Looking Ahead

Sayonara

With the initial frenzy around the great Ballmer succession sweepstakes slowing down, lets look ahead at how things may play out:

Timing

I can’t believe this will take 12 months to resolve or that the company can afford to let it drag on that long. If the board can’t find a new CEO in three months, they’re never going to find someone. My guess is they shoot for an announcement around November with a January start date for new guy. Overlap between old and new CEOs is fraught with issues, so my guess is Steve will get an extremely well-deserved and complete summer vacation next year. UPDATE: the fact ValueAct doesn’t get its board seat until early next year is another impetus to get this decision made before then.

Candidates

I speculated discretely a little here, but am stunned at some of the crazy names in play. How does a company like Ladbrokes stay in business if this is an example of their handicapping skills? Does anyone know how to arbitrage this insanity? And where is Harold Stassen in this race?

I said earlier there was really only one internal candidate. After more thought, I now think there are two but the second one is not showing up in all the speculation (which is really surprising because this puts him in the minority it seems of Microsoft employees).

The Re-org

I maintain my earlier (and evidently not safe for publication) claim that the ongoing functional reorganization is batshit crazy. It was crazy with Steve, but it is barking mad with an unknown new leader showing up at some indeterminate time in the future. But the company can’t go back to the old model at this point and has to keep marching ahead in the absence of any other option. I guess they keep implementing this re-org until the new CEO unveils the next re-org. In the meantime, between a lame duck CEO and the groping-in-the-dark of the current re-org, Microsoft is largely on hold strategically (which makes it all the more important to find the new leader quickly).

Breakup

The uncertain transition period and ongoing re-org to greater centralization actually make it harder to break the company up into the “Svelte Steves”, but this is still the right solution for Microsoft’s existential plight. Hopefully the board will realize after interviewing a bunch of candidates that there isn’t anyone likely to manage the sprawling software conglomerate that is Microsoft today any better than Steve and they should break the company up, create a more focused set of companies and unlock substantial value.

Layoffs

I hate to say it, but these seem almost inevitable upon the arrival of whoever comes next. Every new CEO wants to get bad news out of the way while they can still implicitly (or explicitly) blame their predecessor. And I think one of the big motivations for the recent re-org was to “increase marketing efficiencies”. Microsoft laid off a couple hundred marketing people last year, but rumor is the original target was ten times higher. This has implications for local hiring and the Seattle real estate market if nothing else.

Executive Departures

Just as we saw an exodus of “Bill guys” after Steve took over, there are some “Steve guys” that it is hard to imagine being part of any new regime. Kevin Turner would be one (and for anyone wagering on KT as the next CEO of Microsoft, I will take the other side of that bet for every penny you want to put down). Mark Penn, who still lives in the other Washington, may  suddenly discover Hillary’s 2016 campaign is ramping up (perhaps they will have forgotten his prior contributions). And there are some of Steve’s Pro Club basketball buddies with their brogrammer bonhomie (except they lack even brogrammer-level programming chops) whose career trajectories could be impacted. Who else is busy updating their LinkedIn profile (beyond every marketing employee at the company)?

NBA Basketball Returning to Seattle

Steve can get busy on this front, just as our archenemy the hated and despised David Stern exits the scene. Steve would be a great owner (and cheerleader – every home game will like MGX to him), a la Mark Cuban. Others have suggested Steve could also help salvage his home town of Detroit.

What else should we expect on the Microsoft front as this transition plays out?

Filling Big Shoes

Big Big Shoes by tom@hk | 湯米tomhk, on Flickr
Creative Commons Attribution 2.0 Generic License  via Flickr 

There is a lesson in the all-around thrashing Steve Ballmer has received in recent days about filling the shoes of the greats: don’t.

Anyone who succeeds one of the greats -– be it Bill Gates, Steve Jobs, Jack Welch, Peter Lynch, Warren Buffett, Michael Jordan or Peter the Great -– is likely to suffer by comparison. As general career advice, there is more downside than upside to following a legend.

