Read CNBC's full interview with Microsoft CEO Satya Nadella

Watch CNBC's full interview with Microsoft CEO Satya Nadella

CNBC's Jon Fortt sat down with Microsoft CEO Satya Nadella in advance of the company's annual Build conference.

The tech company reported higher than expected third-quarter earnings last month with strong guidance for the upcoming fiscal year.

Microsoft plans to continue driving revenue growth through its cloud services. Its Intelligent Cloud segment contains the Azure public cloud, which competes with Amazon Web Services.

Nadella discussed the future of Microsoft and its cloud service, rivals Google and Amazon, artificial intelligence, and what to expect at this year's Build.

Read the full transcript here.

Jon Fortt: Great. I think it's been seven years or so since we first sat down.

Satya Nadella: That's right. And I guess that was before I was CEO. That's right.

Fortt: Yes, before you were CEO. We go way back, you know.

Nadella: That's right.

Fortt: And you're famous now.

Nadella: What happened?

Fortt: You wrote a book. I think I saw you in Better Homes and Gardens even. [EDITOR'S NOTE: Nadella appeared in Good Housekeeping, not Better Homes and Gardens.]

Nadella: That's right.

Fortt: I've never seen, that I can recall, an executive go from "Who's he?" to now, "This guy knows what's going on, and he is at the center of the zeitgeist," quite the way I've seen you do it. Is it weird?

Nadella: If you say so. I don't find any difference, but it's been a fantastic ride. I think what's been humbling for me is — I don't get confused — this is all because of the platform I've been given, which is Microsoft and the work we do. It's not me, but it's the opportunity I've been given.

Fortt: At what point do you say, and I know this isn't a turnaround, this is hitting refresh, and there's still work to do — as you said in the book — but Microsoft's stock is near all-time highs, in the mid 90s, recently. At what point can you say, "Yeah, we've got that part behind us. The turnaround, or the refresh, or whatever you want to call it, there's still more to do, but yeah, good job, team. Now it's time to take the next hill."

Nadella: I mean, I think that's the fundamental posture that we have to have. And quite frankly, any company that needs to continue to renew itself needs to have. Because if you think about it, what's going to happen next, and the day after, is what you have to anticipate. So what has happened in the past is just the past.

Fortt: Is Phase One done? Can you kind of say, "Hey, I've been CEO for four-ish years now, and yeah, we got that part done, pretty good job."

Nadella: Yeah I think to me it is very important to start with two things — a very clear sense of purpose and identity, and a clear understanding of how to express that sense of purpose and identity in a changing world. I feel like in the the last four and a half years, we were able to do a good job of that.

But I tell you, I only think of what are we going to do next. Because that sense of purpose will have to remain constant. And our culture that allows us to move forward has to remain constant. But there's going to be a lot of churn about how the world's going to change, and we will have to change with it and, in fact, ahead of it.

Fortt: Speaking of a sense of purpose, you said something interesting recently, you said, "That's what I want my legacy to be, that anyone who joins our company is able to connect their personal passion, and use Microsoft as a platform to realize it." What's your personal passion?

Nadella: That's a great question. In fact the way I got to this was I used to work for a gentleman by the name of Doug Burgum, who is actually the governor of North Dakota now. He had said this to me, I was probably in my mid-30s, he says, "Wow, we spend far too much time at work for it not to have meaning."

And that's when I said, "Why am I at Microsoft? What is it that gives me the energy at Microsoft, day in and day after?" And it is mostly because of the platform it creates for me, to be able to connect with what I'm passionate about. Take accessibility. It's something that I personally am super passionate about. But Microsoft's given me an amazing opportunity to be able to take that passion, connect it to real work and see its impact in the world. And I think that's true for 100,000 people here. It's the local communities, the countries we work in, the sectors of the economy, education, health. That broad spectrum impact that Microsoft has is the opportunity that it creates for every one of our employees. But what defines me, I think, is curiosity, love of ideas and the ability to translate that into impact.

Fortt: Some of what you just shared about accessibility is a good segue way into Build and some of the announcements that you're making at the Developer Conference. I was looking at what you said four years ago, when we sat down here, in Redmond, about why Microsoft is leading with mobile and cloud.

