Nadella's appointment comes at a time of turmoil for Microsoft.
Founded in 1975 by Gates and Paul Allen, the company has always made software that powered computers made by others -- first with its MS-DOS system, then with Windows and its Office productivity suite starting in the late 1980s. Microsoft's coffers swelled as more individuals and businesses bought personal computers.
But Microsoft has been late adapting to changes in the technology industry as PC sales declined. It allowed Google to dominate in online search and advertising, and it watched as iPhones, iPads and Android devices grew. Microsoft's attempts to manufacture its own devices have been marred by problems, from its quickly aborted Kin line of phones to its still-unprofitable line of Surface tablets.
Analysts see hope in some of the businesses Nadella had a key role in creating.
Microsoft's cloud computing offering, Azure, and its push to have consumers buy Office software as a $100-a-year Office 365 subscription are seen as the biggest drivers of Microsoft's growth in the next couple of years. Both businesses saw the number of customers more than double in the last three months of the year, compared with a year earlier.
Nadella "was really one of the people who helped build up the commercial muscle," said Kirk Materne, an analyst with Evercore Partners. "He has a great understanding of what's going on in the cloud and the importance of delivering more technology as a service."
Michael Turits, an analyst with Raymond James, said that Nadella will likely view the Nokia acquisition and the Surface tablet as pawns to help drive Microsoft's cloud computing business.
"Whatever strategic decisions are made, we like the idea that someone like Satya would most likely make them with an eye to preserving and optimizing the value of those enterprise businesses," Turits said.
Nadella is a technologist, fulfilling the requirement that Gates set out at the company's November shareholder meeting, where the Microsoft chairman said the company's new leader must have "a lot of comfort in leading a highly technical organization."
Born in Hyderabad, India, in 1967, Nadella received a bachelor's degree in electrical engineering from Mangalore University, a master's degree in computer science from the University of Wisconsin, Milwaukee, and a master's of business administration from the University of Chicago.
He joined Microsoft in 1992 after being a member of the technology staff at Sun Microsystems.
Partly because of Nadella's insider status and the fact that both Gates and Ballmer will remain among Microsoft's largest shareholders and, for now, company directors, analysts are not expecting a quick pivot in the strategy of making tablets and mobile devices.
Some hope, however, that he will make big changes that will help lift Microsoft stock, which has been stuck in the doldrums for more than a decade. Since Ballmer took office on Jan. 13, 2000, Microsoft shares are down a split-adjusted 32 percent, compared with a 20 percent gain in the S&P 500.
"We do not want to see a continuation of the existing direction for the business," Nomura analyst Rick Sherlund wrote in a note Friday. "So it will be important that Mr. Nadella be free to make changes."
AP Business Writer Barbara Ortutay in New York contributed to this story.