Steve Ballmer is right, and I was wrong

Steve Ballmer's departure from Microsoft will be a series of epitaphs written over the coming months. Many arm-chair pundits and analysts will scrutinize his 13-year tenure as chief executive, and you can expect him to be the scapegoat for all things wrong with Microsoft. Most assuredly, Ballmer could have done many things better, but he also contended with forces out of his control: government oversight for anti-competitive practices conducted under predecessor Bill Gates' leadership; maturing PC software market; and rise of the Internet as the new computing hub, among others.

For all Microsoft's CEO might have done wrong, he was right about something dismissed by many -- and I among them: Google. Ballmer started treating the search and information company as a competitive threat about a decade ago. Google as Microsoft competitor seemed simply nuts in 2003. How could search threaten Windows, particularly when anyone could type a new web address to change providers? Ballmer was obsessed, chasing every Google maneuver, often to a fault. Execution could have been better, but his perception was right.

Look at the situation a decade later. Google had no web browser or mobile operating system five years ago. At the end of September, Chrome had 40.8 percent global browser share, according to StatCounter. Internet Explorer: 28.56 percent, down from 67.18 percent five years earlier. Android debuted on one phone from a single carrier, T-Mobile, in October 2008. Half a decade later, Android is the leading smartphone operating system, with 79 percent share, based on device sales, according to Gartner.

Then there is the ghost of Netscape past. In the late 1990s, Gates engaged the browser wars to prevent Netscape from building an alternative development platform to Windows. Chrome is that platform during the 2010s, and Chromebook is metaphor for its success. Today, with the exception of Dell, every major Windows OEM builds computers running Chrome OS. Acer and HP released sexy, and affordable, new models last week. Chromebook foreshadows a computer future beyond Windows. Granted, Chromebook sales are nowhere near Windows PCs, but the platform comprises one-quarter of sales in the only part of the U.S. personal computer market that grows -- systems selling for less than $300, according to NPD.

In less than five years, Google did what seemed impossible: Launch and succeed with three new platforms, in categories Microsoft dominated: Browser, mobile OS and PC OS. That ignores success of many other products, like Apps/Docs, Gmail, Google Now, Maps, Search and YouTube, among many others. Google products or services disrupt Microsoft's in several core categories. Ballmer recognized danger before anyone else.

How Did It Come to This?

About a half-dozen operating principles explain Microsoft's success. Four matter more:

  1. Less is more
  2. Good enough
  3. Adopted standards
  4. App cross-integration

Less is more. The PC platform from Day 1 brought more computing power for considerably less cost. Businesses deployed thousands of server-connected personal computers for a fraction of one mainframe's costs. Microsoft crested this early wave with some help from IBM but more from Compaq clones and those later adopted by other PC manufacturers.

During the PC's early days, Microsoft competed with other applications developers. Gates chose to undercut competitors' pricing everywhere. For example, when WordPerfect owned the word processing market, Microsoft responded with Office, which gave businesses three useful products for the price of one. The company consistently carved up competitors by offering more for less, or what I call in this instance the "Less-is-More Principle".

Google does to Microsoft what the software giant did to other companies, only more aggressively. Because the information giant profits from search and advertising revenue, rather than selling things directly, lower pricing is easy and impossible to beat. Google offers many valuable products or services for free, a price Microsoft can't possibly match and remain profitable. The more the software giant gives away, which it does regularly to consumers, the less stable are long-term revenues and, in part because of execution under Ballmer's leadership, the less adaptable is the company to change.

Microsoft faces the IBM dilemma. Big Blue couldn't adequately respond to the PC, mainly because revenues from mainframes were so great. Executives refused to risk tipping over the money pot. Microsoft's problem adapting to the cloud -- and Google-free -- is quite similar. Revenues remain strong from the enterprise, even though clear signs of erosion are evident everywhere.

Apple approaches similar crisis, strangely soon. I predict the company also won't respond fast enough to Google and the shift from touch to touchless computing. CEO Tim Cook focuses too much on preserving revenues streams, rather than disrupt them as predecessor Steve Jobs risked so many times. During calendar second quarter, iPhone accounted for 51 percent of all Apple revenues. But if you include "halo" sales, the number could be 65 percent or more. You want to know why iPhone's industrial design changes so little, even as so many techheads demand it? Fear of tipping over the money cart is among the top reasons, if not the main one.

Circling back to Microsoft, Ballmer tries to combat free. Office 365 is all about "less is more". Subscription pricing is, straight out of the pocket, less than buying the full stand-alone productivity suite, and there are many more benefits -- like access to content anytime and anywhere or Office licenses for multiple PCs. Ballmer bets Office 365 will be "good enough", which is another operational principle.

Good enough. Under Gates, Microsoft never really attempted to release the best products first -- if ever. Rather, he lead development teams to create products that were good enough and for much less cost to customers than competitors charged. The two principles together proved hugely successful. The majority of buyers in any category wanted the most for the least cost. The problem for any company is finding that threshold, where Product A is good enough at X price for the majority of purchasers.

