The 1984 advertisement referenced was shown during the Super Bowl in 1984. The ad was a takeoff of George Orwell’s book of the same title, and the symbolism was that the Mac—to be released that week as a project of Steve Jobs—would be a form of revolution. Given the more recent history between Apple and Microsoft, the Apple fans at Macworld Boston booed Bill Gates, even as Gates was announcing the provision of software and technology resources for Apple, as well as a non-voting investment of $150 million in company stock to ease the company’s financial pain:
• Microsoft will develop and ship future versions of its popular Microsoft Office productivity suite, Internet Explorer and other Microsoft tools for the Mac platform.
• Apple will bundle the Microsoft Internet Explorer browser with the Mac OS, making it the default browser in future operating system software releases.
• The companies agreed to a broad patent cross-licensing agreement. It paves the way for the two companies to work more closely on leading-edge technologies for the Mac platform.
• Apple and Microsoft plan to collaborate on technology to ensure compatibility between their respective Virtual Machines for Java and other programming languages.
• To further support its relationship with Apple, Microsoft will invest $150 million in non-voting Apple stock.26
In a scene viewed as reminiscent of Apple’s 1984 ad, Bill Gates is projected over Apple CEO Steve Jobs as Microsoft announces a financial investment and technical assistance that helped save Apple from failure. (AP Photo/Julia Malakie)
Former partner Microsoft stepped in with a cash infusion of $150 million to help Apple at a point when bankruptcy was seen as a real possibility for Apple. While all of the actions taken by Microsoft could be easily seen as increasing the potential market for Microsoft products, others felt that the effort to invest in Apple was directly influenced by the antitrust lawsuits the company was defending at the time. And the “non-voting” component of the stock would likely be designed to suggest no power at all over a company that made similar products. The joint video announcement—made by Steve Jobs and Bill Gates—shows a cooperative arrangement with a competitor to the Windows operating system rather than direct attempts to harm a competitor. This announcement was made just two months before the U.S. government filed the second, more commonly known federal antitrust suit against Microsoft, and Gates had to defend his firm from multiple angles at the next Microsoft shareholder meeting.
FLYING AS THE RICHEST MAN IN THE WORLD
Although Gates had been ranked for many years as the richest man in the world, he flew commercial airlines until 1997. Not one to be ostentatious in public, he did not even fly in business or first class, just a standard seat in economy/coach. “His preference on long trips was to throw a blanket over his head and sleep.” Given increasing demands in his travel schedule, Gates bought a Bombardier Challenger 604 private jet in October 1997 for $21 million, which he decided to use for business and personal purposes. Gates did not believe it was appropriate to have Microsoft pay for the aircraft, so the plane purchase was a personal one.27
BILL GATES AT THE 1997 SHAREHOLDER MEETING
The date was November 14, 1997. Microsoft was holding the company’s annual shareholder meeting, and the government had already filed the contempt motion, alleging that the company had violated a settlement document signed in 1995. And Ralph Nader had conveniently scheduled an anti-Microsoft conference across the country for the same date. In addition to the items that excite Gates about technology, he also had to address threats to the business.
He noted how quickly the Internet moves, and that each year would see radical changes. He talked about the simplicity—or lack thereof—in 1997, where “Using a personal computer today is still more frustrating, still more complicated than we’d like it to be. And people are trying to do more and more with their personal computers.”28
He talked about the Digital Nervous System, a metaphor he created to talk about how technology gets used now that the Internet was prevalent. And the Digital Nervous System would become far more widely known in 1999, as that was the year Gates published a best-selling book about the topic (Business @ The Speed of Thought: Using a Digital Nervous System). To the Microsoft shareholders present in 1997, he offered this:
It’s a term I came up with to describe the idea that every business in this Information Age has to think of how they best use personal computers connected to the Internet to change the way that information flows inside their company, the way the (sic) deal with standard process like sales planning and employee management, the way they deal with surprises like a project being delayed or a competitor coming out with something that’s particularly strong.
Of the events occurring outside Microsoft, he talked about how three of the other largest companies—IBM, Oracle, and Sun—were working together against his company’s initiatives. He felt that Nader’s conference was funded by competitors to hurt Microsoft in the court of public opinion, and he wanted to clarify how the company had decided to move toward including browser technology into Windows:
Our decision to put browser technology into the operating system actually predates the founding of Netscape. It was not a decision that was made based on some view of competitive dynamics. It was simply a natural progression of putting integrated features into our operating system. And our right to continue to do these integrated features is irrespective of whether those capabilities have been available separately in advance.29
His declaration that the idea “predates the founding of Netscape” could be debated. In his book about the Digital Nervous System, Gates notes: “After the first (retreat), on April 6, 1994, I e-mailed my staff to say, ‘We’re going to make a big bet on the Internet.’”30
Mosaic Communications Corporation was founded on April 4, 1994, and was later renamed Netscape on November 14, 1994, because “Mosaic” was the name of the web-browser most of the staff had worked on previously at NCSA. While the Netscape timing is thus unclear, the staff Netscape hired from NCSA clearly pre-dated Microsoft’s decision.
