Bloomberg News

Steve Ballmer Failed to Take Microsoft Beyond the PC

August 24, 2013

Ballmer Exits After Failing to Take Microsoft Beyond PC

Steve Ballmer, chief executive officer of Microsoft Corp. Photographer: Toshiyuki Aizawa/Bloomberg

Steve Ballmer spent his first two decades as a Microsoft Corp. (MSFT:US) manager pushing the company’s software onto 97 percent of the world’s personal computers.

He spent his 13-year tenure as chief executive officer in the failed pursuit of an encore.

Ballmer, 57, said yesterday that he plans to retire within a year, capping a career that took him from a take-no-prisoners salesman once known for bringing a baseball bat to meetings into an embattled CEO of a company that couldn’t keep pace with nimbler rivals and shifting customer tastes.

“He was a true company man,” said Tim Bajarin, president of market-research firm Creative Strategies, who first visited Microsoft when it had 28 employees in the early 1980s. “The bottom line is, he stayed too long at Microsoft with a position focused on PCs, and didn’t really anticipate the dramatic impact of mobile computing.”

Ballmer put his stamp on Microsoft by dint of his intellect, dogged pursuit of his goals and a close personal and business relationship with co-founder Bill Gates that saw the two executives complement each other’s strengths and weaknesses through Microsoft’s meteoric rise.

While Ballmer was clearly in charge, his tenure was marked by a list of missed opportunities: smartphones, Web search and tablet computing. While Microsoft built many of these products early on, it never came up with a hit. Its latest attempt to fight back, with Surface tablets, hasn’t succeeded.

Industry Shift

The company, based in Redmond, Washington, wrested control of the computer industry from International Business Machines Corp. (IBM:US) in the 1980s and made personal computing a reality for much of the world in the ’90s.

During his time as CEO, Ballmer brought Windows, one of the world’s most valuable brands, into the modern era. He was also instrumental in resolving a U.S. antitrust case that almost saw the company broken in two.

While Microsoft was already talking about a shift away from PC-based computing when Ballmer became CEO in 2000, the company has been eclipsed by Apple Inc. (AAPL:US) and Google Inc. (GOOG:US), as the industry’s center of gravity shifted to handheld computers and software served via an Internet “cloud” instead of programs installed on the PCs that fueled Microsoft’s two big franchises, the Windows operating system and Office productivity suite.

Ballmer’s tenure hasn’t worked out well for shareholders, either. An investment of $1,000 when Ballmer took over is now worth 13 percent less, including dividend returns, according to data compiled by Bloomberg. Since Microsoft’s 1986 initial public offering through the end of the Gates era, $1,000 turned into $554,464.

Terrific Energy

“Microsoft had a great run for 30 years, but it’s too much to expect somebody like Steve, who is more of a caretaker CEO than a visionary leader, to just bring Microsoft to the next level,” said Michael Cusumano, a management professor at the Massachusetts Institute of Technology, who wrote a 1995 book on the company.

Ballmer, raised outside Detroit and whose father was a manager at Ford Motor Co. (F:US), started at Microsoft in his 20s, dropping out of Stanford Graduate School of Business to join his Harvard friend Gates as Microsoft’s first professional manager in 1980. The partnership would come to define the company and led to a string of historic success.

“I’ve met Steve a number of times. He’s a great motivator, he has terrific energy, tremendous enthusiasm, and he loves the company deeply,” Cusumano said. “That energy is contagious. But Microsoft competes in a market where the competition and the pace of change is really quite fast, and if you’re not ahead of the game, then you’re likely underneath it.”

PC Era

IBM contracted Microsoft to write the software for its original PC, which debuted in 1981. Gates correctly foresaw that the rise of cheap, plentiful machines using off-the-shelf parts rather than the custom-designed computers seen in the ’60s and ’70s would shift most of the value to software. Along with partner Intel Corp. (INTC:US), which had a chokehold on PC chips, Microsoft siphoned off much of the industry’s profits.

Microsoft also dispatched Apple, whose Macintosh was considered by many users to be more elegant and better-designed. Windows PCs were cheaper, spawning a universe of software programs and add-on hardware that Apple couldn’t match. Microsoft’s sales (MSFT:US) grew 10,000-fold, from $7.5 million when Ballmer joined, to $78 billion last year.

