[widdershins] Forbes: Microsoft's Midlife Crisis

[N J]

Melissa,
 
I agree this seems odd.  I emailed the author and she told me this -
'Microsoft's other divisions are money-losing, so Windows etc account for
more than 100%'.  This isn't correct, as obviously profits cannot exceed
100%.  I'm not sure what to say to her :O
 
N J
 


  _____  

From: widdershins-bounces at attrition.org
[mailto:widdershins-bounces at attrition.org] On Behalf Of Melissa Shapiro
Sent: Tuesday, September 13, 2005 7:57 PM
To: widdershins at attrition.org
Subject: [widdershins] Forbes: Microsoft's Midlife Crisis 



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_0913mi
crosoft.html?partner=daily_newsletter>
http://www.forbes.com/2005/09/12/microsoft-management-software_cz_vm_0913mic
rosoft.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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