Book Review: Disrupted: My Misadventure in the Start-up Bubble

Dan Lyons’ “Disrupted: My Misadventure in the Start-up Bubble” is laugh-out-loud funny in places, as one would expect from Dan, creator of the Fake Steve Jobs blog, comic novelist, and a writer for HBO’s Silicon Valley. But it is also an unexpectedly personal and serious book. Dan doesn’t just lob one-liners from the sidelines, but frankly chronicles his own missteps on a not-very-successful journey of personal reinvention from career journalist to marketing professional at age 52. Along the way he raises some uncomfortable questions about the technology industry.

After being “unceremoniously dumped” as Newsweek’s technology editor and a brief stint editing an economically unsustainable website, he joins HubSpot, a Boston-area marketing automation company. As Dan notes, “Online marketing is not quite as sleazy as Internet porn, but it’s not much better, either.” As if to compensate, his new employer has made “changing the world” its mantra. HubSpot turns out to be the Platonic form of the wanna-be tech company, amping every inane startup trope to 11 while neglecting the actual technology part (the company makes mediocre software with which to spam prospective customers). Most of the humor comes from simply holding a mirror up to its management (or lack thereof), “the Cult of the Orange People” culture and “adult kindergarten” workplace trappings, all of which the New York Times succinctly describes as “self-satirizing”. The excerpt in Fortune captures a lot of this.

My vote for the funniest part is the chapter about attending the Dreamforce conference and realizing that as over the top as HubSpot’s marketing antics may be, they are but a pale east coast imitation of Salesforce:

“There’s an art to this kind of horseshit, and Benioff is its Michelangelo.”

“Now, here in the Moscone Center, the P. T. Barnum of the tech industry is giving a master class in how the game is played.”

“Sure, Benioff is full of shit, but so are we, and Benioff is way better at being full of shit than we are.”

(Note to Dan: don’t rule out Salesforce as a future employer. Seriously).

Wrapped within that tortilla of humor, the book contains two meatier critiques of the technology industry, with HubSpot as poster child but hardly the only offender. One is labor practices that both exploit younger workers (who seemingly are easily distracted away from the size of their paycheck) and cast older workers in a remake of Logan’s Run, with no discernible happy medium between. As a guy who was twice the age of the average employee at HubSpot, Dan experiences the ageism firsthand (plus the CEO of HubSpot is dumb enough to advocate it in a New York Times interview). He also takes aim at tech companies that never make a profit yet whose founders and early funders do extremely well, even if no one else does. “Grow fast, lose money, go public, get rich. That’s the model.” While the book has precipitated some discussion about tech’s treatment of both the young and the olds, not so much for the second topic.

But the book has become a circus unto itself, beyond the one featured in its pages. Fulfilling every author’s wildest promotional fantasy, HubSpot executives evidently tried to obtain a copy of the manuscript before publication. This led to the CMO/co-founder being fired by the board, the CEO “reprimanded”, another executive quitting before he could be fired, all with a chaser of an investigation by the FBI. HubSpot utilized a tone-deaf PR strategy of stonewalling that will surprise no one who has read the book, only allowing that there was “some fishiness” and “really aggressive tactics”. The FBI characterized those tactics as possible extortion and hacking, although they ultimately didn’t press charges. Dan has yet to get an explanation of what they tried to do to him and wonders whether he missed some bigger malfeasance HubSpot was worried would be uncovered in the book.

Reactions to these events have added to the spectacle. HubSpot sympathizers and Boston tech fanboys rallied around the company and basically acted like the Patriots fans most of them are (i.e. the type who would loudly maintain Tom Brady’s innocence – and deity status — even if he were convicted of multiple felonies based on incontrovertible evidence and a full confession). Outside of Boston, VCs who never miss an episode of Silicon Valley were disdainfully harrumphing on Twitter that they had no plans to read the book. How dare he mock these noble entrepreneurs busy changing the world? Struck a little too close to home perhaps, but it underscores the need for an alternative playbook for those companies that aren’t, in fact, “changing the world”.

