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Monday, February 24, 2003 - 12:00 a.m. Pacific

Microsoft at midlife

Photo
ALAN BERNER / THE SEATTLE TIMES
Steve Ballmer, Microsoft's chief executive officer.
Microsoft CEO wants company to broaden its reach, burnish its reputation

By Brier Dudley
Seattle Times technology reporter

In the depths of Microsoft's bruising antitrust battle, Chief Executive Steve Ballmer found inspiration.

The company had been caught in a midlife crisis of sorts when Ballmer took the helm from Bill Gates in January 2000.

A judge had ordered the company broken apart, revelations of brutish business practices had tattered its reputation, and its once golden stock was heading down.

The pall on Microsoft's Redmond campus distracted employees and applied so much pressure that Gates broke down at a meeting.
 
Microsoft at midlife: The series
Part 2: Microsoft CEO wants company to broaden its reach, burnish its reputation
· Q&A session with Steve Ballmer
· Selling more, but profits leveling
· Steve Ballmer's ascension
· Ballmer's lieutenants

Ballmer found a way to capitalize on the soul searching. He used it as an opportunity to streamline management, update company culture, refresh Microsoft's reputation and hone its strategy.

"It's like we went through this valley of death," said Jim Allchin, the executive heading the Windows division. "Internally we said, 'Look, we can't do anything about this trial, you know, it is what it is. But what we can do is try to learn from it and we can try to build great products and just drive ahead.' "

Ballmer and Microsoft emerged leaner, wiser and more mature, with a new realization of their leadership potential. While Gates is charged up about new technologies in the coming decade, Ballmer seems energized by his mission to navigate today's choppy market while building a foundation to keep Microsoft growing another 50 years.

Photo
ALAN BERNER / THE SEATTLE TIMES
Microsoft CEO Steve Ballmer checks out a photographer's camera in the company's studio between videotapings of in-house material and a Discovery Channel story.
"I suspect he saved the company," said Mark Anderson, a Friday Harbor entrepreneur and technology commentator. "Microsoft has, in fact, changed how it does business."

In an interview with The Seattle Times, Ballmer detailed how he is trying to change the company and some of the challenges he faces — including finding more time to attend high-school basketball games with his family.

But business first. Ballmer said Microsoft has started four major initiatives:

• To improve its service, support and how it connects with customers, banking on more and new technology to make the improvements.

• To become a leader in the technology industry. Ballmer wants the company to be trusted, inspiring others by its behavior, as well as by its power and wealth.

Steve Ballmer at a glance


Title: Chief executive officer
Age: 46
Hometown: Farmington Hills, Mich.
Residence: Hunts Point
Family: Married, three children
Education: Graduated from Harvard, dropped out of Stanford Graduate School of Business
Ownership stake in Microsoft: 4.4 percent
2002 salary and bonus: $753,310
Net worth: $14.8 billion
Rank in Forbes 400 richest: 15

— Microsoft, Forbes

• To streamline its research and development management structure that oversees Microsoft's product lines. That could better align spending with strategy and avoid missing future waves of technological change.

• To emphasize expansion into new markets over staying focused on its existing business. The debate arose in part because of antitrust concerns. But the company decided it could safely widen its reach if it did a better job communicating its plans to its partners and other industry players.

Underlying these changes is a companywide restructuring that organized Microsoft's product groups into seven divisions. Significantly, Ballmer gave leaders of each product group more autonomy and responsibility for their division's profits and losses, a structure reflective of large, mature U.S. corporations.

Accompanying the changes is an overarching effort to update the public's perception of Microsoft, supported by a $400 million public-relations campaign that includes television commercials playing up the company's mission to help people "realize their full potential."

"They're pretty interesting," Ballmer said of the changes. "And if we do them right, it's a lot of great opportunity at Microsoft to change the world."

Photo
TIM MATSUI / THE ASSOCIATED PRESS
Ballmer holds a placard checklist for Microsoft Office XP at a release party for the software in 2001 at the company's Redmond campus.
Forced to change?

Some say the changes are evolutionary steps Microsoft had to make to survive.

"Microsoft has discovered after this litigation that they've been a little bit too self-focused, a little bit self-absorbed, and realized there's a big world out there they've got to engage in," said Mike Useem, professor of management and director of the Center for Leadership and Change Management at the University of Pennsylvania's Wharton School.

He suggested it isn't surprising that Microsoft is trying to prescribe goals and principles that underscore Ballmer's leadership charge.

