Remaking Microsoft

Remaking Microsoft
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Remaking Microsoft

Building Microsoft 2.0

'I'm Trying to Let Other People Dive in before I Do'

Steven Anthony Ballmer

The Five Facets of Bill Gates's Tech Vision

Q&A with the Visionary-In-Chief

Why Microsoft Shareholders Should Cheer the AT&T Deal

Remaking Microsoft
Why America's most successful company needed an overhaul

In Corporate America, does it get much better than this? Imagine a 24-year-old company still hotfooting along like some young whippersnapper. Revenues and profits are rising at a 30% clip. Income per employee is an enviable $257,000, vs. an average $17,000 for the Standard & Poor's 500-stock index. And the company has gone on a spending spree, investing in or gobbling up 92 companies in the past five years. Still, it has $22 billion in cash--more than any corporation in the U.S. Oh yeah--it also boasts the highest market cap of the lot, $414 billion.

Then why do the top minds at this amazing performer, Microsoft Corp. (MSFT), think something's wrong? Why are they neck-deep in ripping up the company's structure to create an entity that barely resembles the one that got them to the top? Look no further than Steven A. Ballmer, the new president, who--with nine months and 100 in-depth employee interviews under his belt--has concluded it's time to reinvent Microsoft. He explains: ''We needed to give people a beacon that they could follow when they were having a tough time with prioritization, leadership, where to go, what hills to take.''

Ballmer and his boss, Chairman William H. Gates III, call it ''Vision Version 2,'' a sweeping overhaul of the thinking and structure at Microsoft. As Gates says: ''The Internet has changed everything,'' and now Microsoft must change, too. The company's mantra--a PC on every desk and in every home--has grown moldy. The new rallying cry is giving ''people the power to do anything they want, anywhere they want, and on any device,'' whether it's on a PC or on a Web phone, says Gates. The most surprising part: Now, Microsoft programmers are freer to develop products that don't revolve around Windows software. Says Gates: ''It's a very big deal.''

Indeed, Microsoft already is spinning grand Web plans. In an uncharacteristic move, the software giant jumped into the takeover fray for cable giant MediaOne Group Inc. (UMG) that ended on May 5 with AT&T (T) the victor. The phone giant walked away with the third-largest cable operator, which owns fat pipes that can deliver the Internet at lightning-fast speeds into some 8% of U.S. homes.

But Microsoft may yet get just what it wanted out of its maneuvering for MediaOne: a deal to supply the software to a new generation of cable-TV set-top boxes that promise to usher the Web into living rooms across the U.S. Late on May 5, Microsoft was still in negotiations on a broad partnership agreement with AT&T that called for Microsoft to take a $5 billion-plus stake in the phone company. In return, Microsoft would get a nonexclusive contract to supply set-top software. ''If Microsoft is looking to grow, they have to look at new platforms,'' says analyst Cynthia Brumfield of market researcher Broadband Intelligence. ''The interactive digital box is the most promising new platform there is.''

DOUBLE VISION. Just as bold is another manuever being bandied about on Microsoft's sprawling 26-acre Redmond (Wash.) campus: creating a ''tracking'' stock that would give its Internet properties their full due with investors. Those assets might include Microsoft's popular Web sites such as Expedia, MSNBC, Investor, and any new cable ventures. Not only would Microsoft cash in on the sky-high Internet stock valuations, but the company could protect its cash cow, Windows software business, from any wild Internet swings.

It's an approach that gets at the complex nature of Vision 2--its split personality. On one hand, Gates wants to urge his troops on to new heights developing Windows software for PCs and servers--the core business. But he also wants his programmers to be on the Internet cutting edge, coming up with software and services that may not always be Windows or PC-based. Indeed, the differing software might even wind up competing for customers. The trick for Microsoft will be pressing on both fronts without going to war with itself.

Ballmer's plan is supposed to ward that off. A crucial piece of Vision 2 is a massive makeover of Microsoft into eight new groups that will no longer dance just to the tune of the company's technologists but to customers. Product development, budgets, and sales will revolve around different types of buyers: knowledge workers, for example, or the work-at-home crowd. If customers want software tailored just for the Net, that's what they'll get. If they want Windows with gobs of new features, Microsoft will be happy to accommodate. ''Follow the customer,'' bellows Ballmer. ''That's the No. 1 thing you do if you are at all lost.''

CHOKED ON RED TAPE. And lost is what Microsoft was becoming. While its financials have dazzled investors on the outside, inside there has been a growing discontent. As fast as Microsoft has been moving, it has not been near fast enough for the top brass. In the breakneck Internet era, where more than 10,000 new Web sites appear every day, companies are dishing up new products and strategies faster than a short-order cook. Against this manic backdrop, Microsoft had begun to look sluggish, even bureaucratic.

With 30,000 employees, 183 different products, and at least five layers of management, staffers had begun complaining about the red tape. One midlevel manager quit in March out of frustration with the snail's pace for decision-making. Last year, he suggested adding a feature to HotMail, the company's freebie Internet E-mail service, that would quickly take it's 40 million users to Microsoft's MSN sites. It would have taken about 30 minutes to write the code, he says. Yet, because of the need for consensus, it took 10 meetings and three months to do the job.