I’d retain at least a modicum of sympathy for HubSpot and the ridiculous company they have created except that even after all this they’re still out hyping their culture and belief in “radical and uncomfortable transparency”. No acknowledgement whatsoever — much less explanation – of how that vaunted culture led to executive dismissals and an FBI investigation. Or how to reconcile their stonewalling on the whole episode with that deeply held commitment to transparency.

Ballmer vs. Chambers: A Corporate Cage Match

Amidst adding Cisco to Dinosaur Row, I asked someone “If Steve Ballmer got run off by Wall Street, how does John Chambers still have a job?”

Both are/were long-tenured, non-founder CEOs of two of the biggest technology companies. Both have presided over erosion of prior dominance during the course of the 21st century, even as revenues and profits kept growing. Neither has been shy about making sweeping calls about the future, yet their predictions have stubbornly refused to come to pass. Both found themselves increasingly reacting to rather then driving key industry trends (although Ballmer will eventually get credit for not missing cloud computing, which is coming for Cisco, even as Chambers continues to ply ye olde enterprise playbook in response). Ballmer’s tenure as CEO began January 1, 2000 while Chambers took the CEO chair in January 1995.

I’ve related this story before, but Steve was acutely aware of the consequences of taking office almost exactly at the top of the dot com bubble. He would bellow, not proudly, that “I’ve lost more market cap than any CEO in history”. After a couple years, he could amend that with “Thank god for John Chambers”.

Lets look at their performance during their shared tenure (January 1, 2000 to February 4, 2014). Revenue and profits are generally up and to the right, but stock performance is negative – presumably their future performance was already priced into the stocks. Microsoft’s total return is better with all the dividends, but still in the red over Ballmer’s tenure.

Total Return: Advantage Ballmer (Microsoft -15.3% vs. Cisco -56.8% )

CSCO Total Return Price Chart

CSCO Total Return Price data by YCharts

Market Capitalization: Advantage Ballmer (Microsoft -49.7% vs. Cisco -68.2%)

CSCO Market Cap Chart

CSCO Market Cap data by YCharts

Revenue Growth: Advantage Ballmer (Microsoft +333.5% vs. Cisco +156%)

CSCO Revenue (Quarterly) Chart

CSCO Revenue (Quarterly) data by YCharts

Profit Growth: Advantage Ballmer (Microsoft +175% vs. Cisco 75.12%)

CSCO Net Income (Quarterly) Chart

CSCO Net Income (Quarterly) data by YCharts

Bigendian Suit: Advantage Chambers

John Chambers, chairman and chief executive officer of Cisco Systems

(A picture of Steve in his red v-neck sweater — or worse, forthcoming Los Angeles “America’s Team” Clippers garb — is omitted as a matter of common courtesy).

Now you may say “but lets look at Chambers’ full tenure”, as he assumed the big boy chair five years before Ballmer. And you’re welcome to do that, even in our what have you done for me lately culture, but the record is uglier than that of the much derided Microsoft (I won’t even start digging up all those acquisitions everyone has rightly forgotten about). Will Chambers declare victory and head for the exits before the future pain becomes more evident at Cisco, or will he overstay his welcome until the hounds of Wall Street start baying for his head? Stay tuned. And then we can have a discussion about whether Cisco’s next CEO should be a product guy or another sales guy…

Dinosaur Row

IBM’s cloudy predicament is now widely understood.

BusinessWeek made IBM’s existential crisis a cover story (a concept that doesn’t really exist any more if you read the publication online):

Bloomberg Businessweek (US)

Forbes then called out recently departed IBM CEO Sam Palmasaino for his financial engineering shenanigans with “Why IBM is in Decline”. Cringely went one better with the full Gibbon in his new book “The Decline and Fall of IBM”.

To which I say, welcome to the club!

IBM employees have been crawling out of the woodwork over the last year to defend the holy EPS roadmap (even as Wall Street tells them “um, you might stop the financial engineering games and optimize for survival at this point”). While I have listened patiently, not a single Big Blue booster made an argument based on their product portfolio or confidence in their ability to innovate or adapt. They have a bad case of assuming past performance guarantees future survival.