And it sounds exactly right in terms of what is important in the space. Do the same for me, if you will, with artificial intelligence. What are the necessary ingredients for a company to excel in AI and be a mega-scale player? How many mega-scale players are there going to be, and why is it essential?

Nadella: First of all, the world that we are entering and, in fact, we're in the midst of this massive transformation, is what I describe as an intelligent cloud and an intelligent edge. I mean, think about it, the computing fabric is getting more distributed and more ubiquitous.

You have now more computing power. Take GPU power in a car, [there's more] than perhaps even in a data center a few years ago. You have a microcontroller with this Azure Sphere that we just recently announced. Every microcontroller out there, in your fridge, in any drill, is going to have compute power. Every factory is going to have millions and millions of sensors.

Fortt: Your neighbor Amazon is buying intelligent doorbells, video cameras recognizing faces…

Nadella: That's right. In fact, one of the announcements at Build is going to be a Qualcomm camera that's capable of running an image classified in a container. So that means in the wild, you could start recognizing objects, or a DJI drone.

In fact, that's going to be capable of running the Azure Edge so that you can detect any faults in an oil pipeline. So computing is becoming ubiquitous. And that means data is getting generated in large amounts. Once you have that, then what you do is, you do AI on it, which is your reason over large amounts of data, using all this computer power to give yourself, in whatever app, in whatever field, that predictive power, that analytical power, that capability to automate things.

Fortt: So do you have to be a mega-scale player in either cloud infrastructure or in data, to really be able to play in that then?

Nadella: I think that in our business, there is absolutely scale. If you think about Azure, we have 50 data centers, more than anybody else in terms of data center regions. We also have the capability of putting Azure Stack wherever you want it. If you have the ability to even embed things like Azure Sphere. So yes, you have to have to have some scale around the capability, whether it's the AI capability or the cloud capability. I sort of view it as this next phase is not about celebrating just the mega-scale players, it's who can really translate their scale into mass impact, where every business is becoming an AI business.

Because I feel like we're in this phase still of celebrating AI breakthrough. I do that myself, too. If you think about it, Microsoft, I'm so proud of our achievements in human patterning speech or object recognition, or machine greeting and comprehension. These are big breakthroughs. But to me, what is going to define our business success is going to be our ability to translate that into a set of platforms and tools that are actually commoditized.

Fortt: Commoditized?

Nadella: That means it should be possible for any developer out there in any company, at Maersk, at Bühler, any of the companies we work with, to be able to become an AI developer.

Fortt: OK.

Nadella: Because unless and until we achieve that, at least for Microsoft's business model, and our identity, just saying I have speech recognition that's world-record-breaking is no good. I've got to give it to Xiaomi, so that they can, for every Chinese traveler, build a machine translation device, or a speech translation device. That's breakthrough, and that's what we're focused on.

Fortt: So at another developer conference back in the fall, Amazon's, they also were unveiling some AI related tools … Are we going to end up with these developer tools around artificial intelligence with walled gardens?

Nadella: In fact, if you look at Amazon and us, if there's one real common ground we have between us is that we believe in our personal digital assistants, whether it's Alexa and Cortana, in fact, working with each other. This is speaking to your walled gardens point, which is, I think that sometimes walled garden strategies can work for some of the time, but not all of the time. I think at least in our case, when it comes to Azure, we are building it out as an open ecosystem. A distributed ecosystem that addresses the world's needs, and we'll have strong competition.

In some sense, there will be some scale players that will always be competing. I'm not a believer in all these winner-take-all type of dynamics. I feel like you have to sort of compete each day to make progress.

Fortt: I want to talk to you about data ethics, because I know that's something that's going to be a theme at Build, as well. Have you considered rethinking Microsoft's business model around data? I mean, there's been this idea in the industry that in exchange for free services, you basically allow certain companies to follow you around digitally. Yes, you have the opportunity to opt out using certain browsers or certain browser settings but generally speaking, the trade-off is you get to use this for free, we get to follow and target. Is there the possibility that that bargain is not going to work anymore?

