Microsoft: back from the brink

From near annihilation, the company behind Windows, Surface, and Xbox came back to join Amazon, Apple, Facebook, and Google at the top of the tech world. Center director Jeffrey Cole explains how they did it.

By Jeffrey Cole

Satya Nadella

Recently, I was speaking at a technology conference when someone asked, “Who is currently the best CEO of a media, technology, or entertainment company?” Despite all the work I do in the industry, I didn’t have a ready answer to the question. After carefully thinking, I came to a surprising conclusion: the best CEO in the industry succeeded the worst. The company is Microsoft.

It isn’t that one followed the other: Steve Ballmer deserves to be remembered as one of the worst CEOs ever not just by looking at who followed him but based on his record. And Satya Nadella is the best not in comparison to Ballmer, but because he reinvented one of the great but moribund technology companies.

The big four (Amazon, Apple, Facebook, and Google) should have always been thought of as the big five–adding Microsoft to its august company. But Microsoft fell behind the others and stagnated for many years because of poor management. Now, five years after Steve Ballmer stepped down, it is the biggest of the five.

Ballmer succeeds Gates

Steve Ballmer was never meant to be the CEO of Microsoft.

If you go back to the dorm room at Harvard where Microsoft was born, there were two brilliant programmers: Bill Gates and Paul Allen. Ballmer got into Harvard and had a quick, non-programmer mind, but he was the guy who brought the pizza.

Gates, Microsoft’s co-founder and first CEO, built the company into a global behemoth powering almost every personal computer in the world. Gradually, he became more involved in the philanthropic activities of the Bill and Melinda Gates Foundation helping to improve education and eradicate disease around the world. Having already built Microsoft into a household name and becoming the richest man in the world in the process, Gates saw the Foundation as the place he should focus the rest of his life’s work and genius.

Ballmer took over from Gates at Microsoft as the ground beneath the technology world was shifting. Having been the most important technology company from 1980-2000, an amazing run, Microsoft was now facing real competition from Google, Facebook, and Amazon. The problem of Microsoft reacting to disruption too slowly began before Ballmer. Gates himself was far too late to recognize that the internet would change everything and that all of Microsoft’s business models and research had to acknowledge this change.

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There is a new energy at Microsoft. It is relevant again.  In September of 2019, Microsoft is a bigger company than Amazon, Apple, Facebook, or Google.   It is one of the few companies that looked into the future and saw its own demise — unlike Gateway, Sun, Wang, Xerox, or Kodak. Microsoft made it back, bigger and better than ever.

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Since Microsoft was the first of the “big five,” and the most successful for 25 years, Ballmer never took the threat from Google and Apple seriously. Facebook and Amazon were less of a direct threat to Microsoft. When Apple introduced the iPhone in 2007, Ballmer dismissed its disruptive role and proclaimed, “There’s no chance that the iPhone is going to get any significant market share.”

Google, Apple, and then Facebook became the cool places to work, attracting the best graduates in computer science and drawing some of the best Microsoft employees to move from Redmond. To many, Microsoft had become “the evil empire,” a predatory, anti-consumer company skirting anti-trust laws. In the 2002-2008 period, the best graduates didn’t want to work at Microsoft.

Ballmer became obsessed as Google in particular decimated Microsoft’s advertising business and attracted the best talent. When one of Microsoft’s managers left to take over Google’s China operations, Ballmer exploded and vowed: “I’m going to f*cking kill Google.”

Microsoft went out of its way to hurt Google any way it could, even adopting anti-tracking tools on its browser that hurt its own interests under the belief that it would hurt Google more.

The Google obsession continued. About ten years ago, while visiting the general counsel’s office at Microsoft, I asked, “Why don’t you just change the name of the legal department to what it really is: the anti-Google division?”

Ballmer was also slow to recognize that their profitable business models were under siege. Microsoft was determined to sell users a new Windows Operating System every two years, whether they wanted it or not and regardless if it was any good. Microsoft never could erase the foul taste of user anger at the Vista operating system and, later, at Windows 8. It seemed like only every other version was any good — even more reason to do nothing.