The most compelling argument I heard from any IBMer was “Well, at least we’re not HP”. HP is in a similar situation as IBM, except a few years behind. On the plus side, HP has less software legacy (there are positives to not being a software company period). I’m waiting for HP to buy Rackspace as their SoftLayer-like “Hail Mary”, except paying more and doing it a couple years later due to the need to rebuild their balance sheet “autonomy”. But a wise man once told me “life is too short to work with HP”, so enough about them. Unlike some other vendors, I don’t think anyone really cares whether HP make the next transition or not.

The storm clouds of creative destruction blow not just in Armonk and Palo Alto. Things also look blustery in San Jose, home of another dinosaur: Cisco (or as I like to call them, “the IBM of networking”).

Cisco has many parallels to IBM:

  • Revenue has plateaued and oscillates between flat and down.
  • Competitive threats abound including fundamental technical and economic disruption.
  • They can’t innovate and have relied on buying R&D for even longer than IBM and to a greater degree.
  • Lots of acquisitions that haven’t had much discernable impact. One can argue IBM has done better with its acquisitions, where they at least milk the installed base for revenue even if the acquired products go immediately into maintenance mode.
  • They have lost the leading edge customers who prefer to build their own switches or rely on other vendors.
  • Their biggest customers may face an existential threat by continuing to rely upon them, facing competitors who don’t have that legacy dependency.
  • Their core competencies have shrunk to browbeating the press (and watch the press pay it back that the dam has finally broken on IBM after years of oppression) and manipulating Wall Street expectations (revenue only down 5.5% – it’s a beat!!!).
  • They are dismissive of the threats they face (a la “it is early days for cloud”) and take their survival and market position for granted.
  • Their product efforts focus on trying to pull innovation back into the old way of doing things (see Cisco’s ACI, which kind of misses the whole SDN point).
  • They believe they can play with the big boys in cloud but on a bonsai budget. Cisco’s Intercloud is another “multi-year, one billion dollar investment” in cloud capex that amounts to about six weeks of Google’s capex spending.

Cisco is flailing all over the place when it comes to communicating their strategy:

  • Competitive bluster and/or schizophrenia: they plan to “crush” VMware who is “enemy number one for Cisco” (but also maintain this SDN thing is not a big deal…). Yet VMware doesn’t even make their slide of competitors today or in 2018, when it seems they plan to compete exclusively with the cream of the late 20th century NASDAQ:

Cisco competitors prediction

  • Misdirection and/or distraction: “Hey, look at this $14 TRILLION dollar market over here. It isn’t just the Internet of Things, it is the Internet of Everything!” I’m a big believer in the Internet of Things (hold the “Every”) but am hard-pressed to understand what Cisco is going to do to capture any disproportionate part of that. Cisco’s IoT executives are so impressed with the opportunity they keep bailing out.
  • Safety in numbers: they would like you to believe their challenges are not unique to Cisco, but plague the whole “industry” (aka Big Old Tech with no appearances from the companies taking share). John Chambers forecasts “brutal” times ahead and provides this handy chart by which to track his self-selected cohort’s misery:

Cisco Chambers Keynote 5 Tech Revenue

Cisco picked the right peers with HP and IBM (aka Dinosaur Row), but Microsoft and Oracle are in a different class as I am sure this time series will prove out over time. We’ll be tracking the “Chambers Chart” going forward.

Small Blue and the Bonsai Datacenter

Bonsai by Andreas D., on Flickr
Creative Commons Attribution 2.0 Generic License  Via Flickr

IBM today announced new datacenter investment plans to bolster its cloud computing presence. They’re going to spend $1.2 billion to build 15 new datacenters (seen above, lower shelf). After some consultation with the Twitterati on matters of long division, it appears IBM is going to spend a whopping $80 million per datacenter. That may sound impressive until you consider that the big boys in cloud can spend half a billion or more per datacenter. Google’s most recently reported quarterly capex was $2.29 billion.

Perhaps IBM is has some special sauce that lets them go toe-to-toe with the big boys on the cheap? If so, they haven’t bothered to mention it and they’re not known for their low costs or frugality. I for one am disappointed IBM has stifled its usual impulse to pitch the mainframe as the obvious choice for the workload de jour. Surely there is a story to weave about cloud computing bringing the industry back to its timesharing roots, blah, blah, blah, mainframe uber alles? Or maybe they’ve beaten their heads against that wall enough to knock some sense into them.