Nadella: That is a great question. In fact, if anything, I feel at Microsoft we've done a lot to make sure that our business model is fundamentally aligned with our customers, and their preference. What I mean by that is we do have some ad-supported businesses but we have subscriptions.

Whether it's for individuals, or for organizations. And the predominant business model at this company is all about making sure that the data, and any surplus that gets created out of data, like AI, is to benefit the user, not us. So we want to be a pure software company that, through subscriptions, helps every organization and every individual get more out of their data, more out of their time. That, to me, I think is going where the world is going. I think people are going to put more value on their data. Even individual consumers are going to wake up to the fact that there's nothing free. And so, it's a choice. It's not to say that there isn't room for someone to say, "Yeah, this is a good trade, where I'm using a free service in exchange for some data." But there's nothing free about it.

Fortt: So is there a Plan B for Bing, for, et cetera, that says, you know what? If we get to the point where tracking is something that there's a backlash against, we have a plan for that.

Nadella: Absolutely. I mean, in fact, in a lot of these things, in Search, in particular, we have taken great pains that it's only ads that are being driven on intent, which is part of the results page. We don't take that data, use it elsewhere. We don't have any targeting business that is at large. We are very, very conscious of those choices that we have made, in terms of making sure that the products that we create are all about users' interests, as the first and foremost.

Fortt: On cloud, you said when we sat down four years ago, "If you're not already spending a lot of capital on the order of $4 or $5 billion each year to grow your…"

Nadella: Which has increased.

Fortt: Which has increased. It doesn't go down, right? "Probably it's a little too late to enter the market." You went on to say, "There are at least two players like that, Amazon and Google, in particular, but we are one of the three in that category." Update me. How does the competitive field look? Is it still the three? Would you tweak your definition of what it takes to really be...

Nadella: Capital investment is one part of it. And clearly, I think Amazon and us, when it comes to broad cloud platform, are number one and number two. And that game's on, and each quarter you all track us on that progress. And Google's also in there and obviously has a lot of money and a lot of capital and is investing a ton.

Fortt: $2 billion, I think they recently announced? They're starting to show some numbers.

Nadella: And so, to me, what I think is going to be important here is increasingly trust. What I mean by that is it's not just about capital. Let's say among the three of us if you think about talking to a CEO of an industrial company, a CEO of a health care company, a financial services company…

Fortt: A grocery company.

Nadella: Yeah. Grocery company, good example. I think it's going to come down to trust. Trust not just in the technology, the ethics around AI, privacy, security — all that also matters — [but] trust in business model, where that alignment of your interests as a customer and the interests of the provider are fully aligned. I sort of say one of the currencies is what you think, what you say, and what you do have to be in alignment.

Fortt: Now, I'm reading between the lines here. I hear stories about retailers coming to Microsoft because hey, Amazon's all in grocery now, with Whole Foods. Retailers are looking over their shoulder wondering, Amazon's got a good platform, but at the same time, are they going to come at the core of my business model?

Nadella: Yeah, it's not even just Amazon, by the way. You've got to remember, Amazon and Google both are fantastic at being able to rig transactions. It's not that, you know, Google is somehow more friendly to retailers.

They have a nice two-sided market that they can subsidize one to advantage [the other] and also, by the way, the advertising business is just so funky, which is sort of second priced auction. I've never seen business models where [when] there's more demand, there are higher prices.

So I feel like any customer who is essentially subsidizing their own tax increase should think through exactly how that's going to work out in the long run. So that's where I feel like long-run business model trust is going to be so important.

Fortt: How do you structure your workforce to, I guess, best embrace that interest in trust that the customer has? Is there a different approach in sales, in messaging? What are you telling people?

Nadella: In fact, that's where you're getting every part of your organization aligned, starting with your sense of purpose and mission. That's why when I say we want to empower people in organizations all over the planet it's got to be more than a set of words.