As a reminder of Gates’s consistently high intensity he said the following concerning the Internet and shipping an operating system without a browser: “Any operating system without a browser is going to be f______ out of business,” he says. “Should we improve our product, or go out of business?”31
1998—OPPORTUNITIES LOST
Gates’s firm control of the company’s decision making led to many lost opportunities over time. An example was the creation of an e-book reader by a team of engineers. The team developing the product thought that the CEO would absolutely love the product, which would fill a need that became apparent a decade later. Yes, Microsoft engineers were presenting what was effectively a Kindle, nine years before that device was first introduced by Amazon in 2007. Gates dismissed the project because the e-book reader interface did not look like Windows.
By 1998 a prototype of the revolutionary tool was ready to go. Thrilled with its success and anticipating accolades, the technology group sent the device to Bill Gates—who promptly gave it a thumbs-down. The e-book wasn’t right for Microsoft, he declared.
“He didn’t like the user interface, because it didn’t look like Windows,” one programmer involved in the project recalled. But Windows would have been completely wrong for an e-book, team members agreed. The point was to have a book, and a book alone, appear on the full screen. Real books didn’t have images from Microsoft Windows floating around; putting them into an electronic version would do nothing but undermine the consumer experience.32
INTELLECTUAL PROPERTY REVISITED, GLOBAL EDITION
Despite vigorously fighting to protect the intellectual property rights of Microsoft for more than two decades, Gates recognized that the world was changing rapidly. While computers and Internet usage were becoming much more prevalent in the United States and other industrialized nations, other regions still had opportunities for much more growth. Gates went on record as acknow
ledging that individuals and companies in those regions might be in the same scenario as the software industry of the 1970s and early 1980s in the United States, where widespread copying of software occurred frequently without direct financial benefit to the company that originally wrote the software. In the late 1990s, the success of Microsoft in many countries allowed Gates to make one really key rationalization: that the unauthorized copying of the company’s software in some rapidly growing countries might help establish a standard, precisely as had occurred in the United States. And establishing a standard meant that more individuals and companies would be reliant upon Microsoft products in future years: “About three million computers get sold every year in China, but people don’t pay for the software. Someday, they will, though. As long as they are going to steal it, we want them to steal ours. They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.”33
Microsoft still continues to promote initiatives to protect intellectual property, domestically and abroad. The firm provides an introduction to intellectual property in its current Software Asset Management (SAM) initiative targeted toward businesses. The company speaks of the forms of intellectual property that cover intangible items like software (patents, copyrights, and trademarks) and that software is protected under copyright. As Gates had long argued, the company’s document on SAM says intellectual property rights have to be strong enough to convince authors and inventors to create the item, while using the work of others in a limited way allows others to grow and expand knowledge (like the quotes used in this book). The World Trade Organization (WTO) oversees the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) that most countries in the world have now signed. Microsoft also talks about the risks to the firm that knowingly—or unknowingly—uses nongenuine software, including various forms of security breaches like malware and viruses that might be in the unlicensed versions. China signed the TRIPS agreement in 2001, in theory closing the storyline of Bill Gates seeking to protect Microsoft’s intellectual property. Not only had he achieved a legal determination in the United States, but countries where he was previously willing to accept unlicensed software began to protect intellectual property on a global level.34
1998—A PATH AWAY FROM MICROSOFT VIA STEVE BALLMER
As Gates had already spent 23 years as CEO of Microsoft, he began to speak of a day when he would not be CEO. Even before the U.S. Department of Justice trial began against Microsoft, Gates provided a hint at his future in a Town Hall event at the University of Washington in mid-1998, noting:
“I think probably a decade from now or so—even though I’ll still be totally involved with Microsoft because it’s my career—I will pick somebody else to be CEO.” He went on to say: “Picking that next person is something I give a lot of thought to, but it’s probably five years before I have to do something concrete about it. If there was a surprise, well, there’s a contingency plan.”35
Gates had only ever spoken of one person as being able to provide the ideas and feedback he needed after Allen was no longer involved with the firm. And that was Ballmer, although Ballmer had a few structural failings in the organization. While he was good for brainstorming with Gates and questioning how Gates allocated time to avoid overexertion, he was always the number-two staffer after Allen left. No matter what Ballmer believed, Gates was always the decision maker. Ballmer moving from his current role to an elevated one may—or may not—still require deferring to Gates’s wishes.
It’s a phenomenal business partnership. I wouldn’t enjoy my job like I do if it wasn’t for how much fun Steve and I have brainstorming things. And with the company, everybody has understood that we work very closely together and have a very common view of where we want to go. Externally, people tend to identify the company with one person.