In the absence of special sauce, it seems more likely that IBM is either confused about what it takes to play in the big leagues and/or lacks the financial resources. They continue to confuse cloud computing with web hosting. Do they really believe their Amazon depositioning is relevant or is it just an attempt to muddy the water? What does IBM say when Amazon utters the letters C, I and A? IBM also has real constraints on their ability to invest due to their prioritization of financial engineering over engineering engineering.

I will offer IBM some free consulting for their next big initiative to help them come up with some differentiation and a storyline beyond how much money they are going to spend. What are the odds that they find themselves budgeting a billion dollars for almost every initiative? (The way we knew they had given up on AS/400 was when their grand revitalization initiative was only backed by $125 million). “One billion dollars” has been the only page in their marketing playbook for a long time. Had I more time and dedication to the cause, I would collect all the “one billion dollar” announcements and assess their subsequent market impact. Because this is capex (and because it isn’t a round billion dollars), the $1.2 billion number is probably a real number unlike most IBM investment numbers. But there is at least one real billion dollar number for IBM and that is their Q3 revenue miss.

Various evergreen belittlements aside, IBM seems to have woken up to the reality of cloud computing and the existential threat it poses. The “it is early days for cloud” speaking point seems to have been retired. They’re overreaching and flailing around with announcements and advertising. but are at least trying to get into the discussion. But they still face an extremely difficult road. IBM’s ability to develop technology (the engineering engineering thing) has atrophied (“SmartCloud? Just kidding…”) and letting others do the technology development is risky (e.g. taking an OpenStack dependency in the absence of controlling your own destiny is looking a lot riskier). And IBM is operationally unproven across multiple datacenters. It is easy to needle AWS for outages, but another to avoid outages yourself. The real question is would anyone notice an IBM outage. Finally, IBM is constrained financially relative to the competition.

Many financial observers assume that because IBM is one of the few technology companies to have survived multiple generational technology transitions, they will successfully traverse this one as well. Past performance is definitely no guarantee of future survival in technology and IBM’s past transitions are notable exceptions to the broader industry history. And this transition is different in that the workloads in play are core workloads for IBM. With the minicomputer and PC transitions (the later of which was near fatal to IBM), the workloads in question were mostly net new and didn’t directly replace mainframe workloads. The cloud is taking core workloads, so even if IBM executes well and moves existing customers to its cloud, they will take a revenue and margin hit.

IBM is damned if they do, damned if they don’t. If they accelerate the move to cloud, they will undercut their existing business and miss their sacred financial roadmap. If they don’t, everyone else will partition up their existing business. Maybe they can thread that needle, but IBM has not shown any reason to believe they can successfully catch up to and compete with the leaders in cloud computing. Bonsai datacenters show IBM wants (or needs) to compete on the cheap.

A Dispatch from Cloud City

A few end of the year observations from Cloud City (aka Seattle):

Cloud City, Bespin by TK769

Image via TK769

Cloud Infrastructure

  • AWS remains a beast. Yet a chink in their armor is emerging…
  • Azure has become the clear challenger to AWS. The much maligned Mr. Ballmer is not getting credit for Microsoft’s embrace and execution on cloud. Unlike most of its cohorts rooted (mired?) in previous generations of technology, Microsoft is well on its way to making the cloud transition.
  • Despite very strong technology and an impressive operational footprint, Google Cloud Platform is still a hobby for Google. They are as yet unwilling to make the necessary non-technology investments to really compete to win here.
  • Private infrastructure clouds just aren’t happening – instead enterprises are both getting more comfortable (surrendering?) with public cloud and continuing to invest in virtualization (VMware obituaries were definitely premature).
  • OpenStack’s identity crisis is warranted. Without a credible ecosystem of OpenStack-based public cloud providers and little enterprise private cloud adoption, the OpenStack bandwagon is left providing ingredient technology to the industry itself, which doesn’t really need what the vendors are selling.
  • Rackspace’s OpenStack bet outcome is increasingly clear: they may not exit 2014 as an independent entity. They should have invested up the stack in higher value services like Amazon, not down (and to add insult to injury, I’ll wager their VMware business still is bigger than their OpenStack business). They’ve lost over half of their market cap this year. While they still sport a premium multiple, the overall trend is towards a SoftLayer kind of valuation which could put them in play for acquisition by the kind of legacy vendors who confuse hosting with cloud (isn’t HP out telling the world their balance sheet has finally recovered from Autonomy?).

