MSFTextrememakeover

Saturday, February 23, 2008

Awooga, Awooga... Abandon Ship!

What do you do when you find yourself aboard the USS Caine and unable to locate enough fellow deckhands willing to stage a mutiny? Why, abandon ship of course. And that's what MSFT shareholders have been doing - in droves. I wonder if Ballmer is holed up somewhere right now, in front of the Board of Directors, with a scene like this playing out? Okay, maybe not. Must be my excitement over the upcoming Academy Awards talking. Reality is probably more like Alfred E. Neuman's "What, Me Worry?" anyway.

Meanwhile, MSFT shareholders are paying the price - a $73,000,000,000 tab in just the past three months ($85B if you go back to the peak in Oct.). Of course, some of that was the mysterious inability of the stock to hold its rally coming out of the strong earnings report - something that had already gotten my spidey senses tingling and waiting for the inevitable "bad news" shoe to drop. No way anyone knew something was up in advance, right? Like say, YHOO's and MSFT's M&A advisors from Wall Street? But if you want to explain that away as just market related, compare and contrast how HPQ fared in an equally bad environment following their strong report (I'll come back to them later). Then you have the market meltdown itself, which is responsible for a good chunk of the loss. And finally you have the massive fallout from the YHOO deal. A few billion here, another few billion there, $40B+ on top of that, and pretty soon you're talking serious money.

Consider the implications, for a moment, that if I left you with just two clues: "MSFT" and "$27.68" (it actually hit $27.20 intraday), I could be talking about 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, or now 2008. That's right, the stock has hit that level at some point during each of those years. How can anyone still be a CEO with a track record like that?  Ballmer is like a small child who, having been told not to put their hand on a hot element, continues to do so anyway. Only in this case, it's our hand that repeatedly gets burned. Or - at the risk of belaboring the point and overextending the child analogy - maybe he's like the teenager who wants money for a home recording studio because he decided on a whim that he's the next Ray, or for a boxing ring in the back yard because he's convinced he's the next Rocky, or for a big-ticket plane to park in the driveway because he watched Top Gun and figures he could be the next Maverick. All of which end up going to waste, due to the subsequent half-assed dedication and limited attention span.

Funnily, this post was originally going to be about how maybe, just maybe, Microsoft was finally getting past the denial stage it has been in for most of this decade, and starting to acknowledge - and even get serious about attempting to fix - its many obvious problems. Now admittedly, you had to make like Andy Dufresne in The Shawshank Redemption and swim through a river of [MSFT executive and pr] crap to get there - truth still being anathema to current management. But there had been a series of moves recently that struck me as atypical: the YHOO bid - no matter how ill-advised (confirming that MSFT's Online efforts have failed miserably), the Danger acquisition - no matter how costly (acknowledging that Windows Mobile is being clobbered by the iPhone in the consumer space and is now at risk to even stay an also-ran in the business market, despite nearly a decade of investment), Ballmer admitting to having had "fits and starts" in the Xbox business (translation: it has been one ginourmous clusterf$k, which looks to be getting worse not better), several executive departures in areas that are all clearly struggling - dare I say some long overdue executive accountability? (I would even have entertained right-sizing the exec ranks, if it wasn't for the fact that they promptly turned around and minted even more VPs via promotions. Gotta keep that agility-sucking "top 500", er... "top 800", er... "top 1000", 1200?, in tact), and finally - gasp! - Ballmer acknowledging that AAPL is kicking MSFT's butt and that they need to do "more to market Windows" (wow, and that only took a few years of AAPL bombarding the public with Windows-bashing ads and increasing their marketshare at MSFT's expense).

