The audience of 6500 Microsoft sales executives were on their
feet as Steve Ballmer, sweating under the auditorium lights, led
the rallying cry: "I love this company! I love this company! I love
His display of passion at Microsoft's annual sales meeting in
July wasn't a one-off - Ballmer has undergone throat surgery in the
past as a result of his tendency to become over-excited when
talking about his employer.
And if ever the world's largest software company needed a
rallying cry, it's now. Facing falling sales in the operating
systems and server software sectors, and increasingly sidelined in
the internet space, Microsoft's rapid growth has stifled much of
the entrepreneurial spirit that propelled its heady growth in the
1970s and 1980s.
From the outside, the 25-year-old company's performance looks
miraculous. Revenues and profits are rising at 30 per cent a year.
It has invested in or acquired 92 companies in the past five years,
but still has a market capitalisation of $400bn and $22bn in the
bank - more than any other US corporation.
Does that cash pile equal price gouging? Microsoft believes its
pricing policy is exemplary, despite recent criticism on that front
from analyst Gartner. "We have led the way in pricing," claims
Charles Fitzgerald, director of business development in the
platforms division. "Gartner always whines about everything - it's
Compared with companies such as IBM and Oracle, Fitzgerald
believes Microsoft is extremely cost effective. "Those companies
make half their revenue through services," he says. "They are
charging for the software, then the customer has to pay for a
rocket scientist to get it up and running."
More encouraging words come from Marks & Spencer, which uses
Microsoft everywhere apart from on the mainframe.
"I see Microsoft as a trusted advisor," says Mike Yorwerth, the
retailer's development manager. "The products give us massive
competitive advantage through their breadth and depth, ease of
integration and cost-effectiveness."
Nevertheless, cracks are appearing in Microsoft's armour.
While the company enjoys 88 per cent market share in the desktop
operating systems market, Apple and Linux increasingly threaten
that position. The open source upstart has gone from zero to
three per cent of global shipments in less than three years,
according to researcher IDC.
After 15 years of dominance, sales of server software shrunk
for the first time last year, slipping from 36 per cent in
1998 to 33 per cent in 1999. Here, particularly, the influence
of Linux is being felt, with open source software's global
market share jumping from seven per cent in 1998 to 17 per cent in
Indeed, the Halifax only adopted Microsoft NT technology because
the software company offered its technology free, in return for
"It was very much a marketing-led initiative," says Simon Brook,
senior business analyst at the bank. Although the Halifax has no
regrets about selecting Microsoft as a supplier, had another
company made the same offer, Brook is under no illusions about what
would have happened. "We would have taken it," he says.
Customers, meanwhile, had begun to be overwhelmed by the
Microsoft marketing machine, and felt that the company was more
interested in the bottom line than meeting their needs. When
Halifax rolled out its pilot ecommerce solution two years ago,
Microsoft gave the company its own dedicated in-house team of
developers and a product manager. While the technical staff were
pragmatic and realistic, the marketing team were prone to oversell,
But open source is only part of the problem: the real issue is
disquiet about Microsoft's dominance. Even at Marks & Spencer,
some felt that Microsoft had become overbearing.
"They were a bit arrogant in thinking that they could dominate
the whole server space," says Yorwerth. "I would like to see more
interoperability, such as being able to run NT on an IBM mainframe,
but I suspect that's just a pipe-dream."
Within Microsoft itself, things aren't what they used to be.
Staff turnover has risen to 7.4 per cent - still half the industry
average, but a significant increase for a company where churn had
remained static at six per cent for more than 10 years. With almost
40,000 employees, 183 products and five layers of management,
developers have become increasingly frustrated by Microsoft's red
tape. When one manager suggested a small improvement to the
company's Hotmail service, approval for the 30-minute task took 10
meetings and three months.
Staff and nonsense
"It's not only the number of people who have left, but who those
people are," says Rob Enderle, vice president of research at Giga.
The loss of Brad Silverman, who left Microsoft last year to join
internet incubator Ignition, is a blow to the company's internet
Silverman masterminded the development of both Windows 95 and
Internet Explorer. Ignition has also recruited seven former
Microsoft managers from Silverman's team, including Jonathon
Roberts, former head of Microsoft's Windows CE division, and chief
technology officer Nathan Myrhvold.
Other significant losses to fast-moving competitors include
Peter Neupert (vice president of Microsoft's internet group), Steve
Perlman (founder of the Web TV division), and Ben Slivka (internet
developer); the latter left last year to join Amazon.com. Now even
co-founder Paul Allen has left the board.
