It’s possible, even likely, that Microsoft is about to enter the darkest period in the firm’s history. Darker, even, than July 2000, when it seemed the US government might dissolve the house that Bill built, and force the company to be split into two different companies.
The revenue Microsoft earned in the quarter ending in March 2013, $20.5 billion, probably represents a high water mark for the company, at least for the foreseeable future. In the most recent quarter, the company’s revenue missed expectations, which Microsoft blamed on ongoing weakness in the market for PCs. There is no sign that demand for PCs is going to pick up again—even Intel is projecting sales will be flat, at best—and plenty that the world’s demand for PCs, or at least the kind that run Microsoft Windows, is in terminal decline (1).
Microsoft’s problem can be distilled to this: Computing is no longer confined to personal computers, where even now Microsoft maintains a near monopoly. More than ever, people are hiring other devices to do the jobs that PCs once did: communication, entertainment, and some portion of their work. For a host of reasons, Microsoft failed to compete effectively in the two markets that are disrupting its core business: first, the mobile devices that are supplanting PCs, and second, the cloud computing resources that are essential to making those mobile devices more useful, in many cases, than PCs.
Microsoft does produce a valuable good: its operating system (2). But with the decline of the PC and the rise of the web, mobile devices, and cloud services, the company failed to anticipate or effectively dominate these alternate—and in many cases superior—means of getting computing done. We have reached out to Microsoft for comment and are awaiting response.
Pulling back the curtain on the rot in Redmond
Everything that follows is, necessarily, from anonymous sources, all of them veterans of Microsoft. Synthesizing their feedback with other publicly reported accounts yielded some valuable insights about what ails the company and how to address it.
All the reasons Steve Ballmer never should have become CEO in the first place
The timing of the handover of Microsoft from founder and technical genius Bill Gates to employee no. 30 and MBA dropout Steve Ballmer could hardly have been worse for Ballmer. On December 29, 1999, Microsoft’s stock price was at an all time high, and Microsoft was the most valuable company on earth. Then the stock began to fall. Seventeen days later, Steve Ballmer took over, the stock market crashed soon after, and Microsoft has never returned to its pre-bubble valuation.
In 1999, when Microsoft was a blue-chip company wringing a steady stream of income from the Windows monopoly, it might have made sense to put Ballmer, who was initially the company’s first business manager, in charge. But Microsoft remained a technology company, and having a non-technical CEO meant that Ballmer was ill-equipped to oversee the increasingly large and unwieldy development project that Windows had become.
There is copious evidence of Microsoft’s broken product pipeline, which stretches back a decade, at least: In 2004, Steve Jobs unveiled a version of Mac OS X that incorporated many of the features that Microsoft had promised in its “Longhorn” reboot of Windows, a project that became so snarled that Ballmer eventually had to decide to throw out all the work his engineers had done and start again, delaying the release of Windows Vista (which succeeded Longhorn) by at least two years.
More recently, Microsoft’s disastrous attempt to copy the iPad, the Surface RT, led to a $900 million write-down, and the company’s cloud services simply aren’t functioning as the “glue” that should connect the company’s online software together, says one veteran. That contrasts sharply with Google, which has made inroads against Microsoft by offering a tightly-integrated suite of “Google Apps” that include replacements for Office and Microsoft’s email system, as well as cloud storage for data.
But perhaps the most concrete demonstration of Ballmer’s failure to be a “product guy” as a CEO is the way the company has pushed touch-screen PCs and a touch-centric Windows interface onto a public that has been trained for decades not to leave smudges on our PC screens (in contrast to tablets and phones) by touching them. (Granted, Google has made the same mistake with its Chromebook Pixel.) Touch screen PCs and “convertibles”—heavy laptop/tablet hybrids—have both failed to sell as manufacturers had hoped, contributing to the overall slump in the PC industry.
Low morale and a destructive internal culture
What was at the root of Microsoft’s broken product pipeline? As outlined by Vanity Fair’s expose on Microsoft’s lost decade, Ballmer was a tone-deaf manager. Microsoft’s “stack ranking” system of management, in which employees were graded on a curve that meant that one in 10 members of a team always had to receive a rating of “poor” even if everyone in a group was an A player, pitted employees against one another, discouraged collaboration between and even within teams, and slowed Microsoft’s development process to a crawl.
In 2012, Ballmer’s rating among his own employees was just 46%, compared to Google CEO Larry Page’s 94% approval rating and Mark Zuckerberg’s 99%.Morale at the company is at an all-time low, says one source, and Microsoft has for years been losing its best executives and engineers to competitors like Google. Even when Microsoft hires talented employees, the most talented ones leave more quickly than the less talented ones, degrading the overall quality of Microsoft’s workers.