The same was true of Office. By 2003, Microsoft Office was delivering all the functions users needed; each new version only added incremental improvements. In 2019, I still have many friends completely satisfied with Office 2003.

Ballmer was so determined to take on Google that he decided to take them on directly.

Microsoft poured billions of dollars into creating its own search engine: Bing. Bing was actually a very good search engine, just one that was entirely unneeded. It did nothing better than Google did, and failed to offer users who wanted one search engine any reason to look at the new entrant.

Under Ballmer, Microsoft hardly fared any better with hardware (Xbox came at the end of Gates’ term) or acquisitions. Its most noteworthy hardware foray was the Zune, an effort to take on Apple’s iPod. The Zune was a pretty good music player, but it came to market too late, after the iPod had already become a massive success. The Zune did nothing better than the iPod. It gave users no reason to move from Apple, which had already established itself as the cool company.

Ballmer’s acquisitions of Skype and Nokia were made too expensively and too late.

By 2014, Microsoft had lost its edge. It had little buzz from either the tech community or Microsoft’s customers. It had been eclipsed by the big four.

The Nadella era begins

When Satya Nadella became Microsoft’s third CEO in 2014, he had an enormous job ahead of him to reinvigorate Microsoft and make it relevant again. He got off to a good start.

One of his first actions as head of the company was to end the pointless squabble with Apple by making Microsoft Office available on the iOS platform for iPhones and iPads.

He then changed the company’s entire philosophy in marketing new versions of its profitable software, especially Windows. Recognizing the lingering bad memories of Vista and Windows 8, Nadella moved over the number 9 and right to Windows 10–as if to signal it was several incarnations better (which it was). More importantly, for the first year or so Windows 10 was free to anyone upgrading their system, a very un-Microsoft move. Still more important, Windows 10 was very good (probably the best of the Windows operating systems).

Over four years later, Windows 10 is still the latest operating system (with lots of transparent upgrades). Nadella didn’t cling to a policy of creating a new system “because it’s time,” forcing businesses into an upgrade that was very expensive and consumers into one that was inconvenient. It was even more galling when the upgrade was inferior and full of bugs and problems.

Recognizing that consumers didn’t need a new version of Office every three years, Microsoft created Office 365 and successfully moved to a subscription model that continuously updates itself. While there is still a non-365 version of Office, it has become secondary to the subscription model.

Nadella’s move into hardware was also successful. For the first time, Microsoft competed with its biggest customers (not users, but computer companies like Dell) by creating the Surface: a tablet that can be used as a PC (or vice versa). It has received near universal acclaim, and for the first time Microsoft forced Apple to re-imagine its products–especially the iPad.

Microsoft finally made a large and successful acquisition with the purchase of LinkedIn in June of 2016 for $26.2 billion. Unlike Nokia and Skype, LinkedIn was successfully integrated into the company (although after many years, Skype, too, is now integrated).

Nadella’s biggest accomplishment was to consolidate the company’s move (begun under Ballmer) into the cloud. Nadella made the cloud one of the company’s biggest priorities; today it only falls behind Amazon as the largest cloud company in the world.

There is a new energy at Microsoft. It is relevant again. Today, the best engineers and programmers have grown disenchanted with Google and Facebook. Now they want to work at Microsoft. The “Evil Empire” is the other guys.

In September of 2019, Microsoft is a bigger company than Amazon, Apple, Facebook, or Google.

It is one of the few companies that looked into the future and saw its own demise — unlike Gateway, Sun, Wang, Xerox, or Kodak. Microsoft made it back, bigger and better than ever.

It is an amazing story largely dependent on leadership and vision. It sends an important message to companies everywhere: you can come back. Disruption can be embraced.
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Jeffrey Cole is the founder and director of The Center for the Digital Future at USC Annenberg.

 

 

See all columns from the center.

September 18, 2019