Cloud Platform

  • PaaS is still a zero billion dollar category, but could PaaS end up being the level at which enterprises implement private cloud? I see more traction for PaaS than IaaS in the enterprise.

Big Data

  • In the absence of a strong set of customer successes, I think Hadoop may be spending some time in the trough of disillusionment. The challenge is not filling the data lake, the challenge is extracting meaningful and material business results from the lake. It is a data science problem far more than an infrastructure problem. How long will it take to transition to a Hadoop 2 that is robust, deployable, performance, has ecosystem support, etc.?
  • I continue to be amused that Google is so far ahead when it comes to big data that it is a material disadvantage for them. They get dismissed as proprietary while the rest of the industry is enraptured with Google’s technology from two generations back that has been awkwardly laundered through Yahoo.

What else is happening below the clouds on the ground?

Dinosaur Down: IBM’s Q3 Earnings

Scene: Armonk, New York

The earnings release speaks for itself (love that typeface – they must still do press releases on a Selectric typewriter in the IBM museum), but a few comments:

A billion dollar (as in $1,000,000,000) miss on the top line. Everything in varying levels of freefall, led by the swan dive of the hardware business (Power Series down 38%!). After a decade of the consistency so prized by Wall Street, that is three misses in a row for IBM and six straight quarters of declining revenue. Yet they beat their EPS number (modulo “other stuff”) and recommitted to the EPS roadmap for the year. Somehow, profits keep going up even as revenue declines (key contributor: a materially lower tax rate).

The earnings release in a nutshell: “Growth markets revenue down 9 percent”.

Cloud is starting to bite IBM and as I have noted, they lack a relevance amidst generational change. The company made some more detailed yet meaningless claims about cloud revenue. As with Q2, “cloud revenue up more than 70 percent year to date” but with no definition of what constitutes cloud (last week they were out making a distinction between “cloud-enabled” and actual cloud services). They did break new ground and say “$460 million is delivered as a cloud service” which presumably is mostly SoftLayer. Most glaring, IBM still doesn’t seem to have any material customer references, either in terms of the cloud technology being consumed or in terms of business impact.

IBM’s fundamental problem: they supply those being disrupted by technology, not those doing the disrupting. Today an IBM dependency can be an existential risk.

Exploring Alternative History

Tablet circa the year 2000

Bloomberg has a nice piece revisiting the broad vision Microsoft laid out in June 2000 at the grandiosely named Forum 2000. They even have an edited cut of some of the scenario videos developed for the event to bring the vision to life.

The event was originally scheduled to open the new millennium in January with a bang and more importantly to lay out Microsoft’s vision for the 21st century. The company felt intense pressure to reassert its thought leadership on at least three fronts. Microsoft, by virtue of being a business with actual profits, probably had an even greater relevance problem during the height of the dot com mania than it does today. Second, the unrelenting antirust assault on the company was building to its climax and the company desperately wanted an alternative narrative. And, largely forgotten today, the company was very concerned about demonstrating it would not lose a step in the transition to its brand new CEO, one Steven A. Ballmer, who had just taken the reins from Bill Gates.

The event was pushed from January to March and then ultimately June because the dates kept overlapping with antitrust rulings. That event kicked off a train of events that lead us directly to Microsoft’s current situation and the search for a new leader. It definitely provides a glimpse of a different trajectory for Microsoft over the last decade.

The original process to define Microsoft’s forward vision was through a set of technical committees made up of Microsoft’s best and brightest technologists. Despite high hopes and leaks to the press that such a process was under way, this approach was pretty much a complete bust. As that became apparent, Steve asked Paul Maritz to oversee an effort to pull together a compelling vision for the company. Paul described this exercise as “creating a new parade”.  A small and fairly eclectic group was formed of people from across the company but largely outside the engineering ranks. We sketched out the broad attributes of what things going forward would look like and then five sub-teams were tasked with making this brave new world come alive for consumers, small business, enterprises, knowledge workers and an end-to-end healthcare scenario that illustrated what developers would be able to build. Each group scripted and then shot professional quality videos from the user perspective.

