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Originally published December 22, 2012 at 8:02 PM | Page modified December 23, 2012 at 10:17 PM

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Tech giant Microsoft faces fragile period

Special to The Seattle Times

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When I worked in Dayton, Ohio — at the time the second-largest General Motors employment center in the nation — I had a good idea how the General was doing (not well).

Later, working in Charlotte, N.C., during the late 1990s, I also understood how the big banks were performing (very well, on the way to helping bring on the financial collapse and then being rescued by your tax dollars).

After five years in Seattle, Microsoft remains a mystery.

Chief Executive Steve Ballmer called this “the most epic year in Microsoft history.” The company debuted its Surface tablet, a major move into hardware, to generally favorable reviews. Almost all of its products received makeovers.

In the first month after the launch of Windows 8, Microsoft sold 40 million licenses, according to a Reuters story. Windows 8 is engineered specifically to compete in the growing field of tablets and mobile computing. Windows Phone 8 is geared for smartphones.

Microsoft also enjoys a strong positing in the gaming sector with the Xbox video-game console and the Halo game franchise.

Microsoft continues to earn huge sums of money, especially from its flagship Windows and Office products. With plenty of cash on hand, it spends heavily on research and development, $9.8 billion in fiscal 2012, much more than Apple. The software giant employs some of the most talented people on the planet.

On the other hand, those 40 million licenses, a faster pace than Windows 7 three years ago, were “a solid but unspectacular start,” according to Reuters. Designed for touch-friendly operating, Windows 8 has been greeted with less enthusiasm by desktop users.

In October, the company’s earnings for its fiscal 2013 first quarter missed expectations. Market share in most areas keeps falling. Microsoft stock has nearly flat-lined for more than 10 years. Apple shares are worth more than 20 times their value a decade ago.

And the company that in the 1990s stood astride the technology world as cool, visionary and a dangerous bully, depending on your perspective, is playing catch-up to former nobodies. Apple, Google and other competitors have leaped ahead as the computing world changed from standard PCs to iPods, iPhones, the android operating system and the cloud.

Then there was The Article.

In August, Kurt Eichenwald, a former business reporter for The New York Times, wrote in Vanity Fair magazine on Microsoft’s “lost decade” of the 2000s.

It’s a well-reported and devastating piece. Words used to describe the company included “bureaucracy laden,” “lackluster,” “staid and brutish,” “bloated,” “out of touch” with the tastes and habits of younger technology users and “stand(ing) at a precipice.”

Such language isn’t hyperbole considering the many humiliations and competitive disasters Microsoft has suffered — particularly when, in many cases, the company was on the verge of something new, such as social networking and the e-book, but torpedoed it — and considering that Apple, a onetime boutique also-ran, became the most valuable company in history and Google poses a mortal threat to key Microsoft business lines.

I have yet to encounter a current or former Microsoft employee who fundamentally disagrees with the article. And while it might be tempting to say it looks backward as Microsoft is pushing new products out the door, the dysfunction it chronicles remains.

One element is Ballmer, whom Microsoft co-founder Paul Allen famously remembers from their first meeting as looking like an agent of the Soviet secret police. “He had piercing blue eyes and a genuine toughness.” Maybe so, but Ballmer is a businessman, not a techie. And he has presided over Microsoft’s years of missteps and bloat.

Another continuing problem is the company’s so-called stack ranking employee-evaluation system. Reminiscent of General Electric’s Jack Welch at his worst, it requires managers to grade a certain percentage of employees in their units as poor performers, even if they’re not.

The not-surprising result is back-stabbing, aversion to risk and collaboration, sabotaging co-workers and an emphasis on the short term. Ballmer defends the resulting “churn” as a way to bring in and reward new talent.

But that’s not the way such systems really work. They are toxic. They are company destroyers.

The departure of the brilliant Ray Ozzie is only the highest-profile example of a brain drain.

To be fair, Microsoft’s lost decade also came after having to defend itself from an antitrust action that might have resulted in its breakup. So the company has been cautious, looking over its shoulder. This point was made by Dan Gillmor, who as a columnist for the San Jose Mercury News was among Microsoft’s harshest critics in the 1990s. He now writes for The Guardian.

“Microsoft is not standing still, despite the corporate inertia, or worse, that Eichenwald capably describes,” according to Gillmor. “That said, Microsoft does face an existential crisis, much as IBM did in the 1980s and especially the 1990s.”

I agree, and the stakes are enormous for the Seattle area. Microsoft employs more than 41,000 in Washington.

Kicking out Ballmer, as many long for, might not be enough. Bill Gates can’t make a Steve Jobs-like triumphant return for the simple reason that he’s not a Steve Jobs.

Nassim Nicholas Taleb, famous for his book, “The Black Swan,” which foretold the Great Recession, has a new one entitled “Antifragile.”

He describes entities that will survive and grow stronger amid the disruptions to come. But if I read him right, Microsoft’s problems and size make it very fragile.

So is Microsoft doing badly, doing well or something in between? It’s all those things. But that won’t be enough to ensure long-term survival.

You may reach Jon Talton at jtalton@seattletimes.com

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