FWIW, I attributed all of this to either fear (i.e. MSFT has seen the future and doesn't like the view) or MSFT management finally getting sick of being a punch line for most of this decade - the edge going to the former (not that it much matters if the end result was achieved). But somewhere along the way I started to doubt my entire premise. Maybe I just saw what I wanted to? Which is why you're getting this post instead. After all, what right-thinking management team with problems like those below, would turn around and make a huge offer to buy someone even more screwed up?:

Windows

Home Server

Live

Office/CRM

Xbox

Zune

Online

Mobile

Marketing

Legal

And that - believe it or not - is just a quick sampling. Wouldn't it be an idea to maybe get your own clearly dysfunctional and threatened house in order first, before embarking on trying to clean up someone else's? Is there any doubt that management's credibility would be higher, and the market would be responding more favorably to the proposed deal currently, if that had been true?

Ballmer, imo, has one opportunity to get things back on track. Given the hostility of the YHOO Board to the offer, the list of good people jumping ship or being pushed, the severance programs being put in place that would add billions more to the cost of this already insanely valued deal, its declining share in search, recession risk in this space broadly, and the clear message being sent by MSFT shareholders, Ballmer should revoke the proposal. Just sail away. Chalk it up as a somewhat successful ramming of an enemy cruiser (even if you had to disable, at least temporarily, a few of your aircraft carriers to do it), and leave them to sink via additional shareholders lawsuits and customer/employee defections. Maybe buy just the parts you really wanted at some future date - for ten cents on the dollar versus a 60% premium -  when they're on the block and being sold as scrap. And yes, give up your dreams of blowing up the GOOG battleship anytime soon. Like the Bismark, you let that one get built and sail out of port right under your nose. But instead of chasing it recklessly now, maybe see if you can manage to successfully maneuver your own little destroyer-minesweeper for a change, without taking on water continuously and using shareholder cash to fuel the bilge pumps. Perhaps - and I'm just spit-balling here, like Jack Nicholson in A Few Good Men - use some of those $10B's in R&D every year to actually innovate and say, eventually make battleships obsolete? Oh, and do a mea culpa to all shareholders and set about making the current MSFT the best fighting vessel it can be. 'Cause it sure ain't there currently.

Meanwhile, accepting the Oscar for best CEO is... envelope please - HPQ's Mark Hurd:

Excerpts:

It's just that the CEO who may be the best big-company operator in the country is all about making uncomfortable observations that so far have ended up being the right call for his company: Market share isn't the best goal to shoot for; even good businesses need to be examined carefully (especially their cost structures); and strategy and execution trump vision any day of the week.

(Take special note of the "cost structures" and "strategy and execution" parts)

And,

Hurd doesn't talk about the competition.

How refreshing.

He boils down the CEO's responsibilities to three tasks: setting strategy (not offering a vision); aligning operations and modeling ways to execute on the strategy; get the best team to help the CEO. "There are a thousand distractions that keep you from doing that," he says. But that's where the focus needs to be.

Pretty clearly, Ballmer has too many "distractions" as it is. The last thing he needs is another super-sized one. That said, will he be smart enough to recognize that and disengage? Sadly, I doubt it. Egos are now involved. So the silver lining is that this decision is big enough and reckless enough that if/when it goes forward, he'll either rule the ocean if it succeeds or be scuttled when it fails. And since we've seen this movie before, odds heavily favor the latter. Let's hope there's enough of the ship left by then to resurrect. Maybe Captain Hurd will be looking for a new berth by then...

16 Comments:

  • This comment has been removed by the author.

    By Blogger Vikas Agarwal, at 9:30 AM  

  • If a successful forward strategy depends on Ballmer disengaging his ego, you may as well give up now.