I don’t think people appreciate how close Microsoft came to completely imploding in 2000. Employees woke up every day to relentlessly negative headlines from the DoJ case. It was not yet evident that the surreal world of the dot com bubble had ended, and even if you weren’t being wooed daily to join revenue-less startups with ridiculous valuations, you felt obligated to explore options.

Forum 2000 changed all that internally. It provided a sense of purpose and showed how the whole could be greater than the sum of the parts. Soon after Forum 2000, Mark Lucovsky, one of the key contributors to Windows NT, the inventor of Win32 (he also likes to brag he invented “DLL Hell”) and one of the company’s distinguished engineers, showed up with an architecture to make the Forum 2000 videos real (the ability to actually implement had not been the foremost consideration in painting the vision…). This lead to .NET My Services (aka hailStorm) which was announced in the spring of 2001.

.NET My Services was a cloud-centric model using web services to deliver consistent, personalized experiences across a wide variety of devices (including non-Microsoft devices – the very first device demonstrated was a Palm). It was also an API-first model, which meant any endpoint could access the system (this is an approach the Facebooks and Twitters claim, but regularly violate in the name of “protecting the user experience” which really means protecting ad revenue). It was a major departure from Microsoft’s traditional PC-centric platform and also introduced a subscription business model as opposed to the traditional license model. It was an open platform accessible from any device or service through open XML-based protocols but could be bootstrapped using Microsoft’s vast footprint of devices, applications and services. It represented a fundamental shift to a service-centric world, both technically and in terms of business model.

By 2001, it was clearer that the dot com mania had been a giant bubble and wasn’t coming back, plus the appeals court ruled that Microsoft would survive the antitrust proceedings intact. The confidence stemming from these positive external factors, however, ultimately undermined Microsoft’s desire to invest and realize the new vision.

Competitors like Sun Microsystems, no doubt horrified that their years of lobbying had failed to hobble the company, now faced a revitalized Microsoft with a vision for the future that was compelling to customers and driving the industry discussion. When they probably should have been figuring out how to save a business shackled to the dot com ship, Sun embarked upon a very effective campaign of demagoguery around Microsoft leading the shift to a user-centric model. As a result, My Services ushered in the first big industry debate around identity and privacy in the cloud. In retrospect, Microsoft’s personal computing heritage and fundamentally user-centric approach to give users full control over how their data would be shared looks vastly superior to today’s world administered by the almost interchangeable Big Brothers of Facebook, Google and NSA.

With the competitive and existential threats from dot coms and the DoJ having abated by this time, Microsoft chickened out on seeing it through. It was easy to back down from the industry debate over identity, shirk the challenges of figuring out the subscription service model and revert to the comfort and familiarity of good old Windows and Office. Harvard Business School later did an interesting case on the tensions between the old and the new camps inside the company and how it played out.

I don’t think it is widely appreciated that WinFS was born of a desire to realize the My Services scenarios, but to do it in a Windows-centric way. There was broad agreement on the importance of the scenarios, but strategic nostalgia for Windows resulted in the company trying to rethread them through the franchise and revisit the eternal dream of integrated storage. Instead of the truth being in the cloud, the truth would reside on Windows and everything would have to sync with your PC (just don’t turn your laptop off…). This decision triggered a sequence of events that directly brings us to the present day where the erosion of the Windows franchise played no small role in Steve Ballmer’s departure,

My Services was shut down, with CTO and WinFS cheerleader David Vaskevitch dismissively telling the team the company “didn’t need another $500 million business”. The fixation on WinFS technology brought down Longhorn, the release of Windows scheduled to follow Windows XP. Simply put, WinFS was too ambitious technically. After much internal debate, Longhorn came to an end with the “Longhorn Reset” whereupon the company embarked on the far less ambitious Windows Vista (and WinFS was never to be seen again, although I have flashbacks when I listen to the Hadoop guys talk today). However, given it had been over five years since Windows XP had shipped, the company felt pressure to rush the product out the door to meet obligations to customers who had paid for a new version of Windows as part of their enterprise agreements. Hence the “Vistaster” of shipping a half-baked version of Windows.

