Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (48 page)

“SmartGlass” technology will provide MS with sufficient technology to at least equalize Apple and Google. It will let users control a TV, an Xbox or other entertainment devices from a tablet or phone, using Windows 8. Add to this the availability of Xbox’s music services
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, which my old friend Yusuf Mehdi, now VP of MS’s interactive entertainment division just announced. It makes me believe that MS is finally right on the ball and ready for a counterstrike. The technology will work across all competitors’ devices as well and more trouble for competitors might be ahead if MS’s Wallpaper
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efforts will bear fruit.

Nothing hinders MS to license the SmartGlass software and a TV adapted version of Windows 8 to Apple’s competitors. This allows them to quickly integrate a low cost ARM CPU into their TV set or the remote—whatever works best. Creating a great opportunity for these OEMs to beat Apple to the punch! Add MS’s Kinect interface or the even more advanced “Leap Motion” controller
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to the equation and the relative passive way to operate a TV, as my generation knew it, will soon be forgotten. I predict generation F will immediately embrace and enjoy such a dramatic and cool—sorry,
modern
—feeling providing changeover.

At the end, the possibility to easily fit Windows technology into TV sets might be the most unforeseen yet overwhelming reason why that OS finally had to meet ARM. The battle for dominance in the living room will be renewed and this time it will not be fought over game console’s market share. It will go way beyond and create a chance for every end-user to have the most encompassing and enjoyable digital entertainment experience the world has experienced so far. Consumers and businesses will be allowed to simultaneously access what they desire—at their fingertips—in the living room or on an office wall. As always, all this naturally comes down to just the right software and synergistically emerging digital devices creating opportunities galore for all market participants.

With this in mind, let me paint a broader picture for MS and explain how she needs to maneuver most effectively in this fast changing digital landscape. The need for her to be a nimbler company comes to mind first. This is along the lines of what Ray Ozzie recommended five years ago and what I have personally mentioned to Steve. Bring the company back into start-up mode. Easily achievable through spinning off some business units! Being smaller and doing a few things right has a much higher chance to conjure some immediate magic. Let only software DNA guide the company. Hardware will be produced cheaper by others. Consequently, selling intellectual property and services are the way to go to immensely reward shareholders. They have been waiting for this for over a decade.

Even Apple’s luck will run out one day. It has only lasted this long because the company filled a void and was able to keep her prices high. This is coming to an end and her perceived high quality image is nothing other than a marketing gimmick—her competitors are already at her heels. Let’s see what happens when she only incrementally improves her products like she just did with iPhone 5, when her novelty image peels off and when Apple users cannot be retained as much as today and the user pool from other vendors dries up further. Good–bye, Apple outlets, and good-bye to her current darling status. All the more reasons for MS not to venture into making tablets and notebooks! She needs to put her skin in the game differently by using her corporate cash hoard and seed some desired developments. Reap in some rewards when they succeed, thus limiting exposure and OEM defections as she goes along.

Steve Ballmer’s recently declaring that Microsoft is from now on a “devices and services company” is the wrong direction for the company. I agree with Paul Thurrott opining in
Windows IT Pro
that somebody in MS might suffer from a “bout of reality distortion” suggesting that “Microsoft might end up jettisoning the one important differentiator that it has against monoculture competitors such as Apple and Google: the diversity of its ecosystem.“ If carried out to the detriment of the company—it should lead to the CEO’s dismissal.

As tempting as it looks today, copying the Apple model does not guarantee MS’s future success—only following software DNA does. Freeing avant-gardists from the chains of the company’s bureaucracy and committee politics will lead to pioneer novel go-to-market strategies and foment enduring partnerships. Can the CEO overcome his lust and thrust of empire building and value a leaner and meaner new culture and spearhead such transition? As English historian Edward Gibbon once said: “We improve ourselves by victory over our self. There must be contests, and you must win.”

There is no reason why this could not be achieved in two steps. First spin off the Xbox and device division including all software and services currently contained within. The resulting entity should be big enough to stand on its own feet, prosper and shortly thereafter launch a successful supplemental IPO
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to gain some operating cash and fund new development efforts. Such move should help to defend Xbox’s market share against the emerging and well-funded Ouya game console as well. A $99 device based on the Android OS promising to deliver the gaming software through the cloud for free—we will see! I further recommend to go one step further and incubate the promising new Windows 8 devices there as well. OEMs might regain trust.

Second, improve productivity of the distributed work place using Office, Windows, and foremost the cloud and Skype. Observe the car manufacturers as they come up with more and more tricks to save fuel. Do the same with software DNA to save things like battery lives for any mobile device and connectivity cost for enterprises and consumers alike. Last but not least, perfect voice and handwriting recognition to increase security, input accuracy and speed.

Ideally, MS’s board will embrace a divide and conquer strategy and in the long haul restructure the company into a holding company of tech innovations causing one cool market revolution after another to happen. Instead of coordinating it all with the current bureaucracy, cut the rest of the software divisions loose and allow them be increasingly entrepreneurial when doing the hard work. As a result, I would expect huge savings in coordination cost, faster responses to interruptive technologies and a flood of innovations coming to market earlier. In the process the company needs to get rid of all distractions like her doomed retail stores. (Fortunately I don’t need to ask for the same in regard to the MSNBC partnership, it just got severed, hallelujah—what took so long?) These are relicts from a bygone area. Next to address would be ineffective R&D investments and discontinue them. Billions of dollars with not too much to show for in pure research is not healthy for shareholders. Long-term these changes will lead to a new management team. For sure initiating this much change constitutes a challenge to MS’s board which has been pretty lame duck in the past. It will need to start demanding—with fortitude—not only revenues and profit gains but leadership from the executive suite following a change in chairmanship. In the best interest of the company and her shareholders!

