Is Microsoft Dead? And Why Steve Ballmer should quit? Ashutosh Harbola tells...

Steve, You just went too Soft there!
Ever since it began, Microsoft was Globally hailed for its Innovations, and even feared, Hated & Fined for its Anti-Competitive practices. But especially since Steve Ballmer took The Helm, Microsoft has only Moved Downhill, becoming a Pale shadow of its former self.

Two childhood friends Bill Gates and Paul Allen, who had a strong passion for computer programming, started a company in 1975, which preliminarily developed interpreters for microcomputers. Since then, Microsoft has been the temple of innovation and a clear market leader under the leadership of Bill Gates. Great empires are built on foundations laid by great visionaries, and it is undeniable that Bill Gates and Microsoft were right up there among the harbingers of the software industry as we know it today. The magnitude of their contribution can be gauged from the fact that global IT spending touched $1.5 trillion in 2010 according to IDC.

But the true test of visionaries is the ability to create empires that last beyond them. In 2008, Bill Gates had declared, “We have achieved the ideal of what Microsoft wanted to become.” By this statement of Bill Gates, who stepped down as Microsoft CEO in 2000 (and Steve Ballmer took over) and as executive Chairman in 2006, one would like to believe that he crossed that rubicon as well. But is Bill’s statement a statement of achievement, or still one of wishful thinking? Well, they do say that time will tell. And to be frank, it has been doing so for quite a while, though we do not believe that Bill would exactly like to hear its verdict so far! To understand that, we need to look at what transpired since the time Gates stepped down and Ballmer stepped in.

It took Steve Ballmer 20 long years to become the top man at Microsoft, ever since he dropped out from Harvard to join the company. Incidentally, even his joining heralded a turning point of the IT industry with the dot com bubble bust, and ironically, the relations between Steve and Bill were also hardly the kind you would expect between a CEO and his succèssor. The Wall Street Journal reported the same and an internal source in the board clarified the entire issue. Steve was reported as having said, “Once Gates leaves, I am not going to need him for anything”. And he even reportedly added, “Use him, yes, need him, no.” In fact, Gates even stormed out of that meeting, according to sources. Two camps had been built since then, with respective allegiance to Ballmer and Gates.

With a start like that, the signs seemed quite ominous. In 2000, the company’s M-cap was recorded at a mammoth $586.2 billion, and was leading the list of top companies in the world. Even the conglomerate GE, which stood at second place was way behind with an estimate of $474,956 million. It’s almost a decade since then, and Ballmer’s leadership has come under scrutiny not once but on many occasions. The company’s M-cap in the fourth quarter of 2010 was only recorded at $238,784.5 million, almost one third of what it was in 2000 as reported by Financial Times Global 500. The decline is a clear indication of the pessimism of investors in the company. IT analyst Jeff Kagan comments to B&E on the company’s major problem, “Microsoft has happy customers and it is a natural for them to transform and lead the new industry. They have just not done that over the last decade”.

One common logic given is that those valuations were unfair as they were at the peak of the dotcom bust. But consider Apple, which did not even manage to grab a place in the top 500 list based on M-cap in 2000. It has immensely grown over the decade and even surpassed Microsoft with an M-cap of $295.89 billion in 2010. Apple’s growth can be attributed to its innovative approach and its ability to deliver unique products to the market. Over the past decade in particular, Microsoft failed to create that effect, even though it had all optimal resources to leverage. Microsoft’s core business is still the Windows & Window’s division, where 80% of sales are obtained by partnering with OEM’s and 20% by independent selling. This is the bread & butter of Microsoft, contributing the maximum profits.

They call it the phenomenon of the one trick pony. Microsoft reported $18.49 billion in revenues in 2010, compared to $14.97 billion in 2009. The revenue increase in the segment was because of the overall demand in the PC and laptop segment. Interestingly, Microsoft’s major revenue in this segment is because of its OEM partners, who provide Windows as the operating system. Another reason for the growth of this segment is the lack of competition and the general tendency towards using Windows. It is argued that things could have been very different if Apple would have partnered with OEM’s to only sell the MAC as the operating system. However, that’s one rare area where Steve Jobs truly missed the bus. Though there have been competitors like Linux, which have offered operating systems like Ubuntu, but they were not able to create a buzz with them. While the software division of the company remains strong, its other divisions remain weak. While Microsoft may remain relevant today, a serious question with respect to its ability to sustain itself, say, ten years down the line, still persists. One learns to have a better appreciation of this point when one learns that Microsoft’s consolidated revenues grew by only 7% in 2010 yoy, whereas Google booked 26% and Apple grew by a mammoth 70% in revenues. It’s a clear indication of poor leadership at Microsoft. Nearly all the verticals have been booking low growth.

