Victor Keegan on Microsoft’s worst enemy … itself
It’s lunchtime in the spacious restaurant. Outside the windows water flows gently over landscaped rocks and maple trees are starting to shed their leaves. There are millionaires to the left of me and millionaires to the right of me – though you would never guess from their casual attire and deceptively relaxed demeanour.
We are at the headquarters of Microsoft, the most aggressively successful company in the world and it’s all feeling a bit unreal. It is hard to believe that in these pastoral surroundings more wealth is produced than anywhere else on the planet. And all from a single product combining trillions of ones and zeros of binary code into spreadsheets, operating systems and the like.
To some, Microsoft – under investigation by the Department of Justice – is still the Evil Empire, threatening rivals and gobbling up potential competitors to protect its 90% global armlock on personal computer operating systems. To others, Microsoft is still the American Dream of hard graft and dizzy rewards made flesh.
The company has been expanding for two decades. This year the price of its shares has almost doubled to $110, bringing chair Bill Gates’s personal stake to $62,1-billion. The rampaging stock price has made its 28 000 employees millionaires (at least, on average) through a generous stock option scheme. In practice, however, the options (now worth nearly $30-billion) are heavily skewed towards senior management.
Microsoft combines the welcoming campus feel of a university with a formidable ruthlessness in business. But behind the deceptive Redmond campus calm, potentially seismic changes are taking place. Serious questions are being asked, inside as well as outside the company, about whether this steamrolling profit machine – with $17,2-billion cash in the bank – might soon go into reverse thrust.
None of these worries were obvious at November’s annual meeting of Microsoft at the Maydenbauer Center, Seattle. Gates and his board were given an ovation as they entered and another when the meeting finished. Microsoft must stage the only company meeting in the world where directors are besieged by shareholders asking for autographs. Gates was even asked to autograph money.
Microsoft is changing on several fronts. Most immediately, the American Dream is at war with its own government over alleged abuses of its monopoly power over a whole range of business practices. Gates vehemently resists all these charges and promises to refute them blow- by-blow.
Gates may be right. He had better be because the alternative could be the puncturing of what others see as Microsoft’s corporate pride and the eventual humbling of this supremely self-confident company. But Microsoft may not need the justice department to cut it down to size.
Top management is worried that the virtuous circle of recent years that has propelled the company ever upwards could soon turn into a downward spin. Greg Maffei, chief financial officer, flashes a battery of slides to show how past success was driven by 30% annual revenue increases and falling costs. This produced high profit margins leading to a soaring share price that hugely boosted the value of incentives (through stock options), making Microsoft the place where motivated movers wanted to be.
Now, he argues, turnover will slacken as sales of PCs are reaching saturation point while the main reason for the recent decline in the cost of goods sold (the switch from floppy disks to CD-ROMs) has run its course.
The cash benefit from the fall in costs has been used to finance research and development – running at an impressive $3-billion for fiscal 1999. If Microsoft’s revenue growth slackens while costs rise it will be caught in a double squeeze leading to a fall in its stock value. This in turn will make it much more difficult to attract bright new recruits – so the company will have to pay higher salaries instead, adding more to its cost base and threatening research and development spending. At present, according to Maffei, most recruits take a pay cut when they join because of the future attraction of options.
Another cultural change is that employees – the famous Microserfs – aren’t quite the workaholics they once were. The barometer of this is the company car park. Mike Murray, vice-president human resources, claims there are lots more spare parking lots at 6.45pm than there used to be seven or eight years ago. Why? Employees are no longer single. They are getting older and more than half are now married, including Gates.
Microsoft gets 15 000 job applications a month. Of these 150 to 170 are hired. Between 6% to 8% of employees leave each year. The main reason given: ”My job was no longer exciting.” But Murray emphasises that this is exceptional. ”We have several thousand employees who could go home and never work again. They’ve won the lottery. So why are they still here? It’s clearly not just the attraction of money.”
Of course you don’t have to believe the doom and gloom scenario. Microsoft has attempted to talk itself down in the past – but Wall Street has refused to listen.
Microsoft still keeps a tight grip on its golden geese, a 90% market share not only of computer operating systems but of the two leading software packages that run on them.
Microsoft is using part of its huge cash reserves to move into all the avenues opened up by information revolution, with a devouring ambition to dominate them all. Mostly it buys small companies in order to develop them. Corporate policy to ”embrace and extend” has led the company into HotMail, Web-TV, cable TV, wireless telephony, speech recognition, video transmission, electronic payments, software for gas pumps and so on.
While we were being given a presentation this month, a press conference next door announced the formation of a joint company between Microsoft and Qualcomm, the telecommunications company, to exploit mobile Internet access – a head- on response to the United Kingdom company Psion’s alliance with Nokia and other cellphone makers.
The most resounding impression gathered is the absolute refusal even to admit that Microsoft is in a monopoly position. Maffei points out that WordStar once held 90% of the market only to be dislodged by WordPerfect, which was then upended by Microsoft’s Word. It is rare for anyone to get a ”middling” share of the market, and Microsoft is merely ”investing to stop the next guy”.
This is a version of the argument by neo- classicist economists that technological monopolies rarely last more than a decade as new technologies regularly upstage them.
But is it true? Especially for a twin- track monopoly like Microsoft’s which has a 90% market share both of key products and the operating system to which they must be attached? Two things have changed in recent years. One is that products like spreadsheets have become so integrated with other Office-based products that the ability of a new product to succeed on its own is getting harder.
The second factor is that it is a key part of Microsoft’s strategy to look out for potential competitors so it can buy them out or take other action. Steve Ballmer, president of Microsoft, was asked what could topple Microsoft. Could it be a reviving Apple Computer? He replied: ”I’ve never thought of Apple as a competitor. I never have.” Java? ”It’s no threat as a programming language.”
And what about the Linux operating system? ”I wasn’t going to cite that one, but put it on the list,” he replied with an ironic smile.
It’s impossible to come away from Redmond without being impressed with Microsoft and its ferocious ”win, win” mindset.
But the company’s blanket refusal to admit that it is a monopoly despite earning a 27% profit margin on its sales and making millionaires of most of its staff is pretty eerie. It emphatically denies that it has done anything wrong or that the company might even change its spots as a result of the Department of Justice’s inquiry. Ballmer insists that the company has behaved with ethics and propriety ”100% at all times”.
Notwithstanding its oft-repeated warnings that its position in the market place is fragile, Microsoft has a self-confidence that borders on hubris.
And, as in Greek – not to mention geek – tragedies, that is what might bring it down if the justice department doesn’t do it first. Microsoft has nothing to fear except perhaps … itself.