July 18, 2012

Microsoft is Doomed

Steve Ballmer struts and frets his hour upon the stage…

I just read an article in the Wall Street Journal about how Google Apps is winning big customers away from Microsoft Office.

Microsoft is doomed.

How do I know?  Two big reasons:

1) It’s a natural law of corporate physics — the financial incentives for leaders of a public corporation simply do not permit them to allow a less profitable product to cannibalize a more profitable one.  And make no mistake — cloud-based applications like Google Apps are less profitable than de-facto monopolies like Microsoft Office client software.

2) I saw #1 happen when I was at AOL.

It was late fall 2005.  I was on the AOL.com team.  We were planning the launch AIM.com mail — AOL’s entry into the free webmail category to compete with Yahoo! Mail, Gmail and Hotmail.

We were latecomers to the game.  We knew that a “me too” product wouldn’t be good enough.  We had to leapfrog the competition with something big.

That something big was unlimited storage.

If you used your webmail like a regular heavy user we would guarantee that you would never run out of space.  It was the big claim we needed to enter the space with a bang.  We were all very excited about it.

Senior management told us that we needed to brief the general manager of AOL’s Access business, Jim, and get his blessing.  [“Access” was the group that ran AOL’s dialup and broadband package business.]

We made our presentation to Jim.  When we were done we all held our breaths waiting for his reaction.  He looked perplexed.

“Unlimited storage?  You can’t do that.  If you do, free AIM.com mail will be better than AOL subscriber mail.  Sorry.”

We made our case as best we could.  But the battle was over before it began.

The Access group delivered almost all of AOL’s massive profit.  The CEO, Jon Miller, wasn’t willing to do anything to jeopardize a fat profit stream [even if it was declining] in favor of a less profitable and highly speculative bet on free webmail and related advertising.  My educated guess was that his financial incentives were based on total profit and not laying the groundwork for a sustainable business in the future.  And Jim was in the same boat.  He was just doing his job.

We walked back to our building, heads hanging and spirits down.

“That’s it!” our group leader exclaimed with dripping sarcasm.  “Our corporate strategy is to be a strong follower!  Brilliant!”  He left a few months later for a startup in California.  My sense is he wanted to apply his talent in a place where he was allowed to build the best and coolest product he could.

I’d bet my last dollar that the same thing is happening at Microsoft right now.

The “Office 365” team [Microsoft’s answer to Google Apps] is having similar meetings with the Office team as we speak.  And similar decisions are being made.  They will always be handicapped by Microsoft’s reluctance to jeopardize the client Office cash machine.  Their best people — the people who just want to build the best product possible — will get fed up and leave.

Yep, Microsoft is doomed.  It’s just a question of time.

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  • Wayne C.

    Yupe. How many times did Bill Gates deny development of any innovative product that did not fit with Windows?

    They give this guy too much credit especially when declaring erroneous statements that a only certain amount or memory is sufficient, or the Internet is fad, desktop computing is where it is at.

    Bureaucracy is dooming Microsoft. Too many senior management that are rich stock holders hanging onto to their retirement fund. 

    It is too bad, they had developed many products and had a good tablet when Apple was still called Apple Computers Inc. and was struggling to hold 5% of the desktop market.

    • Yep.  There are precious few successful companies that are able to cannibalize their own profitable products.  Apple has done it.  But note that Apple has always cannibalized less profitable products with more profitable ones (e.g. iPhone replacing iPod), not less profitable ones.

      I really think the reason boils down to individual incentives for company leaders.  They are not paid a bonus this year for insuring company survival 5 years from now.  They are paid a bonus this year for profit this year.  Hence the inability to sacrifice profit today for long-term viability.

      Incentives matter.  A lot.  I read Bob Lutz’s “Car Guys” book last year.  Fascinating read.  Lutz analyzes what went wrong with Detroit and particularly GM.  One big problem was the incentive structure for executives.  Execs in charge of development and production of new cars were paid bonuses based on strict measurement of meeting project deadlines and coming in at or under budget.  They were not incented on the quality of the car they produced.  As a result execs swept quality and design problems under the rug and used unexciting designs with mediocre materials and styling.  They result was crappy cars that didn’t sell.  The execs got paid fat bonuses and got promoted out of that division before the failure became apparent.  When Lutz came back to GM he completely revamped the incentive structure.  The result was far better cars.  “Car Guys” is a hugely recommended read for anyone interested in management and visionary product leadership.