Where do you go after your company has achieved a 95% market share and a stock price at an historical peak? Add to this the departure of a visionary founder (see "The Legacy of Bill Gates," Communications, January 2009). Bill Gates stepped down as Microsoft's CEO in 2000, just when critical changes were about to disrupt Microsoft's economics: continuing growth of the Internet as a new applications and communications platform, handheld computers and cellphones starting to converge, growing popularity of free open-source software, and the beginning of software as a service and cloud computing. The most likely place to go is down, and that is what happened to Microsoft after Steve Ballmer took over as CEO.
The Gates-Ballmer relationship began when they were undergraduates at Harvard University during the mid-1970s. Ballmer graduated and then went to work for Proctor & Gamble, before attending Stanford's MBA program. He left after a year to join Microsoft in 1981 and help his old college dorm-mate grow the business. Ballmer went on to become enormously successful (and wealthy) himself. He was Gates' most trusted lieutenant for the next two decades, exhibiting great skills in marketing products, motivating the sales team, and building relationships with enterprise customers. The announcement in August 2013 that Ballmer will step down as CEO within 12 months makes this a good time to reflect on his legacy and how he has positioned Microsoft for the future.
Ballmer also announced a major acquisition to take place in 2014: Nokia's cellphone hardware and services business. Nokia's CEO for the past three years, Steven Elop, worked at Microsoft from 20082010 after being COO of Juniper Networks. He will rejoin the company as Executive Vice President of Microsoft's Devices and Services business unit. That puts Elop in a strong position to succeed Ballmer or at least become very influential within Microsoftif the merger proceeds smoothly.
On the positive side, Ballmer did well on several key dimensions. First, and most importantly, Ballmer proved to be an able steward of the Windows platformthe "mother ship." This franchise is supported by enormous revenues from Windows, Office, and Windows server and tools. In fiscal year 2013, Microsoft had revenues of nearly $78 billion and operating profits of $27 billion; about 24% of sales came from Windows, 32% from Office and other business products, and 26% from Windows server and tools.3 These three sectors also generated nearly all of Microsoft's operating profits. Historically, about 70% of Windows and Office sales also have been to enterprises (large corporate customers or personal computer manufacturers like Dell and Hewlett-Packard), not individuals. This means Microsoft is largely shielded from the volatile consumer market.
Second, Ballmer presided over the establishment of a new platform for home entertainmentthe Xbox, launched in 2001, and currently the most popular video-game console. This business generated $10 billion in sales for Microsoft in 2013, though only $850 million in profit. Development started while Gates was still CEO in the late 1990s. However, Ballmer and his executive team, especially Robbie Bach (who left in 2010) and Don Mattrick, deserve lots of credit. The Xbox operating system is derived from Windows NT, but cannot run Windows programs and is optimized for graphics and video games. For Microsoft to create a new operating system incompatible with Windows was an important step to diversify and show it could build products aimed at being best in class, not just best at running Windows.
Ballmer proved to be an able steward of the Windows platformthe "mother ship."
Third, Ballmer presided over the extension of Windows and Office, as well as other packaged software products, to "the cloud," with Windows Azure, introduced in 2010, as well as the Sky-Drive cloud hosting service, first offered as Windows Live in 2007. Microsoft's cloud-based infrastructure and development platform will become more important as enterprises increasingly access their software via the Web and rely on subscription pricing or build new hosted applications. Azure positions Microsoft reasonably well to maintain its enterprise accounts. However, young Web-based companies generally do not use Microsoft products and services because they are too expensive. They prefer Linux and other free open source products, or hosting via Amazon, Google, and others. This preference does not bode well for Microsoft. The startup firms of today will become the larger customers of the future and, in general, they are not Microsoft customers.
Fourth, Ballmer added some new platforms, brands, and complementary products and services. Most notable is Skype, for video communications, which Microsoft bought in 2011 for $8.5 billion. Under Ballmer, Skype has gone from a money-loser to generating some $2 billion in revenues last year, with about 300 million users. The sales and user base, which Microsoft could leverage for other product sales, helps justify the high acquisition price. Ballmer also bought Yammer in 2012 for $1.2 billion, giving Microsoft a presence in social networking for the enterprise. Overall, these acquisitions, along with the Nokia phone business, further diversify the company and should become more valuable. The Nokia acquisition will expose Microsoft more to the commodity consumer market. Nonetheless, since sales of smartphones and tablets now far outpace those of personal computers, a greater presence in mobile devices is necessary to grow revenues, albeit at the expense of profits.
On the negative side, as CEO, Ballmer struggled or failed in several key areas. First, Ballmer was unable to rein in the many warring factions that fragmented the Windows group after Gates handed over the CEO job. With no one in charge to focus the huge teams (as many as 7,000 programmers and test engineers worked on Windows Vista), the operating system devolved into a massive pile of "spaghetti" code. There were too many bosses and too many bugs. It took leadership from the better-managed Office group to ship the poorly received Windows Vista, released in 2007 (after being originally scheduled for 2003), and then to right the ship with Windows 7, released in 2009 (see "What Road Ahead for Microsoft and Windows," Communications, July 2006, and "What Road Ahead for Microsoft the Company," Communications, July 2007). Steven Sinofsky rose to president of the Windows division, but he left after shipping Windows 8 in 2012, again making it unclear who was in charge of Windows.1 In July 2013, Ballmer announced a reorganization, consolidating eight separate product groups around software platforms, software applications, hardware devices, and online services. All major operating systemsdesktop, server, and mobilenow report to one executive, Terry Myerson.6 This move should improve coordination within Microsoft, but it will still be very hard to catch Apple and Google in smartphones, tablets, and Internet services.
