IDC Viewpoint: Microsoft's Steve Ballmer Announces Plans to Depart: End of an Era

By: Al Gillen, Program Vice President, System Software

Frankfurt, (PresseBox) - The surprise announcement by Microsoft CEO Steve Ballmer that he would resign in the next 12 months caught the industry by surprise. While there have been frequent suggestions from the investment community that Ballmer step down, up until now, it appeared that those suggestions were falling on deaf ears. The news set Microsoft's stock price on an immediate upward trajectory, gaining 6% in the hours following the news, which indicates the investment community sees this as a positive.

The departure is slated to take place after a replacement CEO is found, with the company saying that a board-level committee had been formed to seek a replacement and would consider both internal and external candidates. In the mean time, Ballmer continues in his current role.

This is truly the end of an era, with Ballmer having spent virtually his whole career at Microsoft since joining the company in 1980 when Microsoft was a tiny $8 million start-up. Things have not always been smooth for Ballmer, and during his tenure as CEO the company has faced a number of challenges. During this period, the company has, at times, been sluggish to respond to dramatically changing market conditions. But nobody can deny that the company grew during his leadership. He took over the CEO role in 2000 to a $23 billion company, and he will depart with the company on a $70 billion run rate.

Among the challenges the company faced during his tenure as CEO were the emergence of Linux and open source software, the emergence of x86 server virtualization, the growth of online search, smartphones, tablets, and cloud computing. It is easy to point to most of those as missed opportunities or missteps, most of which Microsoft would later realize to be critical to long-term success. In many cases, Microsoft ended up making a massive "catch-up" investment to bring the company back into the tier 1 competition.

Ironically, the company actually led the industry into at least some of these technology shifts. There was a Windows phone long before there was an iPhone, and there was a tablet PC (remember Windows XP, Tablet PC Edition?) long before the iPad took the industry by storm. But none of these products caught on, eventually fading into history, only for Apple (in these two examples) to come along and perfect the concept. We would argue that Microsoft didn't miss the boat on cloud computing and has been investing heavily in Windows Azure since that technology was launched back in 2008. Microsoft's investment in Windows Azure is massive; the full impact of that investment has yet to be fully felt in the industry and accordingly is overlooked by many industry observers that point to Amazon as the early winner.

The argument can be made that somewhere along the way, Microsoft transitioned from a scrappy start-up to a mature and increasingly conservative company that became more of a fast follower than a true innovator. If you look at Microsoft's success in breaking into new market opportunities, in many cases that view would prove true.

The recent reorganization that Ballmer unveiled was sweeping and impactful, but it is not clear that the reorganization would make the company become more willing to take risks, and there was no indication that the company was willing to change its long-standing philosophy of protecting its children, rather than cannibalizing its product base with next-generation products - which at times might mean a lower margin but potentially much higher volumes.

Finding a replacement for Ballmer is going to be challenging at best. Given the company's legendary internal culture, with its highly technical, competitive, survival-of-the-fittest environment, bringing in an outsider will be risky at best. Any outsider is going to have to have impeccable technology credentials - make that impeccable hands-on technology credentials - to be respected by longtime Microsoft employees.

Internally, we believe the list is very short. Few of Microsoft's top executives have CEO experience at a company the size of Microsoft, especially among the technology executives. At the head of the short list is current Microsoft COO Kevin Turner, who has both been a CIO at Walmart and served as CEO of Sam's Club prior to joining Microsoft.

The real question becomes whether Microsoft's board wants the company to continue on its current trajectory, or whether it wants to take this opportunity to bring in an outsider with a visionary perspective who can sort through the Microsoft portfolio and match products with opportunities going forward. The company has a tendency to drink its own Kool-Aid, making it difficult for longtime Microsoft employees to put competitive challenges and opportunities into a truly objective perspective, which makes it harder for an internal candidate to make the hard decisions that Microsoft needs to make in the near future.

The challenges are real for the company. In cloud computing, competitors such as Amazon and Google present their own unique threat, but the long tail of cloud computing is going to be a haven for non-paid Linux operating systems, creating a long-term threat for the Windows Server business - and long-term downward price pressure. To the extent that Microsoft can move its existing customer base over to Windows Azure, that portion of the customer base can be protected, but the challenge moving forward is to capture new, not-yet-invented applications aboard Windows Azure. The company also faces a tough uphill battle in the low-margin business of smartphones and tablet computers. That was made quite clear by the enormous $1 billion write-down associated with the Microsoft Surface product at the end of last fiscal year.

Needless to say, the whole industry will be watching this transition carefully, and the type of executive that replaces Ballmer will say volumes about what Microsoft is going to look like during the next decade.

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