There's a reason for the old adage Microsoft gets products right on the third try, that is version 3. Under Gates, the company punched out down-and-dirty applications out fast, trying to gain "good enough" market share and refining the product until it really would satisfy most potential customers' needs for the price. Windows 1.0 was an ugly imitation of Mac OS, but 3.1 was good enough and sold well. While a blockbuster seller, Windows 95 couldn't really meet most businesses' best needs. That came with the third NT version, Windows 2000.

Looked at differently, though, the third-is-right adage is wrong. More typically version 4 crosses the good enough threshold -- Windows 95 as the fourth from 1.0 and XP as the fourth from Windows NT 3.51, for example. By that reckoning, Windows 9 promises much, as v. 4 from Vista.

Google gets "good enough", too, and is better positioned to deliver than Microsoft. Free is one reason. Risk is another. During its rise, Google had no customers to lose, just those to gain. Gmail was laughable early on. Now some businesses use it to replace Microsoft Exchange. Same can be said of Apps/Docs, which offers most features most people need for a fraction of the cost of Office -- and with content available anytime and anywhere. As long as the price is so much lower than Microsoft's, Google good enough will be better enough for many businesses or consumers.

Adopted standards. Gates learned several important lessons from IBM's mainframe success. Big Blue controlled critical interfaces -- standards -- that compelled many businesses to buy its products. Not just one, but many. Gates made establishing and controlling standards among young Microsoft's top priorities.

For example, in the early 1980s, he put Charles Simonyi in charge of productivity applications development. Early work done by the "father of Microsoft Office" achieved two important goals by the mid 1990s:

  • Established format standards that resolved problems sharing documents created by disparate products
  • Ensured that Microsoft file formats would become the adopted desktop productivity standards

Format lock-in helped drive Office sales throughout the late 1990s and early 2000s -- and Windows along with it.

The Windows PC and everything wrapped around it came to be the standard device adopted by businesses and consumers across the planet. Gates achieved his goal by several means -- among them how the company engaged developers and OEMs around application user interfaces.

During this century, the World Wide Web usurps standards fundamental to the PC's -- and so Microsoft's -- success. Google does what Microsoft tried to and failed to starting in the late 1990s: Be the Internet. The information giant now clearly is the essential adopted standard for most things web. Google starts with search, which share is anywhere from 65 percent to more than 90 percent in most countries, based on combined analyst estimates.

Google search is an essential standard. Around that standard, particularly since Larry Page's return as CEO in April 2011, connects countless services -- many of them adopted standards/services, such as Maps and YouTube.

App cross-integration. That's good segue for Microsoft's fourth principle for success. Gates brilliantly chose to tie together Microsoft products so that one really required many. The company coined "better together" to describe a strategy of sales pull. Customers benefited from using product A, with B, C or D. Later, Microsoft created co-dependencies such that, particularly for businesses, necessitated buying cross-integrated applications to get meaningful benefits. Customers spent more to get more, a tactic only successfully used when "less is more" eliminated major competitors in any application category.

Google uses similar strategy, which is more aggressive under Page's tenure than any other time in the company's history. Search is Google's lifeblood, accounting for the overwhelming majority of revenues. Around this free service, which for many Internet users is a necessary utility, Google ties together other services. Google Account is the anchor to the search gateway, tying to Gmail, Google+, Google Apps, Google Maps, Google Now and YouTube among many, many, many other products or services. Google will soon include users' online recommendations with contextual search advertising.

Google is the essential standard for using the Internet, with Chrome increasingly platform for content development and consumption. When you match this with cross-integration and free products that are good enough, Ballmer's nightmare is reality. Microsoft faces a perfect storm of competition that washes across the consumer market into businesses, education, government and organizations. No wonder Ballmer gets out while he can!

Where Do We Go from Here?

Microsoft's situation is much like IBM in the early 1980s. The PC's rise risked the mainframe's dominance, by making computing available to more people for lower cost. No longer would computers be the parlance of large businesses or would workers be tethered to big boxes. The PC diminished the mainframe's relevance, but IBM didn't go away.

Post-Ballmer Microsoft faces similar transition. The contextual cloud computing era, where devices connect to the Internet hub, makes information available more places for lower cost. The question: How does Microsoft maintain relevance? Ballmer sought to do this by reinventing as a "devices and services" company, partly with Google as strategic competitor.

IBM survived by bringing in outsider Lou Gerstner, and he saved the company by transforming it around core values steeped in customer service and integration. Microsoft's board must decide whether an outsider could achieve something similar. Everyone acts like the PC is already dead. No! The PC's role changes, from being the hub connecting devices and information to one among many connected to the cloud hub.

But the Internet cloud isn't Microsoft's problem. Google is, as its products and services increasingly become essential utilities -- the standards -- everyone uses. Ballmer is right about Google, and I was wrong. Like many other people. But for all his perception about risk, he couldn't execute an effective counter-strategy. That task is left to his successor.

Google buried Ballmer, but it doesn't have to be Microsoft's end.

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