[widdershins] Forbes: Microsoft's Midlife Crisis

[Melissa Shapiro]

Anyone else wondering how this statistic could be right?  140% of
profits?

The company relies on Windows and a suite of desktop
applications--products released a decade ago--for 80% of sales and 140%
of profits. Newer products--the Xbox videogame machine, the MSN online
service, the wireless and small-business software--collectively have
racked up $7 billion in losses in four years. 



> Microsoft's Midlife Crisis 
> Victoria Murphy, 09.13.05, 6:00 AM ET 
> http://www.forbes.com/2005/09/12/microsoft-management-software_cz_vm_0
> 913microsoft.html?partner=daily_newsletter 
> 
> Steven Ballmer, Microsoft's cheerleader and chief executive, takes the
> stage at the Georgia Dome in Atlanta to stoke the spirits of 10,000
> faithful at the company's annual sales meeting. "Win, drive, innovate,
> impress!" he shouts, his forehead glistening under hot stage lights as
> ponds of sweat soak the pale blue shirt on his barrel-chested frame.
> "But there's a way people keep score. Billions! Billions! Billions! If
> you wanna grow, things that rhyme with 'billions' are very good," he
> roars, sprinting up and down the aisles to trade high fives with
> starstruck salespeople. 
> 
> The crowd at the Georgia Dome loves it, but even Ballmer's booming
> voice can't mask the disturbing truth: Microsoft (nasdaq: MSFT - news
> - people ) is slowing down. It is bigger, more lumbering and less
> profitable than it was five years ago. Its sales are up 73% in five
> years, but profits are up only 30%. Payroll has doubled in the last
> six years. In the fiscal year just ended, sales rose only 8%, the
> first time the company has ever reported less than double-digit
> growth. 
> 
> In the dog years of Silicon Valley, Microsoft, at 30, is in advanced
> middle age. The company relies on Windows and a suite of desktop
> applications--products released a decade ago--for 80% of sales and
> 140% of profits. Newer products--the Xbox videogame machine, the MSN
> online service, the wireless and small-business software--collectively
> have racked up $7 billion in losses in four years. 
> 
> In Web-server software, Microsoft has 20% of the fast-growing market,
> while the free Apache program, a Linux variant, has 70%--worth $6
> billion in revenue had Microsoft gotten the sales. In search, Google
> (nasdaq: GOOG - news - people ) and Yahoo! (nasdaq: YHOO - news -
> people ) get 70% of queries while MSN gets only 13%. Google now gives
> away features (desktop search, photo archiving) that Microsoft
> promises in its next upgrade of Windows--which is running two years
> late. 
> 
> What has gone wrong? Microsoft, with $40 billion in sales and 60,000
> employees, has grown musclebound and bureaucratic. Some current and
> former employees describe a stultifying world of 14-hour strategy
> sessions, endless business reviews and a preoccupation with PowerPoint
> slides; of laborious job evaluations, hundreds of e-mails a day and
> infighting among divisions so fierce that it hobbles design and delays
> product releases. In short, they describe precisely the behavior that
> humbled another tech giant: IBM (nyse: IBM - news - people ) in the
> late 1980s. Tellingly, IBM reached a point of crisis just over three
> decades after it started selling computers to commercial users. 
> 
> "Microsoft is a vestige of the past," says Marc Benioff, chief of
> rival Salesforce.com, whose shares, since they were first offered to
> the public in June of last year, are up 27%; Microsoft's are down 5%
> in that period. Salesforce, which trades at 84 times next year's
> earnings (versus 20 for Microsoft), rents its software to businesses
> over the Internet. "Microsoft," Benioff says, "still wishes the
> Internet hadn't been invented." 
> 
> "Microsoft has become what it used to mock," says Gabe Newell, a
> developer on the first three versions of Windows. At late-night rounds
> of poker with "Bill and Steve" in the mid-1980s, he says, "we laughed
> at IBM. They had all this process for monitoring productivity, and yet
> we knew they had spectacularly bad productivity. That's Microsoft
> now." 
> 
> Jeff B. Erwin, who quit in December after five years there, adds,
> "Microsoft has some of the smartest people in the world, but they are
> just crushing them. You have a largely unhappy population." 
> 
> Unhappy because they aren't getting rich the way they did in the
> 1990s. In September 2003 Microsoft ended its stock option program,
> replacing it with outright grants of shares, which aren't at the
> moment minting very many millionaires. Since the tech crash in 2000,
> Microsoft stock has lost half of its value, although it has done
> better than the next four entries in the March 2000 ranking of Nasdaq
> stocks by market capitalization: Cisco (nasdaq: CSCO - news - people
> ), Intel (nasdaq: INTC - news - people ), ITC DeltaCom (nasdaq: ITCD -
> news - people ) and Oracle (nasdaq: ORCL - news - people ). And now it
> is being eclipsed, in software cool and stock market excitement, by
> the upstart Google. 
> 
> The doubts and the sniping gnaw at Ballmer, 49, who became chief
> executive six years ago, just as the tech sector was peaking on Wall
> Street. "The one thing that frustrates me is any sense that the
> company doesn't have huge, amazing opportunity to change the world and
> huge, amazing opportunity to grow," he says. "We absolutely do. Will
> we execute well? That's my job." 
