What Will It Take to Save Microsoft?

What's lost in the current furor about Apple (Nasdaq: AAPL  ) passing Microsoft (Nasdaq: MSFT  ) in terms of market cap is Mr. Softy's contribution to the momentous event. Sure, Apple is doing great -- but Microsoft is also in the process of silently imploding.

The latest symptom
Two longtime leaders are leaving Microsoft, according to announcements this week. The Entertainment & Devices division is losing its president, Robbie Bach, and CTO, J. Allard, at the same time. The double departure takes place with the Windows Mobile 7 smartphone system and the Project Natal controller-free gaming experience about to launch, and you have to wonder why the captains are leaving the ship at the supposed moment of great victories.

OK, so let's just take the charitable view and say that two rich men decided to leave the stresses of work behind in favor of family life and good books. Then you still have a glaring issue staring you in the face: CEO Steve Ballmer won't replace either man. Instead, two of Bach's direct reports will now report to Ballmer -- and the entire division is left floundering for effective leadership.

Good luck pushing that new mobile Windows platform past Google (Nasdaq: GOOG  ) Android and the Apple iPhone platform in the consumer space while battling Research In Motion (Nasdaq: RIMM  ) BlackBerry for corporate dominance … with no proven leader driving the car.

It's a feature, not a bug
If this was Microsoft's first act of random cluelessness, it would be forgivable. Even a second or a third major misstep would be OK -- accidents will happen when you're one of the biggest business ventures in the world. But that's far from the case. Instead, Microsoft has misfired on nearly every cylinder over the last decade.

Looking back at the 2000s, it's hard to find examples of Microsoft doing anything truly great. OK, Windows XP was a success that erased the bad old days of unstable and buggy Windows 98 and ME computers. Halo 3 broke sales records and extended a franchise -- but Microsoft played more the part of distributor than developer there. And ... sorry, but I'm coming up empty at this point.

The outright disasters are easier to spot:

  • Windows Vista took everything that was good about XP, wrapped it in a clumsy user experience, and pushed it out the door five years after XP but also two years before Vista was really ready. Windows XP is still the most popular operating system in the world, though it's tripping over a long, graying beard.
  • Apple's iPod created a market for portable media players, and Microsoft assumed that it would simply be a reprise of the PC versus Mac rivalry. But dozens of various-brand players using Microsoft's media formats failed to contain the symbiotic iPod and iTunes system; the workmanlike Zune HD was too little, too late, and it never got the marketing support it needed. Microsoft is less than a bit player in the media player market today.
  • The iPhone repeated that trick in the cell phone market. The difference is that Windows already had a respectable market share before Apple changed the game. But Windows Mobile 6 and 6.5 never had the muscle to drive a true smartphone, and Apple will have its fourth-generation iPhone on the market by the time Windows Mobile 7 hits the proverbial fan. If the product is amazing, it's still way late to the game. And how often do you see the first release of anything make much of a splash in a maturing market?
  • In a misguided effort to fight Google in the online search market, Microsoft failed to buy Yahoo! (Nasdaq: YHOO  ) and settled for a partnership instead. Windows Live couldn't hold a candle to Yahoo! as an online portal, or to Google as a search tool, and it lacks the advertising power that makes Google profitable. Bing certainly looks nicer, but Google still has to look really hard to find that distant speck in its rear view mirror.

I could go on, but you get the drift. Just about every big project at Microsoft has failed for a very long time. The company's share price has stagnated through the decade, and the world is turning away from the traditional computers that Redmond loves, instead relying more on mobile gadgets, where Microsoft is losing badly. Ballmer is good with numbers and is a Harvard-educated businessman, but have you ever seen him make a correct call on technology trends?

Where will it all end?
Microsoft has become its own bubble, and it looks just about ready to pop. Slow and steady doesn't win a race where the competition innovates at Internet speed, and even the age-old Office bastion doesn't look secure anymore. Microsoft is trying to be everything to everybody, like an IBM spanning a different set of markets, but fails to deliver on any of its own lofty promises.

