sleeping giant

Steve Ballmer’s retirement could unlock the talent and resources now dormant at Microsoft

August 23, 2013
Obsession
Mobile Web
August 23, 2013

Here’s the thing you’d never know about Microsoft under the 13-year reign of Steve Ballmer: Microsoft remains, just barely, an amazing company. Not “amazing” in the sense of ambitious or unique, which it is, or particularly well-run, which it isn’t. But “amazing” in the one sense that counts at a technology company: Microsoft is able to hire, or simply acquire, extremely talented people.

Their intelligence and willingness to experiment is in evidence throughout Microsoft’s products. The interface of Windows 8 is a radical departure—so radical that it’s been wildly unpopular with desktop PC users, but had it been confined to mobile devices it might have been hailed as the one true alternative to the Apple/Google mobile duopoly. (It’s still doing well in Latin America, where it’s now more popular than Apple’s iOS.)

Microsoft’s Kinect motion sensor, originally built for gaming, is rapidly becoming one of the first truly useful alternatives to keyboards and mice for humans to interact with computers. And despite the abject failure of Microsoft’s Surface RT tablet, which happened because Microsoft saddled the device with a new operating system that can’t run traditional Windows programs, the Surface RT tablet is yet more evidence that Microsoft does actually make excellent hardware.

Ballmer’s hill of beans

But Microsoft in its current state is a hard company to run. It’s less a corporation than it is a pile of vaguely related businesses, including gaming (Xbox, Kinect), software (Office, Windows), hardware, and web services (Bing, cloud versions of staples like Office). But that lack of focus is due in no small part to Ballmer, under whose leadership Microsoft has had a habit of acquiring companies, and then absorbing them badly. For example, Microsoft bought mobile startup Danger, but most of Danger’s senior employees soon left, alienated by the company culture. One of them, Andy Rubin, went on to create Android and run the Android division of Google.

Both outside the company and, say insiders I’ve spoken to, within it, Ballmer has always been viewed as more of a “bean-counter” than a technical genius like its founder, Bill Gates. Ballmer’s focus on sales sufficed to increase revenue in the years when Microsoft still enjoyed a near-monopoly on personal computing, through Windows.

But with the rise of mobile and web, Microsoft must compete on new playing fields. Without a CEO who can make the most of his or her employees’ inventiveness, its future returns are under threat. Yet for a leader who knows what to do with them, the components of success are there.

A global network of developers

Microsoft’s 99,139 employees are only part of its workforce. Its real power lies in the millions of programmers (exact numbers are hard to come by) in the Microsoft Developer Network who build software and services on top of Windows, .NET and Microsoft’s other platforms. Microsoft’s proprietary systems, which teach engineers skills that are in some ways incompatible with the larger pool of open-source software that runs most of the web, bind developers to Microsoft.

For example, many developers who create (boring, unsexy, but necessary) software that runs on PCs themselves and not the web cut their teeth on Microsoft Visual Studio. Microsoft is losing consumers, and that means it will also, inevitably, lose some of the developers who write software for them. But consumer products aren’t the future of Microsoft, anyway.

Ascendant in enterprise software

In some ways this is an odd time for Ballmer to be stepping down. Last quarter Microsoft missed analysts’ estimates of revenue by a wide margin, even after accounting for the Surface RT disaster. That was largely due to declining revenue on Windows, probably because Windows 8 had been so disappointing.

But Microsoft is less a consumer-products company than ever. Windows is now about a quarter of its revenue, and shrinking. Overall revenue for most recent quarter, at $19.9 billion, is still up almost $2 billion on this time last year. And that’s led by led by Microsoft’s Business and Servers & Tools divisions—in other words, sales to the enterprise.

And unlike, say, Hewlett-Packard, Microsoft remains primarily a software company, and software companies are generally pretty efficient and profitable. Microsoft books $779,814 in revenue per employee, compared to HP’s $401,333, and HP has three times as many people. Notably, as revenue has grown recently, Microsoft’s headcount has barely climbed since 2008.

However, the company has a problem: its attempts to create snazzy new versions of Windows to tempt consumers away from Apple and Google has not only failed to attract those consumers; it also alienates corporate IT departments, which want reliable products that don’t change too fast for them to keep up. That puts its lead in enterprise software at risk. Finding a way to please both consumers and corporate customers (or just settling for one or the other) is one of the things Ballmer’s successor will have to tackle.

But is it too late for a turnaround?

Not everyone agrees that Microsoft is a hothouse of untapped talent just waiting for the right leader. One veteran ex-employee I spoke with said that a lot of Microsoft’s best people have already left, many of them to competitors like Google.

The company is also far away from where a lot of techies want to be. Of its 58,000 US employees, nearly three-quarters are in the Puget Sound area (a.k.a. Seattle and Redmond, Washington), not Silicon Valley. It’s also an older company, with 45% of its employees over the age of 40, and another 39% between the ages of 30 and 39. It’s hardly the haven for recent graduates that is, say, Facebook, where the median age of employees is 26. (IBM, notably, has a workforce with a median age of 44. But IBM isn’t the one eroding parts of Microsoft’s business; that’s the young startups.)

That said, the company has a number of strengths that, against all odds, continue to increase Microsoft’s revenue even as other companies with closely aligned fates—like HP, Cisco and Intel—are shrinking. Whoever comes next will have to figure out how to keep and grow the things that are working, while dealing with the dysfunctional internal culture and the perception that Microsoft is no longer the place where the best and the brightest go to work.

One source told me that morale has never been lower at Microsoft. A radical regime change seems like the perfect solution.

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