You may be as or even more skilled than the superstar you’re following, but they also likely had both good luck and timing on their side. The tailwinds that favored them probably won’t keep blowing for you. Nothing lasts forever. The rules change. The great bull market eventually comes to an end. Low draft picks erode your bench. The competitors keep coming and coming, and unlike you, they often have nothing to lose. The window for breakthrough innovation in your industry may not stay open 24×7. Cambrian explosions can be followed by long periods of unpunctuated equilibrium. No small part of becoming a legend is successfully getting out on top (cf. Michael Dell).

And your predecessor’s success increases degree of difficulty you face. It sets expectations for your performance, yet there are real diseconomies associated with success. You get to defend the substantial realm your predecessor built. That scale and scope of success brings complexity. You inherit a valuation that presumes your future trajectory; you really only can screw it up. Sheer size means you move markets. Opposing teams always get up for the game when the defending champions come to town, even if there have been roster changes. The key lieutenants who had the legend’s back may decide it is time to enjoy their rewards. You’re an easy target for populists, contrarians and anyone who wants to stick it to ‘the man’. The press, who first build you up, inevitably get bored and will decide it is time to tear you down. A government or two may shake you down for campaign contributions, directly or indirectly.

A big part of Steve’s problem is he isn’t Bill. He’s had to manage the house that Bill built in the face of unprecedented government assault, the complete collapse (and rebirth) of the tech sector and try to keep up with, much less stay ahead of the incessant march of technology. Steve is a amazingly successful and accomplished guy, contrary to what you may conclude from the twenty-something blogger consensus this week. It isn’t clear anyone, including Bill, could manage the sprawling empire that is Microsoft today or have maintained Microsoft’s dominance in the serendipitous world of technology up to the present day. I wish Steve’s last move had been to break the company up (and frankly, there is still time for that). It would be better for the company and for his legacy.

But it isn’t just Steve who has this problem. Tim Cook is experiencing all the joys of not being Steve Jobs. Ballmer’s buddy Jeff Immelt soldiers on at GE, having started at a similarly awkward time of high valuations (GE has dropped a couple hundred billion in market cap on his watch). Peter Lynch’s Fidelity Magellan Fund, where at least the first couple managers to follow Lynch made headlines, is largely forgotten today. And I won’t invest any money with whoever eventually takes the reins from Warren Buffett (whose own best performance came when he was investing much much smaller amounts). Pete Myers, of course, had a career year and lead the Bulls to a 55 win season after MJ retired (the first time), but the Bulls didn’t win another championship. Peter the Great continues to cast a long shadow unbroken by any Russian leader in the ensuing centuries (except maybe Stalin, but he was more from the Ivan the Terrible school).

Mean reversion is a bitch, and mean reversion from an extreme outlier can be even more painful. Put another way: bet against the guy who comes after the legend.

Note: I leave Larry Ellison off this list of examples. Due to the fact he intends to live forever, he will spare any successor the ordeal of following him.

A Handicapper’s Guide

 
With the announcement that SteveB will depart within the year, there is all kinds of speculation about his successor, much of it ranging between vapid and nutty. There are three classes of candidate:

Internal Candidates

While people are having fun going through every headshot of the Senior Leadership Team as a possible CEO candidate, there really is only one internal candidate. This candidate would be a strong vote for continuity. The next CEO of Microsoft will be in Redmond and won’t be a connoisseur of corndogs.

External Candidates

Microsoft is historically very tough on executives hired from outside and succeeding Steve would be exceptionally challenging. Given Microsoft could have almost anyone, there are not a lot of obvious candidates here. Would love to hear suggestions as I am sure there are some out-of-the-box candidates I have not considered. Gray-faced/gray suited enterprise executives seem unlikely, and especially not anyone who ever worked at HP or IBM (internships should not be disqualifiers).

