How Microsoft’s Satya Nadella became tech’s steely eyed AI gambler

Seatle: Earlier this year, Satya Nadella hammered out a deal that surprised everyone outside his inner circle at Microsoft.

Nadella, Microsoft’s CEO, had his eyes on a Silicon Valley startup called Inflection AI. The company’s CEO, Mustafa Suleyman, was one of the founders of the pioneering artificial intelligence company DeepMind. He had raised more than $1.5 billion in funding and hired top researchers for his new company, but he had a not-so-great reputation as a boss. Inflection also didn’t seem to make any money.

Microsoft still shelled out more than $650 million to license Inflection’s technology, hired most of its staff and put Suleyman in charge of a more than $12 billion chunk of Microsoft’s business. It was, to put it mildly, risky.

Risky bets on AI have become a habit for Nadella. Over the past five years, he has committed to investing $13 billion in another aggressive young company called OpenAI, even though it hadn’t yet made much money. And he told all of his lieutenants to find ways to build AI into Microsoft’s many, many products, even though the technology didn’t always work correctly.

But he had his reasons. Nadella sees the AI boom as an all-in moment for his company and the rest of the tech industry. He aims to make sure that Microsoft, which was slow to the dot-com boom and whiffed on smartphones, dominates this new technology.

Microsoft’s investors like the gamble so far. The tens of billions Nadella has spent on AI over the past two years has pushed Microsoft’s worth up 70 per cent to more than $3.3 trillion, making Microsoft one of three companies (with chipmaker Nvidia, another AI star, and Apple) vying to be the most valuable publicly traded company in the world.

A 56-year-old engineer who came up through the ranks of Microsoft to become its CEO about a decade ago, Nadella was credited with restoring Microsoft’s luster after a yearslong slump under his more famous predecessor, Steve Ballmer.

Nadella was still “looking to make some big bets, and he was exploring all kinds of different things,” said Penny Pritzker, the former US commerce secretary who is on Microsoft’s board of directors. He paid $69 billion to acquire video game publisher Activision Blizzard, despite considerable resistance from antitrust regulators around the world, and made a stumbling detour into the metaverse.

Then AI came along. It was, Nadella believed, the game changer he had been looking for.

In early December, Nadella met with Suleyman for hours in his office at Microsoft’s headquarters in Redmond, Washington. He also vetted Suleyman with Reid Hoffman, a Microsoft board member and venture capitalist who was a co-founder of Inflection, according to two people with knowledge of the conversations.

Less than a month later, Nadella finalized the deal.

The Soul of an Engineer

Nadella grew up in Hyderabad, India. His mother was a Sanskrit scholar, and his father a Marxist economist and officer in India’s highly selective civil service.

He attended high school at Hyderabad Public School, a century-old institution modeled after Eton, where British royalty study, and he fell in love with cricket (he is now an owner of the Seattle Orcas, of the new U.S. professional league). “All of us as kids were expected to have a real all-around education,” said Shantanu Narayan, CEO of Adobe, who overlapped with Nadella at the school.

Nadella came to the United States for graduate school — first computer science at the University of Wisconsin-Milwaukee, and later an MBA from the University of Chicago Booth School of Business — and joined Microsoft in 1992 from Sun Microsystems.

When Nadella took over as CEO in early 2014, he rapidly overhauled the almost 40-year-old company. He pushed Microsoft to embrace cloud computing and open-source software that customers could freely adapt.

Microsoft had long resisted that approach. But Nadella introduced a wave of open-source technologies, supercharging Microsoft’s cloud business. From 2015-18, Microsoft doubled its market share in cloud computing, cementing its role as the No. 2 behind Amazon.

In 2018, he needed only 20 minutes to greenlight the acquisition of the world’s most important open-source company: GitHub, the site where developers shared and collaborated on software code.

After executives spent years debating whether to buy GitHub, Nat Friedman, a former Microsoft executive who worked for Nadella for five years, said he pitched the idea to Nadella and other senior leaders at an annual executive retreat at the Suncadia Resort in the Cascade Mountains.