    By Anonymous Anonymous, at 11:03 AM  

  • Stop it...you're making me cry. Seriously...the whole thing is so depressing. I actually had a dream last night that some mystery conglomerate came up with a competing bid for Yahoo and we dropped the offer to buy them. And in my dream, the stock took off like $4 in one day on that news. My dreams are happy places, but your post just makes me want to cry. :-(

    By Anonymous Anonymous, at 11:36 AM  

  • From my blog post.
    Lets take an example that has bothered me a lot lately- Microsoft
    After refusing to pay 3B to acquire double click, Microsoft thought it was a great idea to buy Aquantive for 6B. Then paying 2B for Norwegian search company Fast was also hailed by both Microsoft executives and analysts alike. The same microsoft that implied youtube acquisition for 1.6B was not a long term investment, somehow discovered that valuing facebook for 15B is a very smart move. And now their bid to buy Yahoo for 45B which could well cost them around 55B(considering the price raise, Yahoo employee severance package poison pill, Yahoo employee retention bonuses, Investment banks and legal fee) makes me wonder how are they going to get a reasonable rate of return.
    Imagine Microsoft succeeds in buying Yahoo for 50B, to get 10% ROI Yahoo will have to generate 5B in profit, Aquantive will have to generate about 600M and Fast will have to chip in 200M. Thats almost 6B in profit per year. Currently they are creating less than 1B in profit. So unless Aquantive, Fast and Yahoo are just pieces of a jigsaw puzzle when combined create a very rosy picture, I cant help but wish good luck to Ballmer, Ozzie et al.
    http://valueinvestmentblog.com/

    By Blogger Vikas Agarwal, at 1:49 PM  

  • In the 90's, Microsoft created an internal culture where advancement went only to the "rock stars", the top 10 or 20 percent. Since Microsoft also had an outstanding ability to hire smart and capable people, who were almost all capable of being "rock stars", the result was that advancement went not to the best 10 percent, but instead to the 10 percent who gambled on the most ambitious efforts and won. People who instead focused on improving existing products, solidifying existing market positions, or taking a slow, unspectacular, but more strategic and sure, approach to opening new markets, were swept aside as "good, but not great."

    I've said this before, MSFT selected for promotion based on luck and ambition, not skill and ability. So it's no surprise that the people running the show are highly ambitious but have little skill and rely on luck to pull them through.

    By Anonymous Anonymous, at 9:41 AM  

  • An important category you might want to break-out from the OS is virtualization.

    Virtualization is another area where MS is years (even decades) behind the competition, in a technology that is rapidly becoming the battleground that reshapes corporate computing.

    Most notably, VMWare and IBM provide solutions to consolidate Windows-based application computing onto increasingly larger platforms. By changing its licensing from per copy to utilization pricing, MS can delay erosion of those revenues, but the handwriting on the wall (as previously noted) is enterprises are experimenting and spending big dollars on finding non-MS solutions, both for cost-efficiencies (economy of scale never went out of style) and stable, reliable longevity.

    Here is IBM's most recent offering:
    I.B.M. to Introduce a Notably Improved Mainframe:
    "The goal, according to I.B.M. executives and analysts, is to recast the mainframe as a nimble supercomputer in corporate and government data centers, running Web-based programs, Linux, advanced data mining and business intelligence software."

    and:

    IBM Sells New Mainframe, Challenging Hewlett-Packard
    "'The mainframe was viewed as legacy technology, but now it's consolidating new application workloads once handled by networks of smaller computers,' said Brad Day, a senior analyst at Forrester Research Inc."

    "This platform isn't for every type of workload,'' he said. ``But as some of the work done today in the H-P or Dell environment becomes more complicated, and there's a need to become more simplified, the new mainframe becomes more competitive from a pure performance and economics standpoint."

    If you read between the lines, portability of Windows-compatible apps, off of windows, is not far behind.

    As an aside, consider the managerial and technical competence of IBM (not that you personally ever questioned it) to not only regularly introduce timely new versions of extremely well architected OS and subsystems, but entire hardware computing platforms plus a global service org.

    By Anonymous Charles, at 11:01 AM  

  • Anonymous makes a very astute observation:
    Since Microsoft also had an outstanding ability to hire smart and capable people, who were almost all capable of being "rock stars", the result was that advancement went not to the best 10 percent, but instead to the 10 percent who gambled on the most ambitious efforts and won.

