I Invested In Microsoft But I Have More Than A Few Words For Steve Ballmer

Dear Steve Ballmer,

Let me start by giving credit where credit is due. I have to say that you are one of the most successful executives in the world, and in fact, a brilliant human being. Rumor has it that you scored a perfect 800 on the mathematics section of the SAT. No doubt you have a serious brain.

I certainly don't have enough space here to list all of your achievements, but I've selected a few that I felt were worth mentioning in this article:

• You came to Microsoft (NASDAQ:MSFT) as the 30th employee and you are now the CEO (and one of the richest men on the planet)
• Under your tenure as CEO, Microsoft went from $25 billion in revenue to $70 billion, while net income has increased 215 percent to $23 billion
• You led and built incredible businesses at Microsoft such as the .NET framework, the data centers division ($6.6 billion in profit for 2011) and the Xbox entertainment and devices division ($8.9 billion). Not bad at all …

But if there is anything I have learned throughout my life, it is that brilliant people can also be wrong, sometimes very wrong.

Your career has been outstanding and based on the results that I listed above alone you have been one of the best CEOs of all time, with a 16.4% annual profit growth at Microsoft you have crushed the record of Jack Welch, with 11.2% at General Electric (GE). But Mr. Ballmer, since you became CEO, times have changed and there are other geniuses behind you waiting for an opportunity. As Steve Jobs once said, "Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new." This is evolution and regardless of your amazing brain and leadership there are things that others know and understand better than you, not because they are more intelligent, but simply because they have had different experiences and learning opportunities.

There are some brain connections and associations that new generations have that we old timers don't, that's the nature of evolution, we can't skip steps, by experiencing new ways of doing things you can come up with new ideas, not before. Creativity is born from experience and social interaction, never talent or intelligence alone. That's why it is important to open the door for newcomers. New generations just "Think Different" if you know what I mean…

I believe Microsoft ran out of gas years ago and unfortunately, you Mr. Ballmer are not helping. Ever since the Microsoft Vista release, things have not been the same. I personally remember paying $300 for the professional version of Vista Ultimate, that "Ultimate" was a complete waste of money. Vista never worked, it was glitchy even with the same Office products from Microsoft. I felt robbed, I felt Microsoft stole that money and gave me a defective product in return. I still have the software in the original package, barely used because the truth is it was a useless piece of spaghetti code, not even the support team you hired in India were able to fix the Vista issue in my computer, I was frustrated and for the first time in my life I was really disappointed in Microsoft.

I'm not going to call you "the biggest overhang on Microsoft's stock" as David Einhorn did because I have profound respect and admiration for everything you have done at Microsoft. I'm not going to call you "the worst CEO of a large publicly traded American company," as Adam Hartung did, because I don't believe that is true either. I'm simply asking you to create opportunities for those that come behind you and want to take Microsoft to the next level.

Aside from my $300 loss on a piece of software that never worked, I have a long list of disappointments from Microsoft that just have added up one after another, here are some of them:

Bad Acquisitions

You will be remembered both as one of the best CEOs in modern history and also as the leader of one of the most disastrous acquisitions in technology ever, aQuantive that you acquired for $6.3 billion only to write it off few years later, is a real lesson of mass capital destruction. The first thing you did when you bought the company was to change the name and focus on search advertising instead of capitalizing on aQuantive's display advertising strengths. The rest is history, top talent filtered out, business was lost, and millions of dollars were literally thrown down the drain. But Mr. Ballmer this was not your fault, you just didn't understand search engine marketing and display advertising as well as the people you were leading. Your error was not letting them shine. Just look at what Google (GOOG) did with DoubleClick, they kept the name, they kept the talent, they kept the ideas, and the marriage flourished. That is one of the most successful technology acquisitions in the same market and category of the aQuantive acquisition, with completely opposite results. Google let people shine, express their ideas, and lead. I wish you would be able to do the same one day.

Retaining and attracting good talent

Steven Sinofsky abruptly left Microsoft after the Windows 8 release. He was in my opinion the most valuable player you had at Microsoft. He turned around the disaster of Vista with the Windows 7 release, and played a key role in overseeing the development of Microsoft Office, making it the indisputable leader in the industry. He had a lot to give to Microsoft, but he was another star you didn't let shine.