The company then spent three more years cleaning up the quality, performance, haphazard user experience and packaging of Vista, resulting in the very solid Windows 7, but failing to move the PC industry forward in any material way during that time. Windows XP remained the most popular version of Windows and Microsoft was forced multiple times to extend the end of life of Windows XP by a customer base that was just not compelled by multiple subsequent releases.

Meanwhile, iPhone and iPad (and imitators like Android) were in market and Microsoft’s Post-PC nightmare was looking very real. The company decided to focus Windows 8 almost exclusively on tablets, hoping to pull the tablet category back into the PC universe. Except that didn’t happen. Windows 8 on tablets received mixed reviews. Surface was a costly mistake, both financially and in its impact on critical OEM relationships. And it screwed up the desktop experience for billions of PC users (one senior Microsoft executive told me Windows 8 was only for tablets, but didn’t answer my question of why they neglected to mention that in the advertising). Which brings us to the present and the search for a new CEO.

In retrospect, this sequence of events is crystal clear in a way it never is in the fog of the present. Even with greater commitment, there are a million other ways the Forum 2000 vision could have gone wrong. Parts of the vision were dead on, others such as assuming tablets would rely on a stylus were big misses. It was still predicated on bootstrapping from the current Microsoft installed base, which would force a myriad of tradeoffs between old and new every day. There were major business challenges to overcome in building a successful subscription business, particularly as the Google advertising revenue volcano was just beginning to erupt. Microsoft subsequently spent years drooling over the prospect of hundreds of billions of dollars of advertising moving online, without fully internalizing that capturing those revenues would require behavior that was in many ways antithetical to the personal computing ethos at the core of the company. The good news is the rise of the tablet kept Microsoft from turning Windows into an ad-funded desktop billboard monstrosity.

The Price of Success

And of course, Microsoft faced the innovator’s dilemma in spades. The last decade of Microsoft’s history is a classic and very public case study on how a very successful company deals with disruption (disruption it knows is coming). The dissipation of the Forum 2000 vision was very much the result of a battle between seemingly reactionary forces exercising their fiduciary responsibilities and the hazy dreamers of a less distinct and unproven future. The counter-revolution obviously prevailed, at least temporarily.

Some have even argued that Microsoft did the right thing by maximizing Windows profits for as long as it did (and is still doing even though Windows profits dipped slightly below $10 billion in the last fiscal year). Horace Dediu’s recent podcast “The Limits of Executive Power” has an interesting take on this (and smart commentary recently on Microsoft is hard to find):

We begin with a defense of Ballmer for preserving great things, continue by condemning him for not having destroyed those very same things and end by asking whether anyone could have done the right thing.

The Innovator’s Dilemma came out in 1997. We all read it at Microsoft and were looking for disruption behind every tree. Discussions about the need to cannibalize Windows before someone else did have been going on for at least 15 years. And in the meantime, the company has banked profits from Windows alone in excess of $100 billion (I have not done the actual math but the number is of this order of magnitude). Clearly undermining that profit stream proactively 15 years ago was the wrong thing to do, but how should the company have avoided its current situation? The company invested in pretty much every kind of non-PC device including smartphones (Microsoft was the leader in this space as recently as 2006), tablets (albeit with styluses) and a bunch of goofier form factors.

I believe the fundamental problem was the unwillingness and/or inability to transcend the single device (UPDATE: I should make explicit that this is a reference to Tim O’Reilly’s popularization of Dave Stutz’s farewell from Microsoft missive which was written after the My Services experience). Microsoft had the vision and means to both lead the industry and bridge its existing businesses to a cloud-centric, multi-device world, but failed to follow through. Now it finds itself belatedly embracing this model but from a disadvantaged position. It is yet another technology industry example of innovations conceived in one place being successfully commercialized elsewhere that lacks the baggage of the conceiver.

Near the end of my tenure at Microsoft, I was in a meeting with a cast of thousands. One of the presenters said “we wouldn’t want to do another hailStorm”, expecting all the heads in the room to nod in unison. The SVP in the room turned to me and said “we should have done hailStorm” to which my answer was “damn straight”. The rest of the room was aghast. I suspect this viewpoint is not as contentious now, even at the board level. Success can be a bitch.