On Steve Ballmer's big day, a look back 11 years
Today is a big day for Microsoft, with the Windows 8 and tablet launches, and potentially a very big day, too, for Microsoft CEO Steve Ballmer. It had better be, because some pundits think Win8 is Ballmer’s last hurrah, that he’ll be forced to step down if the new operating system isn’t a big success. That might be true, though I have a hard time imagining who would replace Ballmer at this point and how the company would change as a result. I’m not saying there isn’t room for improvement -- heck, I’m among those who have called for Ballmer to go -- I’m just not sure what would be any better. More on that in a future column.
Today, rather than look to the future or even to Windows 8, I’d like to write more about Ballmer, putting his reign at Microsoft into some context.
Ballmer became Microsoft’s CEO in 2000, taking over for Bill Gates, who had run the company for the previous decade. It’ hard to imagine that Ballmer has been running Microsoft longer than Gates did but it’s true.
Back in 2001, in addition to writing this column, I was a columnist for Worth magazine -- a monthly business book that lives on today in name only. The magazine failed years ago but the title was eventually sold to The Robb Report, which covers conspicuous consumption and luxury goods. So while there is a Worth published today it isn’t the one I wrote for and, interestingly, they don’t own the back issues (I checked).
In 2001, I was asked to write for Worth its cover story on the CEO of the year. Ballmer shared the award that year with -- get ready for a shock -- Enron CEO Jeffrey Skilling. I wasn’t asked to write about Skilling, just Ballmer. Of course Skilling was out of Enron just three months later as that house of cards began to fall. Five years after that, Skilling was in a minimum security federal prison in Littleton, Colorado where he remains today, not due to be released until 2028.
Here’s the story I wrote about Ballmer back in 2001, which I’m fairly sure is unavailable online anywhere except from me. Remember this was 11 years ago. The Ballmer of today isn’t dramatically different from the one I describe. He’s still willing to bet big and expects to win. Note that .NET and Xbox, both mentioned in this piece as important new products for Microsoft, have been just that. The big question for 2013, of course, is whether Ballmer can pull off something similar again?
"Use the picture where I look friendly!" Microsoft CEO Steve Ballmer boomed to Worth design director Deanna Lowe during the photo session for this month’s cover. "When you work at Microsoft, you always try for friendly". That could be the theme for Ballmer’s reign as head of the world’s largest software company, a role he assumed a year ago from Bill Gates, who often acted as though friendliness was not in his job description. And that’s the whole point, because it is Ballmer’s job to remake Microsoft for the post-personal computer, post-Department of Justice, post-Gates reality of the new century. But don’t be fooled by Ballmer’s legendary exuberance, because he’s a shark, too, just a shark of a different color.
Ballmer’s challenge, and what makes him a good CEO, is different from that of most other chief executives. With market share big enough to attract the attention of government antitrust lawyers, with $10 billion in annual profits, and $27 billion in available cash, Ballmer’s job is to keep that money machine oiled and running smoothly. This is harder than one might expect. It’s not just the economic downturn or even the maturing personal computer market that presents the greatest challenge. It’s what Ballmer calls the "large number problem" -- simply that it is hard to keep sales and earnings growing at 20 percent a year when a company gets to be the size of Microsoft. Yet it was exactly that kind of sustained growth that made Microsoft stock the darling of the '90s and made Ballmer, himself, a billionaire. The challenge is finding new ways to repeat old results.
With year-on-year PC sales dropping, Microsoft can’t count on growth to be driven by traditional customers like Compaq, Gateway and Dell. Nor are new Internet businesses the growth center that Microsoft, and almost everyone else, thought they would be. Ballmer is quietly moving out of those operations -- Expedia, Citysearch and others -- closing them, selling them outright or taking partners to share risk. Even Microsoft network properties like MSN and MSNBC have to function under a new reality that means no more $400 rebates for committing to two years of MSN service. Under Ballmer, this richest of all US companies is doing everything it can to save money.