> 
> In many ways, Microsoft still looks invincible--its stock may even be
> a bargain. Surely it has the wherewithal to buy its way into new
> fields. Even after paying a $32 billion dividend last year, Microsoft
> has $40 billion in its pocket. With annual net income of $12
> billion-plus, it outearns every other technology company. 
> 
> Moreover, the next 18 months could be filled with blockbusters.
> Fifteen product releases are set, including new versions of Windows,
> Office and the SQL database; the much-hyped Xbox 360 is to debut this
> holiday season. Microsoft is at its best when a new threat looms--as
> Netscape did a decade ago--and now it has the next one. Ballmer revs
> up the troops with a new battle cry: "Goo-GLE! Goo-GLE! Goo-GLE!" 
> 
> "Tone comes from the top," he says. "People have to be reminded that
> there's nothing that stands in our way of competing. Our capacity to
> learn is amazing." 
> 
> Ballmer is one of the richest men in the world. His 3.78% stake in his
> employer is worth $11 billion. Bill Gates owns 9.42% and, with other
> assets, has a net worth of $51 billion. And while Gates sells 20
> million shares every quarter to diversify his assets, Ballmer rarely
> disposes of shares, and even then mainly for charitable purposes. He
> drives a seven-year-old Ford to the office every day. 
> 
> Ballmer grew up in the suburbs of Detroit, one of two children; his
> father was a manager at Ford Motor (nyse: F - news - people ), his
> mother raised the kids. Steve and Bill bonded at Harvard in their
> sophomore year. Bill dropped out, while Steve dutifully stayed on.
> Ballmer graduated in 1977, did a stint at Procter & Gamble (nyse: PG -
> news - people )and entered the Stanford Graduate School of Business in
> 1979. In 1980 Gates persuaded him to ditch the M.B.A. program and join
> Microsoft as employee No. 30. 
> 
> For two decades Ballmer was Bill Gates' right hand. He headed sales
> for Windows 95, then became president in 1998. In January 2000 Gates
> ceded the chief exec role in order to focus on the big picture. They
> talk or e-mail each other daily, and Ballmer consults with Gates even
> on small acquisitions. 
> 
> In Gates' grip the old Microsoft ran like a startup, even though it
> had long ceased to be one. A decision as small as hiring a
> product-marketing manager required approval from the very top. "There
> was no management structure," says Mich Mathews, a 12-year veteran who
> now heads marketing. "We were very hierarchical. If a guy in France
> wanted to do something, that had to go through Steve." 
> 
> Shortly after Ballmer took charge, he began looking at how to build
> some structure into an unwieldy management process. He interviewed a
> hundred employees at all levels. What emerged was an attempt to create
> a system with both accountability and flexibility. He recast the
> company into seven divisions and ordered each to publicly disclose a
> quarterly profit-and-loss statement, even though accounting rules
> don't require such revelations. 
> 
> "This will be a place with some structure, but structure that aids
> teamwork, not politics and bureaucracy," Ballmer told employees in a
> companywide e-mail in June of last year. "Nothing solves 'big company'
> ills quite like a strong focus on accountability for results with
> customers and shareholders." 
> 
> With accountability, though, comes competition for resources. The
> seven divisions act as rival fiefs, pursuing overlapping technologies
> and warring over whose code will prevail in the spaces where different
> divisions' products interact. "Windows and Office would never let MSN
> have more budget or more control," says Mark Jen, who quit Microsoft
> eight months ago. "MSN e-mail should talk to Office Calendar contacts
> and share appointments from Office with friends and family on the Web.
> But then MSN could cannibalize Office." 
> 
> The squabbling is delaying the release of the next version of Windows,
> called Vista. In 2001 Microsoft promised that Vista would be ready in
> 2003; by mid-2003 it said 2005. Now Vista is set for year-end 2006,
> the company vows; some analysts say early 2007 is more likely. 
> 
> Some employees complain that they spend hours tracking down
> collaborators in far-flung groups instead of talking to customers and
> taking products to market. Working on a huge project requires checking
> in with management constantly. "Instead of promoting the product to
> customers, I'd get stuck in the office until midnight preparing slides
> for my monthly product review," says David Ryan, 33, a marketer for
> Windows XP. He has just been freed up to pursue an incubation project
> in the server group, where he is happily exempt from most reviews. At
> Microsoft a "review" is often a progress report illustrated with 15
> PowerPoint slides. 
> 
> Other staffers say that almost every move requires a lawyer's
> signature and that even routine approvals can take weeks. Recently one
> employee waited a month while a $10,000 purchase order for outside
> development work was held up by legal. By the time the lawyers were
> done, the budget for the deal had evaporated. Dennis Reno left
> Microsoft two years ago feeling burned out from bureaucracy. He'd
> worked 18-hour days but got little done because he was bogged down by
> paperwork. "The smallest issue would balloon into a nightmare of a
> thousand e-mails," says Reno, who is now at Plumtree Software (nasdaq:
> PLUM - news - people ). 