And I see no end to the misery. Microsoft should learn from longtime brother-in-arms Intel (Nasdaq: INTC  ) , whose CEO Paul Otellini has cut a complicated beast down to the operations that really matter. That's the kind of sugar-free medicine it would take to save Microsoft from itself, and of course, something that drastic will never happen.

What a shame.

Should Ballmer get up and leave, or has Anders finally gone insane? Maybe both? Discuss the finer points of this conundrum in the comments below.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. Intel and Microsoft are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a buy calls position on Intel and a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (24) | Recommend This Article (30)

Comments from our Foolish Readers

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  • Report this Comment On May 28, 2010, at 5:44 PM, tdstauffer wrote:

    Ballmer's record is 100% perfect: Everything he has done since becoming CEO has turned to s**t. Why would anyone think MSFT will improve as long as he is at the helm?

  • Report this Comment On May 28, 2010, at 6:11 PM, RichWee wrote:

    MSFT is no longer the leading techno company that develops leading technological solutions quickly to all. Under the current era and leadership, it losts

    "it". It being - the right solutions developed correctly, at the right time in anticipation of needs and with the marketing muscle to create demand. That's what Apple did. MSFT has proven it's not a leader in new product development, marketing prowess, or operational efficient. Under Ballmer's leadership, MSFT achieved all these - all in one decade. A company stinks at the top - its CEO. Remove Ballmer and you will may a chance to turnaround MSFT.

  • Report this Comment On May 28, 2010, at 6:54 PM, JeffreyYang wrote:

    Microsoft board of directors were split between management styles. One camp argue for more executive power, the other said developers should be more independent, management is there just to help, not to direct. Microsoft lost permanent temp law suite in 2000, and this gave the "hands off" camp upper hand. Microsoft top management was restricted in what they can do. Unfortunately Microsoft employees were not as self motivated as those directors thought. The result was stagnation for aboout 8 years. The board of directors has changed nearly half of its members since 2007, and Microsoft show clear sign of improvement since 2008. As an example why Steve Ballmer was not the cause I want to use Jim Allchim and Jeff Raike as examples. These two executives were responsible for the great success of Windows and Office. Their records until early 2000 would put them in hall of fame, yet they both performed pooly since then. The "lost decade" of Microsoft was caused by the policy of Microsoft board.

  • Report this Comment On May 28, 2010, at 7:40 PM, lawman508 wrote:

    You guys said the same thing about Apple 10 years ago!

    While Apple is easily taking over the consumer space (for now), Microsoft has spent the last 10 years (under Balmer) taking the Enterprise from IBM.

    Check your numbers - Enterprise revenue DWARFS consumer revenue - this is where Microsoft has been focusing their efforts.

    Windows 7 mobile will catch up with Apple in the next 5 years.

  • Report this Comment On May 28, 2010, at 7:47 PM, estebansalsa wrote:

    Wow. The article ignores Windows 7 the fastest selling operating system in history!

    Also ignores the fact that since 2000 revenues have gone up almost 3 fold. In addition, they have become fully entrenched in enterprise computing which is a much more sustainable business than have the coolest gadget of the day.

    Sooner or later Apple's phone won't be the coolest kid in town and the company will come crashing down. Meanwhile, MSFT will continue to grow steadily.

  • Report this Comment On May 28, 2010, at 10:02 PM, MaBellIsDead wrote:

    As long as a solid company with solid products is on-hand to pick up what Microsoft loses, I don't have anything but casual sympathy for MS. And most of that sympathy is for the employees.

    Microsoft's vindictiveness in not permitting computers using Vista to have XP installed was a good example of their lack of concern for their customers.

    Their salvation will undoubtedly require ousting Balmer for the greater good.

