The Next Generation of Microsoft (Fool on the Hill) January 24, 2000

An Investment Opinion

The Next Generation of Microsoft

By Yi-Hsin Chang (TMF Puck)
January 24, 2000

I'm just getting over the shock of the sudden announcement week before last that Bill Gates was stepping down as CEO of Microsoft (Nasdaq: MSFT). Granted, Gates will stay on as chairman of the company and also assume the newly created role of "chief software architect." And he named Microsoft President (and his best friend) Steve Ballmer to the position of CEO. Still, Bill Gates IS Microsoft, and Microsoft IS Bill Gates.

Unlike the company's co-founder Paul Allen, Gates has remained at the helm since the very beginning. Frankly, it's almost impossible to separate the two. Even in the movie South Park, you'll recall the scene where the general shoots and kills a cartoon version of Bill Gates for the shortcomings of Windows 98. (By the way, I hated that scene in the movie and didn't see the humor in it.)

So for the past week and a half, I've been pondering the ramifications of Gates's decision. My conclusion thus far: This is a brilliant strategy that just might save Microsoft and Bill Gates. This is a major strategic shift, one that takes into account what might come out of the pending antitrust case.

First of all, Gates is taking himself out of the limelight. Considering how much he's been vilified in the media (not just in movies like South Park; even in magazines such as The Economist, which has depicted him as a spider on a web on one cover), it's just a wise public relations move for Gates to decrease his public exposure at a time when the Justice Department is trying to make a case for splitting up the Microsoft monopoly.

With Gates still as chairman and Ballmer adding CEO to his previous appointment as president, not much has changed in terms of the firm's overall power structure. Gates is still the big boss and the biggest shareholder in the company. What is different is the way the company is going to be run strategically.

As chief software architect, Gates will essentially head up Microsoft's "next generation Windows Internet platform and services." Basically, this means that Gates is planting his flag not just on the Windows operating system but on the company's Internet-related businesses, including the Internet Explorer browser and the MSN Internet access provider. The company plans to create an Internet operating system connecting computers and computing devices.

In my mind, the strategy effectively carves out the businesses Microsoft -- and Gates -- wouldn't want to do without. Given the projected growth of the Internet, it's not surprising that Gates & Co. would want to focus on this part of the business, especially given that the company was, in fact, late to the Internet party to begin with.

In other words, while Gates and Ballmer insist that they will resist the government's efforts to break up the company, this recent restructuring basically maps out the areas Microsoft will do its best to hang on to: Windows and anything Internet-related. So if anything has to be sold or spun off, it will be applications such as the Microsoft Office suite, computer books, and the like. And if that's not enough, the current strategy makes it easier to prioritize and get rid of the less essential parts of the business.

Ultimately, Ballmer might be able to pull off what Gates never could, that is, to reach some sort of settlement with the Justice Department. In contrast to Gates, who tends to come off as arrogant and stiff, Ballmer is known as friendly and boisterous, and, according to one report, someone who "promotes smooth relationships with customers."

Whatever happens, the change is a good move for Microsoft. The company's shares moved up $4 7/16 to $112 1/4 the day after the announcement was made.

For those already writing eulogies for Microsoft, I say, it's way too early to be talking about the death of Microsoft. It'll be interesting to see how the company recreates itself in the months to come.

Related links:
Fool News, 1/13/00: Gates Steps Down as Microsoft CEO
Microsoft message board
Rule Maker Portfolio (Microsoft is a holding)