Daily Reaction: A New Microsoft; Life After Ballmer

With Microsoft’s CEO Steve Ballmer set to retire within a year, Daily Reaction’s Sebastian Moss and Dan Oravasaari discuss what this means for the American tech and software giant.

Seb: Today’s announcement has caused Microsoft’s share price to shoot up a whopping 8%, simply because investors finally know that Ballmer is leaving. So how did it get to this? Why are investors so glad to see Ballmer leave? Let’s take a trip back in time.

After joining Microsoft in 1980, as their 30th employee and first business manager, Ballmer became an increasingly important character in the company. By 1992 he was the Executive Vice President, Sales and Support, and by 1998 he was President of Microsoft. Then, in January 2000, he became Microsoft’s CEO.

Ballmer took over from Bill Gates, co-creator of the company, and of the golden goose Windows. With Gates having brought Microsoft from nothing to the largest tech company in the world, Ballmer had big shoes to fill, and the pressure was on – but thankfully Gates was helping as Chief Software Architect, and would retain that role until 2008.

One of the first major milestones to happen during Ballmer’s rule was the release of Windows Mobile in 2000, which, while managing to get over 20% of the market share of phones, would become completely decimated by iOS and Android later on.

Next up was the release of the first Xbox in 2001, although development began before Ballmer took over and Bill Gates announced it. Former VP of Windows Sales at Microsoft, Joachim Kempin, told IGN that “The main reason was to stop Sony”.

You see, Sony and Microsoft… they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

In many ways, Xbox has been a huge success – both the original and the 360 have sold tens of millions, the brand is massive, titles like Halo break all sorts of records, Xbox Live is a goldmine and they managed to stop PlayStation replacing Windows as they feared (not that that would have happened anyway). But, on the other hand, the Xbox division was a massive money drain, with profits still yet to offset the total cost. And, as with all platform holders, there is always a risk of losing everything when a new console generation begins.

2006 saw the release of the Zune. While it technically managed to last five years before being discontinued, it was never a hit, and utterly failed in its attempt to stop the iPod and halt the growth of Apple.

In 2007, things really took a turn for the worse. Investors and industry pundits were willing to overlook mistakes on new ventures, as long as Windows was ok, but Windows Vista highlighted the problems with their core business. While it was a financial success, and sold tremendously, the terrible reviews led to serious concerns.

Also in 2007, Microsoft spent $6.3 billion on buying online display advertising company aQuantive, and in 2012 wrote off the company in a shocking $6.2 billion writedown.

Later in 2007, Ballmer laughed at the idea of the iPhone:

I said that is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard which makes it not a very good email machine.

In 2010, Microsoft tried to compete with the ‘hilarious’ iPhone with the Kin phone… which was discontinued two months later. But, before I get ahead of myself, back to 2008, where Microsoft tried, and failed to buy Yahoo! for $44.6 billion, to try to fend off the online dominance of Google. Then, MS launched Bing in 2009, which has lost them billions every year.

Desperate to be competitive in a tech world increasingly dominated by Apple and Google, Microsoft tried to unify all its major branches under one touch-focused UI – Metro. The result was Windows Phone 8, an expensive failure, Windows Surface, an expensive failure, and Windows 8, which has performed below internal projections, and seen mixed-to-bad reviews.

This July 19th, Ballmer announced a $900 million hardware write-off for Surface RT, causing stock values to drop by $32 billion, the biggest slide in Microsoft’s stock since 2000 – the year Ballmer took over.

Dan: Looking at the history of the Microsoft corporation it should be clear that the company that was once the world’s leading tech developer has slipped since they went from Gates to Ballmer. The world has changed drastically over the last decade as the availability for developers to sell products has become as easy as simply designing a website or aligning with an existing one.

The Windows platform failed to notice the massive shift and influence of the digital market, meaning that they failed to capitalize on the digital music space and to understand what consumers really wanted out of a smartphone, leaving Apple to dominate both. This opening not only hurt their entry into those spaces, they left an opening for Apple to create an ecosystem that has slowly been eating away at the Windows dominated market.