    When promotion criteria is mainly "who won?" mainly winning gamblers will be promoted, but as gamblers lose more often than they win, what now populates the executive ranks is mainly losers.

    Another Gates legacy stemming from not having a clue what makes for a successful company, let alone successful products.

    By Anonymous Charles, at 11:32 AM  

  • When promotion criteria is mainly "who won?" mainly winning gamblers will be promoted, but as gamblers lose more often than they win, what now populates the executive ranks is mainly losers.

    Another aspect is that promotion didn't really take multiple "wins." Overall headcount growth was so explosive, there was no time to see if Joe Hotshot could repeat his "big win" before putting him in charge of an even bigger effort.

    Looking back, there were many things going wrong that I didn't recognize at the time and in the moment. There were things that didn't feel right, but I just didn't understand why. I do understand now. It's why I'm no longer there.

    Back to one of the things our host hinted at - shareholders are bailing out. I think this is more and more common in the markets. People complain bitterly about ineffective BODs and no one holding management accountable, but I think the transaction costs of selling one stock and buying another are just much smaller these days than the transaction costs of trying to exercise ownership rights. Plus, with the rise of mutual funds, much of that ownership is once or twice removed anyway (how much MSFT do I own through my Fidelity S&P500 fund?). Mutual fund managers are even less interested in proxy fights than individual investors.

    The implications for the stock market in general are, I think, profound. And perhaps for the better in the long run. I suspect there will be significantly increased volatility in "growth stocks" (i.e. those that pay crappy dividends), as investors flee at the first sign of trouble. Companies that assume ownership is about a share of the profit will be more stable.

    So how does incompetent management ever get replaced? When the stock goes down far enough to be bought out by someone else - either another company, or a Carl Ichan type.

    I think that's MSFTs eventual fate.

    By Anonymous Anonymous, at 1:56 PM  

  • Would you care to reevaluate your comments Google's success after the events of the past few days?

    By Anonymous Anonymous, at 4:29 AM  

  • "Would you care to reevaluate your comments Google's success after the events of the past few days?"

    Not particularly, no. I could go into a lot more detail - and will if you're interested - but that's the short answer.

    By Blogger MSFTextrememakeover, at 8:27 AM  

  • Full text: Microsoft execs on Vista problems

    Words fail. Ballmer's consideration for his customers verges on depraved indifference.

    The irritation MS executives charitably express towards their own product pales in comparison to what customers express about MS in the privacy of their boardrooms and cubicles, and yet, Redmond seems incapable of relating.

    30 years of inept, indifferent, incompetent, inbred leadership, that confuses cash flow with entitlement.

    By Anonymous Charles, at 8:05 AM  

  • It was a bit of shock when Ballmer announced the corporate VP promotions on 2/14/08 that only one out of 14 was a woman. Ms Roz Ho was the lone female. Now for the good news: the promotions were all internal, outsiders were not brought in, and there was ethnic diversity.

    By Anonymous Anna, at 9:10 AM  

  • Charles,

    Reading that email thread reminded me of a few things I remember from my days in Windows (I left after Vista shipped).

    1) Jim Allchin was was smart and had good judgement when he applied it, but he was usually so totally disconnected from the division he was supposed to be leading that it didn't matter. He was always a day late and a dollar short.

    2) Will Poole was in way over his head. I was never quite sure how he got where he was. I was obviously wrong about him in one respect though - I thought he never did anything. Clearly, he managed to do something. Too bad it was a disaster.

    3) Management tendency is to get caught up in deals and "cross-group" (or in this case, cross-company) collaboration and lose sight of the actual product and customers. I think this is a result of PMs taking over from the real engineers.

    4) Jon Shirley was a huge asset as a day-to-day executive. If the company decided to can Ballmer and needed an interim CEO while looking for the real new guy, Shirley would be a great choice.

