Cloud computing is widely perceived as a threat to Microsoft, because the maker of Windows and Microsoft Office earns the lion's share of its money selling licenses for packaged software.
But Microsoft's new Server & Tools President, in his first public appearance since taking the top spot, said cloud computing is another opportunity Microsoft can exploit just as it did with the birth of the PC.
Microsoft cloud stumbles: Windows Azure turns 1 in 'anemic' market
"If you look at our history, it's always been about taking an inflection point and being the democratizing force behind," said Satya Nadella, who replaced longtime Microsoft executive Bob Muglia as the Server & Tools chief in February this year.
"At a philosophical level, if you say there is a fundamental change in architecture, we have to embrace it and ride it," Nadella continued, during a 20-minute on-stage discussion Wednesday with Eric Savitz of Forbes at the GigaOM Structure Conference.
Microsoft has always been about "low price and high volume," Nadella also said, making the case that the consumption-based economics of cloud computing fits into Microsoft's sweet spot.
"We're not the ones with high license fees," he said. "I look at this as structurally a very beneficial thing for us. But, sure, we have to innovate."
Windows Azure, Microsoft's platform-as-a-service cloud, opened for business more than a year ago but hasn't gained the adoption seen by Amazon's infrastructure-as-a-service offering or Salesforce's PaaS cloud.
Still, Nadella insisted that Amazon's success can help Microsoft, because Amazon hosts Windows Server instances.
"A good chunk of our Windows business, we do through Amazon," he said.
Going forward, application developers could build services that use Azure for computing and Amazon for storage, and even make calls back to the customer's internal data center, he said.
"My approach would be to partner as broadly as possible with anyone who is in this business," Nadella said.
While Nadella oversees Windows Server and Windows Azure, Microsoft's cloud ambitions extend much further with Office 365, a hosted version of Exchange, SharePoint, Lync and Microsoft Office. Office 365 is set to launch out of beta next week, while its predecessor, the BPOS service, suffered an outage just before Nadella took the stage.
Office 365 isn't Nadella's responsibility, but he was willing to admit something other Microsoft executives try to avoid discussing: Office Web Apps, the online versions of Word, PowerPoint and Excel, are limited.
"They're pretty good, but they're not as good as the Office client is today," Nadella said of Office Web Apps.
Regarding Azure, Nadella pitched Microsoft's ability to offer both public cloud services and the software necessary to build private clouds. The Windows Azure appliance has allowed customers like Fujitsu and eBay to bring Microsoft cloud technology into their own data centers, he said. Fujitsu, for example, turned to the Azure appliance when it came to putting mainframe applications in a cloud service.
Customers often aren't willing to trust all their applications to a cloud vendor, Nadella noted. While a company might host a website on a cloud service, the same company may keep its core billing system in-house. This is due both to performance and security concerns.
Nadella said the industry needs "great encryption technology for anything that is moving over the wire," adding that: "I think security will remain a big topic for the industry at large. But it's not just a cloud issue. It's an issue for anyone with any type of network."
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Read more about cloud computing in Network World's Cloud Computing section.