Second, Ballmer did not sufficiently embrace broader changes in the technology landscape as he kept the company closely tied to Windows and PCs. This is another legacy inherited from Gates. Since Ballmer was not a software programmer, perhaps he should have been the one to make the technical and emotional break. A dozen years ago, Ballmer could have presented Microsoft as a platform company, not just a Windows company, and built other operating systems with workable bridges to Windows applications. This would have leveraged the Windows franchise but better enabled the company to move into tablets and smartphones.
Microsoft has made some efforts to evolve, but not aggressively, except for the Xbox. For example, Office has become a productivity platform for a billion users, but we do not see this application suite on smartphones and tablets running Apple's iOS or Google's Android. Office on non-Windows mobile devices is a huge gap in the market that Ballmer has not addressed. Perhaps Microsoft should have followed its own lead with Xbox and built a new operating system optimized for mobile devices, without worrying about Windows compatibility. But Ballmer found himself in an old Catch-22. Microsoft's main advantage over Apple and Google is the Windows platform. Smartphone and tablet customers who want to use their mobile devices as substitutes for PCs probably want to run standard Office and other Windows applications. At the same time, maintaining Windows compatibility has restricted Microsoft's ability to innovate and optimize in mobile software.
Third, while protecting the Windows franchise, Ballmer has managed to confuse users, hardware partners, application programmers, and industry analysts. In 2012, Microsoft introduced Windows RT, a reduced-instruction set operating system for tablets (and potentially smartphones) that runs on a long-battery-life ARM processor, like Google Android devices and the early Apple iPod and iPhone devices. RT tablets have met with poor sales and have little advantage over Google Android or iOS devices.5 RT can only run new Windows 8 apps, and their number pales in comparison to the applications available for regular Windows or for Android and Apple devices. RT also requires a special emulation utility to run Windows 8 apps. Perhaps if we had seen Windows RT devices in 2006 or 2007, bundled with an RT version of Office, the new operating system might have had a chance. Now, smartphones running Google Android dominate sales, with about 80% of recent shipments.2 Android tablet sales (more than 60% of recent shipments) have also passed the iPad (33%, down from over 75% in 2010).4 In comparison, Microsoft's total presence in smartphones and tablets remains in the low single digits. Adding Nokia revenues will help, but they are now just a few percent of the market.
Ballmer remains an important figure because of what he did to help build the world's most successful software platform company.
Fourth, Ballmer let too much talent leave the company. The list of departures is very long, though it started while Gates was still CEO in the late 1990s. The list of new executive recruits under Ballmer is also short. One exception is Steven Elop, though he was unable to do much to reverse Nokia's decline after taking over there as CEO in 2010.
Finally, Ballmer never managed to make Microsoft's online business prosper, including MSN and the Bing search engine. This division also started under Gates in the mid-1990s, who then skillfully adapted the network to the Internet. MSN and Bing have provided Microsoft with lots of experience in how to run an online, ad-supported business. The division, nonetheless, has generated enormous red ink, including $12 billion in losses versus $8.7 billion in sales during the last three years. A sizeable part of these loses include charges taken against aQuantive, a $6 billion acquisition Ballmer made in 2007. This was an advertising software and services company that Microsoft failed to integrate, except for some of the ad software technology.
What to conclude? Ballmer leaves the CEO post with a mixed record. Microsoft's market value is about one-third less in 2013 than it was in 2000, despite tripling revenues and more than doubling profits under Ballmer. To be fair, growing revenues and profits while market value declined is common among high-tech companies that peaked at the height of the Internet boom, including Cisco and Intel. Nevertheless, Ballmer remains an important figure because of what he did to help build the world's most successful software platform company during the 1980s and 1990s. In other words, Ballmer's greatest legacy seems to be what he did before becoming Microsoft's CEO, not after.
1. Cusumano, M.A. What Sinofsky's departure suggests about the current state, and the likely future, of Microsoft. MIT Technology Review (Nov. 21, 2012) http://www.technologyreview.com/view/507746/what-sinofskys-departure-suggests-about-the-current-state-and-likely-future-of-microsoft/
2. Etherington, D. Android nears 80% market share in global smartphone shipments, as iOS and BlackBerry sales slide, per IDC. TechCrunch (Aug. 7, 2013); http://techcrunch.com/2013/08/07/android-nears-80-market-share-in-global-smartphone-shipments-asios-and-blackberry-share-slides-per-idc/
4. Pepitone, J. Apple's sliding mobile market share. CNN Money (Sept. 3, 2013); http://money.cnn.com/2013/09/03/technology/mobile/apple-market-share/.
5. Tibken, S. Top 10 biggest drawbacks of Windows RT. CNET (Oct. 23, 2012); http://news.cnet.com/8301-10805_3-57537730-75/top-10-biggest-drawbacks-of-windows-rt/.
6. Wingfield, N. Microsoft overhauls, the Apple way. The New York Times (July 11, 2013); http://www.nytimes.com/2013/07/12/technology/microsoft-revamps-structure-and-management.html?_r=0.
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