    By Anonymous Anonymous, at 10:46 AM  

  • 3) Management tendency is to get caught up in deals and "cross-group" (or in this case, cross-company) collaboration and lose sight of the actual product and customers. I think this is a result of PMs taking over from the real engineers.

    Agreed. Inability to focus and deliver seems de rigueur for MS management. They certainly don't hire and promote based on (positive) track record, in fact 'twould seem the opposite.

    PM's need to report into development and engineering judgement and priorities need to drive development decisions. If a feature set isn't complete, fill it out incrementally over subsquent releases, but MS products are a mess because of PM's over-reaching (and Gates' kibitzing).

    QA and doc writers need to report into customer support (to ensure quality is measured from a customer perspective), and more test automation is needed and engineering needs to architect products to be testable.

    Mfg needs to own the code-lines and the build architecture needs to be able to rebuild an entire product nightly. Engineering needs to design every product so it can be built (on multiple machines in parallel) overnight and then tested the following night, with codeline open for checkins the 3rd day (twice a week cycle).

    A tall order considering the hole MS is in, but that's the hole they've been digging for well over a decade now.

    Another reset is in order. Start with MinWin and keep the architecture clean and free of app functionality. Cancel Vista and the Yahoo bid. Announce and sell maintenance refresh SPs of W2K and XP for $150 each, followed by functional SPs to keep customers in the fold until a nextgen OS is truely ready for prime time. Yeah that'll entail some retrofitting, but jamming Vista down peoples throats hasn't, isn't and won't work.

    MS has lost what little patience and trust remained in its customer base.

    I doubt any of that will happen (at least until the exodus away from Windows builds to an irreversible crescendo).

    By Anonymous Charles, at 12:28 PM  

  • "PM's need to report into development and engineering judgement and priorities need to drive development decisions. If a feature set isn't complete, fill it out incrementally over subsquent releases, but MS products are a mess because of PM's over-reaching (and Gates' kibitzing)."

    Are you serious?

    The engineering driven model is one of the reasons why MS is so broken, both in terms of delivery and customer satisfaction.

    - There's no concrete product vision.
    - Our products are way too overcomplicated.
    - We don't ship the product when we say we will.
    - Products don't have to be profitable to launch. Future P&L isn't even calculated until after we've mobilized.

    If you add in the whole "we need to launch a product in that space, too" model, we're just a sprawling development amoeba fueled by money from products we all but finished a decade ago.

    Engineering has far more input into what is done at MS than at any other company I've worked at to date.

    Until there's a clear product vision and decision maker, MS will continue to be extremely busy delivering the latest mgmt wishes until there's a reorg, then it's rinse and repeat.

    The beauty of the current model is that no one is accountable - fiscally or tactically (let's not even think about strategically).

    Dev/test/pm can continue to blame each other but it does no good.

    By Anonymous Anonymous, at 11:53 AM  

  • Are you serious?

    The engineering driven model is one of the reasons why MS is so broken, both in terms of delivery and customer satisfaction.


    I think you are confusing what MS current does for "engineering." It's not.

    Real Engineers are rare at MS. Most CompSci degrees are not true engineering degrees, and most CompSci graduates do not do real engineering. MSFT has a bunch of technology geeks running loose pretending to be engineers.

    That problem however is massively compounded by the idea of putting PMs in charge of the product. PMs are even less engineers than the devs, and what they lack in technical acumen they fail to make up for in business sense. I've known many, many PMs in my time at MS, and while several are intelligent, hard-working people who could be highly productive, the role they are put in at MSFT (especially in the Windows div) practically guarantees they will be worse than useless. They get in the middle of everything (because they are expected to) and cause nearly every communication (internal and external) to go astray.

    The dev culture has its problems, but nothing causes more day-to-day operational difficulties than the PM organization. Every viable solution to MSFT's execution woes involves eliminating or radically restructuring the PM role.

    But too many PMs have been promoted to PUM/GM/VP for that to happen without senior management being gutted.

    By Anonymous Anonymous, at 6:48 PM  

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