Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (45 page)

Employees got mired in committees and were cautioned to not drive on as boldly and heedlessly as before. No longer stepping forcefully on competitors’ toes! Let’s prevent being put on notice again—controversy to be avoided! Deceleration meant losing decisive battles in the arena of the IT coliseum during Internet services and social network expansion time. Lush and fertile fields were left open and accessible for the Googles, Facebooks and the Twitters of this world. With MS culture and agility severely curtailed, a variety of start-ups enjoyed nimble and unhindered grazing.

I met with Steve in the spring of 2010 and offered him unabashed outsider’s feedback. The man had tried hard and worked feverishly; I applauded him for his effort and the financial results he had produced. He is not
“Bad Boy Ballmer”
as a book with the same title wants people to believe. And don’t get confused when he looks aggressive and mean making an announcement; he is just acting! He remains a decent human being and capable business executive with whom I continue to have spirited differences. Fair to me and the people who worked for me—we respected each other. (He unexpectedly and surprisingly called me recently to wish me happy birthday, my 70th. I am very thankful for that!) During our meeting I gave him what he, at the end, labeled “a friendly pep-talk.” Not expecting anything else—I didn’t disappoint. The company by now had bloated to 90,000 employees. (I still remember when Bill criticized IBM having 1000 people working on OS/2!) This was no longer the mean and lean tiger I knew.

The non-OEM sales and marketing groups had now been converted into a more centralized structure. Being a government regulated business, the OEM group was no longer reporting directly to him. Nevertheless her profit contribution seemed too large to be run—in true McKinsey style—as a small part of a product division after having been overseen by the COO for a long time. A sales group managed by an administrator? Hard for me to understand as brilliant as he might be! Or should I say no wonder the company failed to win the mobile phone and tablet wars? After Richard Fade’s cautiously fore-shortened stint, four other executives have earned the honor of managing OEM. The frequent management changes left no room for consistency, bold maneuvers or lasting imprint. Take it or leave it is the choice customers now have according to the Feds’ edict and MS’s covenant. Theo Lieven would throw another of his famous fits if he was still in the PC business. On a separate note, how much fun is this for its sales personal and current management team?

The system-builder business, once wrongly separated from the main group, got reintegrated a couple years down the road. While it was robust enough to survive and show gains as long as it was run by capable ex-OEM managers, it nevertheless distorted the rest of the subsidiaries business. Its healthy revenues were used to justify overall headcount growth without helping market penetration for Office and server products. After reintegrating it four years later, the new OEM management team, having lost touch, showed less passion to nurture and grow it, resulting in a severe decline of revenue. I loved that business and lavished attention on it. People wondered why. Simply put, these customers were much closer to their clientele than the large manufacturers, and understanding their business well provided me with a great learning experience and beneficial feedback.

In other parts of the OEM business, major challenges have not been answered in developing countries, the People’s Republic of China (PRC) and India in particular, because of failed OEM marketing activities, political tolerance of renewed piracy attacks made possible by hackers, and unaddressed security loopholes. For the first time, in 2005 an OEM security key for Windows Vista found its way into the hacker community and in 2009 the same happened with a Windows 7 key from Lenovo, opening the door for uncontrolled distribution which can only be fixed through altering security specific BIOS code through a new service pack. If MS would have the guts and threaten to impose huge fines for negligence of this kind, no damage might have ever occurred. Too radical considering current company policies and politics.

In concrete numbers: According to the research firm Gartner, PC sales grew by 3.8 percent in 2011 while MS’s Windows revenue decreased by 1.4 percent. Taking into account that Intel reportedly scored the highest CPU sales gains in emerging countries, MS’s failure, growing Windows revenue in lock step, can only have two main reasons. An approximate 10 percent price erosion—not true as my sources tell me—or most probably—a failure to control piracy in developing countries. The probable cause for a $600–$650 million revenue loss for the company!
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A few of my old crew still work in the OEM group and a couple who had left actually came back. I hope the old timers do not suffer too much when they remember the old days full of unbridled energy, inspiring eventfulness, fun, volatility and tumult.

