Author’s note: this was originally written in September, but was lost amidst a sea of Sublime Text tabs until I rediscovered it earlier this week and never published. As late seems better than never, I offer it up months after the fact. You heard it here last, as always. – sog
Since Microsoft announced Steve Ballmer’s pending retirement, there has been no shortage of commentary and retrospective on his tenure. While opinions on the subject vary widely, it’s probably safe to characterize the conventional wisdom as more critical than not. The contrarian, therefore, is one that defends the outgoing Chief Executive. The former viewpoint is generally inclined to focus on a share price that has stagnated since the millennium, the latter Microsoft’s historically impressive ability to generate and sustain revenue.
As with most large entities, however, it’s probably a mistake to assign too much responsibility for either to a single person. In the case of the man most Microsoft employees refer to as Steve B, it’s true that his ascension to the role of Chief Executive came at a natural apex of the firm. Given how meteoric the rise of the company was, in other words, it would be difficult to expect anyone to sustain the growth that inflated the share price in the first place. On the other hand, it’s worth asking whether Ballmer created the twin revenue engines that have sustained Microsoft for over a decade and subsidized its efforts to replicate the success of Windows and Office, or whether he inherited them.
Which means that it’s probably best to deprecate evaluations of his tenure that focus purely on financial metrics and focus instead on broader assessments of the company’s ability to react to the market around it.
This is, of course, ground that has been covered nearly as completely as the financial metrics. Nearly every piece reacting to the Ballmer’s retirement and the forthcoming transition has referenced, appropriately enough, the disruption theory dissected and described by Harvard Business School Professor Clayton Christensen. By now, most are familiar with both the broader argument and how they pertain to Microsoft specifically. Businesses become successful over a period of time, and their success in one or more product areas blinds them from, and in fact actively disincents a response to, the threats posed by those that will succeed it. Companies built to dominate one market, in other words, are rarely able to replicate that success in the model that succeeds it. Applied to Microsoft, even laymen cannot fail to understand how a variety of market forces from open source to cloud to mobile collectively and individually first undermined and then actively disrupted Microsoft’s once unassailable dominant market position.
There might be some dispute over the specific implications, then, but there is near universal consensus that Microsoft has been disrupted just as numerous technology giants have before it. What’s up for debate is how Steve Ballmer responded – or failed to respond – to these disruptive forces. And, assuming that one acknowledges that the firm has been disrupted, whether anyone might have responded more constructively than Microsoft’s outgoing CEO.
For critics, the answer is simple: Steve Ballmer uniquely failed to identify the potential and threat of markets such as cloud or mobile, and is as a result directly responsible for the disruption. The majority of these arguments imply, further, that others might have done better in Ballmer’s stead.
Asymco’s Horace Dediu describes this line of thinking most clearly in a piece entitled “Steve Ballmer and the Innovator’s Curse“:
The most common, almost universally accepted reason for company failure is “the stupid manager theory”. It’s the corollary to “the smart manager theory” which is used to describe almost all company successes. The only problem with this theory is that it is usually the same managers who run the company while it’s successful as when it’s not. Therefore for the theory to be valid then the smart manager must have turned stupid at a specific moment in time, and as most companies in an industry fail in unison, then the stupidity bit must have been flipped in more than one individual at the same time in some massive conspiracy to fail simultaneously.
So the failures of Microsoft to move beyond the rapidly evaporating Windows business model are attributed to the personal failings of its CEO.
He goes on, however, to call these theories nonsense. He is correct, at least in the implication that Steve Ballmer did not suddenly become stupid. Whatever else that may be said about the man, even his enemies acknowledge his intelligence. And his track record supports this; as Dediu wryly notes, Ballmer’s “only failing was delivering sustaining growth (from $20 to over $70 billion in sales.)”
This defense, however, is built on a core assumption I do not happen to share. Specifically, the following:
The Innovator’s Dilemma is very clear on the causes of failure: To succeed with a new business model, Microsoft would have had to destroy (by competition) its core business. Doing that would, of course, have gotten Ballmer fired even faster.
Having studied under Christensen, Dediu doubtless understands the disruption theory articulated by the Innovator’s Dilemma as well or better than anyone save Christensen himself. But it seems worth examining the assumption that Microsoft was intrinsically and unavoidably vulnerable to the disruptions it is currently coping with.
Consider mobile. It’s easy to forget now, but Microsoft actually didn’t miss this market: it was simply out-executed. Along with the rest of the market, to be fair. Microsoft had a presence, and a sizable one, in mobile prior to the arrival of the iPhone, which fundamentally altered the landscape in one stroke. But its mobile offering was heavily and unfortunately influenced by its desktop roots. The important questions are first, having seen what mobile has done to the PC market, whether Microsoft should have been investing in mobile in the first place, and second, if they had invested, whether a desktop computer company could effectively adapt to a mobile market.
The answer to the first question is simpler than it might appear. Many analyses point to the massive disruption in the PC market as evidence that Microsoft could not have, and in fact should not have, invested in mobile due to the possibility (now a certainty) that their existing PC business would be cannibalized. But this response tends to omit the financial opportunity mobile came to represent. If Microsoft had decimated its own PC business but ended up owning the profits of Apple’s mobile businesses, one suspects the market would have few complaints.
As to whether or not Microsoft could have been successfully innovative in mobile the way that Apple was, what prevented it? Adherents to the theory of disruption might argue that it was impossible; that Microsoft was so fixated on its success on the desktop that success in a fundamentally different model – mobile – was virtually impossible. On a technical level, of course, but in broader terms as well. How could a company built on selling licenses of software, one utterly convinced of the superiority of software over hardware and validated by years of market confirmation, adapt to the radically different model of selling an integrated package of hardware and software?