“Do we have the right to do this?” Nadella asked. In other words: Would people still use GitHub if it was run by Microsoft?

The executives debated the question for 20 minutes, Friedman said. Then Nadella slapped his hand on the table and said, “We should do it.”

Within weeks, Nadella agreed to buy GitHub for $7.5 billion.

To make Microsoft’s cloud more sophisticated, Nadella considered an investment in OpenAI, a hot startup exploring new approaches to AI. Building what OpenAI needed would force Microsoft to step up its game.

But OpenAI was a risk. It began as a nonprofit organization and was still controlled by a nonprofit board that did not answer to investors. It had also just cut ties with Elon Musk, who had been OpenAI’s main benefactor.

“You can imagine the debates that we had internally about making a bet like that and taking that level of dependency,” said Microsoft’s head of business development, Jonathan Tinter. But Nadella believed OpenAI CEO Sam Altman and his team were doing something fundamentally different — and better — than Microsoft.

A few months later, Microsoft announced its $1 billion investment in OpenAI. Microsoft got rights to OpenAI’s products and the innovative cloud customer that Nadella wanted, but no board seat at the upstart. The arrangement was so bizarre, few in the industry thought it would succeed. As one former executive said, it was a Hail Mary.

OpenAI Cracks Open

In 2021, OpenAI began to unravel. A group of researchers who developed the technology that would become ChatGPT left over concerns that OpenAI was favoring commercial ambitions over technological safety. With their departure, OpenAI lost a year of progress.

While OpenAI foundered, Nadella took a detour into what was supposed to be the next hot thing: the metaverse. It was a flop. Microsoft’s metaverse product was expensive, and it didn’t sell well.

As the metaverse work fizzled, Nadella wanted to invest an additional $2 billion in OpenAI and was “shaking every bush in the company” looking for someone to infuse AI into their product line, Friedman said. He raised his hand.

The result was GitHub Copilot, which used OpenAI’s technology to automate code writing for developers. The product was a hit — attracting more than 1 million developers in a year — and cemented Nadella’s commitment to AI. It could, he believed, transform everything.

Last fall, Nadella’s bet on OpenAI nearly imploded. He had planned to spend the weekend before Thanksgiving cheering on India in the Cricket World Cup. But on that Friday, he was asked to step out of a meeting to take a call: OpenAI’s board of directors had ousted Altman because they said they couldn’t trust him.

Over that weekend, Nadella worked the phones with OpenAI’s board and its executives, trying to understand what went wrong and how it could be fixed. Ultimately, he offered Altman and any OpenAI employee a job at Microsoft. In other words, he was prepared to gut OpenAI if Altman wasn’t welcomed back.

OpenAI’s board promptly reinstated him.

(About a month later, The New York Times sued OpenAI and Microsoft for using copyrighted news stories to train their AI systems. Microsoft and OpenAI say their use of the content is allowed by the fair use doctrine.)

The attempted coup at OpenAI caused Nadella to focus more on Microsoft’s own AI work, said S. Somasegar, a former Microsoft executive now at Madrona Venture Group who speaks regularly with Nadella. And they needed to find ways to rely less on OpenAI.

Getting close with Suleyman’s Inflection AI could help fix the problem.

Suleyman’s company was on Nadella’s radar because Microsoft was an early investor. But there were concerns about Suleyman’s management. After DeepMind was acquired by Google in 2014, workers there complained that he was a bully. He apologized but left the company.

Over a secret dinner at Microsoft’s headquarters, Nadella peppered Suleyman and his co-founder Karén Simonyan about how Inflection operated. By the end of the meal, he had made his call. He decided Suleyman had learned from his failures and proved himself at Inflection.

The deal was announced three weeks later. It wasn’t technically an acquisition, which could get bogged down in antitrust reviews, but it let Microsoft hire Suleyman and nearly all his staff.

Suleyman was put in charge of creating AI “agents” that act like personal online assistants, steering people through their daily tasks and even doing some of the thinking for them.

“‘This isn’t just about search,’” Suleyman recalled Nadella saying. “‘This is about the new platform of computing for the future.’”

At least, that’s the bet.