Our success is based on our customers' success. Second is then create that business model. Take subscriptions. If you don't use it, they will churn out. That means you only get paid when they're using it and driving value. Consumption business model, so getting fully aligned on the business model. And then shaping the culture, whether it's the person in the field, we now have these new roles in the field called customer success. That's all about making sure that the customers are able to do what they want to do with technology to impact their business. And to me, that type of transformation and consistency, it can't be like I'm doing something here, but something else somewhere else.

Fortt: How do you compensate customer success?

Nadella: Just by how customers are rating you. NPS is a good one.

Fortt: Net Promoter Scores.

Nadella: Net Promoter Scores is a good one. Are they consuming? For example, have they activated all the capabilities? So we have what we describe as leading indicators of success of our customers. And in fact compensate our folks, not on revenue, not on margin, but on those metrics.

Fortt: Interesting. I think we've already established you were right about a lot of things over the past four-plus years. What were you wrong about?

Nadella: I think the thing that has caught me most by surprise is how multi-constituent… Even when I started out four years ago, I thought I understood it's about customers. It's about our employees. It's about our shareholders.

But it's not just that. It is about recognizing that in every community that we operate in and serve, there are multiple constituents that all have to be in harmony with your interests. That is probably the place where I've learned a lot.

Fortt: Starbucks just got a lesson in that, if I'm reading you the right way. Somebody who's in your store, you've made a certain brand promise, they haven't bought anything necessarily, but they can have a big impact on the perception of your brand.

Nadella: Yeah, by the way, I'm on the board of Starbucks, and I think that Starbucks and Kevin [Johnson] and team responded to something that was a brand promise, and what the expectation was, very well. And I feel like they've set the bar, in fact, of how it's not about sort of being perfect, it's about being able to learn from things that happen and to be able to improve and change the culture of your organization. That's what we're doing, as well.

Fortt: So what drove that home for you? You said that was an area that caught you off guard a bit, the multi-constituent nature of your job. Was there a moment where you realized…

Nadella: Yeah, I'll tell you. In fact, one of my biggest moments was, we got a letter probably my first year in from the association of the blind in the United States about saying, "Hey, look, you guys have to take software, work you do, very seriously for accessibility, especially for people with visual impairment." And I've always, in fact, championed — long before I was CEO, I used to be the one who internally championed our accessibility work. But that's when it struck me as, this can't be a checkbox. This requires us to integrate into the mainstream, and, you know, universal design needs to become something that is much more culturally ingrained in everything we do.

And it's been phenomenal. I mean, to me, [it's] some of the most exciting impact of AI, whether it's gaze technology, and what it can do for someone with ALS, or some machine reading technology, and what it can do with someone with dyslexia. That's now been an awakening for us.

And that's when it caught me in saying that, you know, that particular advocacy group sending me a letter was a bit of a wake-up call for me to sort of recognize that we will only be a company that we, you know, want to be, if we take all constituents, and but yet approach with that universality in our products.

Fortt: I think you can expect some more letters from advocacy groups now. What do you have new around that specifically, accessibility at Build?

Nadella: Yeah, so one of the things that we did last year was something called "AI for Earth." The idea is not just build technology and advances in AI, but to use it to fund organizations' research that are going to really turn, in that case, AI for things like tackling climate change or creating an early warning system for Zika, or what have you.

And so we're now going to take that same approach for AI for accessibility. So we are putting a $25 million grant, which is going be available to research institutions and other nonprofits to be able to take advantage of, and use AI tech to solve some of the accessibility challenges out there.

Fortt: I think the last time I sat down with you, [former GE CEO] Jeff Immelt was next to you. And you were talking about ways that Azure and Predix, GE's platform for industrial software, were going to work together. GE is announcing that they are cutting their digital unit by more than 25 percent this year, but the industrial internet moves on. Are you going to do anything within Microsoft to pick up the slack for what companies like GE might cut back? Different partnerships?

Nadella: In fact, we just were coming back from Hanover, where the biggest industrial conference happened. And it's stunning to see — you know, Microsoft would go to Hanover in the past and we had an embedded business. But this has now become a main show for us, if you look at the number of announcements coming out with this fundamental fact that Azure, along with Azure Edge, is becoming built-in to every modern factory. I mean, one of the things I even talked about in our earnings last quarter was turning to material handling. Literally, they're taking the material handling in a particular modern factory that they're building, a digital factory, using drones to fly through to optimize the pallet routing and optimize the entire supply chain efficiency.

