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Post-Gates Microsoft’s woes laid to Ballmer

The Washington Post

“Do you have an iPod?”

Steve Ballmer: “No, I do not. Nor do my children. My children — in many dimensions they’re as poorly behaved as many other children, but at least on this dimension I’ve got my kids brainwashed: You don’t use Google, and you don’t use an iPod.”

Fortune Magazine, “CEO of Microsoft is ready to take the offensive,” March 29, 2006

The decade since Ballmer took over as chief executive at Microsoft from his Harvard University pal Bill Gates has not been kind to the company: Its stock price plummeted, it made ill-advised acquisitions, demonstrated poor capital management and suffered a significant loss of market share. The once-dominant software giant lost its way.

The firm, considered the mac daddy of technology at one time, missed every major tech innovation of the new millennium. The Zune, its foray into portable music players, was an embarrassment. It let Apple gain a toehold on the consumer desktop, which Steve Jobs then leveraged to show consumers a superior alternative to kludgy Windows software. Microsoft was late to Web search and failed to monetize online properties. A belated attempt to jump into advertising by acquiring aQuantive for $6.2 billion led to its first-ever quarterly loss, in 2012.

It wasn’t just the existing software. Microsoft failed to recognize the impact of nearly every worthwhile development. It missed the rise of touch-screen technology and the mass appeal of social-networking sites (i.e., Facebook and Twitter). Perplexed by tablets, it lost more than $1 billion in that venture. Late to user-generated content and blogging, it built MSN Spaces — a Windows-only ghetto that failed to catch on or turn a profit. It blew its early lead in smartphones by failing to understand their significance. And it certainly never threw the same weight behind them as it did its mainstay PC business.

Indeed, it is hard to think of new technology since 2000 that Microsoft had a significant role in developing, marketing or monetizing — other than the Kinect device for the Xbox 360.

Much of the debate about its fall from grace focuses on two factors: Analysts have argued that its fade was part of the natural progression for all companies. The life cycle of innovation, adoption, missteps and irrelevancy is the inevitable fate of all companies. It suffered the “innovator’s dilemma” of overemphasizing its current business lines. This led to a failure to develop new technologies and profitable businesses. In the end, the thinking goes, it was a victim of its own success. (This is true for so many tech companies, though IBM is an exception; it morphed into a consultancy).

The counterargument is that a mediocre CEO allowed the company to slide into decline. Ballmer oversaw ill-advised acquisitions. He missed the tectonic shifts in technology. And despite the number of employees tripling over the past decade, many of the company’s most talented software engineers left for more nimble rivals, a better lifestyle and more interesting opportunities.

Both arguments are valid. Indeed, they are not mutually exclusive. But I believe there is a broader, overlooked explanation.

Microsoft’s greatest strength has always been its monopoly position in the PC chain. Its exclusionary licensing agreement with PC manufacturers mandated a payment for an MS-DOS license whether or not a Microsoft operating system was used. Because it made no sense to pay for two operating systems, it created a huge barrier to entry for any other software firm. No other operating-system maker could get a toehold in the PC market. By the time the company settled with the Justice Department in 1994 over this illegal arrangement, Microsoft had garnered a dominant market share of all operating systems sold. It held a lock grip on the market until 2008, when it fell below 90 percent desktop OS share for the first time.

Consider Microsoft’s huge cash flow: The former monopolist throws off nearly $78 billion in revenue and earns almost $27 billion in profit each year. Its three main product lines — Office, Server Tools and (now slipping into third place) Windows — account for three-quarters of its revenue and nearly all of its profit. It is not a coincidence that these business lines were the direct beneficiaries of the Microsoft monopoly. Indeed, none of Microsoft’s other businesses has achieved the success of its monopoly properties. Online service loses money each year. Despite enormous investments, its entertainment and devices division still earn less than $1 billion annually.

Gates’s true genius was not as a tech visionary. It was his business acumen in leveraging a monopoly position in operating systems to become the dominant U.S. tech company. IBM gave the world its first PC in 1980. The mainframe giant looked down on the idea of a personal computer for home or even business use. It thought the PC insignificant — it could never replace the big iron it made. In 1981, it happily outsourced the operating system to Gates’ squad of geeks, who themselves outsourced the OS code writing. By 1982, MS-DOS was released.

