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The Revisionists Have It Wrong – Ballmer Blew It

Outgoing Microsoft (MSFT) CEO Steve Ballmer is leaving the company in a “fantastic position.” He was an excellent leader. Blame the innovator’s dilemma. It was the butler’s fault.

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Netflix Max

Okay, that last one was a joke, but the others are actual arguments emerging amid a wave of revisionist history seeking to restore some of the luster to Ballmer’s 13-year record running Microsoft. The college pal of Microsoft co-founder Bill Gates announced on Monday that he would step down within 12 months after a successor was named.

But don’t believe the hype – Ballmer’s mistakes have left Microsoft in a dangerously weakened position.

Take the argument made by some Microsoft investors who see a few green shoots and credit Ballmer with setting the company up for future success. It is true that a unit of Microsoft making software and services for the online “cloud” future is doing well. Sales of products such as SQL Server and the Azure hosting platform garnered revenue of $20.3 billion for the fiscal year ended June 30, up 9%, and operating profit of $8.2 billion, up 13%. Still, the growth rates slowed from 12% and 19% respectively the prior year. And competition from Google (GOOG), Amazon (AMZN), VMWare (VMW) and others is only intensifying.

Alleged success stories

Other alleged success stories are even murkier. Bing? Yes, it has 30% share of Web searches (including traffic it gets from Yahoo), almost half of Google’s reach. But it doesn’t have almost half of Google’s profits – it has none. Online services lost $1.3 billion in fiscal 2013, down from a loss of about $2 billion in 2012. The prior year’s loss was reported as $8.2 billion because of a $6.2 billion write-down in the value of one of Ballmer’s biggest follies, the 2007 acquisition of aQuantive, but the underlying business wasn’t that bad.

The $10 billion-a-year XBox unit turned a small profit but the war to win gamers' hearts for the next generation of consoles has barely begun. Microsoft already got off to a rocky start introducing its Xbox One, backtracking on some controversial policies, and unit leader Don Mattrick just left to head struggling game-maker Zynga (ZNGA).

But aside from those few areas, Ballmer has completely whiffed on the biggest trends in tech today. Microsoft is virtually shut out of software and hardware sales for smartphones and tablets. It almost certainly makes more charging its patent tax on Android manufacturers than it makes from Windows Phone 8, Windows RT and the Surface tablet combined. Traffic at Microsoft stores is minimal, especially compared to Apple (AAPL).

Lining up with Nokia (NOK) on smartphones has done nothing to stem Microsoft’s falling share of smartphones. Partnerships with Dell (DELL) and Barnes & Noble (BKS) don’t look promising at this point, either. To his credit, Ballmer made an early investment with Facebook (FB) that has continued to pay off as the two companies work together, including on a partnership with Bing and Facebook's "graph search" feature. Apple and Google can only dream of having as cozy a relationship with the 1-billion member social network.

Meanwhile, growth in the Windows-Office juggernaut that provided just over half of total revenue – and 96% of operating profits – is grinding to a halt as PC sales dive and competing products improve.

Not doomed, not fantastic

Microsoft may not be doomed, as its most vociferous critics claim, but it’s not in a fantastic position, either.

Judging Ballmer on his leadership performance also reveals a mostly losing record. On his watch, the company used the destructive stacked ranking system that crushed morale and hampered innovation. Many key products, from Windows Vista to the Zune music ecosystem to the Surface tablet, were both flawed and delivered too late. Windows 8 appears similarly damaged.

Ballmer ridiculed competitors such as Apple and Google, ignoring their appeal to individual consumers just as the consumerization of IT was making such a strategy critical.

And neither of his biggest acquisitions, paying $8.5 billion for Skype in 2011 and $6 billion for aQuantive in 2007, appears to have justified their price tags. Some argue at least he hasn’t ruined Skype, and its revenue has grown to $2 billion. But that's small solace to shareholders. Most of Microsoft's remaining $77 billion of cash is trapped overseas due to the company's tax avoidance strategies.

Among a CEO’s most important jobs, cultivating and retaining top-level talent, Ballmer may have been at his worst, losing promising stars such as Ray Ozzie, J Allard, Stephen Elop, Kevin Johnson and many others.

A final argument offered in defense of Ballmer is that he did a great job squeezing profit out of the company’s existing businesses. Microsoft is only in danger now because of a few disruptive innovations, impossible to foresee, including the iPhone and iPad.

A great job with its existing businesses? Windows and Office, which produce nearly all of Microsoft’s profits as they did a decade ago, mainly benefited from the tripling of desktop and laptop computer sales during Ballmer’s tenure. Windows Vista and Windows 8 are hardly the output of a genius CEO’s masterful efforts to expand existing product lines. They’re the kind of duds a monopoly vendor could get away with in a rapidly growing environment.

Now that desktop sales are shrinking fast, Windows and Office could soon be soon as well.

But using Harvard B-school professor Clayton Christensen’s widely cited theory of the so-called innovator’s dilemma as a defense of Ballmer rings hollow. The leader of a company at the center of the entire tech market must be highly attuned to possible disruptive changes. Only the paranoid survive, to quote former Intel (INTC) CEO Andy Grove.

Terrible execution

It’s not that Ballmer didn’t see the disruptions or ignored them because they could have undercut Windows. He went after all of the new markets hard – but usually with terrible execution. He was impatient, failed to study his competitors' successes and let his teams get bogged down in bureaucracy and infighting.

Occasionally, Microsoft rose above. As noted, Microsoft’s cloud computing business is thriving. Ballmer focused on the unit even though corporations use such services to lessen their need for Windows-running PCs and servers. Defenders who cite the innovator's dilemma can't account for Ballmer's successful efforts in cloud computing.

But in mobile phones, tablets and consumer online services – all much bigger markets – Ballmer’s legacy reeks. Microsoft was offering tablet computers and smartphones long before Apple. But the company didn’t listen to customer feedback, didn’t combine innovations to make the products more useful and was incredibly slow to change even after Apple showed the way.

Ballmer’s iPhone dissing comment from 2007 has been widely quoted since his retirement announcement: "There's no chance that the iPhone is going to get any significant market share. No chance."

But his full answer to the question – Like Apple, does Microsoft have a product customers feel passionate about – is even more revealing. Clearly not having studied the iPod’s success, Ballmer criticized Apple’s strategy to make integrated hardware and software devices. He disparaged the Mac’s meager desktop market share and credited all Apple’s success in music to being early.

Meanwhile, customers started doing more and more of what they had done on PCs with smartphones and tablets, making hardware/software integration critical. And as employees started demanding the same level of convenience and ease of use with computers in the workplace, Ballmer’s blind spots became crippling.

Oh, and that iPhone that had no chance? It brought in more sales than Microsoft’s entire product line last year.

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