I encouraged Steve to listen carefully to IT world-shattering ideas his employees were concocting and spin off new businesses to sponsor a MS-led Silicon Valley like phenomenon of new entrepreneurs, right here in the state of Washington. Ray Ozzie, who by now had left the company, had once asked for the same. My message: Take full advantage of any mind blowing new opportunities they come up with instead of bogging entrepreneurial spirit down with internal bureaucracy, artificially-imposed standards, too many committees and management layers. He answered: “I hear you!” Two years later I am still waiting.

Management’s success comes down to trusting others. Can MS’s CEO trust anyone other than himself, and can he let go of micromanaging results? The recent developments might actually signal the latter. I remember Kurt Kolb, my super smart business manager, approaching me during the Java mess in 1996/97 and asking me if he needed to keep me in the loop of the ongoing investigation and negotiation. I answered: “Absolutely not, call on me only if you run into serious trouble causing us to eventually lose this potentially multimillion dollar lawsuit or believe we might get an injunction stopping Windows.” I recognized he was puzzled and, reinforcing my opinion, I told him “You work for me because I trust your judgment.” Kurt later considered it a management lesson learned.

Is Steve really the man to turn the ship around or is he too entrenched in the culture he needs to revive? Therefore his appointment to run the company may have been a mistake. As Richard Forster observed: “More companies fail because of strong cultures than weak strategies.” Are insiders or outsiders better suited to cause long and lasting change and a successful break with old habits and management styles? Analyzing Lou Gerstner’s, Steve Jobs’ and Eric Schmidt’s (Google’s former CEO and now executive chairman) job performances suggest there are many examples where outsiders trump insiders.
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Steve B. has kept revenues and profits nicely growing. But so far he has not applied himself enough to be recognized as the turn-around product fanatic and perfectionist the company desperately needs. Without being a credited nerd and respected visionary, he continues to struggle with creating and inspiring a top-notch R&D team. MS needs to find her equivalent of a Steve Jobs! Sales, marketing and operational strength alone will not be enough to effectively lead the overhauling of a company in need for product excellence.

I own zero shares in MS. I sold them when I left and never touched her stock again. I still admire the company and I am hoping she can rejuvenate herself. Talking to Steve offered a warm nostalgic taste of the good old days as we spiritedly and loudly rehashed the ancient and almost surreal stories. In remembrance I saw the spark in his blue eyes reappearing. We departed as we often had, as equals disagreeing in what I had contributed in our one hour long discussion.

In the summer and fall of 2010 I spotted rumblings in the press asking for his resignation. For sure the shareholders of the company who had made out like bandits in the early years had nothing to laugh about since he had taken the reins. MS’s stock price has fluctuated between $21 and $36 over these years despite growing into a by now $75 billion plus revenue machine with most admirable profit margins. Wall Street and the investment community still seem disillusioned, not trusting the leadership qualities of the man at the helm.

There is one simple reason for this. MS’s echelons didn’t act decisively on their own judgment when considering how long the PC revolution would last and when the PC could be seriously challenged as number one information appliance. As early as the mid ’90s her executives clearly understood the alternative trend to increasingly mobile devices. Notebooks and Netbooks casted a first light on it. Several efforts were made to engage in e-book readers, smart phones, pocket PCs and media tablets. Plagued by notorious product delays, mediocre product quality and insufficient features, the company failed to gain the coveted number one position in any of these categories as OEMs refused to invest and build these forward-looking devices.

Their reasons, first there was not enough passion or talent to get the software done right first time. Second, MS’s R & D was hamstrung by management through committee and political infighting for resources. And third, most of these numerous and too ambitious projects were mainly undertaking to cover MS’s flank and discourage competitors without a true belief in their validity and success.

Apple’s new CEO Tim Cook recently said in an interview that Steve Jobs—Apple’s former CEO—“grilled in all of us over so many years the company should revolve around great products and that we should stay extremely focused on few things rather than try to do so many that we did nothing well.” This is very different from Bill’s and Steve’s aim to mingle in all categories at all times. Needless to say both philosophies offer a path to success but the one MS has chosen makes retaining focus much harder.