  • Report this Comment On May 29, 2010, at 12:01 AM, Philyogy wrote:

    Microsoft is doing more than just OS. And they are doing so with a vengeance... One example, the "Natal project".. This is the next level of interaction with another dimension.. Sure.. Nintendo has a Wii with controllers that use motion, and Sony has a motion controller as well coming soon, but Microsoft has developed a software that can do more than just movement sense.. Microsoft have come up with a software that can read your facial expressions, and actually ask you, " What's wrong" Or just say "Hi" if it sees you... Microsoft is by far no slouch in the R&D department.. With or without Gates at the helm, Microsoft will continue to roar.. Also.. I have 4 computers at the house.. Two have Vista and XP, and two have Win7 and XP... So I don't follow the statement of Microsoft not allowing more than one OS on a specific machine..

  • Report this Comment On May 29, 2010, at 12:11 AM, MaBellIsDead wrote:

    "So I don't follow the statement of Microsoft not allowing more than one OS on a specific machine.."

    I didn't express it well. What I meant was that a new computer that came with Vista, could nor have Vista replaced by XP. It could not be done! I have an extra, unused copy of XP as proof. The computer would not run it.

  • Report this Comment On May 29, 2010, at 6:52 AM, hahahacreek wrote:

    In Sept 2008, Microsoft tried to kill XP and force everyone to use Windows Vista. Big Mistake! When XP Laptops were no longer available, Linux Netbooks took 1/3 of the Laptop market share. Vista also helped Apple Macbooks become one of the best selling Laptops on Amazon.com. Vista won first place in the 2009 Fiasco Awards hands down. Vista is the most hated OS since Windows ME. In fact, Microsoft lost 4% market share to Mac and Linux since Vista was released in Jan 2007. Now Vista barely has 13% market share while XP still has over 56%. Microsoft should have paid attention to what it's customers really wanted, instead of trying to force Vista on the world.

  • Report this Comment On May 29, 2010, at 10:51 AM, mrfreezy wrote:

    Microsoft is like the Michael Jackson of business in the sense that the same extreme internal forces that drove them to do whatever it took to get to the top of their industry are now destroying them. And yes they are enjoying huge royalties from those extreme earlier efforts but royalties are known, calculable and expected and as we know the only thing that moves the market is the is variance from expectations. In Microsoft's case they have not delivered anything more than what is expected of them for a long time now. Some could argue they've delivered less and were it not for their aggresive stock buy back programs and relatively large percent of insider holdings for a company their size their stock would have depreciated more than it has. And so shareholder value stagnates, year after year after year.

  • Report this Comment On May 29, 2010, at 2:32 PM, blogzack wrote:

    There is a good series of articles at an Open Source site [yes despite their allegiance] that covers 3 important points:

    1)Yes indeed, Microsoft has ruined its brand with Vista and other misplays:

    http://www.theopensourcery.com/keepopen/?p=1034

    2)Steve Ballmer is the defensive specialist - Bill Gates is still the offensive master at MSFT:

    http://www.theopensourcery.com/keepopen/?p=1845

    3)Redmond is loosing its Windows monopoly position as it cedes consumer mobile lite to Google Android[2nd now] and Apple [3rd in smartphones] : http://www.theopensourcery.com/keepopen/?p=2280

    Conclusion: Anders is right - there are lots of problems, and some internecine , in Redmond.

  • Report this Comment On May 29, 2010, at 8:22 PM, blogzack wrote:

    The Windows as OS is the main technical problem. Look what both Apple and Google have been able to do. Create very lite, very fast OS that consider 1GB more than enough memory to work with. Further, Google Android is just Linux with some server functionality/utilities stripped out. I can run 1GB Linux 2-3 times faster on the same Intel box then Windows 7 or Windows XP. Even worse, WinXP runs 20-40% faster than Windows 7. Now I know that there are at least 3-5 "Object" lost in the bowels of Microsoft Research and other divisions - but the warfare between divisions is such that a Goldman Sachs trading room looks the epitome of civility in comparison. NIH and Internecine Rivalry still carry the day. The only thing worse is the 16 government agencies[I kid you not] "regulating" Wall Street each in its own incomplete and apparently incompetent way.