High Octane

In the summer of 1995, Microsoft’s shipment of Windows 95 was a turning point for the PC era, complete with a theme song from the Rolling Stones and midnight lines of customers waiting to buy the revamped operating system. Five years later, Windows 2000, in versions for PCs and servers, helped make Microsoft a viable alternative to Sun Microsystems and IBM in data centers.

Microsoft’s market value soared from about $600 million when it went public in 1986, to more than $600 billion in 1999 at the height of its run.

“Microsoft was firing on all cylinders,” Jack Gold, principal of market researcher J. Gold Associates, wrote in an e-mail.

With a booming voice and physically larger than most others in the room, the tenacious Ballmer often got his way. Yet he could also be a warm and gracious host, pouring sodas for guests and recalling his days as a young Duncan Hines brownie mix manager at Procter & Gamble Co. (PG:US) Ballmer also possessed a business savvy and grasp of data that belied his brusque style.

Critical Juncture

He could also be intemperate, working himself up into a froth, including his sweaty rants onstage at company conferences. During Microsoft’s antitrust fight with the Justice Department, his “the heck with Janet Reno” comment about the U.S. attorney general didn’t help the company’s cause.

“In many ways he had a very hard job,” said Cusumano. “When Bill Gates stepped down in 2000, he left at a critical juncture,” he said. Ballmer took over from Gates just as the Internet was creating new ways of computing and handheld devices were beginning to show promise.

“All of these changes, and Ballmer, who is much more of a sales guy than a technical leader or market visionary, was left holding the bag,” he said. Microsoft had also started to splinter into fiefdoms of product groups that battled with each other instead of collaborating on hit products.

There have also been bright spots in Ballmer’s tenure. He introduced the Xbox video-game console in 2001 and turned it into a $7 billion business (MSFT:US). The Windows 7 operating system in 2009 led to widespread upgrades of business PCs at a time when hardware sales were ebbing.

Apple’s Revenge

With Microsoft awash in more money than any other U.S. company outside the financial industry, and facing pressure from shareholders to return cash, Ballmer began paying a dividend in 2003, a sign that the company was maturing. In 2004, he expanded on that, announcing the return of more than $75 billion to shareholders through buybacks and increased dividends.

Yet Ballmer couldn’t turn Windows into a popular platform for mobile computing, as Apple had with the iPhone and iPad. Apple CEO Steve Jobs -- in his second career fight against the company -- took a page right from Microsoft’s playbook, turning Apple into the hub of an industrywide ecosystem of software developers who wanted to write mobile applications for its platform.

“I don’t think anything will change at Microsoft as long as Ballmer is running it,” Jobs said in Walter Isaacson’s authorized biography, published in 2011. “They were very good at the business side of things. They were never as ambitious product-wise as they should have been.”

Falling Short

Meanwhile Google had become what Microsoft had once been in the ’90s -- a magnet for the most talented computer engineers. Google is now threatening Microsoft’s business on several fronts, including Web search and advertising, mobile software, cloud-computing and productivity software.

Windows Vista, an ambitious operating system that was years late to market and plagued by technical difficulties, met with a terrible reception by businesses and consumers when it was released in 2006.

In tablets and smartphones, Microsoft’s attempts to catch Apple and Google have fallen short. Its own Surface tablet has met with disappointing sales, and Windows 8, an operating system for tablet computers, has failed to gain significant market share on the devices. Various versions of Windows for smartphones haven’t made much of a dent either.

On the Web, Ballmer’s big initiatives -- the Bing search engine, a $6.3 billion acquisition of advertising company aQuantive Inc. that later had to be written down, and an aborted attempt to buy Yahoo! Inc. (YHOO:US) in 2008 -- have left Microsoft without much sway in the consumer space, where Google and Facebook Inc. (FB:US) now set the agenda.

“He was still too tied to the PC past to see the mobile future,” said Bajarin. “When business school cases are written about Steve’s tenure, they will point out that he totally underestimated Apple and certainly the iPhone. He didn’t take advantage of Microsoft’s own innovations.”

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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