Microsoft After Ballmer


Hixon, Todd

September 3, 2013

In most cases, corporate directors change the CEO because they are not happy with results and believe that a different executive can do better. If I were a Microsoft shareholder*, I would be concerned that the board will direct the new CEO to do a better job of executing strategies that Ballmer could not execute, like winning in mobile. Microsoft will do better to accept a secondary position in mobile and focus on growing where it is strong and finding new opportunities that fit with its skills and business platform.

Many say the cause of Ballmer’s departure boils down to: “he missed mobile” (e.g.). The argument is believable. Failing to gain a strong place in mobile computing makes Microsoft a legacy company. It’s still profitable and growing, but the stock value has stalled, because the future is much less exciting.

In fact, almost all of the stars of the PC era are fading. Intel also missed the mobile revolution. Michael Dell is fighting to take Dell private. Adobe is stuck in a niche. HP has lost its “way”, completely. Most of the rest are forgotten.

Apple is the one exception, and its success is instructive. Launching smart mobile devices required three key capabilities: tight integration of hardware and software to optimize performance on a resource-constrained platform, crafting a great user experience, and building an iconic consumer brand. Apple excelled in all these areas in the 1980s when it created the Mac. Its decline in the 1990s came from inability to adapt as the PC market scaled up, corporatized, and commoditized. When Apple was reborn, the wheel had turned and its distinctive skills became decisive again.

Google occupies the position many think Microsoft should have gained. It owns Android, the industry-standard operating system that runs ~75% of new smart phones and ~50% of new tablets. It did this by fast-following Apple, just as Microsoft did with Windows in the 1990s. Microsoft had been attempting to build a mobile operating system business since 2000, but Google swept in with Android, a start-up it acquired in 2005. Google also leads in cloud services sold to consumers and small businesses.

Google’s mobile strategy is the antithesis of Microsoft’s business model. It gives the operating system away for free, with a nice suite of “Google Mobile Services”: Gmail, Contacts, Maps, Navigation, the Play store and player, etc. Google makes its money mostly by selling advertising. Android is a tool to sell advertising at higher prices by gathering eyeballs and information about them. I’ve heard that heard Google bought Android for short money to hedge the bet that smartphones might become strategic, and then played the cards it was dealt, scoring a grand slam. This strategy makes sense if you already have a huge search marketing profit engine and are investing to protect its flanks.

Admittedly Microsoft’s approach to mobile was clumsy: it positioned its products as extensions of the Windows product line (legacy issues, not cool) and wanted to get paid up front for each instance. But, it would have been a huge leap for Microsoft to realize that it needed to create a fresh-start operating system and give it and a lot of the core applications away for free, in order to feed a search advertising business in which it is a weak player. I remember floating an idea like this to a major-company CEO client in my consulting days. He heard my argument, but responded: “It would take a brain transplant for us to do that.”

Now Microsoft is straining to win the mobile fight: making tablet inventory bets that generate near-billion-dollar write-offs, designing a Windows 8 user interface that is optimized for tablets and awkward for desktops, and refusing to sell Office applications on Android and Apple tablets. The last two strategies are likely to frustrate Microsoft’s core business customers.

Interestingly, the one major new market in which Microsoft has done quite well is gaming. The core business model here is one Microsoft knows well: big investments in software products that are sold for good prices per instance.

Medical people say “biology is destiny”. They mean that much of our fate is determined at conception by our DNA; many believe that nature (DNA) is more important than nurture (learning). In my experience much the same thing is true for big, successful companies. Ballmer’s departure marks a major milestone on Microsoft’s journey from a disruptive company to a strong legacy player focused on business customers. But this is the circle of corporate life. Microsoft will do well to stop fighting the last war with Apple and Google, and think instead about deepening its value proposition for its core business customers and developing new disruptive opportunities that play to its strengths.


*Disclosure: I do knot own any Microsoft stock, than than via index funds. I sold all my shares in 2007. I do own stock in Google.

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