Idea Man

by Paul Allen

  In 2006, Bill announced that he’d be leaving his managerial role with Microsoft two years later to focus on his health and education work at the Bill & Melinda Gates Foundation. I tried to tell him that things would be different after he left: “Once you’re no longer a decision maker, people don’t look at you the same way.” I remembered what I’d gone through when I tried to keep my hand in after leaving the company. It took me about a year to come to the realization that my advice no longer counted for much.

  For Bill, the ground had already begun shifting. At product review meetings, his scathing critiques became a perverse badge of honor. One game was to count how many times Bill confronted a given manager; whoever got tagged for the most “stupidest things” won the contest. “I give my feedback,” he grumbled to me, “and it doesn’t go anywhere.” By the time he finally left the company’s day-to-day operations in 2008, it seemed almost anticlimactic.

  IN JULY 2010, Microsoft announced record fourth-quarter revenue of more than $16 billion. Quarterly earnings totaled $4.5 billion—a third again as much as Apple, more than twice as much as Google. Yet the company’s stock price remained flat, as it has for years. With a price-to-earnings ratio of around 12, it traded at a lower valuation than General Mills or Procter & Gamble. No matter how much money Microsoft mints, Wall Street has declined to price in any future growth beyond the Windows 7 upgrade cycle. Earlier in the year, the company saw its market cap exceeded by Apple’s, a development that even recently would have seemed far-fetched.

  Microsoft arguably touches more lives on a daily basis than any other corporation on earth. More than a billion copies of Windows are in use around the world. But the company is haunted by a decade and more of missed opportunities in Internet search and smartphones, social networking and digital media sales. Apple, once a niche player in personal computers, is at present the dominant purveyor of the Cool Devices of the future. Google has blown past Microsoft in search and in Internet-based computing, or “the cloud.” Facebook is king in social networking, where Microsoft’s lone modest success is Xbox LIVE.

  Together, these high-tech hellhounds dominate the platforms that people associate with the future. In a breathtaking fall from grace, Microsoft is perceived as yesterday’s news. A recent year-long study by the Pew Research Center found that 15 percent of tech articles were mainly about Apple, 11 percent about Google, and only 3 percent about Microsoft. How did a company once at the forefront of technology and change fall so far behind? It’s a thorny question, with roots that go back decades, but I believe it boils down to three broad factors: scale, culture, and leadership.

  The obvious answer is that Microsoft got huge and failed to deal with the consequences. When I left the company, it had fewer than five hundred employees. By 1990, there were more than five thousand; by 2000, nearly forty thousand; today, more than ninety thousand. At that scale, cultural changes creep in unless you guard zealously against them. To avoid mediocrity, you need to be rigorous about weeding out underperformers. Microsoft hasn’t proven to be good at that. One executive recently told me, “I wish I could shoot every fourth one.”

  Most of all, an industry leader can never get complacent. It wasn’t so long ago that Microsoft stood by the slogan that Bill and I followed at the start: “We set the standards.” But there is no one in Redmond, speaking privately and candidly, who would make that claim today.

  During 2009 and 2010, I had lunch with more than a dozen people who had recently left the company. They all said the same thing: too many semicompetent managers, too much in-house politics among the fiefdoms and silos of principal product lines. Windows Vista was the dead canary in the coal mine. Released years late in 2007, it became a punch line for pundits and a fat target for a mocking Apple ad campaign. How could Microsoft allow this to happen to its signature commodity?

  Like any debacle of this magnitude, Vista was the result of multiple blunders, beginning with its overly ambitious scope. It didn’t help that the Windows code base had grown more complex to test and upgrade even as the company lost much of its seasoned leadership. Still, a big part of the problem boiled down to basic oversight. Top management failed to pay enough attention to Vista’s development and then allowed it to be shipped when the software was still deeply flawed.