Yet he’s raising salaries. Part of the new reality is that Microsoft can’t continue to count on stock options to keep its employees happy. So Ballmer is giving raises throughout the middle ranks with the goal of paying Microsoft’s 42,000 employees better than they would be at 60 percent of Microsoft’s competitors.
And Ballmer is investing heavily in two new Microsoft businesses. The first, called .NET (pronounced “dot-net”) is a tech-heavy bet that people and businesses can be convinced to essentially rent their software over the Internet if it is more powerful and easier to use. But .NET means more to Microsoft than just rent payments, since it quite intentionally requires a very Windows-centric server infrastructure that could lead to gains for Microsoft against traditional Big Iron companies like IBM. If .NET works, Microsoft will not only have more deterministic revenue, it will finally have made it past Fortune 500 desktops and into those companies’ even more lucrative computer rooms.
The second new business for Microsoft is Xbox, the company’s first-ever video game system, to be introduced later this year, going head-to-head with Sony’s PlayStation 2. Xbox, which also plays DVDs and sure looks like a PC on the inside, is Ballmer’s bet just in case the home computer as we know it today goes out of fashion. It doesn’t hurt, either, that video games are a $16 billion market that’s brand new for Microsoft and not likely to cause a stir at the Department of Justice.
Ah, the Department of Justice. One reason Ballmer probably has the top job at Microsoft is because of the DOJ. No matter what is the final outcome of the antitrust case, Microsoft’s youth is gone, as is much of the cachet of Bill Gates, who came across in his video deposition as arrogant and evasive. In the last year dozens of Microsoft executives have found it not so much fun anymore to be in the software business and moved on. One could argue that list even includes Gates, who continues as Microsoft’s Chairman and chief software architect, but Ballmer runs the company.
This rise of Steve Ballmer says as much about Gates as anything. Ballmer’s first office at Microsoft wasn’t even a desk, it was the end of a sofa in Bill’s office. He has always been subservient to Bill, and that subservience has been an important aspect of Ballmer’s success at Microsoft. When they were students at Harvard, Ballmer and Gates competed for the Putnam national mathematics prize and while neither won, Ballmer scored higher than Gates, a fact that neither man chooses to mention.
But Ballmer is much more than just a straight man to Gates. He finished Harvard (Gates didn’t) and went on for a Stanford MBA. Except for a short stint in product management at Proctor & Gamble, Ballmer has spent his entire working life at Microsoft. Over the years he has run nearly every Microsoft division including and for a decade managed what was the company’s all-important relationship with IBM. So Ballmer knows what big companies are like just as he knows Microsoft inside and out.
And Ballmer has guts, once taking an individual business risk that pales by comparison anything accomplished by Gates. In the late 1980s, when Microsoft was approaching the release of Windows 3.0 -- the first version of the software to do more or less what it claimed -- Ballmer borrowed almost $50 million against his Microsoft stock and anything else he owned, using the money to buy more Microsoft shares. Software tycoons don’t do things like this. They don’t buy shares in their company, they sell them. Gates has never bought a single share of Microsoft, but Ballmer did, and that $50 million grew over the following decade to more than $14 billion, earning him the CEO job he has today. Ballmer, more than any other Microsoft employee, is literally invested in his job.
Microsoft just feels different under Ballmer’s direction. Gates was focused inward on dominating by force of will the company’s thousands of programmers, a role he still performs as chief software architect, instilling fear on video or by proxy. Ballmer could never do that and won’t even try, yet he gains much the same result simply by raising salaries. He’s a jock to Gates’s nerd. Ballmer’s focus goes the other direction, toward customers. And in a soft market, paying attention to customers pays off.
The feel of Microsoft may be different under Ballmer, but some things never change. Ballmer talks frequently about his wife and three young children. During one of these stories, the husky CEO referred to himself as being six feet two inches tall. Looking straight into Ballmer’s forehead I knew this couldn’t be true since I am only six feet even, so I called him on it. Then a miracle happened. Muscles popping, tendons straining, Ballmer somehow expanded his body, growing three inches on the spot. If companies reflect their CEO’s, then Microsoft is as competitive as ever.
Reprinted with permission