As much as Microsoft tries to invest in expanding markets, their lack of foresight always seems to put them behind the technological curve. This means that the amount of money that needs to go into R&D to expand an existing market is costing them billions of dollars, and more often than not they aren’t making anywhere near that in return. Whether it is the Windows Surface tablets, the Zune or even the Windows OS, they cannot seem to understand where consumer needs are turning and always have to change direction to better align with the market. One of the latest examples of this was the infamous ‘Start’ button that was removed from Win8, only to be put back due to consumer blowback.

Now, putting all of this blame squarely on Steve Ballmer is a bit unfair, but things really seem to have slid downhill for the company on multiple levels since he has taken over. The website Mini-Microsoft, which is an anonymous location for MS employees to speak without fear of reprisal from their employer, listed a number of reactions after Ballmer gave one of their company speeches in 2011. Here’s one statement from an anonymous MS employee that really seemed to sum it up:

Windows was once an impenetrable fortress, but in the past year, [Apple] has penetrated it with a single product launch.

Not only that, it removed any remaining ability for the board and Ballmer’s apologists to continue credibly arguing that he’s competent. Even after a decade of mistakes and then losing the smartphone market that MS helped pioneer, they were still getting away with that. But the tablet loss was the final straw and now everyone can see that a decade of criticism by mini and others has been right on target. There is no plan. There is no bold strategy. There’s no magical products resulting from a decade of massive R&D spending that are suddenly about to spring onto the market and change the competitive balance of power. There’s just an arrogant, incompetent, CEO and senior leadership team that collectively failed to anticipate and adapt, got their ass kicked by Apple and Google (not to mention others), and ended up permanently diminishing the company’s competitive positioning and future prospects.

Now, if we bring this back to gaming a bit more, the other thing that is usually noted from Microsoft is their reliance on exclusive deals or purchasing developers. These are very much standard practice within the games industry, so don’t think that Sony and Nintendo don’t do the same thing. But, the difference that appears to be happening is that MS is repeating their failings from over the last decade one more time, just with their gaming division. Looking at the Xbox One and the changes that have happened since the global reaction to the DRM issues, things are simply repeating themselves, and repeating themselves.

As a way to circumvent the lack of first party titles, Microsoft is rumored to have paid Respawn Entertainment around $50 million for the Xbox console exclusive Titanfall – which is also rumored to actually be a one year timed exclusive. This method of doing business is great for their fans, as they are sure to get some big third-party titles, but is risky and potentially a financial sinkhole for the company, as they rely on studios and IPs not fully under their control. The smartest thing that MS Game Studios has ever done was pick up Bungie, but after the studio built up their name with the Halo franchise on Xbox, they split from MS and are now partnered with Activision developing Destiny – a title that is being backed a great deal by the PS4. Mass Effect, one of the greatest games/series of the generation has had its contract expire and has done quite well on the PS3, meaning MS’ initial investment didn’t really hurt the competition in the long run.

Ultimately, this means that as much as Microsoft is investing in technology or game studios to stay relevant and competitive in various industries, they are always trying to secure an immediate future and failing to secure any real longevity. The Windows OS and the Xbox systems have been their only real profitable sources in the market, and that explains why we have seen an overlap between the two – Xbox on Windows and Windows on Xbox.

Despite everything, including Ballmer’s failings, Microsoft as a company has now laid a foundation for a more connected and collaborative future, one that leverages the power of all its branches and works with others to improve their own products. Plus, with the company spending significantly more on R&D than Apple and Google combined, it is sure to have a lot up its sleeves. Under the right leadership, with someone who isn’t hated by the company’s staff, Microsoft could prove they still have it in them to finally get ahead of the curve and lead the technology and gaming industry to new heights.

What was your favorite Ballmer moment? Shout ‘Developers, Developers, Developers’ in the comments below, email us sweaty bald men pics to DailyReaction@PlayStationLifeStyle.net and get terrible investment advice by following Seb and Dan on Twitter.