  • Report this Comment On May 29, 2010, at 10:55 PM, Philyogy wrote:

    check out the natal project.

    http://xbox360movies.ign.com/xbox360/video/article/989/98915...

    this type of innovation, is what will make all the difference.. Out in time for Christmas 2010.. :)

  • Report this Comment On May 30, 2010, at 4:24 PM, WaltFrench wrote:

    There's no law that says any one company needs to change with the times. Lots of Foolish investors own shares of their local electric utilities, with business models that are relatively little-changed in decades.

    Change is hard. As a manager who's tried to introduce radically different approaches in his business (first, as a startup, now, as an insider), you see this instantly. <i>Taking Charge of Change</i> and <i>The Innovator's Dilemma</i> pretty well cover the territory. Microsoft may be hostage both to its blue chip board and to its customers' expectations of backward compatibility forever. Too bad the shareholders get stuck with a grossly inefficient R&D budget wasted on projects that get aborted, or jump-the-shark efforts like Natal, which merely provide bragging rights for an important niche, rather than really new products or (heaven forfend!!!) new <b>markets.</b>

  • Report this Comment On May 30, 2010, at 6:42 PM, plange01 wrote:

    replace the idiot balmer thats what it would take to get microsoft back on track this company has everything going for it.a 5 year old could run it!!!i sold out at $31 after years of owning this stock and will never go back this stock split to $25 a share 10 years ago and its still there!!!!!

  • Report this Comment On May 30, 2010, at 9:58 PM, aleax wrote:

    @waltfrench, the reason one might not mind too much owning utilities, e.g. via IDU, is that while they are flat over the last 10 years they do at least dependably yield 4% yearly dividends. MSFT is down 20% or so over 10 years and only yields dividends of 2% -- not a nice combination.

    Plus, if you're willing to pick and choose which utilities are worth owning, rather than going for the stability of an ETF like IDU, it's not hard to find ones that have been much better than IDU -- e.g., EXC, up 50% in 10 years and yielding 5.5% dividends, or PCG, up 60% and yielding 4.5% (I won't get into the pros and cons of stock picking, but the Fool communities are generally very friendly to it when done in the proper long-term way;-).

  • Report this Comment On May 30, 2010, at 10:26 PM, crawlfish wrote:

    I have been using Linux for the last six years at home. At work we use Windows. Frankly Windows seems primitive to me and not as easy to use.

    Apple uses a form of Unix called BSD for it's under lining operating system and it's GUI is proprietary.Microsoft could do the same thing.

    Apple is betting on media and DRM (digital rights management) for its future profits.That is to lock up the formats. Other wise the authors could use any vendor as an outlet for their creativity. Like the server wars that Microsoft lost to Linux I think Apple will lose its war. The new method of profit will be offering the software for free but selling service for it. I think that the Red Hat model will ultimately be the one that survives.

  • Report this Comment On June 01, 2010, at 3:48 PM, polenium wrote:

    Save Microsoft? Has anyone who claims to be a business journalist or expert looked at earnings vs. stock price? Microsoft earns the entire net worth of Google anually. Apple has 8% of the market of share.

    Why the stock price doesn't reflect Microsoft's success is a mystery. Could it have anything to do with fallacious reporting and whipping up public sentiment against Microsoft?

    Why did our own government go after Microsoft who were providing better products for less money and turn a blind eye to oil giants who collude and price gouge? Go figure.

  • Report this Comment On June 02, 2010, at 8:49 AM, EvilPhD wrote:

    Apple is over-valued in my book. the products they make are faddish, short on versatility, and short lived. Besides there are only so many i-nouns left in the vocabulary.

    MSFT needs to take a lesson from Google and go and an R&D spree. Unleash the creative intellect of it's employees and see what comes out of it. Give the people what they want.

    Windows 7 actually did a lot of good, and project Natal I think is going to lead into other innovations. Innovations that can be built into other devices.

