Microsoft Understands Making Money the Hard Way - Earning It

“Moderate” NYT columnist David Brooks apparently wrote a column last week criticizing capitalism. Since I put little store in what Brooks (or any other NYT op-ed columnist) says, I hadn’t noticed.

However, in responding to the Brooks column, economist, Hoover Fellow and EconLog blogger David Henderson shared his own personal story about his first job at age 16. He quickly learned that a job was not a right, but a privilege, and if he didn’t perform he wouldn’t have a job. I guess because he assumes his audience is economically literate, Henderson doesn’t circle back to make the larger point.

Central planning has been shown to be an abject failure — no one person is so smart or knowledgeable (even with computers) to be able to make all the right decisions for everyone, whether in a city, a state, a country or an economy. The only alternative is decentralized authority and initiative, with the proper incentives and feedback mechanisms. (Cure cancer=make piles of money; cheat customers=go to jail.)

The one thing that’s often missing (as elsewhere in society) is accountability. Young David H. learned accountability from his restaurant supervisor, but not all workers do. The entire system fails if good workers (CEOs, middle managers or grunts) are not rewarded or bad workers are not punished, whether due to laziness, indifference, or a desire to be surrounded by sycophants.

What applies to individuals also applies to companies. If you make something good, people buy it; if it’s drek, they won’t. The worst thing that happened to the American auto companies is that people continued to buy their (mostly) lousy cars during the 1980s and 1990s out of loyalty or due to superior distribution, postponing and magnifying the inevitable day of reckoning. (The companies also cleverly created new product categories like minivans and SUVs which gave them temporary monopolies until the Japanese learned to make them better.)

When I study the best tech startups, they succeed as ruthless meritocracies fighting for survival, where good ideas and people win out. As they get older, they get more comfortable, more political, more bureaucratic. Eventually, they become indistinguishable from an American car or steel company — that is to say, like RCA, Zenith or (soon) Motorola (MOT), once-great electronics companies that drifted into irrelevance and oblivion.

Some of it is the loss of the founder and his (or her) ruthless vision and demand for accountability, such as HP (HPQ) after Dave Packard retired. Apple (AAPL) was this way between the Jobs I and Jobs II eras, and could easily revert when Jobs leaves for good. Google (GOOG) and Qualcomm (QCOM) are heading in this direction, and Intel (INTC) (despite its paranoia) seems to have lost the battle.

Oddly, the verdict seems still out on Microsoft (MSFT) . The past two decades were more about pugnaciousness — fighting all comers — and milking monopoly rents rather than driving innovation. But a few recent signs (such as Windows 7) suggests that the company is coming back. Perhaps it realizes that it won’t be able to print money forever, and (like the post-Gerstner IBM) will have to learn to succeed in the marketplace by providing things that people actually want.

In February, Microsoft CEO Steve Ballmer observed that each generation has to re-learn the need for prudence in saving and spending. Blogger Mike Shedlock applied this to the dissipation of entrepreneurial family fortunes across three generations — until the 3rd (or 4th) generation had to learn how to make a living the way their (great-)grandparents did, by earning it.

Comments

[Jon T:]

You mean making money from stealing other' ideas I think.

15% a year on R&D, which delivers - basically nothing.

Big problems ahead for the greedy behemoth.

Jul 14 08:49 AM

[SiliconVall...:]

This article has so many holes and the logic is so poor, I do not know where to begin.

The only thing worth saying is that the author needs to learn much more about operating system technology and start-up's before writing this article. I have done my time in many start-up's, sweating in the trenches and risking house and hearth on an idea and a vision. Thankfully, I have managed to produce tangible results in most cases. To now read that Windows 7 shows MSFT is different? That GOOG and AAPL are heading in the same direction as the same GM but MSFT is not? Shall I laugh or shall I cry?

On the other hand, please do tell MSFT and Ballmer that they are indeed visionary and innovators. Please, we really want MSFT and Ballmer to think they are that good.

Jul 14 10:27 AM

[Tom B:]

I think a terms like "central planning" require much more explicit definition. In the case of Apple, one might argue that Job's dogged attention to detail is what makes Apples' products so very superior to all competitors. In contrast, I have experienced the wisdom of brainstorming on project teams; everybody brings a different perspective to the table, and eventually you get to ONE course or action. Maybe Jobs has more of an ear for what his gifted designers and engineers are saying to him than would be suggested by caricatures of his personality one sees in the press. Certainly, his lieutenant, John Lassiter, was a huge factor in the success of Pixar.

