Is Microsoft ready to cut ties with its lost decade? AP Photo/Clarence Tabb, Jr.
It’s
possible, even likely, that Microsoft is about to enter the darkest
period in the firm’s history. Darker, even, than July 2000, when it
seemed the US government might dissolve the house that Bill built, and
force the company to be split into two different companies.
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Update: Part 2, The seven-point plan to save Microsoft
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The revenue Microsoft earned in the quarter ending in March 2013, $20.5 billion,
probably represents a high water mark for the company, at least for the
foreseeable future. In the most recent quarter, the company’s revenue missed expectations,
which Microsoft blamed on ongoing weakness in the market for PCs. There
is no sign that demand for PCs is going to pick up again—even Intel is
projecting sales will be flat, at best—and plenty that the world’s demand for PCs, or at least the kind that run Microsoft Windows, is in terminal decline (1).
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Microsoft’s
problem can be distilled to this: Computing is no longer confined to
personal computers, where even now Microsoft maintains a near monopoly.
More than ever, people are hiring other devices to do the jobs that PCs
once did: communication, entertainment, and some portion of their work.
For a host of reasons, Microsoft failed to compete effectively in the
two markets that are disrupting its core business: first, the mobile
devices that are supplanting PCs, and second, the cloud computing
resources that are essential to making those mobile devices more useful,
in many cases, than PCs.
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Microsoft does produce a valuable good: its operating system (2). But
with the decline of the PC and the rise of the web, mobile devices, and
cloud services, the company failed to anticipate or effectively
dominate these alternate—and in many cases superior—means of getting
computing done. We have reached out to Microsoft for comment and are
awaiting response.
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Pulling back the curtain on the rot in Redmond
Everything
that follows is, necessarily, from anonymous sources, all of them
veterans of Microsoft. Synthesizing their feedback with other publicly reported accounts yielded some valuable insights about what ails the company and how to address it.
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All the reasons Steve Ballmer never should have become CEO in the first place
The
timing of the handover of Microsoft from founder and technical genius
Bill Gates to employee no. 30 and MBA dropout Steve Ballmer could hardly
have been worse for Ballmer. On December 29, 1999, Microsoft’s stock
price was at an all time high, and Microsoft was the most valuable
company on earth. Then the stock began to fall. Seventeen days later,
Steve Ballmer took over, the stock market crashed soon after, and
Microsoft has never returned to its pre-bubble valuation.
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In
1999, when Microsoft was a blue-chip company wringing a steady stream
of income from the Windows monopoly, it might have made sense to put
Ballmer, who was initially the company’s first business manager, in
charge. But Microsoft remained a technology company, and having a
non-technical CEO meant that Ballmer was ill-equipped to oversee the
increasingly large and unwieldy development project that Windows had
become.
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There
is copious evidence of Microsoft’s broken product pipeline, which
stretches back a decade, at least: In 2004, Steve Jobs unveiled a
version of Mac OS X that incorporated many of the features that
Microsoft had promised in its “Longhorn” reboot of Windows, a project
that became so snarled that Ballmer eventually had to decide to throw
out all the work his engineers had done and start again, delaying the
release of Windows Vista (which succeeded Longhorn) by at least two
years.
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More
recently, Microsoft’s disastrous attempt to copy the iPad, the Surface
RT, led to a $900 million write-down, and the company’s cloud services
simply aren’t functioning as the “glue” that should connect the
company’s online software together, says one veteran. That contrasts
sharply with Google, which has made inroads against Microsoft by
offering a tightly-integrated suite of “Google Apps” that include
replacements for Office and Microsoft’s email system, as well as cloud
storage for data.
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But
perhaps the most concrete demonstration of Ballmer’s failure to be a
“product guy” as a CEO is the way the company has pushed touch-screen
PCs and a touch-centric Windows interface onto a public that has been
trained for decades not to leave smudges on our PC screens (in contrast
to tablets and phones) by touching them. (Granted, Google has made the
same mistake with its Chromebook Pixel.) Touch screen PCs and
“convertibles”—heavy laptop/tablet hybrids—have both failed to sell as
manufacturers had hoped, contributing to the overall slump in the PC
industry.
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Low morale and a destructive internal culture
What was at the root of Microsoft’s broken product pipeline? As outlined by Vanity Fair’s expose on Microsoft’s lost decade,
Ballmer was a tone-deaf manager. Microsoft’s “stack ranking” system of
management, in which employees were graded on a curve that meant that
one in 10 members of a team always had to receive a rating of “poor”
even if everyone in a group was an A player, pitted employees against
one another, discouraged collaboration between and even within teams,
and slowed Microsoft’s development process to a crawl.