According to Glassdoor, Microsoft is no longer a part of the top 50 companies to work for. Google, Apple (AAPL) and Intel (INTC) are there. - have you ever asked yourself why? Without top talent, you will never be able to be the same again. In the early days of the company, Microsoft used to be first on all the lists. Unfortunately, people have felt the pain first hand and bad Microsoft products have created a negative market sentiment, tarnishing the admiration and talent of the past.

No engagement and investment in young entrepreneurs

Google is leading the way in attracting young entrepreneurs, not only by integrating them into their app ecosystem, but also by providing financial support and facilitating technology for innovative startups. Google Ventures is a great example of this, with $300 million per year in investments it is supporting new ideas from incredibly talented and intelligent people around the world. So far they have funded over 150 companies. These are people working together to change the world through technology and innovation. In the meantime what have you been doing Mr. Ballmer? Oh yes, you launched BingFund, and although the funding amount has not been disclosed by the number of companies you have funded (two so far) -- I assume it is not precisely the largest in Silicon Valley. According to VentureBeat you are investing $50,000-$100,000 in early-stage startups, through standard convertible notes (loans that convert to equity at Microsoft's option) and offering discounted access to Microsoft's Azure Data Marketplace APIs. Seriously? Is this a BeatFund instead of a BingFund? It is like you are looking for employees, not entrepreneurs.

Phone strategy has been a disaster

Mr. Ballmer, I remember the day I got my first PDA (Personal Digital Assistant). It was a beautiful thing, a Palm with a black and green screen, plastic cover, and a useful stylus. It was the first smart device I ever had and I was so happy. My Palm even had apps, I even remember the Vindigo app, perhaps the first world class app of all time. It used to have a list of nearby restaurants and attractions, exploiting the full potential of new location data capabilities. Now looking back this at app, it feels like a technology from the 80's, but I'm only talking about my Palm in 2004, just few years ago. That innovative brand which had such great potential no longer exists because its software began to feel clunky and no major updates were released, people moved away and sought for alternatives. I was waiting for you to give me something that I could integrate with my office products and laptop, but needless to say that never arrived. I gave up on waiting for you, not because you didn't give me what I needed, but because others did. I dumped my clunky inefficient Palm (the device I once loved so much), and got something different and revolutionary called the iPhone. Why did you release the Windows Mobile OS for smartphones 4 years before the launch of the iPhone (April 2002) and were then incapable of building a decent ecosystem and a reliable software that was well integrated with PC and Office products? Didn't you believe new thinkers could have taken your mobile division to the next level? I did, but guess what? You never gave them a shot. If Microsoft was a country, I'm pretty sure it wouldn't be a democracy. I don't even think it is necessary to mention the disaster of the alliance with Nokia (NOK) and the depressing sales of Windows powered smartphones. Currently Windows powered smartphones account for just 2.5% of the market share -- nothing to feel very proud about.

Internet Explorer became obsolete

Now speaking about browsers, how can I forget Netscape navigator? The technology that opened the Internet door forever. The first time I used it was like magic, I was able to browse and get information from remote locations around the world in seconds like nothing I have ever seen before. Unfortunately, as the Palm OS did, the software didn't improve fast enough, and became slow and clunky. At the same time, you introduced Internet Explorer with much better features and distribution channels. By 2002, you virtually killed what was once the dominant web browser in terms of usage share. I loved Netscape Navigator but I can't blame you for its collapse, it is true that your business practices were not the most ethical, bundling Internet Explorer with Windows was an evil decision, but Netscape also has to be blamed for stopping technological innovation. This was not the first time you took advantage of your market position to kill a leading product, you practically eradicated WordPerfect and Qpro.

The bundling strategy you used with Internet Explorer and Windows also worked with Microsoft Office. By 1996 Microsoft had 95% of the market for business applications. Ethical or unethical you got what you wanted, stakeholders celebrated your determination and tactics and the stock price soared. Those glory days are history, now the "slow a clunky" browser is no longer one of your competitors, it is Internet Explorer. You became a follower, not the leader. Other browsers created tabs, synced bookmarks between different devices, and developed interesting ecosystems of browser apps. Internet Explorer has done very little in those areas and people have taken notice. In 2002/2003, Internet Explorer dominated the market with 95% share. Now you barely have 50% of the market, some studies have shown that the real market share may even be smaller. While Microsoft stopped developing Internet Explorer for Mac (Release 5.2), Google and Apple were releasing their browsers for Windows and Macs. I don't think I can call this a smart decision. Why would you want to prevent Mac users from using your browser? Now Internet Explorer just feels obsolete, it is a piece of software that doesn't allow you to do that much. Honestly Mr. Ballmer, you never gave Internet Explorer the importance that you should have, not because you didn't want to, but simply because you didn't see opportunities there. There is a fine line between operating systems and browsers and the day they merge you will be in an uncomfortable position. What happened to Internet Explorer is a reflection of what is happening more broadly at Microsoft, you are making poor bets and you are missing opportunities because the creative people at Microsoft don't seem to have a vote.