> 
> Ballmer views product integration as Microsoft's big advantage--how
> its software will reach from the desktop to servers, databases and the
> Web and onto phones, handhelds and set-top boxes. But reach means
> complexity. As it is, the last version of Windows has 50 million lines
> of code, and Vista will run a lot more. 
> 
> "Projects were weighed down by integration," says Alexander Hopmann,
> who quit Microsoft in March to join a home-networking startup, Pure
> Networks, in Seattle. In 2000 he worked on new storage software for
> Exchange, a server program that works with Microsoft Outlook e-mail,
> but the Outlook team, without admitting so, didn't want it. "They sent
> me a 200-page document that said our technology had to be 100% better
> than the current stuff. Then it failed, of course, so they did it
> themselves." 
> 
> More recently, programmers at the MSN online service were ready to
> release a search tool letting users sift through their own PCs, but
> the research lab and the Windows division were working on similar
> efforts. Some argued that any new tool should wait to be bundled into
> Vista. Yusuf Mehdi, a top MSN executive, had to dicker inside the
> company for a month before striking a compromise that let MSN's and
> Vista's search tools both go ahead. 
> 
> Ballmer has moved to counter the drawbacks of bigness, pushing
> employees to focus more on customers and less on internal doings. At
> the sales meeting in July, former sales chief Kevin Johnson encouraged
> the crowd to "just say no" to internal requests and meetings. He has
> ordered all internal sales meetings to occur only on Tuesdays, so his
> reps can pitch to customers the rest of the time. 
> 
> Some customers say Microsoft is more responsive than it used to be.
> "The old Microsoft took its customers for granted," says J.E. Henry,
> tech chief at the Regal Cinema theater chain. "They didn't care what
> we had to say about total cost of ownership, security, risk. After
> Steve took over, I saw a complete turnaround." 
> 
> In its days of complacency, IBM had a no-layoff policy. Ballmer,
> determined not to let deadwood accumulate in Redmond, Wash., lets go
> of 6.5% of the workforce every year for inadequate performance. He
> makes a valiant effort to penetrate the management honeycomb to rally
> the worker bees. He writes a quarterly overview, e-mailed to all
> employees, and also does several Webcasts a year. He regularly holds
> what he calls "skip-level one-on-ones" with individuals or groups of
> employees who are up to ten levels below him. Another method:
> "wallows" (his word)--impromptu meetings focused on the bigger issues;
> he recently challenged the Microsoft Business Solutions team to
> describe how it will target medium-size companies. 
> 
> Ballmer has put in place half a dozen internal surveys to give
> employees a sense that their opinions are heard. The Microsoft poll is
> an anonymous survey with 60 statements that employees are asked to
> rate, from "strongly disagree" to "strongly agree," on such topics as
> accountability and performance rewards. Last year Microsoft got 70,000
> written responses to various questions. 
> 
> Customer satisfaction gets measured annually. Employees meet with
> managers every August to plan up to six "commitments" for the upcoming
> year. Each job is assigned to one of 15 levels--the system sounds a
> lot like civil service pay grades--and given a "competency tool kit,"
> a list of the skills an employee of a particular type and level should
> have. At annual performance reviews, managers are compelled to rank
> employees on a scale of 1 to 5. Says Hopmann, the escapee now at Pure
> Networks, "There's a bureaucracy that over time has developed these
> rules. It has become a huge morale problem." 
> 
> Morale would no doubt be better if Microsoft were still growing at 50%
> a year, as it was doing 15 years ago. Not counting one-time gains from
> option accounting, net in the fiscal year just ended was up only 19%. 
> 
> The Xbox game console is hot, but its division has lost $4 billion in
> four years and isn't yet in the black. The mobile-software division,
> also losing money, has just a sliver of the market for cell phone
> handsets. Microsoft Business Solutions, after acquiring Great Plains
> Software for $1.1 billion and Navision for $1.4 billion, is supposed
> to deliver $10 billion in sales by 2010. At its current 6% growth
> rate, MBS will attain that goal in 43 years. 
> 
> Give us time, Ballmer says. "You could say 1995 to 2000 was about us
> winning on the desktop. Then 2000 to 2005 we won and drove the server
> market. And the next five years is all about driving and winning the
> Web," he says. Yet it was in 1995 that Gates issued his "tidal wave"
> memo, a clarion call to the Microsoft hordes: "Like the PC, the
> Internet is a tidal wave. It will wash over the computer industry and
> many others, drowning those who don't learn to swim in its waves." A
> decade later, is Microsoft poised to win the Web? Not by any measure. 
> 
> Then again, Microsoft is so vehemently competitive that it could yet
> prevail in videogames, searching and servers. Microsoft is "the
> world's largest startup," says star programmer Ray Ozzie, who wrote
> Lotus Notes and joined Microsoft in April when it acquired his
> startup, Groove. "No one seems to feel comfortable in their own skin
> here. It's weird. They still need to succeed." 
> 
> He observes what Ballmer is too proud to say: "The top executives get
> the potential Microsoft has. But the next tier of employees doesn't
> because of the stock price." 
> 
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