  Microsoft bounced back by finding a drill sergeant par excellence, Steven Sinofsky, to manage the development of Vista’s successor, Windows 7. But the company’s broader cultural issues may be harder to fix. When we began, our mission was narrowly defined as the microprocessor language company. Bill and I were programmers who developed software for other programmers and sold licenses to computer hardware manufacturers. Our DOS deal with IBM marked a departure from that safe home base. Once you start shipping operating systems, and then GUIs and word processors, your products go directly to end users. Microsoft has never stopped hustling in the three decades since to compete in that arena, and continues to make inroads today. But it could be argued that it was never the company’s forte to design products that made the consumer’s heart beat faster.

  That history is currently reflected at Microsoft in the tension between selling to the end user and selling to what’s known as “the enterprise,” the server-based corporate market. Enterprise software is a cash cow that accounts for a quarter of the company’s total revenues and has helped lead it to record profits. (The business division generates another 32 percent of revenues, primarily from corporate sales of Office.) As a result, Microsoft inevitably tilts its energies toward the big clients’ IT managers and away from consumers. The company still has strong competitive juices, from its CEO on down. But when you’re “the No. 1 wholesale seller of plumbing supplies,” as the New York Times recently put it, innovation stops being organic. You may want to innovate, but it can be like trying to fight gravity.

  Today’s Microsoft has fingers in dozens of pies, from small-business accounting software to Webcams. But too many efforts can distract from the unwavering focus you need for your core products and strategic initiatives. In the early years, we overlooked databases. Had the IBM opportunity not fallen into our lap, Microsoft might have been a footnote in operating systems; had Charles Simonyi not shown up at our door, we could easily have missed out on word processors, because no one in-house knew how to write one. In these markets and a number of others, Microsoft thrived as a fast follower, the company’s MO from MS-DOS through Windows to Word and Excel.

  Steve Ballmer forcefully framed the company’s strategy in the midnineties: “[The competition] can be taken. But the only way we’re going to take them is to study them, know what they know, do what they do, watch them, watch them, watch them. Look for every angle, stay on their shoulders, clone them, take every one of their good ideas and make it one of our good ideas.” For a company with a leading market share and a bottomless war chest, it was the ideal approach: minimal risk for maximum return.

  Then the world changed (again). As content migrated to the Web, the pace of innovation accelerated. Fast following became more difficult than in the era of disk-based software. Today, for the most part, the best opportunities now lie where your competitors have yet to establish themselves, not where they’re already entrenched. Microsoft is struggling to adapt to that new reality. Over time, its Enterprise-leaning culture has calcified; the fast follower became a slower one. Zune came out five years after the original iPod, an established category leader with a potent consumer lock-in called iTunes, and has captured only a sliver of the market. Bing, Microsoft’s first credible challenge to Google Search, wasn’t launched until 2009. Fourteen months later, the domestic search engine market share for MSN/Windows Live/Bing Search stood at a combined 14 percent, a distant second to Google’s 65 percent. It’s going to be an uphill battle from here on.

  Years before Google became the goliath it is today, I repeatedly asked Bill how Microsoft was going to catch up in search, or whether the company might consider buying Google instead. Bill was unimpressed by his then much smaller
rival. “In six months, we’ll catch them,” he kept saying. Complacency has taken its toll, most tellingly in the newest competitive arenas of smartphones and tablets, like the iPad. Platforms made Microsoft. The microprocessors of the midseventies were the nucleus of our early success with BASIC. The PC software platform—created by DOS and cemented by Windows and the PC’s symbiotic ties with external software developers—led our young company to dominance. History shows that you ignore emerging platforms at your peril, because one of them might make you irrelevant.

  Consider: First there were huge machines called mainframes, and they ruled the world, like the dinosaurs. Then came smaller creatures called minicomputers, offering cheaper access and leading to whole new classes of useful applications. They were followed by the PCs, which elbowed their way into the business world by giving individual users their own computers, with many minicomputers (and companies like DEC and Wang) becoming extinct. The new PC platform sparked killer apps like Word Perfect and Lotus 1-2-3, which owned their respective markets up until they failed to adapt to the next big advance in access, the graphic user interface. When Microsoft’s Windows and superior GUI-powered applications evolved, it was game over.