"In the garage with two guys, no leadership is required," he said. "When you've got 50,000 people, cultural tone, broad principles, a host of other methods have to be used to keep people aligned and pumped up."

Various phases of this evolution have been reported, often in stories focusing on such dramatic moments as the time Gates broke down during a management meeting at the height of the antitrust trial. Others have focused on an emotional speech by sales chief Orlando Ayala last July, in which he said the company had lost touch with customers.

But Ballmer said the changes have taken place over time. He insists there was no moment of epiphany, no rousing meeting or stirring speech, that set Microsoft on its new course. It was a process that began when he and other senior executives realized that even though Microsoft was a global institution, it was still thinking and acting like a scrappy startup.

One reason is that Ballmer, Gates and many Microsoft employees are the sort of people who drive themselves hard. They constantly push themselves to do better, and it's a characteristic the company looks for when choosing whom to hire, said Linda Stone, a Microsoft executive who advised Ballmer on building better industry relations before she retired last year.

"Microsoft is a very successful company, and yet one of the values of the company is that you're self-critical and you're always looking to self-improve," she said. "If you look at Steve and Bill, it's a quality they have."

For that kind of person, Stone said, "it's hard to feel that you've made it."

Personal changes, too

The transformation of the business has mirrored a personal one for Ballmer. In the past year he updated his look with dark suits and small eyeglasses, and he shed 50 pounds through rigorous diet and exercise.

But, as any dieter knows, it's hard to hold back. Interviewed the day after hosting a gala party with caviar, lobster, oysters and champagne at a Las Vegas trade show, Ballmer had a hard time resisting a large bowl of mixed nuts at the table. "You're killing me here; I'm 300 calories into the thing," he said.

Snacks are one of Ballmer's few indulgences, even though his Microsoft stock is worth around $15 billion, placing him at No. 15 on Forbes magazine's list of the world's richest people. He lives in a house that's relatively modest by Hunts Point standards and drives himself to work in a sedan built by the Ford Motor Co. that employed his Austrian immigrant father.

When he's not at work or flying around the world making deals, Ballmer spends time at home or a beach house on Puget Sound. He likes to golf, and he goes to Sonics games with his oldest son. He tries to go out to dinner with his wife once a week and spends many weekends watching his kids' baseball, soccer and basketball games.

Ballmer won't discuss his philanthropy, and he has no grand plans for his place in history.

"I don't think much about it," he said. "I want my kids to think I was a good dad. That's mostly what I care about."

A new era

He may earn a place in the business history books if he can sustain Microsoft's growth beyond the personal-computer era, which has been overshadowed by the Internet, wireless technologies and the emerging field of business services provided over the Web.

In one sense the more mature Microsoft he has been cultivating is better suited to the company's next frontier, the big business computing centers dominated by companies such as IBM.

In its first 28 years, Microsoft gradually worked its way up from making software for desktop PCs to software for the server computers that power business networks, Web sites and e-mail systems. Its assault on large-scale, business servers begins in earnest this year with its new Windows Server 2003 debuting in April and a new database, test versions of which could be introduced by summer.

Expanding its foothold in corporate computing centers may also help Microsoft build a lucrative business providing Web-based services, which would allow users to transact business or exchange information online no matter what kind of device they have.

So far Web services have failed to excite investors, but Ballmer believes it's a revolution in the making, noting it took investors 20 to 25 years to realize the potential of the Internet.

"The fact that it's not lighting somebody up today doesn't mean it's not a revolution," he said. "The personal computer, hey, the original forecast for the PC was to sell, what, 15,000 to 30,000 units, that was IBM's total forecast. They didn't light anybody else up to get started."

Risks ahead

Moving into these areas may be the riskiest part of Microsoft's strategy under Ballmer. It involves a tricky balancing act that pits Microsoft's growth aspirations against its pledge to be a better partner and leader in the industry.

It means Microsoft may be competing tomorrow against companies that are its allies today, a situation that has created tension and distrust in the past. For instance, Microsoft last month launched a product that competes with similar business software from San Mateo, Calif.-based Siebel Systems, a longtime partner.

Microsoft is also being sued by Sendo, a British phone maker that alleges the Redmond company used their partnership to obtain inside information on how to develop mobile phones, then pushed the company toward bankruptcy. Ballmer declined to discuss the situation, but Microsoft recently countersued, alleging Sendo's suit is baseless.

