[widdershins] Forbes: Microsoft's Midlife Crisis

[Scott Sanders]

It makes sense if you think of it this way:
 
1 Billion = total profits = 100%
1.4 Billion = Profit from windows and desktops apps = 140% of total
profits
 
It's still bad grammar and sensationalistic, but correct.
 
_Scott
 
 


________________________________

From: widdershins-bounces at attrition.org
[mailto:widdershins-bounces at attrition.org] On Behalf Of N J
Sent: Wednesday, September 14, 2005 9:11 AM
To: widdershins at attrition.org
Subject: RE: [widdershins] Forbes: Microsoft's Midlife Crisis 


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_091
3microsoft.html?partner=daily_newsletter
<http://www.forbes.com/2005/09/12/microsoft-management-software_cz_vm_09
13microsoft.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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