Teaching an Old Microsoft New Tricks

"Changing?" you might ask. Yeah. Microsoft is rapidly becoming a very different company than even five years ago. The changes in the last 18 months, particularly in management, are simply staggering for what they mean to Microsoft.

Just this year, two of the three divisional presidents retired and Chairman Bill Gates went into semiretirement. Over the last couple of years, Microsoft has also brought in new blood, people like Stephen Elop, president of the Business division, Chief Software Architect Ray Ozzie and CTO Kevin Turner. The changes, along with some restructuring, also have elevated a number of younger Microsoft product managers and cleared the way for tactical long-timers like Steven Sinofsky. Steven, who is senior vice president for the Windows and Windows Live Engineering, is charged with fixing many of Vista's problems in successor Windows Seven.

But the changes that perhaps count the most come from the top: CEO Steve Ballmer and his willingness to embrace radically new business approaches that digress from Microsoft's roots. Steve assumed the chief executive's position in early 2000. He immediately made customer satisfaction a top Microsoft priority, within two years directly tying employee compensation to the metric.

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There is a post-Bill Gates era, and it started long before his semiretirement. How different is Microsoft today? Just look at the new Windows ad campaign, which in commercials one and two doesn't mention Windows.

In the years since his CEO ascension, Steve has led Microsoft to unthinkable places: end-to-end software, hardware and service products like Xbox 360, Xbox Live and Xbox Live Marketplace; hosted services that compete with partners. Who could have predicted in 2000 or even 2003 Microsoft would have a music player and supporting digital marketplace? Microsoft licenses more intellectual property than ever and probably invests more in interoperability than any other high-tech company. Sure, interoperability is often on Microsoft's terms, but it's there because customers want it and Steve's management style dictates that customers come first.

Steve 'Don't Get No Respect' Ballmer
Steve reminds me of Rodney Dangerfield. He "don't get no respect." Microsoft Watch comments are examples: There have been repeated demands for Steve to retire or be fired. People are dissatisfied with Microsoft's lagging stock price, which is stuck at year 2000 levels. They blame Steve.

Sure, he and his managers bear blame. But what about Wall Street or investors themselves? Microsoft is a hugely profitable company, quarter after quarter. From revenue, profitability and ROI perspectives, Microsoft is still one of the most successful companies on the planet. But the lagging share price doesn't reflect Microsoft's success.

Now for an apples and oranges—maybe peas and grapefruit—comparison: Microsoft and Wal-Mart. In its most recent quarter, Wal-Mart reported $101.6 billion in revenue, which unsurprisingly walloped Microsoft's $15.84 billion in sales. Here's something: Microsoft's net income was higher—$5.68 billion to Wal-Mart's $3.39 billion. Wal-Mart posted higher earnings per share—86 cents to Microsoft's 46 cents—but off a much higher stock price.

I tried to do a calendar year earnings comparison for both companies, which was difficult, because Wal-Mart's fiscal year ends on Jan. 31 and Microsoft's fiscal year closes six months later. I decided that the closest calendar alignment would be fairest to both companies. For the 12 months from Jan. 31, 2007 to the same date in 2008, Wal-Mart reported $12.9 billion in earnings. For calendar 2007, based on my math, Microsoft's net income was $16.9 billion.

By revenue, Wal-Mart is the second-largest company in the world, behind Exxon Mobil. I checked market cap for the retailer and software giant after market close today. Wal-Mart: $245.52 billion. Microsoft: $252.18 billion. The measure of success is often the metric you choose. Microsoft's market cap is higher, as often is net income. Microsoft's margins are hugely greater than Wal-Mart's. By revenue, Wal-Mart is a giant. Microsoft is more profitable. Steve Ballmer deserves more respect. But he and his company have huge perception issues that prevent it.

Don't Trust Anyone Under 25
Part of Steve's problem, and so Microsoft's, is one of ageism. Microsoft is a middle-aged company in an industry dominated by young upstarts. In another era, Americans respected older people. Now, particularly in the high-tech era, many young people view old people as being in the way. These attitudes extend to some companies, particularly those that are established and successful; they're perceived as being in the way of upstarts.

Some of the younger, rising Microsoft product managers and executives are better able to embrace past-and-future attitudes and cross the huge cultural gulf separating the Redmond, Wash., campus from Silicon Valley. Microsoft doesn't belong to the Silicon Valley club, so to speak. It's from there that many of the upstarts come who snicker at Microsoft for its success and establishment.

The new ideas coming from younger managers and outsiders joining Microsoft already are having transformative impact. The company is increasingly becoming a loose network of startups, of incubation projects. From those groups' work has come products like Live Mesh, Photosynth, Popfly and WorldWide Telescope. From any smaller company, these projects would be viewed as being hugely innovative. Instead, they lose something by coming from Microsoft and being lost in the tonnage of such a large company.