A lot of talented employees responded to this operating style like Rob Glaser, the founder of RealNetworks, by leaving the company. Their main motives, their egos, were being bruised and constrained by an ever-growing Windows centric view governed by bureaucracy. Robbie Bach’s
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departure falls into the same category. The top honchos never thought of setting some of their talent pool free, sponsoring new ventures with angel money and creating partners for mutual benefits and life! Instead, the ones who left were sometimes treated as enemies often accompanied by ugly legal wrangling. Never forgotten and making it ultimately harder for MS to obtain cooperation in emerging markets.

Spreading resources too thin or losing key ones hurt further and resulted in neglecting core products. Competitors were provided ample opportunities to catch up or even bypass MS’s offerings. Internet Explorer is a premier example in this context. Having won the integration argument in court, IE and Windows are still joined at the hip. This fall it will be in version 10. But now serious competition has arrived. Neglected during Windows Vista reign, it spurred the release of two nimble browsers Firefox and Chrome. As a consequence, MS’s browser usage share shrank to below 50 percent, forcing MS for the first time ever to advertise the usage of IE heavily on TV categorizing it as a
modern
browser. Worse, it motivated Independent Software Vendors to predominantly write browser applications for her competitors. Losing these ISVs—even if only partially—is not only agonizing but potentially life threatening. What federal regulators did not accomplish MS’s negligence and the free market did. Proving once again competition never sleeps and will attack—even almighty MS—supposedly still protected by network effects.

PC DOWN SPIRAL

PC sale in industrialized countries has decelerated. Some of this can be attributed to the currently shaky economy but most is grounded in replacing PCs with ever advanced smart phones, tablets and doing computing in the cloud.

A phenomenon which has the industry stuck in a crisis potentially dooming IBM PC clone manufacturers. Gartner
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estimates that by 2015 1.1 billion smart phones and 370 million media tablets will be sold annually compared to 400 million PCs. While total PC growth over the next three years will hover between 10–15 percent, smart phones sales will double and tablet sales will triple during the same time frame. The importance of the PC will continue to diminish. Cheaper, safer, faster and higher available connectivity and sophisticated cloud services could quicken this trend further.

MS’s management team is at least partially responsible for the calamities of the PC clone industry. I always considered the PC manufacturers our partners as they listened to and depended on us. With MS now considered a follower, they had no one to look up to when their need was the greatest. The vibrant energies the company still possessed were constrained by regulations, self-imposed failures and her inability to create disruptive innovations. Management by consensus took its toll, by default, by choosing the staid, low risk path over leadership, pro-activeness and bold adventures on the wild tech frontiers.

The changes the IT industry has gone through since I left are nothing short of mind blowing. IBM needed no Ray Ozzie to understand the cloud and its services opportunities. Sam Palmisano, now CEO and chairman, used it to develop IBM into the most powerful IT consulting and services company helping customers to improve their competitiveness. The company is still selling mainframes but no longer produces PCs. In Sam’s view, the cost-effective manufacturing techniques that the PC industry deploys often trump marketing and engineering. Not believing IBM could ever master them sufficiently and make enough bucks with PCs, he sold that business branch to Lenovo, the PRC-based company. I disagree. When compared to Dell’s, IBM’s cost of sales was the true reasons for her non-competitiveness. Streamlining manufacturing and R&D should have therefore played a much lesser role in considering bailout. I believe Sam divested that business just because he wanted IBM to focus where she could more easily excel.

IBM’s failure to keep her PC lead is squarely grounded in her inability to market successfully to consumers. Her PCjr
63
experiment demonstrated this as early as 1984. She was and remains primarily focused on commercial enterprises. The main reason why OS/2 never appealed to consumers! Consumers voted for the elegant simplicity of Windows. Lou Gerstner and Sam Palmisano therefore lost the OS war and the PC battle while building a consulting empire and retaining IBM’s mainframe grip.