Steve Ballmer has restored my confidence in his leadership

Surprisingly, it only took 10 months. I just figured we were done.

As a long-time supporter of Microsoft's CEO, my June 2010 commentary "I have lost confidence in Steve Ballmer's leadership" came as a surprise. At the time, Windows Mobile was a train wreck; iPad launched to huge success, leaving Microsoft clueless; and Apple's market capitalization exceeded Microsoft's.

But Microsoft 2011 has got me rethinking Ballmer, and I'm feeling awfully optimistic that 2012-2015 will be his company's second act. IBM had one under Lou Gerstner's leadership in the 1990s, as did Apple during the 2000s. Ballmer, it turns out, was true to his word about what Microsoft needed to catch and move ahead, which he demonstrated by actions during 2010 and first quarter 2011.

Invest or Perish

The post-September 2008 economic crisis hit Microsoft hard as it did most other public companies, striking like a dinosaur-killing meteor. Recession is the time when many companies pull back investments in marketing and research and development. In December 2008, I strongly encouraged Microsoft to increase marketing spending during the downturn. A month later, during his CES 2009 keynote, Ballmer laid out a course for something better: "I believe that companies and industries that continue to pursue innovation during tough economic times will achieve a significant competitive advantage positioning themselves for growth far more effectively than companies that hold back." He promised to make those investments, which surely weren't evident to me 18 months later.

Ballmer was absolutely right in his assessment, and Apple today is the most visible example. As I explained in September 2009 and again two months ago, Apple's modern success started from four products or initiatives during 2001, when recession gripped the U.S. economy. Rather than hold back, Apple moved forward in that year with iTunes (January), Mac OS X (March), Apple Store (May) and iPod (October). All successes since trace back to these four recessionary investments. Surely, Microsoft could do well by making the right investments. In February 2009, Ballmer told financial analysts that RCA is "our role model. Post Depression they dominated TV technology because they really were the only guys who invested."

Finally, the investments are starting to gain visibility -- and show promise. As significant, Ballmer has made several strategic moves that are transforming. I'll start with the latter, because of its importance to the others.

Leader discovers Leadership

As I explained in January, Ballmer spent much of 2010 consolidating control over the executive team, which also included making top leaders more accountable. Ballmer brutally and publicly ousted Server and Tools president Bob Muglia (January 2011); gave Ray Ozzie, chief software architect, a firm boot out the door (October 2010); and sent Entertainment & Devices execs J Allard and Robbie Bach packing (May 2010). Among others. Business division president Stephen Elop left in September 2010, but he was more an emissary preparing for Microsoft's silent takeover of Nokia (February 2011).

In 2010, Ballmer started taking charge like never before, not just making Microsoft's top chiefs more accountable but ending fiefdoms that had formed around them. If no other reason than that, Allard, Bach, Muglia and Ozzie had to go. The era of personal fiefdoms is over at Microsoft. This year, Ballmer has gone further, by giving more decision-making authority to techies, and taking it away from marketing types. It's sensible management but, unfortunately, corrects the autumn 2005 reorg that ousted techie leaders for marketing managers. Ballmer is fixing a problem he created five-and-a-half years ago.

Something else: Ballmer is showing surprising patience -- as impossible as that might seem from observing such a passionate wears-his-heart-on-his-shelve kind of leader. Related, his priorities are now more in the right place, and I can't figure out how that happened (although the sobering economic crisis surely played a role). During the Noughties, Ballmer and his leadership team wasted too much time chasing competitors like Google rather than leading by innovation.

Suddenly, Ballmer has got the innovation bug really bad, and it's refreshing to see. Microsoft product development is more measured, tactical and looking years ahead instead of the next couple quarters. Microsoft has long stood out among tech companies for making investments in the present that won't pay off for years. But Ballmer's Google obsession put the good ship Microsoft's rudder in the wrong hands -- trying to steer an Olympic-class ocean liner like a speed boat.

The Future is Now

There are five major areas of investment that Microsoft customers, partners and shareholders should closely watch in 2011, but particularly 2012 to 2015. I list them in what I consider to be most to least importance.

1. Kinect. If Ballmer and his top execs fail to fully exploit the potential of Kinect, they should be sacked by the Board of Directors, whose members should resign afterwards -- except Chairman Bill Gates. Microsoft smartly released a Kinect SDK beta during last week's MIX11 conference, where one of the best demos ever was given -- a gesture-controlled lounge chair.

Kinect is a development platform with huge potential to transform how people interact with everything. But it's more than about using gestures to control devices. Kinect represents a design philosophy that is starting to permeate other Microsoft products -- using you as the most natural user interface. Microsoft could reinvent itself just through Kinect, but even more likely with a combination of NUIs.

2. Azure and hosted apps. Microsoft's legacy, and hugely profitable business, is the Office-Windows-Windows Server apps stack. The company's cloud strategy is all about protecting this legacy stack, rather than transcending it. From that perspective, Microsoft holds onto the past at the cost of the future. But from a different viewpoint there is real brilliance here. By extending the Office-Windows-Windows Server apps stack to the cloud, Microsoft gives existing customers in established markets something new to buy -- and there are many benefits, such as anytime, anywhere access on anything and lower total cost of ownership. Microsoft's core products have reached sales saturation, making the company its own worst competitor. Suddenly, Microsoft has something new, compelling and beneficial to sell customers satisfied with whatever enterprise software they already own.

