Advantages, challenges for new CEO at Microsoft
Microsoft has had many stumbles and failings over the years, but it’s also had its successes and strengths. Here are five challenges, and five advantages, his successor will face.
Seattle Times technology reporter
Date of incorporation: June 25, 1981
Date stock went public: March 13, 1986
Employees worldwide: about 99,000
Employees in U.S.: about 58,000
Employees in Puget Sound: about 42,000
Revenue for fiscal year ended June 30: $78 billion
Profit for fiscal year ended June 30: $22 billion
There was Windows Vista, but then came Windows 7.
There was the Kin, but there was also the Xbox.
The company fell way behind on mobile, but it still plays a huge role in corporations.
Microsoft has had many stumbles and failings over the years, but it’s also had its successes and strengths.
That bad-news, good-news split is indicative of the challenges, and the advantages, facing any successor to Microsoft Chief Executive Officer Steve Ballmer.
Ballmer, who has been CEO for 13 years, announced Friday that he would be retiring once his successor has been chosen within the next 12 months.
Here are five challenges, and five advantages, his successor will face.
Microsoft actually came out with a smartphone and a tablet before Apple came out with the iPhone or iPad.
But it was Apple that figured out how to make those devices wildly popular to consumers.
These days, Microsoft has only about a 3.3 percent worldwide market share in smartphones — although that’s slowly inching up — and Windows Phone has overtaken BlackBerry as the No. 3 smartphone operating system.
Similarly, Windows tablets’ market share went up from 1 percent to 4.5 percent over the past year, according to research firm IDC.
But if Microsoft doesn’t continue to make inroads on mobile devices, “They will start to see some market erosion in their other businesses,” said Norman Young, analyst with investment research firm Morningstar.
2. Post-PC era
We are in what some call the “post-PC era,” or, as Microsoft likes to call it, the “PC-plus era.”
Whatever the case, it means that people are turning less to their PCs and more to their mobile devices to accomplish much of what they used to do on their desktops or laptops.
And that’s a huge worry for Microsoft.
For many years, Microsoft has had a cash cow in Windows. But now that the PC market isn’t growing, while the markets for tablets and smartphones are, that source of revenue is slowing.
Another related problem: The margins for Microsoft on smartphones or tablets are lower than what it gets from PC manufacturers.
“Any time a PC is sold by Dell, HP or Lenovo, if it’s a consumer-oriented product, Microsoft sees about $40 to $50,” said Al Gillen, an analyst with research firm IDC. “If it’s enterprise (meaning corporations), it’s more like $100 for Microsoft.
“The license fee per unit for phones and tablets are not going to be in the same magnitudes,” Gillen said. “Which means Microsoft has to adjust its thinking to lower price, lower margin but much higher volume.”
The next CEO, said J.P. Gownder, an analyst with research firm Forrester, “really needs to come to terms with the relative decline of the PC as a computing tool.”
Xbox aside, Microsoft has had a hard time connecting with consumers on a number of its products.
Its Surface tablet — particularly the Surface RT model — has not sold well. Windows 8 is getting a lukewarm reception. Windows tablets and smartphones have yet to break 5 percent worldwide market share.
And rightly or wrongly, Microsoft is still fighting the image left over from those old Apple Mac vs PC commercials: That it’s stodgy, corporate, boring.
The company has been battling that image with marketing efforts such as Surface commercials featuring dancing tablet users and product launches featuring sports stars and other celebrities.
Microsoft has historically been “very defensive of its children,” Gillen said.
That means, for instance, that the company has not put Office on iPads because it might threaten the Windows business.
But, these days, “That’s a risk,” Gillen said. “If they try to reserve some of their best services for the Windows platform and intentionally block them from iOS or Android, they’re limiting their market opportunity.
“They have to think beyond the Microsoft box a lot more than they do today,” he said.
5. Company culture
For years, Microsoft has had the reputation of being rife with turf battles and internal politicking.
But recently, Ballmer has said he wants a kinder, gentler Microsoft — or at least one that’s more collaborative. He began a major company reorganization last month designed to achieve that, as well as to make the company more agile.
But with a review system in place that ranks employees relative to each other, and years of ingrained turf-protection habits in place, shifting an entire culture will be a big undertaking.
“If you have the same leadership on top, that (cultural change) is difficult to do,” Young said. “But if you bring in someone with a different cultural bias, it might be easier.”
1. Corporate pervasiveness
Quarter after quarter, Microsoft’s earnings strength has come down mainly to its pervasiveness among corporate users.
“This is a company that almost, hands down, owns the enterprise,” Young said. “You can go into almost any business environment and they will almost certainly be running some kind of Microsoft product. Whether servers, operating systems, databases — almost across the board — it’s incredibly well positioned in the enterprise.”
2. Technological breadth
Few other tech companies provide the range of products and services that Microsoft does.
And many of the technologies in one area of the company benefit others. Bing, for example, is baked into many of Microsoft’s other products, including Windows and Xbox.
Among the company’s offerings: operating systems, a search engine, gaming consoles, mobile devices, cloud platform and infrastructure services, servers, databases, music and video services, and much, much more.
That, of course, could be seen as either a strength or a weakness: There are opportunities to develop profitable businesses in many areas or, alternatively, the danger of being spread too thin.
“This is a company that has tentacles in every part of technology,” Young said.
3. Number of users
Though Microsoft’s traditional base of PC users is declining, threatening its future dominance in everything from operating systems to productivity software, it still has far more market share in certain areas than any other company.
Windows is still the No. 1 operating system in the world, Office still the most-used productivity suite, and Xbox 360 still the No. 1 gaming console.
Microsoft executives have repeatedly said the company is “all in” on the cloud.
And it has, indeed, made significant gains in this area.
For instance, Windows Azure, the company’s cloud platform, joined the elite club of Microsoft businesses bringing in $1 billion a year or more.
Microsoft has been investing in Windows Azure for a long time, and, “The full impact of that investment has yet to be fully felt in the industry, and accordingly, is overlooked by many industry observers that point to Amazon.com as the early winner,” Gillen wrote in a note.
“I think Azure is going to be a direct competitor to Amazon for long years to come,” Gillen said in an interview. “I don’t have any doubt Microsoft will be in the tier 1 providers.”
Microsoft is also pushing customers toward cloud-based subscription models for services such as Office. Its Office 365 offering is now on pace to become a $1.5 billion business.
5. Cash reserves
Microsoft has huge cash reserves — about $77 billion in cash, cash equivalents and short-term investments.
That should help it fund — should it choose to do so — the development of new technologies, the acquisition of companies that fit into its strategic goals or, as in the case with Bing and Xbox, the time to wait it out while building market share.
Janet I. Tu: 206-464-2272 or firstname.lastname@example.org. On Twitter @janettu.