Life after Steve Ballmer: How Microsoft can get back on track

By almost every traditional measure, Microsoft is one of the world’s most successful companies. Over 38 years it has grown from nothing to become a £50 billion-per-year high-tech powerhouse. It employees nearly 100,000 people and is estimated to have made over 12,000 of its employees millionaires.

Unfortunately, Microsoft isn’t judged by traditional measures – it is pitted head-to-head against even faster growing rivals including Apple, Google, and Amazon. When set against that background, its largely dormant stock price and lack of blockbuster new products have made it look like a laggard, and caused increasingly loud demands for radical change.

Whether Steve Ballmer’s departure after 33 years – 13 of them as CEO – was long-planned, or a reaction to investor unrest and blow back from his recent massive company reorganisation, may never be known, but either way it is the right time for Microsoft to take stock of its assets and draft a new plan for its future.

Unhappy investors like ValueAct Capital – recently offered a seat on the board as part of Microsoft’s changing of the guard – may all know they want new leadership, but they certainly don’t agree on what Microsoft should do next.

Company veterans upset with the centralised control inherent in the new, functional corporate structure may get their chance to figure out what they’d like to see done instead. A changing market and tougher competition has made Microsoft’s “fast-follower” strategy and “Windows über alles” motto insufficient to stay on top of the high-tech heap.

Return of Gates

Predictably, there is a swirl of rumours around the possible return of Bill Gates to run Microsoft, at least on an interim basis. No less a luminary than Salesforce.com’s CEO Marc Benioff thinks this is the right plan. Leaving aside whether Gates would want the job back, or whether he’s doing more good for the world trying to solve its problems through his foundation, it is certain that he has a unique advantage if he decides to tackle the challenge – credibility.

Much of Microsoft’s thrashing over the last two decades has been the result of increasingly harmful internal politics, so whoever takes over will need to make some very tough choices and even tougher changes to the corporate culture. Gates, as founder and original company technologist, is one of the few who has the respect of the organisation and might be able to make those kinds of bold moves successfully.

His time “outside” may also have given him the perspective he’d need to take Microsoft in a new direction. Gates may also be the only executive other than Ballmer with the knowledge and experience to make the company’s new functional model – which is widely believed to have been designed to mimic the centralised management model of Apple under Jobs – work. Gates also has credibility with the marketplace, which will be much needed after the way Microsoft has tattered its brand with lacklustre launches of Windows 8 and the Surface product line – as well as a decade of wild-goose chases in the all-important mobile arena.

Whoever it is, they’ll face plenty of challenges

Ballmer’s recent missives to Microsoft’s employees are reminiscent of Gates’ memo after he freaked out about the success of Netscape and the Internet. Gates was able to rally Microsoft to defuse what it then saw as the largest threat to its business, but today’s challenges are of a much larger scale. Netscape, Yahoo, and other Internet threats were small startups with cachet and momentum, but not much else. Today’s competition is well-heeled, well-managed, and moving aggressively to cut off Microsoft’s main sources of revenue: Desktop and server software.

Google in particular is pushing cloud-based solutions for the desktop, while both it and Amazon are gnawing away at Microsoft’s server primacy with low-cost cloud platforms based on open source internals. A long dry spell for internal business innovation at Microsoft has also driven many of the best and brightest out of the company, so the new leadership will need to grow its talent pool quickly.

To be Apple or not to be Apple

To deal with these challenges Microsoft will need to move away from its comfort zone of high-dollar royalty packaged software products. Obviously it has been feverishly working on alternatives – ranging from Azure and Office 365 SaaS offerings, to the Surface product line to capture hardware revenue that has been going to its OEMs. Unfortunately, so far these are not much more than stopgap measures. Azure may now be over $1 billion (£640 million) in revenue, but that is only about 1 per cent of Microsoft’s total. Similarly Office 365 will be a great new way for Microsoft to reach desktop customers, but so far it doesn’t have any traction in the increasingly important mobile market.

Once and for all, Microsoft needs to decide if it wants to be Apple and reduce its dependence on software royalties by capturing total system revenue. Right now it has a bad case of schizophrenia, making business decisions to try to prop up the value of its software on the one hand, while dabbling in the hardware market in competition with its partners on the other. OEMs need to pay much more to get Windows and Office instead of Android on their mobile devices, for example, while at the same time Microsoft is competing with them directly using its Surface product line. That conflict hasn’t helped its partner relationships and adds to the incentive for partners like Samsung to back away from Window 8 for mobile devices.

Microsoft’s recent announcement that it plans to acquire Nokia’s handset business pushes it much further in the direction of “go it alone” for Windows Phone 8. The move is a tacit admission that Nokia can’t compete on its own against Apple and Samsung with WP8. Microsoft is clearly hoping its deep pockets will make a difference.

Embrace the customer

Whether Microsoft decides to emulate Apple or comes up with some other ideas for blockbuster revenue-generating products, it needs to take a page from the Book of Jobs and seriously embrace its target customers. Microsoft has such a diffuse set of audiences and so much internal disagreement on product direction that decisions often seem to be made by opinion poll. Collecting data on real-life usage is incredibly valuable – and Microsoft excels at it – but cherry-picking features and bug fixes from customer wishlists isn’t the same as carefully defining the target customers and making a product that delights them (a strategy that has minted Apple and Amazon hundreds of billions).