Embedded within that original IBM deal was the seed of Microsoft’s vast fortunes. Microsoft’s true genius was in its license agreements of MS-DOS (and, eventually, Windows) with PC manufacturers. They offered a variety of licenses, but the version that charged the least per copy included a clever kicker: Microsoft had to be paid for every machine sold — regardless of whether MS-DOS was the operating system. This brilliant, if evil, agreement with computer makers effectively blocked all OS competition. Microsoft became the standard adopted by corporate America.

Microsoft had its deal with the devil: Its lightning in a bottle was not some awesome technology or brilliant breakthrough — it was a clause in a contract that led to an enormously profitable monopoly. It then pre-installed Office in new PCs, creating a second monopoly and billions more in profits. By then, Office had become the dominant productivity software suite. Eventually, Microsoft’s server and tools division — which includes Windows Server and Microsoft SQL Database — also became a de facto standard.

Google’s motto, “Don’t be Evil,” was a not-so-subtle swipe at how Microsoft had achieved its dominance.

Most monopolies, aside from baseball, eventually get broken. Microsoft was no exception. Once the Justice Department and the European Commission found the company in violation of antitrust laws, it was forced to compete fairly. It is no coincidence that as the company lost its vice grip on the desktop, its dominance faded. Revealed as a dinosaur, it was unable to compete with the smaller, more-nimble mammals.

And therein lay its current problems. In a fair and level playing field, the once-feared software giant has been revealed as a middling software writer and a mediocre competitor.

  • don108

    While I certainly agree that the reason for MS’ woes and increasing decline can be put in the hands of Mr. Ballmer, the real cause is the philosophical attitude that has occupied all of the company (including Mr. Ballmer) and was introduced and promoted by Bill Gates. He was the cause of MS’ rise as a monopoly and is the author of its fall with his “Windows Everywhere” concept. It destroyed their mobile phones. It destroyed their tablet.

    Contrary to Mr. Gates’ belief, people don’t want the same user interface everywhere. As has been showing by the iPhone and Samsung’s obvious theft of the iPhone and tablet design, the market wants devices that have user interfaces appropriate to the device, not the same interface on everything.

    That same interface everywhere was Mr. Gates’ idea. Mr. Ballmer is just continuing in that process. The fall of MS is primarily due to Mr. Gates’ misunderstanding of the market. It was simply exacerbated by Mr. Ballmer’s inability or unwillingness to challenge Mr. Gates.

  • Aloious Kathcart Alqonquin

    MS extorted payments from us all for DECADES like a vampire sucking life from its victims. Drive a stake thru its corporate heart by refusing to use any of “its” products.. Pity Netscape, and Tim Patterson, the real author of MS-DOS. No amount of self-righteous philanthropy by Gates can expiate the damage he, and his evil cohort, did to us. MS was NEVER an innovator. It has always been a parasite, feeding relentlessly on need, ignorance, and weakness. Move to Linux; you have nothing to lose but your chains.

  • http://www.facebook.com/tim.jordan.56884 Tim Jordan

    I always knew that Microsoft had a bad OS. At university we used Unix. Microsoft was not even created yet nor the IBM PC. Microsoft’s strengths were to keep their stranglehold on their monopoly to the degradation of computer science. Now that consumers have choices and see for themselves the reality of Windows and these bug fix Tuesdays, they realize how stupid they were for thinking that Windows was anything worth buying.

  • XCOM5

    So Balmers answer to major disruption within his own industry was to ignore it and then ban his children (and presumably employees) from looking too?? Whle apple where redefining what an online store was, and showing how it can provide amazing value, he was sat with his fingers in his ears shouting lalalala?? My god that really does beggar belief, but explains completely why MS evolved into the joke they are today. I agree though this guy was only ever Gates’ monkeyboy, and those crying for Gates back are really missing the point on every level …IMHO :)