Alumni Candidates

This is the most interesting category (at least for us alumni ;-). There are a number of names that have been tossed around: KJ, Elop, Sinofsky, Muglia, Gundotra, Maritz. I have a tough time imagining any of them as the next CEO of Microsoft except for Paul. The question is what would it take to get him to do it. And Bill definitely isn’t coming back. It is hard to think of a founder of his stature who has done as good a job of extricating himself from his company as he has.

A few other other thoughts:

  • The most interesting question to me is whether this decision happened over months or weeks. You can infer very different catalysts depending on the timeframe.
  • It is now basically acknowledged there has been no succession plan.
  • The recent reorg, which is batshit crazy, looks even more crazy with Steve out of the picture. Still waiting for someone inside the company to sell, defend or rationalize this move to me.
  • I am still a staunch believer that the best option for the company is to break itself up. With expectations set on a single successor and a year to find that successor, this doesn’t bode well for a breakup. The board in theory could come back with this conclusion before Steve departs after a few disappointing interviews/rejections. But Steve clearly is not an advocate of this approach.
  • With Steve’s fate settled, I expect more eyes turn to John Chambers. Steve became CEO at the top of the dot com market peak in 2000 and subsequently was at the helm as the company lost hundreds of billions in market cap. At the time, he’d lost more market cap than any CEO in history, which was definitely not a badge he wore with pride. After Cisco went on to lose even more market cap, Steve was known to bellow “Thank god for John Chambers”.

Now Every Company Really Is A…

My stump speech seven or eight years ago included two assertions: 1.) every company is now a media company and 2.) every company is now a software company. Someone recently reminded me of that pitch and while it seems obvious today, it was definitely before its time. The globe-spanning organizational behemoths I was then hectoring weren’t buying it (but unlike with mainframe customers, I don’t think anyone ever called me “son” in the course of the conversation).

The media company prediction came out of the path we were taking with Microsoft’s developer platform business. That business at Microsoft, despite Steve Ballmer’s infamous and sweaty “Developers, Developers, Developers!!!” performances (and you should see him order lunch: “Pastrami, Pastrami, Pastrami!!!” with all credit to Bruce Ryan for not only coming up with that line, but shouting it out while Steve was in the sandwich line), was strategically important but a sideline by any quantitative metric. The developer audience had an endless thirst for content but was also very suspicious of anything that reeked of marketing. Intermediaries, particularly the press, had a tendency to water things down and didn’t always fully comprehend the topic at hand. So we started to reach out directly to the developer audience and sidestep the traditional gatekeepers.

Those were the early days of corporate blogging. We had a sign in the office showing “Days Since Last Blogging Accident” (I’m looking at you Scoble 😉 and spent too much time fighting off a prominent executive who wanted to ban blogging across the company (ironically, he went on to probably blog more sheer word volume than any other blogger ever). The genesis of Channel 9 also happened in this time, which provided an authentic and humanizing behind the scenes look at the Microsoft developer platform (it was also as much a rejection of MSDN, a CD-ROM library of developer tools that had clumsily migrated to the web, as anything else). Channel 9 also quickly metastasized into a vibrant community around that content channel. The end result is we found ourselves using cheap digital technology to program (in the TV sense) directly to our audience.

It seemed obvious at the time that everyone would be doing this soon. And this was before the rise of social media, the christening of content marketing or the fixation on the CMO as the new Great White Whale of IT, all of which have fueled the ability for anyone to be their own media business. Meanwhile, the traditional media continue to face gale force headwinds (e.g. the New York Times recently paying to get rid of the Boston Globe, which they paid over a billion dollars for not so long ago). Dan “Fake Steve Jobs” Lyons chronicles the ranks of traditional journalists taking to the lifeboats to join the corporate media ranks, a path he too has taken. There is some irony that being in the media business is increasingly attractive to everyone except those actually in the media business. Even the old line about not getting into a fight with someone who buys ink by the barrel has far less applicability when printing presses are ridiculously cheap (and the guys who buy ink have to budget for bankruptcy lawyers).