Bing will never catch up

Bing is an absolute disaster, losing $1 billion a quarter, with no sign of letting up. Microsoft has lost $5.5 billion on Bing since the search service launched in June 2009. In fact, Microsoft (MSFT) has never made money from its online services division. Since Microsoft began breaking out that unit's finances in 2007, the company has lost a total of $9 billion. Regardless of your efforts, Microsoft hasn't been able to move the needle. The advantages and superiority of Google in this field are so absolute that I doubt Microsoft will ever catch up. You need players that can change the game, forget about putting pretty pictures on the home page to make people click on them so that you can inflate the search activity numbers, you need to create a new playground, develop your own game and come up with a new strategy. All this requires serious new ideas from serious young smart people, and you have the power to make that happen.

Regardless of all these challenges, I believe you and Microsoft can turn things around. You still have a couple of products that are exciting and extremely well positioned to put Microsoft back on track. The first one is Microsoft Office, which still commands 95% of market share in the productivity software market. Office is your biggest revenue driver, generating approximately $23 billion in revenue in 2011. The division has the highest margins for Microsoft at around 60%. That alone justifies an investment in Microsoft at the current price level. I have tried to walk away from Office many times, but I haven't been able to do so. I have tried NeoOffice, OpenOffice and Google Docs, and none of them offer the integration and capabilities that make Microsoft Office best in class. The new cloud model of Office 365 and Windows Intune will generate millions especially because of the dependency on Microsoft products. This will offer Microsoft a steady stream of income where updates will be no longer discretionary. Once companies adopt Microsoft technology to manage their infrastructure, it will be very difficult to move away. The cloud model will also allow you to prevent piracy, and that alone may double Microsoft sales in a few years. According to The Software Alliance/Global Software Piracy, well over half of the world's computer users (57%) admit they pirate software. While the global software piracy rate hovered at 42% in 2011, the steadily expanding marketplace in the developing world drove the commercial value of software theft to $63.4 billion. In North America the software piracy rate is only 19%, while in other parts of the world such as Indonesia it is a whopping 85%. In a recent investigation, Microsoft purchased 169 PCs from shops in China and found that all were installed with pirated versions of Windows. According to the Business Software Alliance (January 2008), lowering the piracy rate by just 10% would create an estimated 600,000 new jobs worldwide and contribute $24 billion in additional tax revenues to local and national governments. The biggest beneficiary of piracy eradication would be Microsoft. Regardless of public awareness, modern intellectual property laws, strong enforcement and governments leading by example, piracy is still on the rise. Cloud computing could finally change that. If every user has to authenticate through the web to use an application, there is no way they can get around purchasing a license. In the next decade, we will see a big shift in how computers are being used.

The second major revenue gem for Microsoft is the Xbox. Since the launch of Xbox in 2005, 67 million consoles have been sold generating $56 billion at retail. The Xbox has 47 percent share of the current-generation console market in the U.S. hitting this mark largely as a result of the success of Kinect for Xbox 360 and a flood of new entertainment options through Xbox LIVE (40 million members worldwide). Although Xbox makes up very little of Microsoft's revenues and profits, it is one of the products with a bright future.

So Mr. Ballmer I bought recently shares of Microsoft because I believe you still have a chance to empower your people and make a change. This may require a drastic reduction of your voice and vote within the company, but if you think about it, this is what Microsoft needs right now. You are one of the most intelligent and successful executives in the world, but remember that there are thousands of people who also scored a perfect 800 on the math section of the SAT that are waiting for a chance. Now is the time to hire a visionary and let him/her shine, now is time for Microsoft to stop letting opportunities fly by, now is time to renew the old and embrace new ideas and innovation. Now is time for you to let that happen.

And finally Mr. Ballmer, thanks for abandoning the "Scroogled" campaign. It was painful to watch those ads, you should invest those millions to finance young entrepreneurs instead.

Disclosure: I am long MSFT, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[timddeb]

Monopoly on Office? The moat has a large leak!

