Our story so far: Businesses go through three waves of activity, powered by three different types of employees. Idea-driven start-ups are centered on brilliant innovators who act like commandos hitting an enemy beach, working independently and accomplishing feats a hundred normal people couldn't pull off, albeit in an idiosyncratic and often unpredictable way.
After the commandos have created a new opportunity out of thin air, the second wave exploits that opportunity like a flood of infantry pouring into the breach: organizing the growth of a profitable business, often involving an initial public offering of stock.
Once this growth hits market saturation, the third wave takes over with the task of holding the captured territory like police, and milking it for all it's worth. By codifying business practices into bureaucratic procedures, they sustain the profitability of each market niche by preventing anyone from changing a winning formula.
Staying second-wave too long is an easy way for a healthy company to destroy itself. You can't squeeze blood from a stone, and you can't grow faster than your entire market, beyond the point of market saturation. Raising prices and pushing volume beyond what the market will bear kills the goose that lays the golden eggs. Companies that scale up their infrastructure in expectation of growth that never materializes wind up incurring debt, laying off workers, closing down factories, handing their customers over to competitors, and generally spurting cash arterially.
The second wave of rapid growth cannot last forever. No product line can become larger than the entire planet's Gross National Product, and any prediction that says it can is lying. Pretending that growth never ends and that market saturation only happens to other companies is a recipe for disaster.
Eventually, switching over to the third wave is inevitable. A company not only gets too large to manage without bureaucrats, but its mission changes from growing a single set of internally developed product lines to growing the company as a whole through sustainable profits and smart acquisitions.
This is where we get to Microsoft (Nasdaq: MSFT). The third wave isn't necessarily embodied in a necktie or a mission statement. Microsoft is a third-wave company pretending to be a first-wave company, and winding up in a tortured second-wave status. Microsoft's current mandate, "defend the Windows monopoly," is clearly a third-wave agenda. Sustain the status quo, hold your ground -- third wave all the way. It has no CHOICE but to pursue this third-wave agenda. Its monopoly is too profitable for any other course of action to make sense. And, inevitably, this leads to bureaucratic decisions.
But Microsoft's upper management is terrified of "becoming IBM." When Microsoft took advantage of IBM (NYSE: IBM), IBM was the wrong kind of third-wave company, a feeble and helpless conglomerate with third-wave bureaucrats at the highest levels of upper management. Bureaucrats are obedient servants of powerful upper management. With servants in place of leaders, IBM's bureaucracy stopped acting as a conserving, sustaining force keeping the huge size of the company from tearing it apart, and instead left IBM paralyzed and rudderless. That allowed a small, nimble company like Microsoft to take advantage of it.
So, Microsoft is refusing to acknowledge its third-wave status, despite the fact that its central goal leaves it no other option. To Microsoft's management and culture, all bureaucracy is pure evil. It pretends to be a first-wave company by using the phrase "innovate" in every press release -- despite the fact its last attempt at innovation resulted in "Microsoft BOB" (the smiley face with sunglasses, in stores everywhere Christmas of 1995). You need commandos to innovate, and commandos are allergic to bureaucracy.
All Microsoft's growth these days is via acquisition, from PowerPoint, to Hotmail, to Frontpage. This is normal for a mature third-wave company, and again there's nothing inherently wrong with it. Berkshire Hathaway (NYSE: BRK.A) has turned it into an art form. What's wrong is that Microsoft denies it.
Microsoft is having a profound identity crisis bordering on a nervous breakdown. If it can't be first-wave, it won't give up the second wave. Microsoft REFUSES to relinquish its second-wave agenda of growing Windows beyond market saturation, despite 95% market penetration and rising prices -- so that Windows, in some cases, now costs more than the hardware it runs on. Microsoft is trying to install Windows in toothbrushes and toasters, well beyond where it makes any sense to be. This is creating a large amount of tension between it and the rest of the industry, and that tension is the main reason for the ongoing antitrust trial.
Microsoft is so afraid of "becoming IBM" that it's desperately trying to return to the first-wave status of groundbreaking innovator, a position it hasn't held since the 1970s (if ever). But, commandos are allergic to third-wave agendas too, and any creative ideas within Microsoft must somehow be bent into a defense of Windows, or else killed as a threat to the Windows monopoly. There is no other option.
Commandos are instinctively tuned in to their industry and feel the stress Microsoft is generating by pushing Windows past market saturation. Commandos can also instinctively sense "suits" or "pointy-headed boss" types, and are actively insulted by the "innovation" press releases that are obviously (to a commando) not true. As a result, commandos in the PC industry have started treating Microsoft as a cancer they must actively work against -- flocking to technologies like Java and Linux not just because they're cool, but to support "Anything But Microsoft." (Since what the commandos choose to work on is the future of the industry, this is bad news for Microsoft.)
Microsoft is trying to compensate for this by hiring boatloads of young students, panning for innovative freethinking minds like a miner panning for gold in a stream. But, since no third-wave company can get commandos to stick around (even without actively alienating them), what it winds up with are a lot of infantry and high turnover among technical employees. (It can keep administrators and marketers around forever: Their agenda is to grow and sustain Windows, which is more compatible with a second- or third-wave environment.)
This is why I think the antitrust trial's mandated breakup is a good thing for Microsoft, and the recent delay in enforcement may actually harm Microsoft in the long run. By surgically removing Windows from the rest of Microsoft, the company is FORCED to relinquish the stale second-wave agenda of "Growing Windows," and may finally replace it with the sensible third-wave agenda: "Growing MICROSOFT."
You can't grow Windows by acquisition, but growing Microsoft that way is easy. It's what they've been doing (unacknowledged) for years now. The growing Microsoft really needs to grow up, and taking away its Windows security blanket will hopefully help the process along. Of course, if Microsoft tries to latch on to a new security blanket, like Explorer or Office, a new antitrust trial will be inevitable. If Microsoft tries forcing all electric toothbrush manufacturers to install Explorer on their products, people will complain.
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