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In 2012, Ballmer’s rating among his own employees was just 46%, compared to Google CEO Larry Page’s 94% approval rating and Mark Zuckerberg’s 99%. Morale
at the company is at an all-time low, says one source, and Microsoft
has for years been losing its best executives and engineers to
competitors like Google. Even when Microsoft hires talented employees,
the most talented ones leave more quickly than the less talented ones,
degrading the overall quality of Microsoft’s workers.
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Microsoft
has also for many years paid sub-par wages. This policy was born at a
time when Microsoft could compensate employees with stock, but the
company’s stock price has been flat for a decade. Meanwhile, companies
like Google are paying employees up to 23% more than the industry average.
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Shareholder constraints on innovation at Microsoft
Microsoft
is a blue-chip stock with huge institutional investors that expect a
dividend—which doesn’t jibe with a culture of risk-taking and
innovation. As a result, the company tends to be more conservative in
its decision-making, says a source. As a result, Microsoft’s last decade
has been almost entirely reactive. The company launched its competitor
to the iPod, the Zune, just before Apple rolled out the fifth generation
of the iPod (as well as the iPod Mini and Nano) and eventually
discontinued the Zune. Bing and Office 365, reactions to Google’s search
and Apps, respectively, came late enough that they seem destined to
forever remain niche products. (Bing’s market share is about 18% to Google’s 67%.)
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Perhaps
the only area where Microsoft has competed successfully in the past
decade is gaming, with the Xbox, but shareholders were never happy with
the billions the company sunk into the project, and analysts are now
calling for Microsoft to sell that business entirely.
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Customer and organizational constraints on innovation at Microsoft
Imagine
for a moment that Microsoft’s next CEO cleans house, and replaces
almost the entirety of senior management (which in reality wouldn’t be
possible given all the institutional knowledge that would be lost). But
if it were possible, here’s the classic innovator’s dilemma Microsoft
would face: Products that were sufficiently good copies of, say,
competitors’ cloud services, would simply eradicate many of Microsoft’s
core businesses all that much faster.
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The
software known as Microsoft Server is one example: Customers use it to
run servers within their own data centers, whereas Amazon’s cloud
services model is simply to sell you time on its servers. If Microsoft’s
cloud services division were to copy Amazon Web Services, down to its hyper-competitive pricing,
Microsoft’s sales force would revolt because Microsoft’s cloud services
would cannibalize sales of Windows Server; middle men who resell
Windows Server to businesses and make a living supporting it would be upset to lose those sales; and investors would be aghast at the hit Microsoft’s profits would take. That
Amazon and Google might eventually eliminate this portion of
Microsoft’s business in the absence of such a move hardly matters to
shareholders whose focus is on the next quarter.
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What’s a Microsoft to do?
Despite
the myriad structural, historical and cultural constraints faced by
Microsoft, there’s always an opportunity for a turnaround. That’s the
subject of part two of this series, which will appear tomorrow: The seven-point plan to save Microsoft, as told by veterans who abandoned the company.
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Footnotes
(1)
There are many theories about why the world doesn’t want as many PCs as
it once did: It’s the fault of Microsoft’s unfamiliar interface for
Windows 8, or it’s simply that people are holding onto their PCs for
longer. But the most compelling is this: Humans need access to
computing, but increasingly, that access is provided by tablets, phones,
and other mobile devices, and the computing itself is done in the
cloud. Also, if a PC user accesses the internet as often for
entertainment as for work, then the PC is competing with the increasing
sophistication of set-top boxes, game consoles, hand-held gaming
devices, and even e-book readers.
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Even
for businesses, which have long represented Microsoft’s primary cash
cow, there are now more alternatives to the conventional PC than ever.
Sales reps in the field are using iPads or tablets running Android, and
Google’s email and productivity apps are luring large and small
businesses into the primarily web browser-based Chrome OS. And the halo
effect of a string of successful mobile devices has for years increased
the market share of Apple’s OS X. Granted, businesses have invested
enormous amounts of money and time into Microsoft’s products, and there
are countless custom apps and services that will take decades to switch
away from Windows. This momentum works in Microsoft’s favor, but it’s
also possible that it has been masking weakness in demand for
Microsoft’s products. That is, even business IT administrators who have
wanted to shift away from Microsoft’s solutions have been unable to,
shackled as they are to their own legacy systems. By necessity, large
corporate IT infrastructures—and for different reasons, even those of
small businesses—do not turn on a dime. [back]
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