Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence

by Joachim Kempin

  I know from people inside the company how tough it was for them to sit back and watch the world rocket past under Bill’s stewardship, only to then watch Steve’s cultivation of MS into a civil service like asset management company. After government intervention, the once cutting-edge tech racehorse stopped winning, and was locked into a barn with neither Bill or Steve nor the board ever daring to break its lock. Taking risks was suddenly deemed uncomfortable and hanging on to outdated principles was favored instead—creating a cozy, however highly profitable, comfort zone as a result. In that context I agree with current press articles, the challenge for MS board members is not to replace her current asset management team but to attract a race horse Wall Street is willing to bet on.

  Change I can believe in means returning to Auftragstaktik leadership principles. Intuitively and instinctively adopting them in the early years created not only a successful start-up but a cadre of empowered and motivated employees willing to sacrifice and go several extra miles. The challenge facing the board today is to renew that winning spirit in a much larger company. A herculean task because most of the key proponents and practitioners of this leadership style moved on—lured away by too much wealth, other lofty opportunities or lack of belief in MS’s future. If it can no longer be passed from one management and employee generation to the next, formal training will be needed to reverse course. Splitting the company into loosely coupled and more autonomous portions should make this an easier task to achieve. After mostly dealing well with operational complexity, healthy transformative change will inevitably follow!

  This newly bred generation of hungry and ambitious warriors need to be able to empower themselves to lead the next social networking and mobile device revolution beyond what we have experienced so far. Cut them loose and it will happen! Monetizing all applications through the cloud and offering its usage for a pittance will probably be one consequence and should spur a tremendous innovation tsunami. Only as recognized innovation leader will MS win Independent Software Vendors (ISVs) back who today eagerly and often with priority add value to competitors’ products. ISVs remain the backbone of all operating and middleware vendors’ success, and if their defection cannot be stemmed and reversed, mighty Microsoft will unravel fast. With competitors like Apple and Google loaded with cash, MS’s money has lost its luster when buying favors. Keeping promises and not upsetting partners will therefore be even more important in the future than it has been in the past.

  In the early years, money in the form of stock options indirectly bought a lot of talent. Employees accepting these thought about a brighter future and directed their passion and employed their skills to move a noble cause forward. To rekindle this I believe a return to employee co-ownership is badly needed for genuinely enduring change and long-term prosperity, bringing me to my final point.

  Compensation and recognition are not necessarily correlated and are very delicately balanced as we have seen with the Linux volunteers. They have contained their venal spirit and gotten their kicks out of fighting the good fight. In moving their cause forward, admired and honored in their own hall of fame they indeed beat the establishment against all odds. With a hired workforce the game changes and when I joined, stock option incentives did play a significant role in how people performed and how they wanted the company to succeed. Before the dot-com bubble burst, MS created a lot of wealthy people and a lot of them stayed around to foster her cause. I was one of them. Monetarily I could have retired years earlier; I had fun, pure and simple, gaining contentedness by helping to win competitive battles and beating the odds while leading my knights. I had the greatest job in the world and I was thankful for the freedom granted so I could perform at my best. No regrets whatsoever.

  But without hope for reward and a possibility of securing my future, I would have left much sooner. Opportunities were aplenty. Fame and pride in your accomplishments present only one side of the coin. Eventually you need to eat and want to enjoy your life after working hard and heal the scars after spearheading your last crusade. Today I am able to do just that. Following the Roman soldiers as they graciously accepted their land grants when retiring from their beloved army. Without that security blanket, this book would have never been completed.

  My book would be incomplete without analyzing Microsoft’s future potential. So let me consider her competitors’ aims, if her products are threatened by substitutes, and what type of bargaining power her suppliers and customers possess.

  In doing such an analysis product costs always come to mind. In regards to Apple, this has never been an issue for Microsoft. Microsoft’s software products have definitely low, per unit cost. But they are not the lowest in the industry. Linux and its derivatives benefit from a volunteer army and a free and open source platform. In this context Microsoft has to compete by offering superior value and has done so successfully for years.77

  Nevertheless devices and services powered by free software always incur ancillary costs. This levels the playing field. There is no free lunch. Customers will be asked to pay a different kind of penalty when using what they obtain for free like having to endure a barrage of advertising and/or an invasion of their privacy. Security concerns fall into the same category. Most customers rely on a trusted company (like Microsoft) to stand behind her software. In a corporate environment, costs get shifted: what you don’t spend up front (and usually more!) gets moved over to technical support and development costs. So instead of thinking just about price buyers are forced to consider trade-offs. This serves to Microsoft’s advantage. Not being the lowest cost provider therefore becomes less of an issue.

  Now let’s look at product differentiation where I believe MS holds an edge. First of all the company has huge brand recognition in general and with Windows in particular. Second Windows 8 will uniquely unify how a variety of computing and mobile devices will be operated and seamlessly communicate with each other and in the cloud. MS’s solutions encompass the living room, the office, and the mobile space. Its characteristics and potential reach are unsurpassed, and her services and applications are attractive—exceeding most competitive offerings at least in the short term.