  Now we’re moving to a new age, and the same pattern keeps recurring. A company jumps out to a big lead and then is late diving into the latest innovation. Before you know it, an adversary has staked its claim and is crowned as the market and technology leader. User inertia makes the new incumbent tough to dislodge, and the one-time alpha dog finds itself trailing.

  The new evolutionary species looming in the PC’s rear-view mirror are mobile devices, epitomized by the smartphone, a computing platform in your pocket. In technology, the future is promised to no one. Microsoft cannot afford to be an also-ran in the mobile platforms, which are rapidly becoming the principal delivery point for low-to-medium-intensity computing and Web content consumption.

  Many younger people already spend half their computing time and more on their smartphones and slates. As the phones’ displays improve and their network bandwidth expands, mobiles’ momentum will only accelerate. Microsoft wasn’t blind to this trend. It released its first mobile operating system back in 2000, but the company’s early, stylus-driven devices fell flat in the marketplace. Then the iPhone broke through with a seductive touch screen and friendly interface, and Microsoft wound up missing an entire cycle in consumer technology.

  Just as the PC carried the day after we persuaded IBM to adopt 16-bit technology, the mobile-platform leaders have thrived by capitalizing on Moore’s law. Today’s robust iPhones and Droids are the products of high-speed communications, low-cost manufacturing, and superfast microprocessors. Apple and Google have beaten Microsoft to the mobile punch because they’ve been more alert in developing new and innovative platforms. They’ve done a better job of following the chips.

  As of mid-2010, Microsoft had slipped to fourth in high-end smartphones behind RIM (BlackBerry), Apple, and a hard-charging Google. While advance word on Windows Phone 7 has been positive, the competition is formidable. BlackBerry looks vulnerable, but Apple is the ultimate auteur company with the most fervent cult following in the business. The world of Jobs offers limited options (there’s only one basic flavor of iPhone), but everything plugs and plays together and is guaranteed to work. That’s a formula that can trump consumers’ natural resistance to walled gardens and their predilection for choice. It can even get them to pay a premium price, at least as long as the products remain compelling.

  Then there’s the nimble, cloud-oriented Google, which takes a different approach: start with limited functionality, copy the leader, bring in apps from everywhere, iterate like mad. In essence, it has mastered Microsoft’s old strategy of fast following for the mobile, Web-based era. (As Google elbows and claws for preeminence in the carnivorous tech sector, its new-age motto, “Don’t be evil,” seems less credible by the day.) The Android mobile operating system is Bill’s old bête noire, the open-source version of Unix called Linux. Google essentially gives it away free to manufacturers for the same reason that Microsoft once sold MS-DOS on the cheap: to dominate a market, in this case in smartphone search.

  Akin to cameras or TVs, Android follows a product development cycle that runs six months or less or thereabouts, a pace that plays to people’s love of the new. By contrast, a major Windows release—slowed by corporate customer demands, backward compatibility, and countless third-party device drivers—has historically required two years or longer. (The last two, Vista and Windows 7, took five and three years, respectively.) The more streamlined Windows Phone operating system could cycle much faster than that, but only if it overcomes the company’s cultural drag. Can Microsoft quicken its pace to compete in the new mobile platforms? I don’t think it has a choice.

  TOUCH-BASED SMARTPHONES and tablets have obvious limitations, notably for multiuser gamers or typists like me who prefer physical keyboards. A tablet isn’t as capable or convenient as a laptop for creating content. But the iPad is unsurpassed for ease of consumption in watching Web videos or reading magazines with a swipe of a finger. Because there are many more consumers than creators in our culture, the Swiss Army–knife strengths of the iPad—and the coming horde of iPad clones—may outweigh its limitations. It appears that tablets are poised to render physical books, magazines, and newspapers obsolete within the next twenty years. As an inveterate book lover, I find the prospect sad but inevitable.