When you say "central planning" do you mean the auto factory workers should have told their bosses to build better, more efficient cars? Not likely. Or should their engineers have told their bosses? Engineers solve engineering problems are rarely get to pick the problems they work on. Should the marketing dept have told management to make better/smaller/more efficient cars? The trouble with market research is that people rarely know what they really want. And what they want may not be fixed in time. And what they want may be influenced by the neighbors. When gas was cheap, only forward-looking people like me looked at MPG ratings when looking for a new car. A minivan is typically safer, less expensive, and way more practical than an SUV, but how many people got suckered into buying SUV's vs, say, Honda Odyssey's? So, an organization needs visionaries, at SOME level-- maybe on top; maybe in the ranks-- who knows how to shoot for where the "puck will be" instead of where it is.

Are CEO's even "incentivized" to help their companies? They get obscene, big bucks whether their company succeeds or fails. They often DO BETTER if their company fails. Look at Pfizer/Wyeth. Who benefits from the deal? Pfizer-- they get Wyeth's assets. Wyeth brass-- they get filthy rich. Wyeth employees? They will all be terminated. Consumers? They will see LESS innovation and FEWER new drugs coming to market because of the consolidation. People will DIE so a few fat cats can get bigger vacation homes. How is Steve Jobs incentivized? He loves computers; he USES computers and wants to build the greatest computers on the planet (and does).

Here's what I suggest: if you are down on "central planning", maybe we should move business directions down into the ranks. Maybe the employees should have a much greater voice on destructive M&A activity, or on executive compensation.


BTW: Win7 won't help MSFT. It doesn't solve Windows' architectural deficiencies; Windows is still NOT UNIX-based (like IS X and LINUX) and, thus, still lags other commercial OS's by decades, technologically speaking.

Jul 14 10:37 AM

[Mac'em X:]

There are some interesting points in the article, Joel, and overall nothing wrong. Except for the title. Other than the passing comment that Windows 7 isn't so bad (compared to the reviled Vista, presumably), there's not a single note to suggest that Microsoft does (or doesn't) understand making money the hard way (or any other way). Did the part of the article about Microsoft get cut out somehow?

Jul 14 12:11 PM

[LarryBlumen:]

Here's my cheatsheet:

Microsoft is WINDOWS.NET.

Google is NET.WINDOWS.

Jul 14 01:27 PM

[miniuser:]

Microsoft makes money the hard way? Ha! They are like the kid sitting next you, peering at your exam paper in the hope they can steal a passing grade. Heck, they even stole the word "windows" from Apple. How clever! How original! How utterly tasteless.

Sure, you can say Apple took Xerox's mouse idea. They did. But they did so to introduce to users everywhere that there was a better way that all would benefit from. That was vision.

Microsoft, so far, are even too lazy to fix the glaring bug in their Aero screen saver! There it is, front and centre on many Vista computers in retail outlets, the bubbles zipping around at a frantic pace, showing for all to see that Microsoft just doesn't care to fix a fault which brings home to many the idea that Microsoft just doesn't get it. Yeah, it's just a screen saver glitch - who cares?

Jul 14 05:14 PM

[HH123:]

Good article except for the part about specific companies. Well said about why Socialism and central planning didn't work.

Jul 14 11:23 PM

[Sam Liu:]

who stole whose ideas, apple capitalized on xerox parc's innovation.

get the facts straight!


On Jul 14 08:49 AM Jon T wrote:

> You mean making money from stealing other' ideas I think.
>
> 15% a year on R&D, which delivers - basically nothing.
>
> Big problems ahead for the greedy behemoth.

Jul 15 01:41 AM

[Tom B:]

Mr. Liu: Apple LICENSED the GUI concept from Xerox, where they wanted to use it to make better Xerox machines-- not computers.


On Jul 15 01:41 AM Sam Liu wrote:

> who stole whose ideas, apple capitalized on xerox parc's innovation.
>
>
> get the facts straight!

Jul 15 09:05 AM