  Microsoft’s competitive aim is clearly defined as I see it: Applications, tools and services for mobile and stationary computing, and communication devices interconnecting users to the rest of the IT world. No other company covers that as broadly and in-depth as MS. Not being too narrow in her aim and not being a monoculture works to MS’s advantage.

  We can expect that current competitors will vigorously answer MS’s challenge and even new competitive forces might emerge. MS is used to deal with all of them by moving her products forward—not resting on her laurels. Management’s revived resolve and fortitude should suffice to regain and keep the company’s lead for the foreseeable future.

  Product substitutes for her top revenue producing products already exist. So far this has not endangered the company’s ecosystem. As long as she can hold onto a critical mass of independent software and hardware vendors she will do well. With Windows 8 she is threatening her competitors with a superior concept, which will take time to reverse engineer. If the Facebook generation buys into this new paradigm as the new standard for coolness, MS will break through.

  When it comes to bargaining power of her suppliers Microsoft has to fear if they will get upset by her ambitious plans to produce competing hardware devices and eventually defect. Producing these devices cheap enough is less of an issue. Not endangering the ecosystem the company depends on needs to be avoided at all cost! In regard to customers, the company has always pursued a low pricing policy, and I am convinced management knows how to make sure that price will never stand in the way when deciding to purchase any Microsoft product.

  Winning over the Facebook and Twitter generation—while no easy task for Microsoft—will be central to success, and I am more than ever convinced that Microsoft will pull through with revived audacity and new magic. Replacing her twenty five year old logo and a
dapting it to the Windows 8 look further underlines how serious the company is taking this launch. As an optimist—while critical when needed—I believe that resolve and fortitude will not only keep her prosperous—but against all odds and pundit opinions—facilitate her conquering of unheard-of heights! Google’s and Apple’s glory days are numbered.

  APPENDIX:

  HOW MICROSOFT GOT HER STRIPES

  For less familiar readers, let me put the nascent mechanics and the growing pains MS endured into context as I background the meteoric evolution of the PC market and showcase its competitive forces. In ’83 when I started working for MS, the company was just 8 years old and had only 400 employees. Co-founded and led from inception by a young and charismatic CEO and chairman, Bill Gates, she gave the impression of a risk taking entrepreneurial software pioneer. She came alive at the cradle of the PC revolution when Bill’s dream to deliver meaningful and affordable computing systems for personal use became a tangible probability.

  The deliverance of such a system in the mid-70s depended on the availability of an affordable and powerful enough semiconductor chip called a microcomputer—the heart, soul, and work horse of early Personal Computers (PCs). In a modern PC, that component has been replaced by a much more complex and powerful Central Processor Unit (CPU). But like a microcomputer, todays CPUs need additional hardware components, peripherals, and software to become a fully usable computing platform. As the hardware components were invented and became available, the focus of the Information Technology (IT) industry shifted to a kind of magic glue, called software. It was needed to make the different parts working together and enable the common man to effortlessly perform meaningful computational tasks.

  Software is nothing other than a collection of instructions a computer can understand and execute. Cobbled together in a meaningful way and able to perform a computing task, they represent an application program. To execute one on a computer system, you typically need an intermediary, which experts call an Operating System (OS). A mystic piece of software code which talks directly to its CPU, manages all hardware components, and enables the utilization of the application program you want to deploy.

  Writing a software programs requires a tool known as a programming language. This is an artificial language that links the instructions a programmer writes to an OS so that the computer system can perform the desired operations. Depending upon the type of application programmers want to write, a number of specialized programming languages are available to them. One of the simplest is called BASIC.78 Bill Gates started MS by adapting a version of it to a variety of microcomputers. Its availability enabled the programmer community to quickly write useful applications for a new platform. With retail distribution channels for software unavailable, he sold his tailored product directly to the early manufacturers, who in turn installed it on and sold it with their microsystems.

  Utilizing the primitive micros of that time required way more tech knowledge than using today’s PCs. No wonder merely a smattering of unsophisticated end-users bought them. Its momentum increased when Tandy and Commodore jumped in the fray, delivering easier to use systems and inspiring more usable and sophisticated application programs to appear. A fundamental breakthrough occurred in ’77 when Apple Computer introduced a PC called Apple II, leapfrogging competitors’ designs and usefulness. Soon overpowering its contenders by attracting a number of quality applications programs, Apple rapidly became the market’s trendsetter. Two years later her position was further manifested with the appearance of a spreadsheet program79 called VisiCalc, running exclusively on the Apple II and turning her flagship into a formidable analytical business tool. The press grandiosely labeled it a “killer application,” postulating how hardware and software progression depended on each other for eternal success. This number crunching program alone, unbelievable as it sounds, motivated people to buy an Apple II—killing its competitors! Software to win—hardware to function!