Or Bühler, in fact, that's another company, that most of the corn in the world goes through their machines. And it turns out that if you really want to protect the food production of the world as it relates to corn, you want to detect any toxin early on. They're using computer vision at the Edge to be able to in their, you know, machines.

Fortt: Already they're doing that.

Nadella: Already. And we're working with them. So to me, being able to sort of translate what I think of as our AI promise, or our cloud and its Edge, into these industrial applications, those are the killer apps. That's what I celebrate.

Fortt: Closer to home, there's this tension between big tech and the communities around big tech. Not just in Seattle area, also seen in Silicon Valley, in particular. But in Seattle right now, Seattle proper, there's this proposal for a head tax. Basically, I think it's $500 for every worker just for big companies and to pay for homeless services.

My gut says this isn't really so much about homeless services as perhaps it's this tension between, boy, these big tech companies are raising the standard, making it more expensive, gentrifying, and it's good for some people, but not good for everybody. We need them to give something back. Is that your view on what this is really about? And what does a company like Microsoft, any big tech company do to perhaps better this, change the narrative, move the debate forward?

Nadella: I think it's the right dialogue for us to have, first of all. Because in some sense, I've always believed that if just a few multinational companies are the only companies that are getting bigger and more profitable than the rest of the economy, is not showing the same vibrancy in employing people and in general, inequality increases in society, that's not stable. That's not stable for any liberal democracy.

Fortt: So is the tax a good idea? Is it the answer?

Nadella: I don't know whether that particular tax is a good idea, because you've got to make sure, basically — because all taxes, you know, can create unintended consequences for economic growth. So you've got to think it through. It's a system. But that said, though, should every community think about how to make sure that the people in the community, across all parts of the economic strata, are able to live there, thrive there? Absolutely. If there is what you call gentrification and the housing expenses are just going up, that's no solution. Our own employees will not want to live in a non-diverse community over time, so we will have to have responsibility, quite frankly, in every community. Not just in Seattle, not just in Redmond, but in every country we operate in. That's why I think of us as a multinational company.

Every time I go into any capital or any city or any community inside the United States, I always ask myself how many people are around Microsoft — how many partners, who do they employ, what are their median salaries, what is the opportunity? Without that, I don't think Microsoft continues to thrive.

Fortt: But what do you do differently to get a different resolution? I remember 15 years ago living in Silicon Valley, sitting down, having this conversation with the Silicon Valley Leadership Group. Boy, it's really expensive, it's hard to recruit workers into Silicon Valley. But housing prices there are up at least 2.5x, since then.

Nadella: I think on this particular one, there are some solutions. I think we should first of all collect the data and say, wow, there is ways to create lower, you know, I would say low cost housing and accessibility to low-cost housing in these urban centers so that we don't have just runaway costs of housing. I think some of these things — whether it's runaway costs of our health care, runaway costs of our education, or runaway costs of housing — these are challenges that I think have to be faced and market forces should work to solve those problems.

Fortt: There's a U.S. trade delegation in China right now trying to work some things out. What's the best case scenario out of that, as far as what gets brought back?

Nadella: Here's my simple view: I think the next 10 years, next 20 years, next 30 years, whatever your time horizon, is going to be defined by these two countries — China and the United States — creating more interdependence, not less.

That's what's going to be good for the two countries. That's what's going to be good for the world. So my hope is that any dialogue that happens in any capital, in any venue, is all about sort of breaking through. I think there are legitimate issues that need to be discussed. But you need to come up with solutions, because interdependence is probably good for economic growth and stability for the world.

Fortt: Any third rails you see?

Nadella: When you say third rail, what do you mean?

Fortt: Things that they shouldn't touch, or push, or…

Nadella: I think that anything that sort of creates uncertainty is just not good. Whom does it serve? I think that the more we recognize that it's true, that globalization, or free trade, as it was conceived, has not created equitable growth in all parts. Like, that's the issue that I think is being debated. So that means you've got to go back, though, to the real principles of free trade and make sure that they are, in fact, implemented fairly.