A LAST WORD

“A heart to resolve, a head to contrive, and a hand to execute.”         —Edward Gibbon

As mentioned before, MS in 2001 abandoned her stock option plan, significantly altering how employees from then on received long lasting rewards. When I joined, stock prices were nowhere on the horizon. After MS went public in ’86, people had substantial incentivized rewards to look forward to, inspiring them to push the company to the loftiest heights of success. In May of ’05 Bill gave an interview declaring the largest mistake he ever made was to shower employees with stock options. Had he gone nuts? I sent him a flame-mail, never receiving a response. Without concrete anticipation of being thusly rewarded, much of the wealth of talent he and Steve had accrued would have marched down the road to any number of competitors at a dizzying and disturbing rate, far faster than anything he could have ever stomached. He is right in one regard. His closest personal friends for sure got way too many.

I know from people inside the company how tough it was for them to sit back and watch the world rocket past under Bill’s stewardship, only to then watch Steve’s cultivation of MS into a civil service like asset management company. After government intervention, the once cutting-edge tech racehorse stopped winning, and was locked into a barn with neither Bill or Steve nor the board ever daring to break its lock. Taking risks was suddenly deemed uncomfortable and hanging on to outdated principles was favored instead—creating a cozy, however highly profitable, comfort zone as a result. In that context I agree with current press articles, the challenge for MS board members is not to replace her current asset management team but to attract a race horse Wall Street is willing to bet on.

Change I can believe in means returning to Auftragstaktik leadership principles. Intuitively and instinctively adopting them in the early years created not only a successful start-up but a cadre of empowered and motivated employees willing to sacrifice and go several extra miles. The challenge facing the board today is to renew that winning spirit in a much larger company. A herculean task because most of the key proponents and practitioners of this leadership style moved on—lured away by too much wealth, other lofty opportunities or lack of belief in MS’s future. If it can no longer be passed from one management and employee generation to the next, formal training will be needed to reverse course. Splitting the company into loosely coupled and more autonomous portions should make this an easier task to achieve. After mostly dealing well with operational complexity, healthy transformative change will inevitably follow!

This newly bred generation of hungry and ambitious warriors need to be able to empower themselves to lead the next social networking and mobile device revolution beyond what we have experienced so far. Cut them loose and it will happen! Monetizing all applications through the cloud and offering its usage for a pittance will probably be one consequence and should spur a tremendous innovation tsunami. Only as recognized innovation leader will MS win Independent Software Vendors (ISVs) back who today eagerly and often with priority add value to competitors’ products. ISVs remain the backbone of all operating and middleware vendors’ success, and if their defection cannot be stemmed and reversed, mighty Microsoft will unravel fast. With competitors like Apple and Google loaded with cash, MS’s money has lost its luster when buying favors. Keeping promises and not upsetting partners will therefore be even more important in the future than it has been in the past.

In the early years, money in the form of stock options indirectly bought a lot of talent. Employees accepting these thought about a brighter future and directed their passion and employed their skills to move a noble cause forward. To rekindle this I believe a return to employee co-ownership is badly needed for genuinely enduring change and long-term prosperity, bringing me to my final point.

Compensation and recognition are not necessarily correlated and are very delicately balanced as we have seen with the Linux volunteers. They have contained their venal spirit and gotten their kicks out of fighting the good fight. In moving their cause forward, admired and honored in their own hall of fame they indeed beat the establishment against all odds. With a hired workforce the game changes and when I joined, stock option incentives did play a significant role in how people performed and how they wanted the company to succeed. Before the dot-com bubble burst, MS created a lot of wealthy people and a lot of them stayed around to foster her cause. I was one of them. Monetarily I could have retired years earlier; I had fun, pure and simple, gaining contentedness by helping to win competitive battles and beating the odds while leading my knights. I had the greatest job in the world and I was thankful for the freedom granted so I could perform at my best. No regrets whatsoever.

But without hope for reward and a possibility of securing my future, I would have left much sooner. Opportunities were aplenty. Fame and pride in your accomplishments present only one side of the coin. Eventually you need to eat and want to enjoy your life after working hard and heal the scars after spearheading your last crusade. Today I am able to do just that. Following the Roman soldiers as they graciously accepted their land grants when retiring from their beloved army. Without that security blanket, this book would have never been completed.

My book would be incomplete without analyzing Microsoft’s future potential. So let me consider her competitors’ aims, if her products are threatened by substitutes, and what type of bargaining power her suppliers and customers possess.

In doing such an analysis product costs always come to mind. In regards to Apple, this has never been an issue for Microsoft. Microsoft’s software products have definitely low, per unit cost. But they are not the lowest in the industry. Linux and its derivatives benefit from a volunteer army and a free and open source platform. In this context Microsoft has to compete by offering superior value and has done so successfully for years.
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Nevertheless devices and services powered by free software always incur ancillary costs. This levels the playing field. There is no free lunch. Customers will be asked to pay a different kind of penalty when using what they obtain for free like having to endure a barrage of advertising and/or an invasion of their privacy. Security concerns fall into the same category. Most customers rely on a trusted company (like Microsoft) to stand behind her software. In a corporate environment, costs get shifted: what you don’t spend up front (and usually more!) gets moved over to technical support and development costs. So instead of thinking just about price buyers are forced to consider trade-offs. This serves to Microsoft’s advantage. Not being the lowest cost provider therefore becomes less of an issue.