Microsoft's 10 Lucky Breaks

[Editor's Note: This is the second of two parts. "Microsoft's 10 Unlucky Breaks" posted on February's Friday the 13th.]

Today we celebrate Microsoft's lucky breaks on what's supposed to be the unluckiest day of all. Microsoft's rise through the 1980s and 1990s is really a series of lucky breaks combined with business savvy and execution on the vision of one PC on every desk.

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Like the unlucky list, I had a really hard time whittling this list down to just 10 items. Once again, the independent analysts at Directions on Microsoft offered some great suggestions; these guys have followed Microsoft since 1992, and some of the analysts are former employees.

The list is by no means comprehensive, and some lucky breaks may seem somewhat arbitrary. Well, yeah, there were just so many to choose from. My apologies to the people who questioned the unlucky list's approach; the same is used here. I chose lucky breaks that had monumental impact on Microsoft—past, present or future. I encourage you to offer your own list of lucky breaks in the comments or by e-mail.

The items—ah, incidents—are in order of descending importance, with No. 1 being luckiest and No. 10 least lucky.

10. Internet goes Code Red. How appropriate: The worm was released Friday the 13th in July 2001. It was nasty, too. Code Red took advantage of an exploit revealed about a month earlier in Internet Information Server 4.0 and 5.0. The worm slowly spread at first, then exploded across the Internet. The number of infected servers jumped from about 12,000 on July 18 to about 350,000 the following day.

The worm, which infected unpatched IIS servers, looked like bad luck. But not really. More than other viruses, Code Red exposed weaknesses in Microsoft's and its customers' security management. Six months later, Microsoft Chairman Bill Gates would make security the company's top priority. In the years that followed, Microsoft improved security practices, policies, and crisis and patch management. The company searched for and fixed security vulnerabilities in its software and made fundamental changes that hardened new coding against exploit. It was a lucky break.

9. Apple fires Steve Jobs. There's an irony to the boardroom coup that sent Apple's co-founder packing in May 1985. Steve recruited John Sculley from PepsiCo to be Apple's CEO. John knew marketing, and there was potential synergy between the Macintosh and the "Pepsi Generation." He seemed like a sensible choice. But John and Steve didn't work well together. Eventually, Steve conspired against John, who responded by a launching his own coup, which ended with Apple's co-founder leaving the company.

John's marketing approach was really bad for Apple but lucky for Microsoft. Product lines grew complicated and too segmented. Perhaps John's consumer product marketing background was the problem. Apple sold computers like toothpaste—Mac Plus Mouthwash, Macintosh Whitening and Mac with Free Toothbrush. Apple's product mistakes, and the licensing of portions of the Mac graphical user interface to Microsoft, helped Windows gain market share from Macintosh. Windows, and not pioneering Macintosh, would dominate the market for GUI operating systems.

Steve's return to Apple in 1996 hints at what might have come from a 1980s power struggle with Microsoft. In 1997, the then interim CEO streamlined product lines and focused design and engineering on achieving excellence. Under his leadership, Apple is hugely successful. It was a lucky break for Microsoft that Apple fired Steve Jobs.

8. Jerry Yang plays hard to get. In February 2008, Microsoft made a $44.6 billion unsolicited bid for Yahoo. Microsoft courted hard, but then Yahoo CEO Jerry Yang hemmed and hawed, even after Microsoft upped its bid. The software giant offered a hefty premium of $31 a share and was ready to go to $33 when in May Microsoft CEO Steve Ballmer retracted the offer. Steve should send Jerry flowers and chocolates every May Day. The deal later would have proved disastrous.

The September 2008 economic collapse sucked billions of dollars of value from the tech sector, among others. Microsoft would have paid even more than Yahoo was worth, accumulated at least $10 billon in debt and struggled through a massive integration project during a major software sales slowdown. Microsoft still wants a search deal with Yahoo, but getting stood up by Jerry was a big lucky break.

7. Lotus skips Windows. Loyalty sometimes comes at a steep price. Lotus 1-2-3 was the spreadsheet king in the early 1990s. But Lotus stuck with DOS and bet on OS/2, a cooperative OS project between IBM and Microsoft. But the cooperation was a feint, as Microsoft secretly worked on Windows 95. Microsoft would later dump OS/2, leaving Lotus stuck in the past (DOS) and committed to a finite future (OS/2).

By the time Lotus reversed course for Windows, it was too late for 1-2-3. Excel already had huge market momentum. The spreadsheet is the killer application for many businesses, much more than the word processor. Lotus 1-2-3 appeared to be an unstoppable product in the early 1990s. It was a Microsoft platform switch, and not a better product (at least then), that broke 1-2-3.

6. Novell buys WordPerfect. March 1994, I was attending the FOSE trade show in Washington, D.C., during which WordPerfect announced its acquisition, along with Borland's Quattro Pro, to Novell. It was a lucky break. WordPerfect already was in decline, because:

• Like Lotus, WordPerfect stuck with DOS, delaying its move to Windows.
• Customers were so satisfied with the hugely successful WordPerfect 5.1 for DOS, they resisted buying upgrades to new versions.
• Microsoft's Office bundle offered three products—Excel, Word and PowerPoint—for about the same price as WordPerfect.

The acquisition proved disastrous for WordPerfect. Novell made several strategic mistakes, which included fumbling the launch of WordPerfect Suite 6.0 for Windows. Suite competition from WordPerfect spurred Microsoft to development excellence, particularly Office 97. Meanwhile, Novell bungling eliminated any serious productivity threat to Microsoft Office.

5. Windows 95 launches. The planets aligned and people waited in line to buy Microsoft's pseudo-32-bit operating system. The launch made geeks cool, too. They were rock stars! Microsoft's decision to leave IBM waiting at the OS/2 altar paid off handsomely.