Besides the fact that Microsoft today is in fact selling integrated hardware and software produts, challenging this theory of inevitable disruption are both Apple and Google. Apple was a computer company that created entirely new markets out of MP3 players, smartphones and tablets. Even granting that Apple enjoyed advantages in its singular focus and expertise in user experience, enabled in part by its ownership of the entire hardware and software package, it seems difficult to make the case that what Apple was able to accomplish was fundamentally impossible for Microsoft.
Google, meanwhile, was an online advertising company that created the operating system that’s the closest facsimile to the Windows model in mobile we have seen to date. They did this, in fact, understanding that it was likely to damage a relationship with Apple at the time that was remarkably close in retrospect. While their motives in doing so are a matter for speculation, it is probable that Android was created and pushed – much like Chrome – to avoid having their core business – which is, again, advertising – disrupted through third party control points, i.e. mobile operating systems.
If a computer market and an advertising company can both create new markets and stave off disruption, it is not reasonable to conclude that Microsoft – once the biggest, most powerful technology company on the planet, like Apple today – would be fundamentally unable to do the same.
Particularly because there is little intrinsic to mobile that is fundamentally incompatible with their primary software-based revenue model. Certainly Android, as mentioned, resembles it reasonably closely today. True, Google effectively gives Android away, because its development costs are subsidized by its advertising business. But Microsoft has managed, through its aggressive utilization of its intellectual property, to recreate a licensing business all the same. What if, for example, Microsoft had approached all of the current Android partners in the wake of the iPhone’s launch with a version of Windows Phone that was similar to what it is today? The bet here is that, just as happened with Android, they’d rush towards anyone offering them a weapon with which to do battle with Apple.
Which means, in turn, that Microsoft wasn’t necessarily doomed to disruption, but merely executed poorly.
Likewise cloud. If you are convinced that the fundamental value of the cloud lies in price, you must concede that Microsoft was doomed to an uphill battle in cloud without destroying its existing businesses. Microsoft’s primary competition then and now, obviously, was an operating system that could be obtained and run at no cost. And that is fundamentally disruptive to Microsoft’s business. But if you recall that Amazon has always commanded substantial margins above competitors, the opportunity for a premium for software seems somewhat plausible. And if instead of price one considers convenience as the primary driver of cloud consumption rather than price, Microsoft’s opportunity becomes clearer. Again, what if Microsoft had been able to offer Windows instances it hosted within a reasonable timeframe of the launch of EC2? As many cloud providers have discovered, it’s much easier to build in the premiums you need when you’re charging by the hour, as it mitigates the sticker shock by masking the premiums.
Both cloud and mobile, in that analysis, represent opportunity as much as threat.
It’s easier to understand, on the other hand, how Microsoft was willing to wage total war against open source for so many years before pivoting towards a more comprehensive strategy. Open source is, after all, a fundamental repudiation of the model Microsoft built itself on. To Microsoft, certainly then and to a lesser extent now, software is an asset of intrinsic and inextricable value. The tens of thousands of people Microsoft employs to write software, in fact, are dependent on this assumption. Open source, however, doesn’t imply that software has no value – but it does require a dramatically different understanding of its commercial value. How does one charge money for an asset that is available for free is a question that every open source business contends with daily. Each evolves different mechanisms to adapt, but none have nor are likely to replicate the growth that Microsoft, Oracle and other primarily software entities have achieved.
So how could Ballmer – the head of a company built upon an assumption fundamentally undermined by open source – possibly have avoided being disrupted by the explosive growth of open source? Maybe by watching the company Microsoft once itself disrupted and were specifically built to compete with: IBM. No less singularly focused on profit than the Redmond software giant, IBM nevertheless found ways to leverage free as in money software to its strategic gain. Rather than fight the tide, IBM found ways to leverage assets like the Apache web server, Eclipse or most recently Hadoop, to its gain. It recognized that for many of its customers, software sales were essentially a packaging exercise. If bottom-line and obsessively profit-focused IBM could perceive opportunities in free-as-in-beer software, it is difficult to make the case that it would be impossible for Microsoft to do the same. Microsoft could have embraced a wide variety of open source strategies while still protecting its crown jewels of Windows and Office, but for the first thirty-three years of its existence open source was a religious rather than business issue within the company.
It’s fine to defend Ballmer by saying that few, if any, perceived the opportunities that Steve Jobs and Jeff Bezos did. But it’s harder to make the case that, having seen that they did, that it would be impossible for Ballmer to do the same. Giving him a pass, effectively, on not cannibalizing his Windows or Office franchises would be akin to giving Steve Jobs a pass for not creating the iPhone to protect the iPod, or the iPad to shield the iPhone. Much like the iPhone and iOS, the cloud and mobile both could have been – and arguably are becoming so today – adjacent, complementary markets to Microsoft’s core Office/Windows franchises. It’s one thing to give Ballmer a pass for missing a fundamentally different opportunity like search; it’s quite another to forgive his slow reaction to two markets – cloud and mobile – that both are dependent to varying degrees on operating system technology.
Disruption is more than likely to overcome every company eventually, but the evidence suggests that Microsoft could at a minimum have acted more proactively to the threats and opportunities they presented. And that, as much as the overwhelming revenue growth, is Steve Ballmer’s responsibility.