Microsoft Troubles X: Ballmer as CEO being questioned

Richard Waters published a piece, "Ballmer's opportunity to prove his worth", on 12-Jan-2011 in the Financial Times. It's been picked up and reprinted - I become aware of this through an investment newsletter.  Microsoft's performance is now a concern/topic for mainstream investors. That can't be good.

Waters starts:
Some members of Microsoft’s board of directors feel the need to keep their chief executive under closer scrutiny.

That does not mean that Steve Ballmer’s job is on the line – at least, not yet. But it does show that some on the board are getting restless about the company’s performance under his 11-year watch. And there may be few catalysts that will make things look any better in the short term to make his position any more comfortable.

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Five years ago this article would've been unthinkable, Ten years ago (2000), talking about the worlds' leading software and hardware companies without mentioning Microsoft was inconceivable.

Ballmer insists "Everything is a PC".

Nope. He's got it upside-down and inside out.
Not just a logic error, but a fault in his world view - you might call it "blinkered".

"The Internet Changes Everything" and "Everything can be a Computer" seem axiomatic and behind the current (whatever it is) revolution that's given us the iPhone and iPad - and their many competitors. These new devices rely on ubiquitous (and affordable) communications and "The Cloud" for storage and services.

(Microsoft) PC's do Internet and are computers - but to reverse the thought is wrong.
I.e. "If it connects to the Internet and has a CPU it must be PC" fails Propositional Logic 101.

The original (1980) vision of Paul Allen (the co-founder moved on by Bill Gates and Steve Ballmer after becoming ill)  "A computer on every desk" was achieved by 2000. We're now in new territory.

A recent Endgadget piece commenting on "Windows on ARM" gave me  a couple of fresh insights:
  •  MSFT's long release cycle is a strength for both it's Corporate Customers and Developers
  • Corporate clients, now that Windows has 'sufficient' capabilities, want/value stability over everything: a decade between releases would suit them just fine.
There are two worlds in software now: 'fast' and 'slow' release cycle.
  • 'fast', typified by Apple and Open Software, does major releases at least yearly and with continuous (at least monthly) updates. On the Supply Side, Developers need to keep up, especially if they track all the new features. On the Demand Side, Users/Consumers get lots of new stuff.
  • 'slow', typified by Microsoft's 3+ year cycle, allows the Supply Side to focus on their code and only rarely deal with platform upgrades. On the Demand Side, businesses can maximise their ROI and make maximise the efficiency of their processes.
In 2002, Windows XP became Microsoft's first fully competent universal Operating System by combining the Industrial-Strength features of Windows 2000 and supported the popular legacy consumer line derived from "Windows 3.1".

It was an accident of history that Longhorn was cancelled and it took 5 years to release "Vista", which both consumers and corporations resisted. [Proof is the rapid take-up of "Windows 7".]

By accident, not design, Microsoft gave Home and Corporate customers a taste of a Good-Enough platform which they didn't tinker with and do their usual "forced upgrade" - and met with overwhelming approval.

The management challenge for Microsoft now is to figure out how to deal in conflicting or opposite worlds:
  • monetize their slow-release, stable platforms and
  • partake in the rapid innovation, high-release Internet World.
  • OR, chose one and own it.
Ballmer isn't cutting it or understanding the world has changed and the existing 17-layer bureaucratic model won't support or allow the free-wheeling, low-inertia, high-speed culture needed.

Proof is the XBox (Entertainment & Devices) division:
Released at the start of 2002, it was 6 and a half years before they announced their first profitable year.
Their strategy was to give away the hardware for long enough to buy enough market share.

And they've had a parade of failed products: Zune, "Project Pink" (Kin), and the market collapse of "Windows CE" and the associated phones, spring to mind. [I'm not a Microsoft watcher.]
With an associated trail of fired executives... [And more by the day, see this piece by Joe Wilcox.]

The Microsoft Board should be able to understand these notions and know enough History of Technology to see this pattern has been repeated often.

The answer for Ballmer and the Board is simple: "You can't get there from here".

Where can you get?
Either broke and irrelevant or leaner, meaner and "owning" the Corporate Desktop.

Do one thing and do it well, you cannot be All Things to All Customers.

