It’s not the Microsoft it used to be

I was reading an interview with Don Dodge, the former Microsoft start-up evangelist recently made redundant and snapped up by Google. Its a great interview and I would recommend that you take the time to read it in full but three bits popped out at me when I read it. I have quoted them in the order that is cogent to the point I want to get over, rather than the order that they appear; but I will try and keep their context clear:

It’s a longtime company with a great tradition and still very profitable, but it’s not the leader. Microsoft is not making the innovative leaps and coming out with the new stuff. People used to fear IBM and they don’t anymore. More recently, startups and competitors feared Microsoft, and I think over the past five or 10 years since that consent decree, I think that changed the company dramatically. I don’t think startups and competitors fear Microsoft the way they did 10 years ago.

Dodge answering a question on Microsoft’s future by comparing the firm to IBM. Illustrating the problem that the firm had with innovation, here are his comments on moving from Microsoft Mobile to Android:

It’s awesome. It is night and day from my Motorola Q phone. That was a Windows mobile device, and going from Windows Mobile to Android has been like night and day.

Dodge gave some predictions on 2010, starting with Windows 7 which he felt would get take-up from enterprise users moving over from XP.

My second prediction is that Office 2010 is going to have the exact opposite problem. I think adoption will be very slow and the reason, I think, is because Office 2007 is good enough. They already own it, it’s bought and paid for, they know how to use it, why spend all the money for Office 2010? It’s going to have a long, hard road.

Dodge’s perspective is interesting because he had been inside Microsoft at a senior level for a long time and has been in the technology sector a hell of a lot longer.

To give an example of how the anti-trust rulings have affected Microsoft compare the debacle of stealing the look and feel of the MacOS which Microsoft fought to the hilt, with the rather more timid approach they took against Plurk recently when similar concerns arose.

So what does it show: Microsoft may be inventing stuff and filing patents, but that isn’t turning out innovations that drive real growth. Yet, much of the company’s coverage and press efforts are all about how innovative Microsoft is, (at the time I wrote this Google News featured 2,911 stories mentioning Microsoft and innovation and Microsoft’s online newsroom ‘PressPass’ contained some 4,300 pages featuring innovation-related messages according to Google search.

This isn’t doing shareholders any favours, it sets expectations too high; it isn’t the next Google, its the next Caterpillar, Kraft Foods or US Steel. Microsoft is a value business now rather than a growth business. In order to maximise shareholder value it should look to peers outside the technology sector as to how it manages its business – Procter & Gamble or John Deere. Like Microsoft these are companies that develop evolving products that contain some innovative features or processes in their manufacture.

  • It needs to ruthlessly prune R&D projects that won’t deliver immediate shareholder value or as Steve Jobs put it:

You know, our friends up north spend over $5 billion a year on R&D and yet these days all they seem to do is try to copy Google and Apple. I guess it’s a good example of how money isn’t everything.

(Microsoft actually spent $9 billion in the 12 months up to the end of June 2009 on research & development.)

In some ways Microsoft reminds me of the kind of firm that private equity firms like KKR (Kohlberg, Kravis & Roberts) would like to purchase. Like the countless fat good, growth-beneath-shareholder-expectation kind of businesses that Michael Milken raised junk bonds to fund leveraged buyouts on in the 1980s. It’s cash pile of money could be used to pay off part of the leverage debt to buy the company, its healthy cash flow position is ideal for supporting bond payments or straightforward loans and as the Jobs quotes indicates there is a lot of fat that can be trimmed and non-core assets like Bing and XBox that could be spun off profitably.

A private equity-appointed management team could whip the operations into place and strip the fat with no emotional involvement, focusing instead on maximising shareholder value and the long-term health of the business.

Other businesses already realise this step-change, so now having Microsoft in your space is less of a concern as it will struggle to run against a disruptive, well-run and dare I say it agile enterprise.