  Against this swirl of change, we need to keep in mind that PCs have averaged double-digit growth over the last decade—and as long as there are PCs, there will be a Microsoft. They aren’t about to be supplanted by smartphones for intensive office applications like sales reports or spreadsheets. Everywhere else, however, people are shifting from desktops and laptops to more portable mobile devices. As technologies evolve, consumers (especially younger consumers) get pulled along with them. I often hear people saying, “I don’t like it personally, but my kids are perfectly happy typing on their iPhone.”

  New products resonate at first with early adopters, who want the next hot item. But once those products are acknowledged to be more useful than what came before, their consumer net quickly widens, until your grandmother is signing up for her iPhone data plan. Brand loyalties are forgotten as a new platform shoves aside the old. Although the PC still has its place, it is no longer the prime driver of innovation.

  Here’s what the death knell for the personal computer will sound like: Mainly I use my phone/pad, but I still use my PC to write long e-mails and documents. Most people aren’t there yet, but that’s where we’re headed.

  If Microsoft fails to catch up in mobile, in other words, it’s in for a long, slow slide.

  Like the IBM 360, the innovative system of its time, Microsoft Windows has enjoyed an extraordinary run at the top—twenty years and counting, an eon in technology. And like Big Blue in 1980, Microsoft now faces a major threat. For a long time, IBM seemed smug and unassailable, counting money from its corporate client base, and then the behemoth stirred and said, “We’ve got to have a PC.” I was there. I saw how IBM went from nowhere in personal computers to number one in a matter of months, with a fortuitous assist from two young men and their team in Seattle. Still, it’s not easy to come from behind once you’ve ceded momentum; it’s so much more challenging to be Avis than Hertz. You need to do more than try harder. You need to be better, or at least markedly different in the way you meet people’s needs.

  If a Microsoft renaissance has grounds for hope, and I believe it does, it’s that markets in technology are inherently dynamic—and that my old company has woken up to the challenge. The smart-phone market will stay fragmented for the foreseeable future, and it’s still relatively cheap and easy for people to switch to something that catches their eye. Five years ago, before anyone had heard of the iPhone, Apple analysts dripped with pessimism about that company’s future. Given Microsoft’s deep cash reserves and its willingness to use them, it could be in a much strong
er position five years from now.

  But to take on Apple and Android, whose phones won’t stop getting better, Microsoft needs a strategy to win: a quicker development cycle, a qualitatively better mobile operating system, and a secret sauce or two to set Windows smartphones apart. Above all, the company needs somehow to return to its cutting-edge roots. In the early days, from the time we squeezed Altair BASIC into four thousand bytes, no core product was released unless Bill and I believed it could be best-of-breed. To win the mobile wars, the company needs first and foremost to produce phones and slates that consumers will love from the moment they use them.

  I left Microsoft a quarter century before Bill did, and we’ve both had our signal triumphs since then. But in certain respects, neither of us has been quite as good alone as we were together. I missed Bill’s laser focus on competition in the marketplace, his ability to execute my ideas and keep me from getting too far ahead of what was doable. And I’d like to think that Bill missed my ability to divine where technology was headed and my knack for meeting its trajectory with something big and original.

  In my post-Microsoft years, I discovered how challenging it was to operate without a pragmatic partner and business maven. Even so, I have no regrets about taking my own road. It has led me to rich experiences in a great range of pursuits—to the life I’d always dreamed of, even back in the early days, when I was happily chained to my terminal and striving to perfect the next line of code.

  CHAPTER 14

  BLAZERMANIA

  On March 13, 1986, Microsoft issued its initial public offering. I sold 200,000 shares and kept the rest, roughly 28 percent of the company. Overnight I was $175 million richer. For some time, I resisted advice to sell stock and diversify. Given how fast computers were improving, I figured that a dominant, well-run technology company like Microsoft would outperform just about anything else. I’d be proven right by the dizzying rise of the company’s market cap. By 1990, at age thirty-seven, I’d become a billionaire. By 1996, I’d be one ten times over.