"Microsoft has become autocratic, and as a result has lost some
of the best thinkers," believes Enderle.
The Microsoft culture remains unique within the industry,
characterised by unstinting loyalty and hard work. Greg Rankich, a
project manager in the infrastructure division, typically works
60-hour weeks or 90 hours in the months before a product launch.
"It's the hardest thing, but nobody complains," he says.
This work ethic is lampooned by a company-wide email headed
'Burnout Prevention: Health tips for the 90s and their Microsoft
equivalents'. Under the health tip, 'Refuse additional demands on
your time or emotions' comes the Microsoft equivalent: 'Never say
no to anything. It shows weakness and lowers the stock price. Never
put off till tomorrow what you can do at midnight.'
Today, some customers find Microsoft employees worryingly
homogeneous. "A lot of these guys look the same, sound the same,
and even eat the same thing in the company canteen," says Marks
& Spencer's Yorwerth. "It's as though there's a Microsoft
cloning machine in one of those corner cubicles."
While the changing culture has certainly driven out staff,
Microsoft's stock performance is another key factor, according to
Enderle. "They can often make a lot more money, more quickly, at a
startup," he says. Employee stock options had been one of the
company's most effective staff retention tools, but with
Microsoft's stock taking a battering courtesy of the US Department
of Justice (DoJ), their appeal is waning.
If one becomes two
The Department of Justice's campaign against Microsoft, which could
take two years to resolve in the appeals court, has created an air
of uncertainty among employees.
"It's certainly harder to keep people focused on the task in
hand with all this stuff going on outside the company," says Steve
Guggenheimer, director of consumer strategy at Microsoft.
If the US government does succeed in splitting Microsoft into
two separate entities, it will certainly throw a spanner into the
works. The operating system would be part of one company, and the
web browser and applications development part of another. The
proposal would not allow the two companies to do business with one
The impact on Microsoft .Net would also be huge as it rests on
the integration of Windows servers and applications to web-based
and mobile appliances.
Regardless of what the DoJ eventually orders, .Net shows just
how far the company has come in five years. In 1995, analysts
claimed it had missed the internet boat and had lost too much
ground to competitors to recover.
Looking at those years, it's easy to see how Microsoft missed
the warning signs. Between 1990 and 1993, the company saw sales
grow threefold to $4bn, and headcount mushroom from 5600 to 14,400
on the back of Windows. The internet was still the preserve of
techno-geeks, and didn't register on the Microsoft radar. "If you'd
told me then that most ads would one day have URLs on them, I'd
have laughed," Bill Gates was to comment later.
Like many other Silicon Valley giants, Microsoft wasn't
initially convinced of the internet's potential. When Gates'
technical assistant Steven Sinofsky returned from a visit to
Cornell University in February 1994 with tales of students using
email and downloading lecture notes from the web, he was virtually
He was eventually dispatched to work with Jay Allard, at that
time the only Microsoft employee with the word 'internet' in his
The two men worked on Microsoft's first web server, and urged
Microsoft to invest in companies such as AOL and Mosaic - which
developed the world's first web browser and was soon snapped up by
Jim Clark to form the basis of Netscape Navigator. The work of
Allard and Sinofsky was overshadowed by Windows, however, as the
company worked to ship Windows 95 on deadline.
While Microsoft dragged its heels, Sun Microsystems, Netscape,
Oracle, IBM, AOL and a thousand other startups rushed into the
space where Microsoft wasn't. The response in Redmond remained
muted until late 1995, when the internet population had reached 20
million - or, in other words, 20 million people using the internet
without using Microsoft software.
Gates issued a company-wide memo entitled 'The Internet Tidal
Wave'. He wrote that the internet was the single most important
development in technology since the PC, and would be assigned the
highest possible priority.
The company knew that it had a lot of ground to make up, says
Fitzgerald. "That time was known internally as the oh-shit phase,"
he says. "We were by no means a power in the internet space, and we
had to do a lot of work in a space that was moving incredibly
IP, IP, hooray
In December 1995, Gates presented his vision of an internet-savvy
Microsoft to 3000 customers in a mammoth presentation.
"It was five hours long," notes Guggenheimer. "And it took a lot
of work to get it down to that length." Gates' vision encompassed
Microsoft web browsers, web servers and internet connected
software. In early 1996, Gates ordered a reorganisation of the
company around the internet, creating a new 3000 strong division
dedicated to the internet platform and tools.