But these and other projects like them are kind of a best-of-both worlds synthesis. They are startups, but coming from a mature company. These incubation projects benefit from Microsoft's years of learning how to be a good corporate citizen.

In my lead paragraph I wrote that there is a freshness in the air. Spring comes best in the shade of old forests, which provide a canopy underneath which younger foliage can grow and animals, birds and bugs flourish. The mature have their place. So does 33-year-old Microsoft.

Is Jim to Blame?
But Microsoft suffers from other perception problems, not just from ageism or Silicon Valley elitism. The company's past business practices are problems, too. I can trace most of those problems to a single corporate struggle between former Microsoft executives Brad Silverberg and Jim Allchin. Brad was the man responsible for the launch of Windows 95 and one of several advocates of an aggressive Internet realignment. But it was Jim who won the infamous corporate struggle that led to a series of disastrous management decisions during the browser wars and later the development of Windows Vista.

As a company, Microsoft still struggles to restore its public image and self-esteem, which were marred by antitrust cases—and their surrounding negative publicity—and Vista's troubled development and disastrous launch.

Bill and Jim both bear blame, but in different decades of management. Bill bought into the protect-the-monopoly-at-all-costs thinking that led Microsoft down a browser-bundling path and to management's inability to manage Microsoft's future. The dot-com boom was a troubling time for Microsoft, which also is when the company's stock price sank and never much rose again.

In the 2000s, Steve should have stepped in sooner and reined in Jim, whose management of Vista's development achieved what no competitor could: shattering Windows.

Management execution has been surprisingly good since Vista's launch. Steven Sinofsky is the new sheriff in the Windows group, which has methodically fixed most of Vista's most troubling problems. The problem now is one of changing perceptions.

In business, perception is everything. Bad perceptions put companies in the position of doing no right. Good perceptions let companies do no wrong, no matter how bad the behavior. On Sept. 8, I wrote a fairly negative review of the iPhone 3G—one of the few out there—because of persistent calling problems. Early commenters defended Apple, with persistent suggestions to just turn off the 3G. Microsoft would have been flamed if it released a product with similar problems.

Microsoft will need to tenaciously work to change perceptions, whether among competitors, customers, investors or partners. If Microsoft can continue down its new trajectory, perception problems will naturally resolve, but over time.

One Destination by Many Paths
What is that new direction? In 2000, Microsoft had one business model: Develop software that a large network of partners would distribute, service and maintain. Now Microsoft has multiple business models, some of which reduce partners' roles. The company no longer just develops software but sells software services and develops integrated hardware, software and services products such as Xbox 360 and Zune. The company also develops more hardware prototypes as models for its hardware partners to use. Microsoft has expanded into other new markets, such as advertising.

Last October, I split Microsoft's organizational focus into three vertical silos:

• Platforms—Office, Server and Windows
• Advertising and Search—AdCenter, aQuantive and search
• Consumer Electronics—Xbox, Zune and other hardware

Services and developer tools are horizontal foundational silos supporting the three organizational pillars.

This structure differs vastly from how Microsoft looked a decade ago and significantly from five years ago. Credit, or blame, belongs to Steve Ballmer and his management team.

Microsoft's new mission statement encapsulates change and foreshadows how much more is coming. Bill Gates launched Microsoft with a vision of putting a computer on every desktop and in every home. On Sept. 8, Kevin Turner revealed Microsoft's new mission statement, which the senior management team crafted: "Create experiences that combine the magic of software with the power of Internet services across a world of devices."

To achieve this new goal, Microsoft must continue the transformation started, slowly at first, by Steve's appointment as CEO in 2000. Whatever Microsoft was it won't be in five years. I'm encouraged by a transformation that is accelerating. There is freshness in the air. If you can't appreciate it, if you must insist that Microsoft stinks, then hold your breath.

[Please send your tips or rumors to watchtips at live.com]

Related Posts:

• Microsoft Splits Platform in Two, Microsoft Watch, July 23, 2008
• Gates-Ballmer Succession Watch, Microsoft Watch, June 23, 2008
• Mr. Smith Goes to Washington, Microsoft Watch, June 5, 2008
• Microsoft Puts on Midlife Executive Bulge, Microsoft Watch, Feb 14, 2008
• The Great Double Standard, Microsoft Watch, Oct. 26, 2007
• A Little More Blush: Microsoft's Makeover, Microsoft Watch, Oct. 1, 2008
• The Google Problem, Microsoft Watch, May 31, 2007