[foobar123]

I have one word: QUIT

[citizen1]

I would wish this to get to Steve Balmer. If he woun't leave maybe he could be hypnotized to do a better job.

[Global Guy]

A really great and BALANCED editorial. Thank you! I agree with it all (except that maybe W8phone may take off) and I admire you for writing so carefully! You did not whine or overreact, but really stuck to the facts. As others have said, I hope your letter goes to MSFT's board. I still think this company has great potential, but it has not been unleashed. I can't comment on Ballmer as a CEO/individual, but I do know that corporate culture starts from the TOP, and I agree that MSFT's corporate culture has not lived up to its ROOTS. Can you imagine how Microsoft of the 80s would act today??? That is what shareholders are looking for.

Instead, we have a kind of utility, where we can safely invest for a yield but not much of a future. I have a little MSFT in my portfolio, but I am reluctant to increase my holding. INTL is another utility, but with better upside. I have bought more INTL this past year.

Mr. Ballmer, who are your successors? What is your vision for MSFT? Will MSFT become a server company and game console player with a monopoly on Office, but nothing else, or can MSFT lead the way into the mobile world where we will see an evolution of 5" smartphones (Sony Xperia Z) and mini-tablets?

Look to IBM in the 1980s and Apple in the 1990s. Which will MSFT be? A solid utility or a leading market innovator?

[timddeb]

Ballmer, educated idiot. Clever, no street smarts, and isolated from customers

[freed0m]

No matter how much people hope Microsoft to be Apple, or Google, the reality is that it is Microsoft. There are far more companies destroyed by their own quick success. Microsoft, in all these years, has been standing there and getting much stronger.

Apple is going to face or facing the same problem as Microsoft in the 1990s. With too much success and money, but there is not much to invest. Apple will slowly go the same way of Microsoft or be destroyed and forgotten by the world. I am wondering what Apple will do to its 100+ billion to make more money. With smartphones and tablets maturing, I am eager to see what Apple can pull out of its hat.

Google eventually, will go the same way.

[citizen1]

What a great article. I hope you can further this with Steve Balmer and the stockholders. Any chance of talking at the Micropsoft meeting. I assume Bill Gates has eyes, ears, and stock in the company. WHY is he not taken a stand?

[tica2012]

Thank your for a well-balanced and objective opinion. I hope that Healthcare CEO's/Administrators would find this very instructive to their industry. In every organization, there are folk with varied talents/experiences, who could take the organization to higher heights. However, it appears that fear of either failure, or loss/reduction of end-of-year perks and in some instances not wanting to defy the wishes of certain board members, do contribute to these disappointing outcomes.
In view of your non-destructive approach to this article, I will invest in MSFT, bearing in mind your observations.
Thanks.

[notsosmart]

so easy to write this type of an article.tougher to become a ceo of a billion $ co.the bod will always protect their seats at the table.very easy to become an ex shareholder.day traders dont do much for the economy.buy low,hold & collect dividends or use drips.it worked great for me.2008 was a bonanza for me.example-i bought GE @ $7.61 along with other great cos @ really great prices.

[295star]

Article says it all. And I agree Ballmer an intelligent guy to a point. And bottom line is that I as an investor want to make a profit and it just is not happening with this stock. And the dividend is somewhat nice, but still not what MSFT could/should be.

[anil92691]

The jest of the article is that Ballmer should leave because there are other intelligent people waiting in line. Understood.

Ballmer as a CEO makes decisions or maybe sometimes just provides a budget for ideas from the geniuses in waiting. It would have helped if the article provided information on the geniuses in waiting that were part of the team that succeeded or failed.

As I see it. Microsoft was hurt badly due to the dot.com bust. Billions of dollars of investments just vanished. And we did not have blogs and today's internet to discuss that. We did have companies that vanished or nearly vanished to discuss. This period weighed onto Microsoft and still does today because the person who bought stock at 58, will never come back. Was this era that of Ballmer or Gates?

As the CEO, Ballmer has done what a CEO does, grows revenues, profits, dividends and value of the company. Not value market cap, that is done by the shareholder.

Replacing Ballmer is a challenge. Who next? And what if that person will not raise the stock price.

I am sure Ballmer knows better, but I would buy all the Microsoft stock with the cash Microsoft has. This will get rid of the shareholders who don't want to be long term shareholders.

[chanella]

I agreed with everything you say in this article. You are more lucky than me because you just bought MSFT shares. I bought MSFT for my son future education at $34 when my son was in highschool. My son now in grad school and MSFT at $28. So much for investing for college. I could not wait for MSFT to be back to $34 to get out. It hurts to sell at loss after over a decade. So, not only I understand everything you say. I FEEL it.