Between 1996 and 1999, the company released the promised web
servers, web server software and included internet protocol (IP)
into most of its products. Internet Explorer became the leading web
browser, while Hotmail and MSN also led the market in their own
sectors. "This was known as the go-grind-it-out phase," says
But in the middle of all the grinding, Microsoft was missing the
point, he believes. "We put out a lot of products, but we were too
server-centric. Basically, we allowed the internet to be defined by
other people," he says.
Among those defining the internet was Larry Ellison, chairman of
rival software company Oracle.
At the height of his powers Ellison, never one to miss an
opportunity to rubbish his rivals in the Redmond camp, said: "The
company's biggest problem is that it missed the internet and has
all the wrong products. As the PC recedes in importance, Microsoft
recedes in importance."
Microsoft's .Net is designed to stop that process. It is a
complex strategy, and one that the company is still struggling to
fully articulate, admits Fitzgerald.
"Historically, we have focused on a single application, and it's
pretty hard to make that rickety software work with something
else," Fitzgerald says. "But when you're constantly connected to
the customer, throwing the CD over the wall and washing your hands
of it becomes less of an option."
Confidence in Microsoft is running at record levels, reports
Fitzgerald. He doesn't see a way that the company can lose. "We
think of it as having the best of both worlds," he says. "Sort of
like running downhill with the wind on your back."
It's certainly a nice idea, says Laura DiDio, research analyst
at Giga Information Group. "But Microsoft is hardly a pioneer in
this respect. Other firms, notably Oracle, are already forging
ahead with this approach."
Over the next four weeks Microsoft will launch its biggest ever
family of servers, all incorporating .Net technology. This follows
the launch of .Net Enterprise Server, an XML-enabled product that
includes everything from SQL Server to Commerce Server.
Business customers will probably gain more immediate value from
Microsoft's moves into the ASP market. Responding to the growing
interest for many businesses in applications that are offered over
the web as services, the company has begun offering desktop, server
and Exchange messaging software for rent. It's quite a gamble - the
applications division accounts for more than 40 per cent of
Microsoft's annual revenues, and isn't a market it can afford to
"We have been a little cautious entering this market," admits
Donna Bullock, ASP marketing manager at Microsoft UK. "But we saw
that companies were forming ASP offerings regardless of whether we
would help them or not, so we would have lost the market," she
Microsoft is negotiating with 22 ASPs in the UK to offer monthly
licensing deals based on subscriber numbers to support rental
services in place of traditional client licence fees, which were
shown to be unworkable during a nine-month pilot project.
"Microsoft realises that there will be more and more hosted
Exchange services that will have to compete with Microsoft's
internal pricing," says Dana Gardner, research director at Aberdeen
Group. "The old licensing model just wouldn't have been
While ASP might be at the heart of .Net, the division with most
to gain is the Stockholm-based wireless and mobility division. This
is perhaps Microsoft's weakest spot, says Enderle. "Microsoft knows
that much of the work currently done by PCs will be done by mobile
devices in a few years, and it has absolutely zero presence in that
Microsoft's repeated attempts to break into the wireless market
with Windows CE have been disappointing, with the first two major
releases of the mobile operating system being universally panned.
The criticism was fair, admits Richard Lind, director of marketing
for the mobility division, but Microsoft was under pressure to
release products before Palm took a permanent hold on the
"If you stay in the lab and hone a perfect product, you jump out
a year later to find that the market has moved on without you," he
Microsoft is quick to minimise the significance of the drubbing
it received at the hands of Palm, but analysts aren't so sure. "A
small division of a tiny networking company kicked them into
touch," says Enderle. "I'd say that's a problem."
Wireless has now become central to Microsoft's aims; much of
.Net is geared to any time, any place computing. This will give the
group a higher profile in Redmond, believes Lind.
"In the past, there was a level of ignorance within Microsoft
about the importance of the mobile market," he says. "A lot of the
progress on mobile internet was in Europe, and wasn't really
visible on the company's radar."
The focus is now evenly split between server software, aimed at
ISPs and corporate customers, services that reside on both the
server and client and the original devices themselves. "We don't
need buy-in on devices to succeed in this market," says Lind. "The
cash is generated on the server side."
Consequently, the technology currently being developed in
Stockholm is platform-independent, and will run on Palm, Epoc and
other mobile devices.
That doesn't mean Microsoft is giving up on Windows CE. The
company's third generation of the software, PocketPC, has all the
hallmarks of a workable operating system, says Kuznetsky.
The company is also investing heavily in a new version of
Windows CE for the smart phone market, code-named Stinger. This
will offer smart phones, wireless internet access with HTML support
and the personal information management software of Windows CE. The
company has signed a deal with Ericsson to bring the devices to
market next year.