In terms of every company becoming a software company, Marc Andreessen nailed this with his Wall Street Journal essay “Why Software is Eating the World”. Software no longer just replaces older generations of software, but everywhere you look software is chewing up and spitting out enormous traditional industries. Skype finished off the long distance business. iOS and Android broke the operator chokehold on the mobile experience (“hello Mr. dumb pipe!!!”). Netflix destroyed the DVD rental business (remember Blockbuster?) and is now driving the DVD itself to extinction as a medium. Uber has pushed the taxi business to lawyer up in the absent of any other strategies for coping with change. Barnes & Noble is a case study in understanding the software threat but then mismanaging its play to the point of threatening the viability of their still profitable bookstore business. AirBnB is not appreciated by hoteliers for opening lots of vacancies. The hottest thing in cars is software that powers the entertainment system. connects with your smartphone, manages the hybrid powertrain and is poised to resurrect the slogan “leave the driving to us”. The energy revolution that has pulled the rug out from under OPEC, Vladimir Putin and predictions of peak oil owes much to advances in data analysis and visualization software. And we’ve recently learned that even the world’s second oldest profession — spying — appears to have become a vast software play.

At a time when the assumption is you outsource everything you can outside your core business, both media and software development are being in-sourced with a vengeance. You just can’t live without them.

Enter The Matrix: Microsoft’s Reorg

image

The new super-matrixed structure doubles down on “integrated innovation”, a model that has historically been tantalizingly just out of grasp from an execution standpoint. The new theory is shorter product cycles will mitigate failures of alignment across teams.

The pendulum swings to functional away from divisions that had clear customer focus and segmentation (ironically, Steven Sinofsky wins philosophically, even as he and most of his disciples lose personally).

The Microsoft org chart cartoon with guns pointed between organizations is getting a lot of airplay. It is worth pointing out it has always been the engineering organizations that had this kind of dynamic (sometimes even implicitly instigated by senior management – there was a a time when internal competition was in many ways more vigorous than external competition) and that there still are multiple engineering organizations. Windows and Office, for example, will always have different priorities, no matter what the organization.

This move elevates some of the strongest engineering managers in the company, but they will have to successfully step up to operate at a whole new level.

The marketing reorg will probably take a long time to sort out, with both new leadership and lots of people moving, which means Microsoft will likely be more internally focused than it should for 6-12 months.

I continue to believe the best, long-term strategy for the company is to proactively split itself up. This reorg of course makes that harder as everything gets mashed into one gigantic blob that will try to successfully span from your house to the warehouse, from the mom and pop shop to the Fortune 500’s top and from the wrist of your arm to the cloud server farm (Rap Genius here I come…).

One of the reasons I believe in splitting the company up is the succession issue. For the all the criticism SteveB gets (some very valid, some completely ridiculous), his are a very difficult set of shoes to fill. I can’t count the number of times I have asked people calling for Ballmer’s head who they would replace him with, only to hear crickets or worse, truly untenable alternatives offered up. This reorg doesn’t bring to light any internal potential candidates and with the elimination of the division presidents, also removes the “mini-CEO” presidential training grounds. Steve is still planning to run the company for a few more years (he has said many times he intends to stay until his youngest child goes to college and has been known to bellow “…and if the kid has to repeat a year, you get me for another year!”), so perhaps there is time to develop an internal candidate. But my guess is the next long-term CEO of Microsoft is not at the company today.

Meanwhile, some of the better posts on the reorg I have seen:

  • Hal Berenson dives deep into internal succession candidates.
  • Ben Thompson on the perils of functional organization in large companies, with the obligatory Apple comparison.
  • Xconomy doesn’t quite go line-by-line, but dissects some of the blather in Microsoft’s memo on the reorg (thereby saving me from having to do something similar). This memo is not an auspicious start for the new marketing leadership (though I suspect the writing team is not new).

Third Time’s a Charm?

So now Microsoft joins the rumored array of aspiring watchmakers.