Other talent has been taking off, too. For instance, online publishing maven Peter Neupert skipped to startup Drugstore.com, browser expert Hadi Partovi left for Tellme Networks Inc., and Product Manager David Rischer left for Amazon.com. The brain drain had become so troubling that Microsoft hired A.C. Nielsen to survey former employees to find out why they left. ''The talent drain is one of the real competitive challenges they face,'' says analyst David Readerman of Thomas Weisel Partners.

POWERLESS. Some say Ballmer and Gates contributed to the problem. With decisions large and small being funneled to the top, the pair became a bottleneck. Worse, they undermined the confidence of managers below. Before Vision 2, Ballmer and Gates were involved in every decision--from key features in the upcoming Windows 2000 to reviewing the response records for the company's customer support lines. ''Senior executives didn't feel like they were in control of their own destiny,'' says Chris Williams, vice-president of human resources.

Now, Ballmer and Gates are turning that lumbering corporate culture on its ear. In the new world order, Ballmer's lieutenants are free to run their businesses and spend their budgets as they see fit--just as long as they meet revenue and profit goals. Last month, for example, the leaders of the company's new Consumer & Commerce Group invited Ballmer to a series of advertising budget meetings. He gladly attended the first one, but then quickly bailed out, saying they could handle the matter without him. ''I have to grow from being a leader to being a leader of leaders,'' he says.

Will Vision 2 work? Customers give a thumbs up to the new focus, a move they say is long overdue. And some of the newly elevated managers say they're already charged up. Robbie Bach, head of the Home & Retail Div., says that he ''feels like I am running my own little company.'' In addition to having say-so over developing products, he now, for the first time, controls a sales force.

Microsoft will need all the fervor it can get. The company is facing more challengers than ever before. In operating systems, Linux server software is coming on strong, while older rivals Novell (NOVL) and Apple Computer Inc. (AAPL) have been revitalized. After years of market gains, Windows server software actually lost share, shrinking from 36% to 35% last year, according to International Data Corp. Meanwhile, Linux' share jumped from 7% to 17%.

The company faces a host of E-commerce competitors, too--including the powerful partnership between America Online Inc. (AOL)-Netscape (NSCP) and (SUNW) Sun Microsystems. And IBM is making inroads into the lucrative market for corporate software. To come out blazing, Microsoft needs its chief weapon: Windows 2000, an industrial-strength version of its operating system that is now two years late. ''Microsoft doesn't have a huge single competitor,'' says analyst Richard G. Sherlund of Goldman, Sachs & Co. ''But the collective of competitors right now is more than a distraction.''

Perhaps the biggest threat is the Justice Dept.'s antitrust trial, scheduled to kick off again later this month. So far, Microsoft has bungled its defense and the pressure is on for a good showing in the final days. If Microsoft loses the case, which could easily drag on for two years in appeals court, the government is likely to seek stiff penalties. Legal experts say Microsoft may face limits on its use of exclusive contracts and may be forced to make Windows more accessible to rivals.

WEB LIFE. While Gates insists the suit hasn't affected his workers and has taken just 2% to 3% of his time, others say the rank-and-file are ''shell-shocked.'' ''The government has just torn them apart, but they are also not proud of how the company has defended itself,'' says a former Microsoft exec. ''It's like Microsoft is a deer in the headlights right now.''

That makes Vision 2 all the more crucial. For years, Gates has galvanized his troops by tapping out call-to-arms memos about the competitive threats ahead. When a product is released to rave reviews and soaring sales, Microsoft employees don't meet to celebrate but to do a postmortem on what should have been done better. And top executives have always lit a fire under Microsoft programmers by clearly defining the No. 1 enemy--Novell in 1994, Netscape in 1995 and 1996, and Sun Microsystems in 1997 and 1998. ''Remember,'' says Gates, ''Microsoft has a culture of operating in a sense of 'we'd better get going.'''

Gates is going now. Since Ballmer became president, he has been freed to ponder the future and what whizzy products it will bring. He has also found time to pen a new book, Business @ the Speed of Thought, that lays out how the Internet is transforming corporations. Tops on his list of new consumer technologies: software programs for what he calls a ''Web lifestyle.'' And he has gathered together his best technical minds to figure out the one thing that has stumped the industry for decades: how to make the PC as easy to use as a TV or telephone.

It's long overdue. For years, most of the company's engineers have spent their time adding features to Windows and applications. In spite of spending $3 billion a year on a research and development organization, Microsoft is still a technology follower. It spent two years catching up with Netscape Communications Corp.'s browser lead. And it's still trying to co-opt Sun Microsystem Inc.'s potentially world-changing Java programming language, which offers software programers the opportunity to write their programs once to run on any computer.

Now, Gates is intent on getting ahead of the pack. He has assembled a kitchen cabinet of techno-whizzes, including Windows architect David Cole, audio chieftain Anthony Bay, online whiz Ben Slivka, back-office builder Paul Gross, and E-commerce expert Satya Nadella. After one of his twice-annual ''think weeks'' last fall, Gates authored a memo pointing the way for the company's techies. His twin concepts of ''MegaServer'' and ''WinTone'' are designed to lead Microsoft into the vanguard of Internet computing.

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