This week Bill Gates officially retired completely from Microsoft (article here), and we also learned the company will no longer ship Microsoft XP (article here). At first blush these two press items seem unrelated, but in fact they should give any investor, or customer, of Microsoft real pause.
Microsoft has long dominated desktop computing. From operating systems the company branched out to personal applications, and has held top market share with most of its successful products. Microsoft was a wonderful example of a company that found a high growth market (PC sales), figured out a Success Formula to grow with the market and make money, and then Locked-in on the behaviors and processes which helped it make money. During the Rapids of growth, Microsoft was a model of doing the right things. To the point it was sued for becoming a monopoly due to its high market share.
But sales of PC aren’t growing like they used to. Instead of non-portable desktops or bulky and often heavy laptops consumers of all types are switching platforms. Increasingly everything from mobile phones to PDAs or MP3s are replacing the old platforms – especially as internet connectivity is more easily accessible on these alternative devices. New applications are being used that make it possible for people to do what they want to do (like exchange words or numbers) without the overhead of a big application like Word or Excel. Additionally, sales of Macintosh have re-emerged along with much greater use of Linux in many servers and even some PCs hurting sales of Microsoft products (see OS share chart here). I’m not saying that Microsoft-based PCs aren’t widely available and used, but they aren’t the growth platform they once were. The market in which Microsoft has competed has begun shifting – moving from desktops/laptops to other devices and solutions – and Microsoft is still stuck Defending & Extending its old Success Formula rather than developing the new markets like it did the old.
Even though Microsoft has continued to do what it always did – and do it well – its growth has slowed. Not because of being a poorly run company. Rather, because it is so Locked-in to continuing its past. Microsoft has dominated PCs, but we can now look to the future and see that PCs will be replaced by alternatives in many applications. Thus, Microsoft has moved into the Flats and is increasingly finding itself flailing away in the Swamp of low growth. Instead of being an exciting company, like Google, Microsoft is the company swatting at aligators and mosquitos biting away at its historic industry dominance.
The last time Microsoft faced this sort of Challenge was when the internet emerged. Stuck thinking of the PC as a truly "personal" machine Microsoft had never been a leader in networking machines for information exchange (networking was dominated by Appletalk, Banyan and Novell for many years.) But Mr. Gates was able to see the future risks, grab Microsoft’s R&D and product development budgets, then push the company towards future market needs. Mr. Gates was the company oracle who could redirect the apparatus toward a more connected internet world. He personally led the effort to license browser technology from Spyglass and create Internet Explorer – then bundle it into every sale – so Microsoft could maintain its market position.
By reviewing the past we can see that Microsoft as a company, under the operating leadership of Mr. Ballmer, has long been an organization constantly focused on optimizing products and defending product positions. The ability to identify and redirect resources toward a changing future was held by Mr. Gates. Only Mr. Gates could Disrupt Microsoft and set up White Space for new products. Instead of building an ongoing capability to develop future scenarios, focus on competitors, Disrupt itself internally and use White Space to remain evergreen, Microsoft has been a very Locked-in company that Defends & Extends while relying on its founder to occasionally "reset" direction.
So now Mr. Gates is gone. And the company is so Locked-in to its practices that it is completely ignoring everyone, from customers to competitors, as it simply refuses to ship a product the market wants (XP) – in its effort to force people to buy the product it wants to sell (Vista). This is less about upset customers than it demonstrates the kind of Lock-in which allows competitors to grow. How many potential customers will now buy a different platform from RIM and simply not buy a PC? How many will now really look hard at buying a Linux-based machine? By ignoring competitors, Microsoft is giving them opportunities to succeed.
Microsoft has a huge cash hoard. And PC sales are slowed, but not dead. So the company won’t go bankrupt any time soon. But we can expect a continuation of the kind of meaningless thrashing around the Swamp of low growth we’ve seen lately. Purchasing a tiny share of Facebook rather than Disrupting and using White Space to really understand social networking applications. Or ongoing unsuccessful pitches to buy companies in growth markets – like Yahoo! in internet ads – that fail because Microsoft brings nothing more than money and a whole boatload of negative, stifling management practices.
According to old managment theory, we should decide Microsoft is now "mature." And it is supposedly time for this market monster, which has used billions of external capital dollars to create its dominant market position, to begin paying back to investors by raising its dividend. But what we all know is that in computer technology markets shift fast. Companies that pay out their cash hoard quickly lose cash generation as customers shift to new competitors. The payout evaporates and faster than expected employees lose jobs as sales dwindle. Just look at how fast Wang and Lanier disappeared when PCs replaced word processing systems – or DEC disappeared when PCs replaced high-end CAD/CAM machines.
Microsoft without Mr. Gates is exactly will be unable to plan from the future backward. A company short on "vision" and long on execution that is happy enough to use its market position to attempt forcing customers to use products they don’t want (read article here), and thereby create greater opportunity for competitors. It’s easy to scoff at smaller competitors when a company is huge, but the kind of behavior Microsoft is now exhibiting quickly leads to trouble. Investors are already well aware that Microsoft has lost its competitive edge, as the company valuation has stubbornly remained stagnant for years (see 5 year chart here). Meanwhile, the only person able to Disrupt Microsoft and set up White Space to change the Success Formula is now gone.
Without Disruption and White Space, it is far too easy to predict what the future holds for Microsoft, its employees and investors. Microsoft is no "safe haven" for the "widows and orphans" fund. Rather, its better to put your investment dollars somewhere with growth – probably at Microsoft’s Locked-in expense.