  The next formidable entry happened in ’81. I can still remember the ads Apple launched that fall headlined “Welcome IBM. Seriously!” The largest computer company in the world legitimizing PC technology motivated her to arrogantly embrace the threatening giant publicly—a gutsy bit of ad copy. Having beaten IBM by four years to the market, nobody at Apple, my then employer, genuinely expected IBM’s new baby could or would endanger her lead. Apple fans counted in the millions and were quite loyal, and with an abundance of slick application programs readily available, the incumbent seemed clearly advantaged.

  Over the years Apple’s strength had been manifested by an army of Independent Software Vendors (ISVs)80 and the huge number of dedicated applications they had created for the Apple II. Their faithfulness was a prized and powerful defensive asset, and Apple’s management knew darned well how essential they were for her success. As soon as IBM showed up, Apple increased support for this software community. I was part of mounting a paramount defense effort in Europe. My management firmly believed we were protected from IBM’s onslaught for now by hiding behind a much richer application environment. Way too cocky as history shows. Within less than two years the imaginary protective shield crumbled. The supposedly iron-clad application barrier to entry81 eroded when ISV’s entrepreneurial spirit risked supporting mighty IBM following alternative and less expensive consumer’s choices and enterprise sentiments. It for sure crossed Apple’s plan to hold IBM in check long enough until she could ambush and beat her with the advanced systems that Steve Jobs, the company’s co-founder and CEO, was working on.

  The two contenders varied tremendously in how they had arrived at their products. Apple mirrored the traditional proprietary go-to-market approach, which the computer industry had deployed for decades. Excluding her CPU, bought from Motorola, all key parts of the Apple II were designed and manufactured solely by or for her. IBM on the other hand had, for the first time ever, deviated from this tactic. Spinning her newly formed PC division off, she freed her from the exclusivity dogma to meet time to market objectives.

  Not making the operating system an exception from this newly crafted policy surprised the industry the most. Yet a bit more cautious, IBM offered a choice of two functionally equivalent ones from two different vendors: Digital Research Institute Inc. (DRI) and Microsoft (MS). Hedging her bets, she avoided picking a winner in the ensuing race for popularity—leaving it to be ultimately decided at the point of purchase.

  Hard to imagine, but the original IBM PC came without any OS, making installing it an afterthought—either performed in the purchaser’s home or on the premises of his or her friendly retailer. The reason for separating hardware from software can be found in an antitrust case IBM settled years earlier and now applied, without being legally obliged, to her newest creation.

  The two vendors IBM had picked as OS suppliers had vastly different backgrounds and expertise. DRI had established herself as a widely recognized leader in early microcomputer OS technology while MS had made a name supplying programming languages for the same ecosystem. Both knew each other from an earlier business relationship which had MS compelled to license an early version of DRI’s OS, CP/M,82 to adapt and sell it together with an add-on card to the Apple II community. A prosperous and profitable business as it turned out. Now the rapport between them was poised to turn ugly, as DRI considered MS’s alternative offering an invasion of her turf.

  The method MS had used to develop her newest darling added insult to injury. To deliver in time for IBM’s launch, she obtained a clone of one of DRI’s CP/M versions called QDOS83 from a small software company in Seattle, Washington.84 It served as a starting point to develop an IBM PC tailored derivate christened MS-DOS.85 After a court challenge about its legality launched by DRI got defeated, the first OS war was about to begin.

  MS’s cloner image and DRI’s market leader reputation should have given the latter a huge advantage over the newcomer. Not so. The first mistake made was how DRI dealt with IBM. While MS licensed86 her version at an aggressive price, DRI�
��s CEO believed that his company’s reputation as market leader warranted excessive royalties. IBM therefore offered DRI’s version at $495 at retail while asking only $39.95 for MS’s version, which she sold under the name of PC-DOS. The low price instantly resonated with early IBM PC buyers who veered to the MS’s solution en masse. Round one for MS!

  To make inroads into Apple’s empire, IBM desperately needed to attract and recruit a sufficient mass of ISVs. Only rich application availability drives PC sales—just the existence of hardware combined with an operating system doesn’t get that job done. IBM smartly enlisted both companies for the challenging recruiting task. DRI did a lack luster job helping IBM out. If she would have made an honest effort and reconsidered here excessive pricing at the same time, history might have turned out differently. Instead serious assistance for IBM came mainly from fastidious MS. She engaged vigorously willing to help other ISVs, even her competitors. It turned the tide and soon the development community followed the most supportive and mass attracting vendor. Round two for MS, without deciding the battle for dominance once and for all!

  IBM’s early decision to buy freely available and generic components from third parties made cloning her hardware quite feasible. A high temptation for start-ups and IBM’s existing hardware competitors to enter the PC fray developed. Early on Bill had bet that nobody would tolerate that IBM could have and eat the PC cake alone. Following his belief, he engaged in an early crusade lobbying for and preaching the cloning of IBM’s architecture.