  • Report this Comment On June 04, 2010, at 2:18 PM, AmcnFndrs wrote:

    Well now, none of this is news. These calls have been made and remade for a long time coming now. It will get real dark before it gets better. The public has not even gotten wind of the lack of business ethics component that burns not far beneath the lid with a culture that behave like teenagers addicted to crack, defending their position, not listening or learning, and where knowing right from wrong is clear as mud. This will at some point overshadow all of the other ills and will come to pass in time.

  • Report this Comment On June 04, 2010, at 7:54 PM, tuffdeal wrote:

    Problem is that Microsoft has never been a hardware innovator or a hw/sw innovator. A software innovator, yes, but the only truly innovative software that they've issued in the past few years is 7 and Silverlight. Ballmer does not have foresight and his minions are there to feed his ego. He really does have to step down so that the company can be reorganized totally and reinvigorated.

  • Report this Comment On June 04, 2010, at 10:41 PM, birder1500 wrote:

    Microsoft's idea of innovation is to come out with new versions of the same old crap. What a piece of crap. I stopped down loading their system updates after one I down loaded crashed the system and I had to reinstall the operating system.

    I hate their crap, but I do use it.

  • Report this Comment On June 07, 2010, at 10:55 PM, webjawns wrote:

    "In short, the iPad iWorks programs are on the verge of overtaking the MS Office as the primary purpose for using a small computer."

    I can't stress how wrong this person is. Microsoft Office is the de facto standard in the business world, and iWorks will likely never replace nor put a dent in this product. It is evident that you do not understand the IT world.

    In order to utilize Apple products, you must have a compatible operating system. Apple doesn't really make software that works on Microsoft-based systems (outside of iTunes). Most business networks use some combination of Linux and Microsoft Windows Server. There is nothing that compares to what Microsoft offers in terms of IT administration and management. I say this not as an investor, but as an IT professional.

    "MS Windows do not have many apps at all, and all of these apps are on the verge of being replaced by iPad apps that are far easier to use, and getting a lot more things done quickly and immediately gratifying."

    This is so funny. There are more applications for Windows than there are for all operating systems combined. Microsoft Windows applications are also more powerful and feature-rich, while most also provide a minimalist approach as an option to cater to the crowd you speak of.

    "My own observations reveal a 50% inclination to switch from Windows to Mac in the general user computing community."

    This was definitely a made-up statistic.

    It is disingenuous for people to claim that Apple's products are somehow easier to use, and it is a flat-out misstatement to say that they are better. Apple is good at one thing - taking a piece of crap and slapping it in a pretty package. I do not believe they are the innovators many make them out to be, as almost every product they've every released has been done by someone else before. Don't mistake innovative marketing for innovative products.

  • Report this Comment On June 07, 2010, at 11:03 PM, webjawns wrote:

    "In short, the iPad iWorks programs are on the verge of overtaking the MS Office as the primary purpose for using a small computer."

    I can't stress how wrong this person is. Microsoft Office is the de facto standard in the business world, and iWorks will likely never replace nor put a dent in this product. It is evident that you do not understand the IT world.

    In order to utilize Apple products, you must have a compatible operating system. Apple doesn't really make software that works on Microsoft-based systems (outside of iTunes). Most business networks use some combination of Linux and Microsoft Windows Server. There is nothing that compares to what Microsoft offers in terms of IT administration and management. I say this not as an investor, but as an IT professional.

    "MS Windows do not have many apps at all, and all of these apps are on the verge of being replaced by iPad apps that are far easier to use, and getting a lot more things done quickly and immediately gratifying."

    This is so funny. There are more applications for Windows than there are for all operating systems combined. Microsoft Windows applications are also more powerful and feature-rich, while most also provide a minimalist approach as an option to cater to the crowd you speak of.

    "My own observations reveal a 50% inclination to switch from Windows to Mac in the general user computing community."

    This was definitely a made-up statistic.

    It is disingenuous for people to claim that Apple's products are somehow easier to use, and it is a flat-out misstatement to say that they are better. Apple is good at one thing - taking a piece of crap and slapping it in a pretty package. I do not believe they are the innovators many make them out to be, as almost every product they've every released has been done by someone else before. Don't mistake innovative marketing for innovative products.

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