Discussing Mr. Ballmer

| About: Microsoft Corporation (MSFT)

Some of the nicest things I have seen applied to Steve Ballmer on the announcement of his pending retirement ring like this:

Steve Ballmer, Minder of the PC (in Bloomberg);

Steven A. Ballmer, not known as an innovator… (in The New York Times);


Ballmer will leave behind an unfinished agenda (in the Financial Times).

Perhaps the most damning thing a departing CEO can experience is that the price of Microsoft (NASDAQ:MSFT) stock rose by 7.4 percent on the announcement. It was up 8.7 percent at one time.

In the Financial Times we read that "His departure will mark the highest-profile casualty yet in the post-PC era led by Apple and Google's mobile devices, after Intel's chief Paul Otellini stepped down last November, sooner than had been expected."

The Financial Times article goes on to discuss the public response of Bill Gates, friend of Mr. Ballmer in the past:

"Mr. Gates, who will take a hands-on role in the search for a new chief executive after years of focusing on philanthropy, issued a terse statement saying that Microsoft was 'fortunate' to retain Mr. Ballmer during that search but did not thank him for his 13 years of leadership."

Mr. Ballmer's focus reminds me of many people, business people, academics, and students I have dealt with over the past fifteen years or so that have little or no perception of what is happening out side of their peer group. When asked about something new being developed in the technology space, they reply that they don't know anyone that would use such a thing.

To me, at the least, there were two places to look for what might the future might look like. First, you look at what the most powerful nations are doing with respect to defense and security. The leading nations must be able to kill people better than other nations in order to maintain their position in the world. And, these nations must be able to keep secrets. They can't afford to be second.

In the 1990s it became obvious that quantum computing would be forthcoming in the future because it was proven that in the future, no secrets could be kept if a nation did not have quantum encryption.

The second place to look for the future, I argued, was in the generation that was in the eight to twelve age bracket. Don't look at what the kids in their later teens are doing. Look to those of a younger age. Then ask the question, what will be ubiquitous information technology when they come of age. It is remarkable what you can learn from these young kids.

It reminds me of the time I was on a task force assembled by my university's Provost. The focus of the group was on the virtual university. One of the burning questions on the day was when we would reach the time when the incoming students to the university would be more "computer literate" than the faculty. Needless to say, we have passed that day years ago.

Microsoft, a leader at one time of the business strategy called "time pacing" got stuck on its company's paradigm… the PC. Yes, Microsoft continued to produce something new on a relatively regular time schedule, but that "something new" was framed within a very narrow perspective. It was the leader and it was going to continue to lead in a specific thing because it commanded so much of the market for that specific thing. It was not the Microsoft that initially missed the Internet market… but then pulled off one of the most impressive changes of direction in business history.

Time pacing, although an excellent approach to change in its time, became legacy because it was limited to the boundaries of specific industries and markets. Firms have moved on beyond this. In terms of technology, the effort became one of reducing the impact on the firm of physical assets. Modern businesses cannot let their investment in physical assets constrain them in terms of being competitive in the latest technology.

For one, in its accounting practices, a business must be sure to depreciate its information technology acquisitions fast enough so that it is free to move on to another technology without having to take a big write-off. Faced with the possibility of taking a big write-off, many businesses have not moved as rapidly as they should have moved to maintain competitive advantages.

And as was very apparent in the past, many organizations will move to bring in the most "edgy" technology to capture market share and catch up later on security at a later date.

I'm not saying that the large high tech companies will not be a big part of what will go on in the future. One cannot say that Microsoft, with its huge market share, will not play a role in the future of high tech. Microsoft does have a Return on Equity of 30.09 percent and has exceeded a 15 percent ROE for quite a few years, whereas the current industry average is an 18.41 ROE.

The company is still benefiting from the cost structure associated with producing information goods, allowing for a huge gross margin coming from its dominance in the market.

And depending upon who replaces Mr. Ballmer, one cannot say that Microsoft will never be on the cutting edge again and not just living on its history. In fact, I hope that Microsoft can become "interesting" again.

The Microsoft situation just presents us with further information about how hard it is to run a large, entrenched company and keep it ahead of everyone else. The above figures would allow one to conclude that Microsoft still maintains a competitive advantage in the industry. And it is not likely to lose that competitive advantage in the near future.

What the events of the past few days indicate, however, is that investors believe that the future of the Microsoft stock should look better. Something seemingly has been holding back the performance of the stock. Given investors' responses on Friday, it would seem that the investment community believes that maybe Mr. Ballmer was a good place to put the blame for this lack of performance. And the press, in its usual manner, has piled on. I must admit that I don't disagree with the general conclusion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.