Last month Microsoft rolled out Windows 7 and opened the first of a chain of new retail stores. As usual with such announcements, there's been loads of hoopla and ginned-up excitement. But mostly people are just relieved. Windows 7 replaces Vista, one of the most disastrous tech products ever. It also caps the end of a decade in which Microsoft's founder, Bill Gates, stepped aside, and the company lost its edge. (Click here to follow Daniel Lyons).
Ten years ago, when Gates appointed his longtime second in command, Steve Ballmer, as his replacement as CEO, Microsoft was still the meanest, mightiest tech company in the world, a juggernaut that bullied friends and foes alike and which possessed an operating-system franchise that was practically a license to print money. Techies likened Microsoft to the Borg on Star Trek, the evil collective that insatiably assimilates everything around it, with the slogan, "Resistance is futile."
That was then. Now, instead of being scary, Microsoft has become a bit of a joke. Yes, its Windows operating system still runs on more than 90 percent of PCs, and the Office application suite rules the desktop. But those are old markets. In new areas, Microsoft has stumbled. Apple created the iPod, and the iTunes store, and the iPhone. Google dominates Internet search, operates arguably the best e-mail system (Gmail) and represents a growing threat in mobile devices with Android. Amazon has grown to dominate online retail, then launched a thriving cloud-computing business (it rents out computer power and data storage), and capped it off with the Kindle e-reader. Microsoft's answers to these market leaders include the Zune music player, a dud; the Bing search engine, which is cool but won't kill Google; Windows Mobile, a smart-phone software platform that has been surpassed by others; and Azure, Microsoft's cloud-computing service, which arrives next year—four years behind Amazon.
How did this happen? How did Microsoft let tens of billions in revenue (and hundreds of billions in market capitalization) slip through its fingers? Hassles with antitrust regulators distracted Microsoft's management and made the company more timid. But the bigger reason seems to be that in January 2000, Gates stepped down as CEO. It's been downhill ever since.
Ballmer is by all accounts an incredibly bright and intensely competitive guy. But he's no Bill Gates. Gates was a software geek. He understood technology. Ballmer is a business guy. To Ballmer's credit, in his decade at the helm Microsoft's revenues have nearly tripled, from $23 billion to $58 billion. The company has built a huge new business selling "enterprise" software—programs that run corporate data centers. Microsoft has also done well in videogames with its Xbox player.
But the problem with putting nontechies in charge of tech companies is that they have blind spots. Gates was quick to recognize that the Internet represented a threat to Microsoft, and he led the campaign to destroy Netscape. In those days Microsoft was still nimble enough that it could pivot quickly and catch up on a rival. Since then the company has become bureaucratic and lumbering.
Worse yet, as Microsoft slowed down, the rest of the world sped up. The new generation of Internet companies needed little capital to get started and could scale up quickly. Google got so big so fast that by the time Microsoft recognized the threat, it could not catch up. With Apple, the threat was not the iPod player itself but the Internet-based iTunes store; by the time Microsoft could create a credible clone of the Apple store, Apple had the market locked down.
Meanwhile, Microsoft's core business hit a snag with Vista. Its engineers have spent three years undoing their mess; Windows 7 doesn't leap past what Apple offers, but it's still really terrific. But while Microsoft has been distracted fixing its broken Windows, yet another new crop of Internet saplings has gained root: Facebook and Twitter in social media, Hulu and YouTube (owned by Google) in online video.
And so it goes. This is perhaps why, in the 10 years of Ballmer's reign, Microsoft's stock has dropped by nearly 50 percent, from $55 to $29. (Apple shares have climbed 700 percent; Google has gone up 400 percent since its IPO in 2004.) A spokesman for Microsoft points out that the company pays a quarterly dividend and in 2004 paid out a special dividend worth $32 billion. Still, it's been a pretty dismal 10 years. Unless the company can do more than focus on the past, the next decade might not be any better.