Fortt: I want to talk about something that we've talked about before, which is gender diversity, women at Microsoft. About a month ago, the Seattle Times did a big story on Microsoft's culture. It said, "The culture is still male dominant. There's casual sexism and change comes slowly." Did you think it was fair?

Nadella: I think that, you know, this is an issue that is front and center for me, and for my leadership team, because in some sense, yes, change happens slowly, but we have to push every day and make progress every day. And that's where I have to hold myself accountable.

In fact, it starts with culture. When I think about the amount of time I and my leadership team now spend on making sure that we have that everyday inclusive culture. At every meeting, we're able to make sure that the people, the diverse group we have — gender, ethnic — are all able to participate. So I think it starts with culture, and taking it as first class. Second, it just cannot be just words. It also has to be a set of metrics. So, for example, my own compensation and my leadership team's compensation is now tied to a set of metrics where we have to make progress year-over-year. So I think you've got to go to work on this, whether it's on the culture or the metrics that really promote diversity and inclusion. And it's the right thing for us to focus on. And not be satisfied with whatever we have.

Fortt: Is that a new thing, on tying compensation to diversity metrics? I remember, you know, Brian Krzanich, [CEO] at Intel, is doing something where by job category, he wants, you know, the target to be, let's reach the available population, according to the Bureau of Labor Statistics. So if electrical engineers are 35 percent women, then that's our target. Not 50-50, but 35 percent because — that used to be called quotas, and it was a dirty word. How does it factor in now that we're at the place we are in diversity?

Nadella: I think, first of all, we've got to start by saying this: Don't think of this as a quota. This is, in fact again, necessary for business success. I mean, think about what a diverse team can do in a multi-constituent world. I mean, if you go back to the question you asked me, "What has surprised you?"

What's surprised me is, wow, as a company, we have to serve many constituents and their interests, their unmet and articulated needs. So every product group, every sales team, every marketing team will be better served by having diversity.

And so to me, having representation reflect the world we want to serve is the best thing that we can do for our long-term business. And so that's what inspires, you know, drives us. And even there, having some metrics on progress. For example, take women and woman representation. Over the last 18 months, we've had a 50 percent increase in the number of corporate vice presidents at Microsoft. That's fantastic to see. Is it sufficient? Absolutely not. But is it a move in the right direction? I think so.

Fortt: What are you reading now? As we as we start to wrap up?

Nadella: I'm reading a book, God I forget the thing, it's The Multiple Literacies of Leadership. It's a fascinating book, which sort of speaks, in some sense, to this intellectual pursuit now I have around saying, it's not just one stroke you can have. You've got to think about the complexity, the ambiguity that exists, the uncertainty that exists in the world. You need to be able to then turn that into understanding and clarity. And you can't be excellent in just one thing, even as a leader and the way you lead. Somebody sort of said this very beautifully to me which is, for example, clarity — I talk a lot about what leaders fundamentally do is about bringing clarity. But it's about clarity of where you need to get to, but not be too dogmatic about the means and being able to even have that distinction.

So I've lately gone back to leadership and another book that I recently read, which I loved, which is just something that I think about a lot, is Forged in Crisis. And that's a great book of some people, like, you know [Abraham] Lincoln, in particular and how he came through his two terms to change history, has been a real imprint on me.

Fortt: Finally, Satya Nadella before work. What's your routine? Is there something that you do before you're in the door, you're on? I mean, a lot of us start work really before we get to work, of course. But before you even get into that mode, is there a certain preparation that you feel works for you?

Nadella: I think my ritual is, however short on time or sleep or whatever, I somehow figure out or manage to get my 30 minutes of a run every day, wherever I am. And that, I must say, is perhaps what gives me all the energy and more.

Fortt: Keeps you trim, too.

Nadella: I hope so.

Fortt: Yeah, the camera doesn't lie, it does. Satya, thanks.

Nadella: Thank you so much, Jon.