Somehow, being on the wrong end of anti-trust cases sounds far better than the Microsoft’s present situation. It is well known how Microsoft lost to Google, since it could never realise the importance of the search engine. To be true, Bing has been gaining share since launch. As compared to a market share of 5.55% in February 2009, it had reached a share of 9.87% in August 2010, within a span of 18 months. But Google’s market share has hardly budged in the same period, from 72.11% to 71.59%. Microsoft even lost the market share of Internet Explorer, which in early 2000, was a market leader and grabbed nearly 90% of the overall market. Today Internet Explorer, with all its versions, holds nearly 40% of the market. On the other hand, Google Chrome, which was launched in late 2008, has grabbed a market share of nearly 15% in a span of just two years. In the same tune, Google’s popularity has spread to e-mail, and Microsoft has been able to do little. Although Microsoft has come up with upgraded versions of Internet explorer, the market has not been too welcoming.

Microsoft has even tried its luck in the smartphone and tablet segments. In the smartphone OS space, Symbian, Android & Research in Motion lead with market shares of 37.6%, 22.7% and 16% respectively. Microsoft meanwhile languishes at 4.2%. The deal with Nokia could help for now (for which they have Elop to thank!), but the latter still faces issues with respect to declining market shares. The deal could even be seen as the association of two market losers in the smart phone segment. Even Nokia is on a decline and its much popular Symbian’s sales went down by 32.2% in 2010. The decision has raised doubts about its plans with the Meego OS, which was earlier slated to be Nokia’s next big deal in mobile phone OS.

As far as tablets go, the game is too much in favour of Apple anyway, which sold 46.6 million units in 2010, booking a growth of nearly 87.2%. Another area where Microsoft has been betting big now is the cloud computing market. But the platform is almost new and CTOs around the world are not very optimistic about the technology with the involved risk of putting the entire data on the cloud platform. A research report of IDC Enterprise panel of 2010 reported that 89% of respondents were worried about security issues on the cloud platform. But the biggest problem with Microsoft remains that the cloud will eat away its core model, as it will prompt more users to go for rent based usage of its OS.

Another sign of alarm is that many top executives have left the company or been ousted. The most alarming was that of Chief Software Architect Ray Ozzie, who was supposed to succeed Gates at one point. Then, there have been many exits at lower levels. Other critical exits included that of Stephen Elop, Microsoft Business Division President and now CEO of Nokia and Server & Tools Business (STB) president Bob Muglia (who was removed by Ballmer). Now Ballmer is speculated to be implementing a major upheaval in management and promoting more technical people, since he wants the company to compete better in segments like cloud computing and tablets. It is speculated that even the recent top management exits in India, starting with that of Microsoft India Chairman & Corporate VP Ravi Venkatesan himself, have a lot to do with the shake up being implemented globally. Venkatesan has himself admitted to the media that the company’s OEM alliances were in trouble and the company was late to respond to innovation. The critical part is that the mobile penetrated India much faster than the PC, and it is another area which has been Microsoft’s Achilles Heel. Analysts believe that this turnaround is a synonym of incapable leadership and these issues would have been entertained much before. One analyst tells us that the company has been trying too hard to ensure diversity in expertise and specialisation as much as possible, in the hope that it would produce results. The bitter truth is that it hasn’t. Microsoft officials refused to comment on the story when contacted by B&E.

Meanwhile, Ballmer has been on a roll in one area, which is booking profitability from his share. In November 2010, Ballmer was reported to have sold 12% of his stake worth $1.3 billion. One theory is that he is reliving the rat and sinking ship analogy. And if that is not the case, then one thing is for sure. Ballmer, and Microsoft, need the ‘original’ Bill Gates much more now than ever before.