tradeoffs are intensifying.

Microsoft is desperate for capacity, so it’s looking to competitors to ease some of those constraints. Following a series of GitHub failures, Amazon bailed out Microsoft. The company also considered leasing Oracle’s cloud infrastructure, but Microsoft backed out due to security and compliance concerns.

Microsoft is currently seeking additional cloud capacity from other providers, including Amazon and Google, according to people familiar with the discussions. “We are looking for capacity everywhere,” one of the people said.

While prioritizing internal services is controversial on Wall Street, the strategy is clear within Microsoft.

“Once we solve Frontier Laboratories, internal business issues like M365 and Microsoft AI, all the supply will be gone,” said one executive.

These decisions led to some difficult internal discussions.

“Why would Satya prioritize Adobe growth over M365 growth?” the person said. “I don’t know how to get that message across to customers.”

As pressure mounted on Microsoft’s core business, Mr. Nadella withstood pressure on its employees and restructured the company and its leadership.

As Business Insider previously reported, Nadella promoted Judson Althoff to CEO of Microsoft’s commercial operations, freeing up himself and the company’s engineering leaders to focus directly on AI. Althoff previously served as Microsoft’s sales executive for many years, but this role further raised his profile. In an internal memo seen by Business Insider at the time, Nadella described this moment as a “tectonic shift for AI platforms.”

The mounting pressure on Nadella has spilled over into Microsoft’s ranks, from executives to rank-and-file employees.

At the same time, Nadella reshuffled his inner circle. Business Insider previously reported that Microsoft has effectively scrapped its traditional senior leadership team structure in favor of a smaller, flatter leadership group. More executive changes are expected, with AI CEO Mustafa Suleiman focusing on Microsoft’s superintelligence efforts, Nadella’s top lieutenant Rajesh Jha leaving and longtime product and marketing leader Yusuf Mehdi preparing to step down.

Heite Garrott, who recently returned to Microsoft from Google to lead the company’s security business, is seen internally as sales chief Althoff’s long-term successor, according to people familiar with the succession plan. Garrott previously worked at Althoff, but one executive told Business Insider that his departure was “not a happy one.” Nadella rehired Garrott to replace Charlie Bell. Charlie Bell has moved into an individual contributor role focused on engineering quality. Rodrigo Quede Lima, who Microsoft just named to head its $2.5 billion AI sales division, is also a rising star, one of the people said.

The changes extend beyond the executive suite. Business Insider has learned that Microsoft overhauled its performance appraisal system this year, simplifying ratings into five categories and making the distinctions between performance much clearer.

Executives say the new process feels like a return to “stack rankings,” a controversial system from the Steve Ballmer era that evaluated employees relative to each other. At the same time, managers have been told to reduce the number of employees in higher-level engineering roles as Microsoft continues to flatten parts of its organization, emblematic of a broader hard-core work culture that has spread across Big Tech in recent years.

“It’s like the old days of Microsoft are back,” said one former executive. “The old Windows days of living with big fears and a billy club in hand.”

For years, Microsoft’s greatest strength has been that it owns the places where people work and developers build software. AI is beginning to question both assumptions simultaneously. Going forward, Mr. Nadella’s legacy will not be determined by whether Microsoft can build the best AI, but by whether it can prevent AI from eroding the business that has made Microsoft one of the most valuable companies in the world.

ashley stewart I’m Business Insider’s chief technology correspondent.