After the Peak: Microsoft

Today’s Wall Street Journal article concerning the “radical reshaping of how Microsoft develops software and services in the face of competition from a new generation of Internet services” is rather amusing to me. Reading of Microsoft’s very late, panicked reaction to the destruction of the environment which favored its rise to power reminded me viscerally of my time with AT&T in the late 1970s and early ‘80s. It also fits with the findings of my proprietary research concerning how long large-cap companies can sustain a path of consistently superior performance.

Bill Gates’ new manifesto won’t work as imagined. At best, Microsoft may develop several competitive offerings for web-based services. However, the days of the desktop operating system being a gatekeeper are now over.

Gates and Microsoft are fortunate to have picked up Ray Ozzie, but I doubt it will really make a difference in Microsoft’s ability to dominate a significant software product/market niche again. Ozzie’s success with LotusNotes demonstrates that he just sees the world differently than his employers at Microsoft have, do and will. So it’s unlikely that the full value and intent of his thinking will be executed at his new corporate home. It’s too late in the game now. MSN Messenger, the web browser, multi-platform operating systems, a search engine, all were nascent at Microsoft while someone else succeeded with them as a business model. This was no accident.

This is why, to me, Microsoft now looks a lot like AT&T did when I first joined it in 1979. It was a large company by virtue of its position in a soon-to-be obliterated competitive landscape. The guys who ran AT&T thought they could control how they would allow competition to affect their very large organization. We had tons of meetings and projects, always infused with the top-down attitude that when we were ready, when AT&T really hit back, then the market and competitors would be stunned with our offerings and success. Well, it never happened, because those senior executives simply could not comprehend the magnitude of the environmental change coming over them. AT&T was first with the transistor, multi-media telephony communication, data switching and processors in the network. At one time, its subsidiary, Teletype, completely controlled the terminal market. To what end?

It looks like the same thing has happened to Bill Gates. Rather than spend weeks alone in some lakeside cottage, sipping sodas and reading a lot of navel-gazing papers from his own employees, he should be out among consumers, watching what they do, listening to what they want.

These personal observations are reinforced by my extensive research on corporate performance. It is astonishingly hard for one company to accomplish what Microsoft did in the 1980s and ‘90s. The firm hasn’t been in my list of consistently superior return generators in this decade. For a technology company to return to the list is virtually impossible. What made it great, its focus on its then-crucial competitive advantages, virtually guarantees that it will find those advantages blunted by later competitors. So long as the firm remains even remotely attached to its earlier product/market strategies, it will not return to its prior success in the equity markets.

Frankly, so long as Gates remains the leader of Microsoft, whether chief technical officer or not, it has virtually no chance of returning to its former status as a consistently superior total return creator.

To be continued…………