IBM had the superior product. OS/2 Warp was a truly 32-bit operating system, and it was object-oriented, too. Lucky break: Without Microsoft, IBM completely botched Warp marketing. IBM's operating system released about 10 months before Windows 95. Anecdote: I flew to Seattle in October 1994 to profile a company using Lotus Notes. The Egghead Software store I left behind in suburban Maryland had a huge OS/2 Warp display. The Seattle store had something different: a huge display for Microsoft Bob. Now Bob was unlucky.

Windows 95 brought much luck to Microsoft. The software made Microsoft a household name, in ways it hadn't been before. Microsoft simultaneously released Office 95 with the new Windows. Businesses bought the software duo by the millions. From Windows 95's release, Microsoft's applications business really started flying.

4. Microsoft seeks Software Assurance. In May 2001, Microsoft announced licensing 6.0, which introduced major changes to enterprise software buying. Microsoft did away with off-the-shelf upgrades. Businesses that wanted discounted upgrades would have to pay Microsoft upfront in two or three annual payments—29 percent of value for desktop software and 25 percent for server products. Software Assurance was hugely controversial, so much that Microsoft delayed the program's launch several times.

The payoff has simply been huge for Microsoft. About 40 percent revenue comes from annuity licensing—65 percent for server software. Microsoft records Software Assurance sales as unearned revenue, which is realized on an ongoing basis. During the average quarter, about 25 percent to 35 percent of Microsoft revenue comes from unearned revenue. Microsoft recognized $6.3 billion in unearned revenue during fiscal 2009 second quarter; total revenue was more than $16 billion. Unearned revenue is like having sales in the bank, booked and collected way in advance.

3. The United States vs. Microsoft. In April 2000, U.S. District Judge Thomas Penfield Jackson opened a dark chapter in Microsoft history: He ordered the company to be split in two, as remedy for violations of the U.S. Sherman Antitrust Act. But Microsoft got not one but two unexpected and timely lucky breaks. The first: Judge Jackson failed to hold a remedy hearing, which ensured the case would be sent back to the D.C. Circuit Court on appeal. The second: He privately spoke to reporters writing books about the case.

As expected, the appellate court remanded the case back to the lower court for remedy hearing. They also removed Judge Jackson for appearance of bias, for speaking to the reporters. The randomly chosen new judge, Colleen Kollar-Kotelly, had no antitrust experience and she inherited a mess difficult to untangle from the court record. Meanwhile: The Bush Justice Department lost the will of its predecessor and started pulling back from the case.

Following the devastating Sept. 11, 2001, terrorist attacks, Judge Kollar-Kotelly demanded the sides settle the case, which the Justice Department and some states did. The others litigated, got their remedy hearing but no breakup. Lucky break: The judge entered the settlement as the antitrust remedy.

2. The clone wars. In November 1982, Compaq announced the IBM PC compatible "luggable," which went on sale in January 1983. The 12.5kg Compaq Portable was mostly compatible with IBM PC software. Compaq reverse-engineered IBM's BIOS. The Compaq Portable would crack open the PC clone market and widespread licensing of MS-DOS and the supporting partner channels.

Compaq engineers sketched out the concept for the luggable PC on a napkin in a Texas restaurant. That's not folklore. I interviewed one of the men more than a decade ago. He also explained how difficult was the reverse engineering of the BIOS. No one who had ever seen the inside of an IBM PC could work on the project. The engineers developed the BIOS based on its functions, which they used as a guide for re-engineering the design.

The Compaq Portable set forth the foundation of modern Microsoft, whose primary business shifted to operating systems from programming languages. The reseller and OEM channels grew out from Compaq's work. While people often refer to Wintel, meaning Microsoft Windows and Intel, it's Compaq and Microsoft (eeek, Composoft or Micropaq?) that together pioneered the different channels through which PC clones were developed, sold and serviced.

1. IBM licenses MS-DOS. This one tops the list for many reasons, not least of which was a series of lucky breaks. For the summer 1981 launch of its PC, IBM sought to license CP/M from Digital Research. For reasons wrapped in folklore, IBM and Digital Research couldn't reach an agreement for CP/M, which was the dominant operating system of its day. Heck, CP/M was the standard, like MS-DOS and Windows later came to be. That turned into a lucky break for Microsoft, which cut a deal with IBM to license DOS, a C/PM knock-off.

Problem: Microsoft really didn't have an operating system to license IBM. Co-founders Paul Allen and Bill Gates had to buy one. They licensed and later acquired full rights to QDOS (e.g. 86-DOS) from Seattle Computer Products. IBM licensed the operating system from Microsoft and renamed it PC-DOS. By the way, Microsoft's business was programming languages. The operating system licensing was a means to an end.

Related lucky break: IBM's agreeing to liberally license rather than exclusively license or buy rights to Microsoft DOS. The terms allowed Microsoft to license the operating system to other PC manufacturers. IBM executives perhaps couldn't imagine that their BIOS would be reverse-engineered, opening up a huge market for PC clones.

By the way, MS-DOS and Digital Research's PC-DOS would compete for years in the marketplace. Lucky break: Microsoft persuaded OEMs to take outrageous terms. They got big discounts for licensing MS-DOS for all their computers, thus thwarting competitors; why ship another operating system when already paying for DOS or Windows 3.1? The Justice Department filed an antitrust complaint against Microsoft, leading to a settlement in 1994. But the presiding judge wouldn't sign the Justice Department-Microsoft settlement, so the parties filed an appeal. The appellate court removed the judge, which is how Microsoft got Judge Jackson. Lucky break? I don't think so.

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