I have Steve look at my calendar. It’s a conversation we have at least 10 times a year: “I’m feeling overloaded again. I wonder if I’m spending my time the right way?” And so Steve will get my calendar and flip through it and say, “Did you really need to do this speech? Did you need to meet with these guys?”36
Steve had accepted that he wasn’t going to get the visibility, the glory, and the final decision on anything…. And I was good at saying, Steve, do you want to say anything more [while making decisions]? But I had to make the final decision.37
Five years from the 1998 town hall event would put one at 2003, and ten years from 1998 would be 2008. Gates would relinquish the role of CEO less than two years later, in January 2000—before the final ruling was issued in the Microsoft antitrust case—and left full-time duties at Microsoft in 2008. In fact, Gates would ask Steve Ballmer to take over as CEO the next year (1999), although the transition occurred in 2000. And Gates still had the expected trouble managing a transition from the CEO role to chairman and chief software architect, although he had specifically requested that Ballmer become CEO:
He (Gates) asked me to become CEO in ’99, and I said, “Do you really want me to be CEO? If you do, I’ll do it. But don’t ask me to be CEO if you really still want to be CEO.” He says, “No, I still really want you to be CEO.” And neither one of us really kind of knew what to do differently. So, he probably tried a little bit too hard to have nothing change, and I probably tried a little bit too hard to have everything change. That was just a transition that we had to go through.38
Chapter 5
WHY WAS MICROSOFT SO SUCCESSFUL WITH BILL GATES?
Gates and Microsoft benefited from many economic concepts. As the first group to produce BASIC for the Altair, the company benefitted from first-mover advantage—the early company had the programming language that was available with the first computer the average consumer would afford. Being first in a market segment is often beneficial, as it is hard for competing organizations to catch up unless the first-mover runs into financial or structural problems. And once Microsoft moved from programming languages and began to sell and develop operating systems, this first-mover advantage became very entrenched. While there can easily be multiple programming languages used on the same computer, most computers come with just a single default operating system (like Windows).
Starting with MS-DOS and IBM, MS-DOS benefitted from being the first-mover on IBM (and IBM-compatible) PCs. With versions of BASIC on almost every computer made from the late 1970s through the mid-1980s, Microsoft’s software would somehow be associated with the devices that gathered the most market share. This was an inevitable conclusion. Later, the addition of Windows while simultaneously developing OS/2 for IBM meant that a computer using an Intel-based processor in an average home would be running an operating system developed by Microsoft. Microsoft would often have more than 90 percent of the market in operating systems for computers in the home.
Going a step past the first-mover advantage, Microsoft’s products set standards by default. If there were no other commercially viable options for operating systems on early IBM computers, everyone purchased Microsoft’s operating system. As we learned over time, Microsoft began to see there would be potential competition against the standard that had been set, which led to the era of “per-processor licenses” that resulted in the first legal consent decree. The consent decree was issued because Microsoft developed contracts that required computer manufacturers (OEMs, or Original Equipment Manufacturers) to purchase a license for a Microsoft operating system for every computer they built and sold—even the computers with other operating systems installed. Stopping Microsoft from defending its first-mover advantage in this way was initially seen as the most important part of the 1994–1995 settlement.
Once the winning platforms were decided, Microsoft was there. On top of the now-ubiquitous Microsoft operating systems were Microsoft applications used in many different settings. And as more individuals became familiar with Microsoft’s Windows, the devices became more and more prevalent. In this form of virtuous cycle, additional users brought even more individuals into
the Microsoft user base. This network effect is reinforcing to an extent; each new user creates more value than the previous; this happens with any form of connection. The adoption of the Internet was also a virtuous cycle that caught Gates a little off-guard.
As the developer of languages on many computers, operating systems on many computers, and later the developer of applications on the winning platforms, Microsoft helped secure the company’s own success through path dependence. Once sufficiently far down a path—whether figuratively or literally—changing paths can become really difficult. If commercial and home users become exceptionally comfortable with Windows and Microsoft Office, there becomes little incentive to change to a different operating system and application. When file types are based upon a certain application or operating system, this also creates a disincentive to change; the files made before a change might not be compatible with a new system. This encourages users to continue to use the same system to minimize switching costs, where those costs involve both money and time.
Prahalad and Hamel (1990) wrote about the concept of core competences1—the part of companies that creates the substantive part of their competitive advantage. Without a long-term competitive advantage, Microsoft products could have very easily ceased to exist sometime between 1975 and today, as many other computer and software companies have. For Microsoft, the initial core competence was related to programming languages, then operating systems, and then operating systems plus applications, which we can see by going through a few steps:
1. Does Microsoft benefit from operating systems and applications across a wide array of devices? Yes, from home computers to servers to phones and video game consoles and various other forms of electronics. Skills learned in one setting can be applied to others.
2. Do the products made by the company benefit the user? If someone knows how to use Microsoft Windows and a set of applications on a single device, switching to another device or another version of Windows is usually a comparatively easy process.
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