Then there's the matter of Linux, the free software that's emerging as one of Microsoft's primary competitive threats. Microsoft has difficulty refraining from attacking the "shared-source" software concept that underlies Linux. An internal memo leaked last summer indicated that Microsoft's negative statements about Linux were failing and, in some cases, backfiring. But Ballmer still cannot resist getting in a few digs at what he called a "hobbyist product."

"It's got Unix roots. Unix has had historic strength," he said. "But at the end of the day, I'm quite sure we can out-innovate and deliver sort of a better solution than the work of a bunch of uncoordinated hobbyists."

Persistent critics would contend that little has changed in Microsoft's attitude or behavior. Sun Microsystems Chief Executive Scott McNealy, who grew up near Ballmer and met him at Harvard, said last August that Microsoft was still up to old tricks such as politicking behind the scenes to keep Sun out of an industry standards-setting body.

"This is new, this is recent, this is since Ballmer took over and changed it into a kinder, gentler company," he said sarcastically.

But other longtime observers contend the company has changed. Anderson, the technology commentator from Friday Harbor, noted that the "tough competitor" in Microsoft remains and is probably one of the hallmarks of a great company.

"The difference, if there is one," he said, "is the company will be satisfied to win against competitors but not kill them, to negotiate tough deals with its own partners and customers but not unreasonable deals.

"That's different," Anderson said. "It's a big change."

Some changes made

Ballmer acknowledged the changes are a work in progress. He said, for instance, that other companies may be intimidated when Microsoft moves into new markets, and that some will see their market opportunities diminish.

"I think there are probably plenty of people in the industry who wish we wouldn't do anything new," he said. "We could stop R&D spending and do nothing, and that creates plenty of opportunity for others, I suppose. But I don't think it's in the best interest of customers. So we have to let everybody know this is in our customers' best interest."

Stone, the former Microsoft executive, said other companies considering a partnership with Microsoft appreciated it when she explained that Microsoft might well move into the area at some point and compete with them. She said she urged them to carefully consider how much of their business plans they wanted to share.

"There is so much change and uncertainty in the industry," she said. "I always encouraged people to keep their eyes wide open and consider very carefully what information they wanted to share and with whom."

A few tentative steps also have been taken concerning industry leadership. In the past year Microsoft has taken positions on the corporate accountability at the heart of recent massive financial scandals. Last summer, Ballmer expressed concerns about the technology industry's reluctance to include stock options when calculating operating expenses, though Microsoft still does not factor them into income statements.

The company broke ranks with most of the others in its industry by committing to pay its first dividend in the current quarter. By doing so, it may have pressured Oracle, Cisco and other cash-rich technology companies to return cash to investors.

Under Ballmer, Microsoft also has a higher profile in government affairs. He has met several times with members of the Bush administration, and the company was a major supporter of the state transportation-funding package that voters rejected in November.

Closer to Microsoft's own house, Ballmer's reorganization turned up the pressure on leaders of the business units by putting their performance under public scrutiny. Investors now get reports on how each division is performing financially.

The new structure was intended partly to explain to investors how Microsoft was expanding into new markets. It also revealed for the first time how much money the company is losing in its efforts to diversify beyond PC software into Internet services, gaming and mobile-device software.

A continuing challenge for Ballmer is tying it all together, making sure that divisions cooperate, take advantage of each other's strengths, pursue a common strategy and avoid overlapping. In the past, Microsoft has overlooked big opportunities, most notably the potential of the Internet in the early 1990s.

But too much oversight can be stifling. Ballmer said he's aware of the risks of too many meetings — this is a guy who uses a spreadsheet to manage his schedule — and he is fiddling with the structure of the company's various high-level leadership teams that coordinate strategy.

Avoiding IBM's fate

One cautionary tale is the fate of IBM in the 1970s and early 1980s, when Microsoft wrested away control of the PC platform. IBM was the dominant company in the industry, an established leader that had emerged whole from a federal antitrust review. But it had become a plodding, vulnerable monolith that was nearly smothered by its management processes.

"I've been around IBM, and I saw how IBM overdid it," Ballmer said. "Maybe we will, maybe we won't, but we have strategy control, we have technology control, we've got financial control."

No matter what, Ballmer said the company will continue to push hard.

"Are we going to have to be aggressive in telling our story and convincing people we have new things? Yeah, we are. That does not go away, it cannot go away," he said. "The day we're not ... being vigorous in terms of pursuing new ideas at low prices with sort of incredible persuasiveness, that's the day you ought to write us right off."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com




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