Similarly, Microsoft has a bad habit of trying to redefine customer needs to fit its business model, instead of adapting its business to customer needs. For example, when it came time to build a robust version of Windows that went beyond DOS, Microsoft rejected using any of the widely available and free Unix variants – including its own Xenix – in favour of hiring VMS architect Dave Cutler to develop NT, a proprietary system that met its need to be able to charge big bucks for the OS.

While it is hard to argue that the $20 billion (£12.8 billion) in enterprise revenue Microsoft’s server and tools division generates isn’t hugely valuable to the company, it has largely meant ceding the hosted and cloud server market to open source alternatives – and cloud developers to Amazon’s AWS. As much of the industry moves to cloud and hosted solutions, that leaves Microsoft as an eroding island with little expertise in Linux or other market-leading technologies.

Apple, by contrast, realised that its value was in the combination of hardware and software, quickly adopting Unix as its base OS – admittedly after its own internal efforts fizzled – and pushing customers onto it when Cupertino realised what a great deal it was to get all that tested technology for free. Instead of tying up billions in R&D on a new desktop OS, it could spend its at-the-time more limited resources on new products like the iPod and iPhone. Being smaller at the time, it was also okay with giving up the server market – allowing it to focus maniacally on the consumer as its target customer.

Microsoft has had the money and resources to be an early innovator in many markets. Despite its partially deserved reputation as an imitator, it has created category-leading products in segments including multimedia, mobile, servers, databases, and developer tools. Unfortunately, many of those efforts, like the TabletPC, Windows Mobile, and Windows Media Centre, were allowed to falter – often killed by the weighty and well-funded existing businesses who saw them as some type of threat.

That type of internal strife – often disguised as complaints about the new products not being architecturally compatible with the company’s flagship products – is incredibly deadly. I saw plenty of it during my time at Sun, where efforts to make our systems easier to use were often thwarted by concerns about incompatibility with existing systems.

Splitting up the spoils

Many investors and pundits have argued for years that Microsoft would be better off split up into pieces. Ironically, a breakup was one of the possible resolutions to the since-forgotten antitrust suit against Microsoft. Unfortunately, Microsoft’s current business strategy relies on leveraging the clout of Windows on the desktop to help it succeed in newer markets like Windows in the living room (with the new Xbox One running Windows) and mobile (Windows Phone 8). Without support from the mothership, those ventures would need to thrive on their own. Perhaps equally troubling to Microsoft’s management team is the possibility that if those business units were separate companies they might decide to dump Windows altogether, further weakening the parent company’s franchise.

The result so far has been paralysis, with Microsoft’s business units “gifted” Windows, whether they like it or not. As an example, if the Surface RT hardware is really as good as Microsoft thinks it is, maybe it would sell more if it ran Android instead of Windows RT. Or perhaps if Microsoft wasn’t so tied to protecting Windows, the Office business unit could be a driving force in Android applications, instead of having a late-to-the-party offering with limited functionality.

Conversely, if Microsoft is going to stick with its “all in” strategy, betting the company on Windows, it needs to take better care of its partners. On the heels of an unpopular launch of Windows 8 and an incompatible Windows Phone 8, Microsoft is asking partners to “trust me” with the launch of Windows 8.1 – by not providing early access to the developers and IT professionals it relies on to smooth the adoption of new releases.

Given the difficulty of managing a company as diverse as Microsoft without a straightforward vision, splitting it along either market or product lines is certainly an option – and one often employed when all else fails. Before that can even been considered, though, the recent reorganisation, heralded as the beginning of a “new Microsoft” would have to be unwound, and functional organisations put back into business units. Even after that is done, the businesses will still have all the same challenges, so by itself dividing into separate companies doesn’t provide a silver bullet solution.

Three suggestions for the new CEO

Firstly, decide whether Microsoft really wants to be Apple – with a growing empire of retail stores, high-margin from selling premium systems, and a laser-like product focus. If not, then stop pretending and figure out how to instead develop the 21st century version of the original vision of being the software provider of choice. Whichever way you go, make sure someone owns each product and jealously guards its key aspects against organisational politics. I know how damaging those can be, as they killed many excellent efforts during my time at Sun – with many of the same “lack of architectural purity” complaints that helped kill innovative products in mobile and media at Microsoft.

Secondly, unleash mobile. Really think through from the ground up the best way to support and sell to the mobile worker. Leverage your strength in the enterprise and IT organisations, but not by limiting what your mobile team can do. Antics like Ballmer’s smashing of an employee’s iPhone only demonstrate a lack of respect for legitimate customer needs.

Thirdly, I’d love to see Microsoft manoeuvre around Google, Amazon, and Apple by making a serious play to be the set-top box of the future. Xbox One is already a better set-top box than gaming system – except that it requires a separate set-top box from the cable company. If you could figure out a way to solve that problem – joint venture, merger, or mega-deal – then you could have the “next big thing” all to yourself.