A piece of mine from a year ago, "Why Microsoft is being left behind" describes them as "being trapped by success" and suffering massive Management/Leadership failure in these areas:

  • Lack of vision and competence in Management, 
  • Rigid and bureaucratic hierarchy,
  • Dysfunctional culture, and
  • Incompetence in their technical speciality: writing software.
What I didn't say at the time, Microsoft is addicted to insanely high gross profit margins: over 90%.
Long-term gross-margins can only be 20-40%, or your customers will leave and your competitors take over.
This extraordinary profitability has led directly to very poor management practices. Winding back profit margins will create a lot of angst and upheaval, creating further organisational challenges.

For more on the mechanics, see this piece: "Death by Success".  Victor Cook points out that Microsoft is breaking the rules of Economics: spending more for Market Share than the revenue returned.

Microsoft management, and you'd guess the Board, have come to believe that a) 90% gross margin is normal and b) that "small" markets are beneath their aspirations.
After the 2008 Global Financial Meltdown, every adult on the planet should understand that 20-year Bull Markets aren't normal or sustainable. In the same way, neither are extraordinary profits.

Every market, even for PC's, start small. The iPod in its first year wasn't a world-beater.
I'm sure, despite the external hype, the Execs at Apple weren't sure of the success of the iPhone before release. They may have been hopeful and optimistic, even confident. But not sure...

That's the nature of real-world Business: it's unsure and risky. Sometimes it takes years to become "an overnight success".
But you have to start somewhere, and small is easy and limits your losses.

After 10-years at the helm, Ballmer is completely responsible for the state of the company.
There is never a business reason for "viscous internecine wars", only personal/political.
Over time, that alone will prevent success and/or destroy the organisation.
Part of the root cause of Microsoft's miserable stock market performance is a lack of focus and a lack of insight into their Strengths, Abilities and Market:

Ballmer can't make this transition on his own and now, being free from the shadow of Bill Gates for 3 years, will the Board give him the impetus to make Microsoft his own?

Is Past Performance an indication or guarantee to Future Performance?
Not necessarily, but Microsoft under Ballmer has only made plays from their usual Play Book.
So why would anyone, especially investors and The Board, expect anything to change?

Ballmer is not a Software guy like Bill is/was. Despite his claims, Longhorn and Vista shows he and his Big Band of managers don't know understand Software, the people that do it, nor how to manage large-scale development.

Nor does Ballmer have Gate's ability to "turn on a dime" and take the whole company with him: the 1995 "Internet Tidal wave" memo when they dumped their whole proprietary network.

There are two factors that, if left unchecked, will see a rapid decline in Microsoft's fortunes:
  • Lack of strong, insightful Leadership, and
  • a culture of incompetent management.
    "Fat, Dumb and Happy" seems to describe their overblown bureaucracy.
I can see three outcomes:
  • Ballmer "gets it" and transforms himself and then the company. [I think most unlikely given his past performance.]
  • Ballmer does "more of the same" and spends a fortune trying to buy Market Share, or
  • the board finally gives up on him and tries to find someone to take on the lame duck...
The only scenario that sees Microsoft getting back to high earnings is a Ballmer 'transformation'.
The two Business As Usual approaches will either see them burning cash at a remarkable rate or Some New Guy taking a giant axe to the company, which will ultimately destroy it.

A weak Microsoft would make a great acquisition for someone like Computer Associates or Fujitsu: business that exploit dependence on once must-have Software and Systems.

OR, my favourite, Bill Gates might take it private and recreate it. I don't think he'd give up his family to do that.

The startling thing for I.T. outsiders is how quickly technologies can be superseded, modulo the few in the "long tail" for whom Change is All Too Hard.
The rate of change-over is exponential.
By the time "Management" and Shareholders become aware there is a problem, the situation is irreversible, compounded by the lead-time to create new products.
The I.T. landscape is littered with the bones of Dinosaurs - once great and powerful companies who dominated their field and were seen as "permanent".

From the first sign of problems in the Balance Sheet to "Close the Doors" seems to be less than 5 years. [Sorry, guesstimate, haven't found the hard data yet.] The usual path is for the brands and assets to be sold to specialist "End-of-Life" companies.

5 years ago I started predicting Microsoft would have a "financial pothole" around now (+/- 1 year).
It may still, but through a different route than I expected - over-spending, rather than through product substitution.

Clocks running...

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