Microsoft has huge opportunity to continue milking its legacy applications stack, while leaping onto the new one. Looks to me like Ballmer isn't an old soggy bones after all. He sees that Microsoft should become the cloud anywhere that it can, while seeking to offer the best front-end cloud-connected mobile applications everywhere.

By the way, Microsoft is now accepting applications for the Office 365 public beta. It's Office in the cloud, baby.

3. Marketing. Ballmer likes to talk about how many billions Microsoft spends on research and development. But marketing is as important, and offers greater value for amount spent. Since the "Windows 7 was my idea" campaign, Microsoft marketing has hit a series of home runs. The company's campaigns for Bing, Internet Explorer, Windows Live, Windows Phone and Windows 7 are all exceptionally good. There's a consistent theme behind all Microsoft's current advertising campaigns -- using technology to reclaim your life. It's a great message for a time when people are slaves to search keywords and social media. "Get it done and get done with the device" is the nut graph.

But it's also clear that Microsoft has made marketing more a part of the product development process, as expressed through clear design philosophy and improved emphasis on natural user interfaces.

Microsoft Store is part of the marketing effort -- and contrary to reports that the company is pulling back from its retail strategy, my sources tell me that it's all systems go opening more shops. But the pace is measured, and this is one area where I'd like to see Microsoft move faster. The mortgage crisis has finally reached the commercial real estate market, pushed on in part by high unemployment and prolonged weak consumer spending. It's a great time to lock in long-term leases on the cheap. If Microsoft truly viewed retail shops as marketing and brand building investments, it would open 50 stores this year.

4. Windows Phone. I was surprisingly impressed by Microsoft's Windows Phone development pitch during last week's MIX11 conference. Sure, Windows Phone lacks some features that Android and Apple's iOS already have, and the forthcoming "Mango" is more about catching up to market leaders. But Microsoft exec Joe Belfiore made a deliberate, measured pitch to developers that impressed and revealed that Microsoft's "glance and go" is much more than marketing pitch -- it's a design philosophy. Recognizing it is behind, Microsoft is resisting temptation to rush too fast ahead, while positioning Windows Phone not for doing stuff on the device but using it so people can do more stuff -- interact with real people not Droids and devices.

The Nokia distribution deal for Windows Phone gives Microsoft good reasons to pace development, preparing for new handsets running the operating system. Day of the Microsoft-Nokia announcement, I criticized the deal as being bad for Nokia -- at least in the short term -- but quite good for Microsoft. Gartner and IDC both claim that the Nokia deal will catapult Windows Phone to second place in smartphone OS market share by 2015. I question analysts' predictive methodologies, but there's marketing value to the forecasts Microsoft can use to justify Windows Phone's development pace and to woo more partners to the platform.

Microsoft is often ridiculed for being an imitator rather than innovator. But who's imitating whom? Microsoft set clear hardware specifications for Windows Phone handsets -- another sign of its measured, calculated approach. Now Google is doing something similar with Android devices. In another imitation, Google CEO Larry Page is reportedly putting engineers in the company's key decision-making positions.

5. Windows ARM. In January, Microsoft announced that the next version of Windows would support ARM processors. I'm surprised how greatly this is overlooked in analyses about the so-called media tablet market. While competitors like Apple, Google, HP and Research in Motion are unifying their phone and media tablet operating systems -- moving up from handsets -- Microsoft is pushing the other way, by taking its desktop/laptop operating system down into the tablet market. That's really the same strategy as announced by Gates a decade ago, during the Comdex debut of Tablet PC.

Full operating system best supports Microsoft's legacy applications, with ARM support opening a larger array of devices, including smartphones. You know what, Gartner and IDC count tablets running Windows as PCs. Android tablets and iPad fall into the new media tablet category. Perhaps that's why last week, three bloggers all wrote about how Gartner sees no future for Microsoft in tablets -- at least through 2015. They responded to a media tablet OS forecast that omitted Microsoft. Right, because Gartner classifies Windows tablets as something more.

Microsoft's approach to media tablets can be different also because the company can leverage both Windows and the cloud. As I explained last week, Microsoft can hugely profit from cloud-connected mobile devices without a tablet or tablet operating system. Windows on ARM is but decoration and icing on the cake.

Something Else

Internet Explorer is another area to watch closely as is Bing, but this analysis already is long enough. I'll wrap by stating this: Ballmer is key to everything. If not for his taking charge in a different way, my enthusiasm would be muted. There is something different about Ballmer now. They say you can't teach an old dog new tricks, but Microsoft's CEO is looking more and more like the counterpoint. Perhaps you can, after all.

By the way, I clearly see a couple of potential successors among Ballmer's top executives. He'll demand their loyalty, and they'll have to command loyalty without building fiefdoms that rival the chief executive. But that's topic for another post.