I know what you are thinking: why was this guy contacted in the first place, and why did he refuse? This might sound either crazy or very stupid, as taking over the most successful software company in the world would be a dream come true for many people. But recent changes in this industry, as well as changes in Microsoft’s management strategies, made me wonder and turn down this proposal. Here is why.
Everybody knows Microsoft and, if you haven’t lived on a desert island for the last few decades, you’ve probably used its products more than once. Even if you did not want to use them, its 95% share of the computer market makes it very hard for anyone to try anything else.
Miscrosoft’s amazing, decades-long domination is unique and has built a monster that has generated almost USD 78 billions in revenue (FY 2013), with a net income of over USD 21 billions, thanks to its 99,000 employees. This is the result of a long and steady growth that started back in 1975, but for this article I’ll focus on the last decade:
Despite the global financial downturn of 2009, that is a period of continuous growth and within ten years revenue has almost tripled. So, looking at this graph, you may wonder why I didn’t happily jump on board this train and quietly take my seat on the company’s epic journey to new heights?
Well, as I said to John Thompson, who is in charge of recruitment and a member of Microsoft’s board, there are two major issues about the company that should concern any candidate.
Firstly, the core revenue of the company is mostly concentrated around PCs. As mentioned in a previous note, PC sales are slowing down. The latest figures have not only confirmed this, but they have shown an acceleration of this slowdown:
After a peak in 2011, when 365 million PCs were sold (that is 1 million per day!), 2012 saw that number decline to 352 million and, in 2013, PC makers lost more ground with only 316 millions machines sold (0.86 million per day). That is a 14% decrease over the last two years! The problem is: this trend is not related to an economic downturn like it has been in the past. Instead, this descent into hell for the PC makers is purely related to a shift in consumer spending. Not only are enterprises and individuals turning away from classical PCs, and embracing tablets instead, most people tend to have an impressive nano computer in their pocket, thanks to amazing chips and miniaturisation. To name just one, Apple’s latest A7 chip – which is shipping with the latest iPads and iPhone 5S – contains more than one billion transistors. This is the equivalent to an Intel Core i7 Sandy Bridge, which you’ll find in any powerful desktop computer.
For the board and the future CEO, that observation must lead to a rethink of what Microsoft’s core business is today, and what it will be tomorrow, as most PCs sold today have a Windows system and Office. As PC sales decrease and the tension on prices continues to drive the whole industry, Microsoft is going to come under increasing pressure and a quick look at the revenues of every division starts to show us why:
Overall, all the company’s divisions look healthy and are enjoying a nice period of growth. However, if we look closer, the Windows division is clearly showing signs of slowdown, as less PCs are being sold which, in turn, means there are less Windows systems licenses. Also, the Surface RT tablet write-off for USD 900 millions hasn’t helped.
But this observation is only the tip of the iceberg. Let’s focus on the Fiscal Year 2013, which we can do thanks to this pie chart:
As you can see, the divisions that provide most of Microsoft’s revenues are Windows (operating systems for PCs, Surface, etc.), Microsoft Business (mainly Office and Exchange) and Server & Tools (operating systems for servers and many other services and products for enterprises), as they account for 82% of total revenues.
Now, if we look at income, it tells another story:
To cut a long story short, only three divisions make 97% of Microsoft’s income. They are helped by the 3% that the Entertainment division makes. All the other divisions lose money and by large amounts. But that is not all. The worse has yet to come, as Office products account for 29% of the revenue and Windows system for PCs an additional 22%. That’s a staggering 51% or over USD 40 billions! These cash cows are clearly dependent on PC sales and, as they are declining, it is very likely that this will have a strong impact on future results, which won’t be easy to compensate.
Of course, the new Surface tablet is supposed to bring in new revenues for them and, most importantly, a presence within the strategic tablet area. But the big question is, will it work, as their first attempt was a disaster? Plus, as European legal authorities allowed the acquisition of Nokia’s handset division by Microsoft, the company is going to add an extra 15 or 20 billions dollars to its revenue… but will this bring in more income? And ultimately, will this USD 7.2 billions investment be successful?
At this point, while at lunch with John, he goes: “But Tony, aren’t those challenges exciting?”
Sure, they are! But it is time to talk about the second and final aspect of why I politely declined this opportunity, and it comes down to people. When Bill Gates stepped down from his position as CEO and chose Steve Ballmer as his successor, he became Chairman of the board and created a new title for himself, in order to stay active within Microsoft as Chief Software Architect. Then, by June 2006, he had made the total transition from Microsoft to his foundation and dropped his position at the company he funded, keeping only one position: Chairman of the Board.
Meanwhile a review is mandatory and from 2000 until today, Microsoft has totally missed several major revolutions. To start with there was music. It was Apple that revolutionised the sector with its iPod and iTunes Store. Then, the smartphone was missed by Microsoft. To make matters worse, Steve Ballmer even laughed at Apple when they introduced the iPhone. Finally, the tablet is a new market where Microsoft is not only absent, but also cannot seem to find the right formula to get their share of the potential profits that are available.
To cut a long story short, Microsoft and its management has missed out on all of the major opportunities that have been created over the last 20 years or so.
Add to this, Steve Ballmer started the company’s first major reorganisation since it was created in 1975 last July before promising – one month later! – that he would stepdown from his position as CEO within the next 12 months.
But this is not the end, as Steve Ballmer is supposed to be staying on the Board of Directors, and there have been rumours that Bill Gates is showing an interest in once again making a more active contribution to the company that he created. How could this happen and, most importantly, what degree of involvement could a busy man like Bill Gates invest in Microsoft in order to renew the company? Is he tempted by the mythical Steve Jobs comeback at Apple? This might not be wise as, generally speaking, history rarely repeats itself and two different men have two different fates in life.
Now, how can a new CEO reasonably take responsibility for changing the company, get serious with smartphones, develop a new business with tablets, compensate for large income that is coming from two main cash cows, and also shake up the Research & Development department, which somehow spent more than USD 10 billions in 2013 (for what?) with the previous CEOs in the board of directors?
Or, to put it another way, how can he make sure that Microsoft gets ahead of the game by becoming a leader and not just a “wannabe” follower, when the only two CEOs that have driven the company for the last 39 years are on the Board of Directors?
As I explained to John Thompson on a final call, I would find it hard to face the challenges that I’ve listed above with this structure.
Of course, John said that I would be given a great deal of latitude and, as CEO, I’d be the one driving the company. However, as I would be a driver on very difficult roads, I’m afraid that I’d have to share the car with people who had only one idea in mind: to get behind the wheel and drive the car themselves.
With that in mind, how can you plan for your succession? And, just as importantly, how can you be sure that you and your management team are the right people to face the new challenges ahead?
PS: today’s note is fictional but the challenges and governance issues are not…