For the past seven months, he was the executive vice president who led Microsoft's cloud computing offerings. That's a new area for Microsoft, which has traditionally focused on software installed on personal computers rather than on remote servers connected to the Internet. Nadella's group has been growing strongly, although it remains a small part of Microsoft's current business.
"Satya is a proven leader with hard-core engineering skills, business vision and the ability to bring people together," Gates said in a statement. "His vision for how technology will be used and experienced around the world is exactly what Microsoft needs as the company enters its next chapter of expanded product innovation and growth."
The company said that Gates, in his new role as founder and technology advisor, "will devote more time to the company, supporting Nadella in shaping technology and product direction."
Gates will also remain a member of Microsoft's board.
Analysts hope that Nadella can maintain the company's momentum in the rapidly expanding field of cloud computing while minimizing the negative impact from Microsoft's unprofitable forays into consumer hardware. Major rivals in cloud computing include Google Inc., Amazon.com Inc., Salesforce.com Inc. and IBM Corp.
Microsoft shares rose 32 cents to $36.80 in morning trading.
Nadella's appointment comes at a time of turmoil for Microsoft.
Founded in April 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 developments in the technology industry. It allowed Google to dominate in online search and advertising, and it watched as iPhones, iPads and Android devices grew to siphon sales from the company's strengths in personal computers. Its attempt to manufacture its own devices has been littered with 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.
Those businesses, along with other back-end offerings aimed at corporate customers, are the main reason why investment fund ValueAct Capital invested $1.6 billion in Microsoft shares last year.
Last April, the fund urged investors to ignore the declining PC market — which hurts Microsoft's Windows business — and to focus on the so-called "plumbing" that Microsoft provides to help companies analyze massive amounts of data and run applications essential to their businesses on Microsoft's servers or their own.
"Satya 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."
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."