Windows takes centre stage
There are other new products in the pipeline. Most important of
these is Windows 2000 and the imminent launch of Windows 2000 Data
Centre, in particular. Data Centre represents the company's first
foray into the high-end business space.
"This is a new market for us, and one where we will have to work
very hard," concedes Greg Rankich, a project manager in Microsoft's
IT infrastructure and hosting group.
Data Centre is aimed at users of high-end servers running
mission-critical applications, particularly in the finance and
government sectors. Mindful of its inexperience in this
Unix-dominated space, Microsoft is using the channel as a buffer,
and will sell Data Centre through partnerships with Unisys and
Compaq, among others.
"The challenge for us is how to sell this stuff," says Rankich.
"We think that the resellers will help convince customers that
Windows is ready for high-end, mission-critical deployment."
The number of new releases is very much down to Gates, who
stepped down as president to become chief software architect
earlier this year. Many within Microsoft were relieved by the move,
seeing it as evidence that the company would discover a renewed
focus. "They thought it was a great thing because he could get back
to thinking really big thoughts," Yorwerth says.
That promise hasn't quite been fulfilled, according to Enderle.
"I think Gates hasn't really delivered in terms of new
technologies, and the company is still a long way from being a
technology leader," he says. "A lot of that is down to being
distracted by the DoJ."
However, Microsoft has occupied itself with the technology that
will replace the PC. According to IDC, 12 million consumer devices
will be sold this year - close to the number of consumer PCs sold -
making this a key market for Microsoft. Top of the priorities is a
simplified version of the PC, says Guggenheimer.
"We are working on things such as the universal frame, which
gives the user one place where all of their information lives," he
explains. "It basically means creating smart software that knows
who you are, and can prioritise what you see accordingly."
The universal frame is part of a new Windows interface,
codenamed Neptune. This will replace the icons and file menus of
Windows with activities, such as communicating or managing finance.
Within Office, the company will offer 'smart tags' - hyperlinks to
web resources and other applications that dynamically address
content. For example, you might click on a product name within a
document to go to the product on the web, or to email the marketing
manager responsible for the product, and all without launching new
In Europe, where Microsoft's research and development is based,
the company is also working on usability. "We are focused on
technologies that will make it easier for people to use computers,"
says Oliver Roll, director of the enterprise customer unit at
Microsoft UK. "The labs are doing a lot of work understanding
speech and incorporating natural language."
Further into the future, the company is looking to integrate
biometrics into PCs and is testing iris recognition as a way of
increasing PC access for people with disabilities.
Got it red-taped
Now Gates occupies himself thinking big thoughts, the running of
the business is left to president Steve Ballmer. Since becoming
president last year, Ballmer has moved fast to put his stamp on
Microsoft. A businessman first and technologist second, his first
action on taking office was to conduct a series of interviews with
product managers. The results showed that Microsoft was seen as
increasingly bureaucratic, with communication and innovation
suffering as a result.
Employees found it hard to maintain links with colleagues in the
face of rapid growth and almost constant reorganisation. "The
culture has changed a lot as the company has grown," says
Guggenheimer. "You do still see the same people, but they are
working all over the company. It makes communication harder."
Ballmer's response to such perceptions was to launch a
comprehensive reorganisation of the company into five
customer-focused divisions, supplementing existing product
The reshuffle resulted in business units serving four groups of
customers: business users, consumers, knowledge workers and
developers. Customer satisfaction surveys are underway to gauge
their progress, and Microsoft is taking action to fix the problems
it identifies. For example, the company is hiring hundreds of new
account reps to address a support problem in large business
The move has revived the company's entrepreneurial flair, says
Bruce Burns, director of the business services group. "It feels
like having my own small company without the hassle of ordering
staples and looking after finances," he says. "They give you
everything to succeed here, and it removes the excuses for
Ballmer's reorganisation is only one illustration of his
commitment to the customer. Take the experience of Marks &
Spencer. When M&S was experiencing teething problems with its
Biztalk implementation, Yorwerth emailed Ballmer. The two had an
email dialogue over several days, and the problem was quickly
"I see it as a very responsive company," says Yorwerth. "I was
impressed, and a bit scared, because I had only met Ballmer for 10
minutes, months before at a conference in San Francisco."
Ballmer's business strategy and Gates' technical outlook are the
best chance that Microsoft has of make a difference in the 21st
century, says DiDio. "They are many things - stupid isn't one of
them," she says. The company's support of XML as the cornerstone of
.Net is a key step in the company being more open, and in its
survival. Let's just hope that Gates and Co really mean it when
they say they want to spearhead innovation through openness."