[Hawinc]

Doesn't Bill Gates own mega-million shares of MSFT, and isn't BG on the board and aren't BG and SB buddy-buddies.....some... smells!

[Matthew Dow]

Gates actually only owns about 5% of the company now I read the other day.... so still a lot of course, but nothing like he used to.

[evildog]

Matthew, Bill owns billions of dollars worth of Microsoft shares.

[FDA_Insider]

let's face it, Steve B is not going anywhere unless it is a basketball game.

as for Nokia Lumina phone, it is better than the iPhone....it is heavier, I can use it as a weapon as well.

to the board of directors of MSFT, you guys are a bunch of idiots not recognizing the problems listed here and do something about it....a bunch of ass kissers....

[Jon sings]

Your letter really slammed the nail on the head. You know, sometime stepping down is harder than stepping up and I truly believe Mr Balmer should consider the first action. As and aside, I really believe the Nokia Lumia series phones are going to be a big hit and if Microsoft does not screw up the relationships with Nokia I feel good things will come of this product. My wife bought a Lumia 822 recently and I have had an Apple 4S for almost 2 years. I have used them both for the last several months and I want to tell you that, in my opinion, Lumia is right up there with the Apple and in some areas ahead of the Apple. That's my opinion and thanks again for you great article.

[evildog]

This is simply a post where the writer is ignoring the real world and exploiting history by leaving out the major events.

Yes Steve has made massive mistakes, but many of the points are simply BS.

MS has a long history of working with young companies, but perhaps the OP got left out and is bitter.

MS did not grow ie6 , because the history with the EU. far too long to explain here, but those of us who understand what happened; also understand MSFT would not exist today if ie 6 was not left to rot on the vine. But I really doubt the OP gets this.

As to Steve leaving after win8, many would say "thank god", he was driving away the best people and crushing those who fought back.
Sure he improve structure but at what cost, many of the best people simply left rather than be beaten up day after day.

Steve B, is not the best CEO. He completely ducked up on mobile and should be replaced. But the OP is just grinding an axe and looking for clicks. Much of the post is just junk echoed and losing meaning as it bounces around the interwebs...

Frightening to see so many poorly informed punters think this is a great post, but I suppose if you keep hearing the same BS sooner or later you believe it.

Me? I am long GOOG NOK MSFT and have every reason to see Steve b replaced but this story goes too far in painting Steve as an ass, where as in fact the roots of the issue can be found with Bill Gates, he was the butthead who could not swallow his pride and made MS the whipping boy of the world.
But hell that does not make good press what with Bill also being the man who has done more to redistribute the west's wealth than any man before him.

[Scenic Dr]

GREAT article! The Board of Microsoft should read this along with all the big wigs at MSFT. Clearly laid out. It's a shame that such a wonderful company can't reach it's potential due to Ballmer and his poor decisions.

[whaddyamean?]

What could possibly be the correlation between a person's ability to score 800 on the SAT math test and that same person's ability to run a company?

You may recall the movie "Rainman" and the protagonist's mathematical capabilities vis-a-vis his ability to dress himself upon awakening. Then, perhaps you'll agree to the questionable nature of your implied correlation.

The Rainman was incapable of formulating an original thought. The protagonist of your article similarly has failed to demonstrate this capability; I would suggest that therein lies the problem.

[garuda11]

Literally what every Microsoft ex-admirer and ex-stock owner wanted to say for this long! You should forward this to the execs at msft and ask them not to ruin, what was once upon a time a great company.

[GregScotts]

Microsoft has been utterly inept at everything it has done for the past 15 years. I can't think of anything that's come out of Microsoft that wasn't a complete abortion. Whilst there remains some love for the Xbox, this was just because Microsoft threw ungodly amounts of cash at it and managed to buy itself some market share through its' shear ability to burn more cash than the competition. (Personally, I dislike the Xbox too).

Is there anything Microsoft does well? Will it ever? It's despised by the IT crowd and if it wasn't for its ability to abuse its total monopoly on the desktop it would have been dumped in a heart beat and very quickly forgotten about in popular culture. It's not Google, it's not Apple.

Microsoft is a dinosaur. Scratch that. It's a zombie, and will stumble about from market to market over the next decade burning its' piles of cash until somebody finally puts a bullet in it.
And nothing of value was lost..