TechCrunch mockup of Microsoft Watch

Every story includes an obligatory reference to the Microsoft SPOT watch and its FM sideband broadcast technology:

SPOT watch

Yet there was an even earlier Microsoft watch. Industry history, it turns out, predates the archives of any tech blog, even those that stretch all the way back to the early 21st century. The first Microsoft watch was a mid-1990s collaboration with Timex called the Datalink (check out this retro unboxing video, featuring a 3.5” disk and a CompuServe offer). The watch had an optical sensor on the face. You synced your Outlook calendar data to it by awkwardly holding your arm up in front of your monitor while the screen blinked madly. The technique only worked with CRT monitors, not LCDs, which certainly put a damper on its future prospects. I found mine, which is a little worse for the wear:

Timex DataLink watch

And if you go back to the 1970s, there is another famous industry watch which doesn’t even merit a Wikipedia entry, despite an industry titan’s efforts to keep it and the lessons it conveyed alive:

The Microma watch

We’ll see if the next wave of smart watches do better than the previous attempts.

A Very Targeted Tax Cut

Unexplored Territory 

We are in new territory with PC sales in freefall after a new release of Windows and, as some analysts contend, because of Windows 8. Even the Windows Vista “Vistaster” didn’t see PC sales to implode.

Discussions of Microsoft are moving beyond product recriminations to the more fundamental. The time-honored strategy of tying new businesses to the Windows mast is not working, and now the SS Windows is taking on water (if you need some frustration in your life, try Windows 8 on a old-school PC – the tablet-first approach dramatically undermines the traditional keyboard and mouse experience).

Both Goldman Sachs and Nomura’s Rick Sherlund have downgraded the stock today (Goldman to an outright Sell, Nomura to Neutral) and get into more existential questions about the company.

I have argued that Microsoft would be well served to voluntarily break itself up. It would unlock value, deliver a material strategy tax cut to individual businesses and solve the succession question.

Goldman views a breakup as ultimately unlikely but still makes it the first of four “Plan B” strategic options they present (the others are leverage offshore cash/increase debt, massive subsidies for mobile hardware to get into the game or significantly cut costs):

Are the parts worth more than the whole? Our sum of the parts analysis suggests a valuation at the midpoint of about $37.

Their sum of the parts analysis is interesting:

image

Note that Server & Tools will basically catch up to Windows in revenue this year and gets the highest multiple of any Microsoft business. Windows is the median business.

Sherlund, the once and future axe on Microsoft, weighs in on taking the company private (maybe Dell actually is an innovator and trailblazer…):

“I’d like to think you could make something happen, but the enterprise value is $200 billion. That’s a pretty big company.”

But another Sherlund comment really makes the case for breakup:

It’s all about Office. There’s so much they could do to sell Office, but Microsoft is focused on trying to sell the Windows. Office is Microsoft’s anchor. How do you compete with Google‘s (GOOG) Android? The hardware guys can produce commodity tablets in China. The lever for Microsoft is Office. But they should deliver office on alternative platforms as well. You would hurt Windows 8 traction, but where is your better revenue opportunity? There is going to be a point in time where Windows has to stand on its own because we are missing an opportunity for a big annuity revenue stream. People are learning Evernote and Dropbox. Microsoft should be pulling Skype and Yammer sales through Office.

I have always believed the Office business was Microsoft’s to lose, as opposed to some competitor being able to take it from them. But if the rumors of Office for iOS not coming until 2014 are to be believed, they seem determined to lose it. I find it difficult to believe the development hasn’t been done for a while, so it is hard to know whether it is an issue of sitting on it to try to help Windows get a tablet foothold and/or not wanting to share 30% of revenues with Apple (the Office 365 subscription model with free clients being the obvious path out of this, but it hasn’t achieved the necessary volumes to make this work well). Office is the bigger business, but Windows comes first at Microsoft and will continue to as long as they reside under the same roof.

Pushing through the strategy tax cut at Microsoft would solve a lot of problems for SteveB.

(Interesting that though the stock is down over 4% today, it is only back to Monday’s price and is still at a six month high. Makes you wonder if the insider trading game that is Wall Street knows something about next week’s earnings).