Ballmer Leaves Legacy of Blunders

Microsoft shares surge on CEO's departure
By Frank Yu
Frank Yu
Frank Yu
August 24, 2013 Updated: August 24, 2013

In a surprising move, Microsoft CEO Steve Ballmer announced on Aug. 23 he would step down from his post in the next 12 months.

Microsoft’s stock (NASDAQ: MSFT) soared following the news. It has become a joke among traders that Microsoft has long suffered from the “Ballmer discount.” Few analysts have confidence in Ballmer’s strategy or leadership at the helm of world’s largest software maker.

Ballmer, one of the company’s first employees in 1980, succeeded founder Bill Gates as CEO in 2000. He then oversaw the company’s transformation from a leading software company to an online, hardware, software, and video gaming conglomerate. He was confident, passionate, and a combative leader. 

Nevertheless, shares of Microsoft floundered during Ballmer’s tenure. Last year, hedge fund manager David Eihorn called for his departure, describing Ballmer’s presence as the “biggest overhang on Microsoft’s stock,” according to his column in Forbes.

But it’s hard to argue against Microsoft’s financial results during Ballmer’s leadership. He has grown the Redmond, Wash. based company’s revenues from $25 billion to $78 billion per year, a 212 percent increase. Net income also increased more than two-fold from $11 billion to almost $23 billion annually. 

Ballmer drastically increased Microsoft’s dividend payout, from 32 cents per share in 2005 to today’s 92 cents per share. He also steered Microsoft away from its traditional reliance on PCs and Windows and built strong franchises in business and data services (contributing $20 billion in revenues) as well as gaming and entertainment (contributing more than $10 billion in revenues).

However, stock performance hasn’t kept up. Microsoft shares are up 32.5 percent during the last ten years, while the benchmark Nasdaq Composite has gained 107 percent over the same time period. In finance terms, this is a substantial “underperformance.”

Much of the vitriol directed at Ballmer is due to a few major blunders along the way. They seem especially severe when compared to the successes of competitors such as Apple Inc. (in hardware) and Google Inc. (in software and online services). Let’s examine a few of the major ones.

Zune Music
Microsoft introduced Zune in 2006 as an answer to the wildly popular Apple iPod. The Zune business at Microsoft was tasked with developing digital music player hardware, digital media player software, and related music streaming and sales. In 2011, Zune was discontinued and folded into the Xbox business and its remnants are now part of the Xbox Music service.

While the Zune garnered good reviews, Apple was already entrenched in the marketplace. In order to unseat the iPod, Microsoft had to introduce a radically differentiated product that offered a better experience. It couldn’t, and the Zune became little more than an expensive paperweight. Even at its peak, the Zune never reached double-digits in market share.

As former Zune boss Robbie Bach admitted, the Zune was too little, too late. “The portable music market is gone and it was already leaving when we started,” Bach said in a Business Insider interview last year. “We just weren’t brave enough, honestly, and we ended up chasing Apple with a product that actually wasn’t a bad product, but it was still a chasing product, and there wasn’t a reason for somebody to say, oh, I have to go out and get that thing.”

Windows Phone
Again chasing after Apple, Microsoft embarked on an effort to develop a Windows Mobile platform in 2008 after seeing the tremendous successes of Apple’s iPhone.

While the company planned a 2009 release, delays in development followed and Windows Phone 7—its first modern mobile operating system—wasn’t released until late 2010. 

The next iteration, Windows Phone 8 (WP8), was marketed in a partnership agreement with Finnish phonemaker Nokia in 2011. By then, Google and Apple were already the dominant market leaders in the mobile computing space. The WP8 is a capable platform, but Nokia’s has weak North American distribution and Microsoft has weak brand-recognition. In addition to the lacking software eco-system support meant WP8 devices are relegated to the dreaded “budget” category. 

The WP8 experiment is still ongoing, but Microsoft is essentially burning $250 million in cash per quarter on a failing joint venture with Nokia. Sales have been decent outside of North America, but Microsoft must consider whether it is profitable to keep spending money on the low-end of the segment. This is even more important, considering the low potential for associated application and data revenues.

Surface RT Tablet
Continuing with the theme of “too little, too late,” Microsoft introduced the Surface tablet computer in an attempt to steal market share from Apple’s iPad and Android-based tablet devices.

The Surface RT, Microsoft’s first major tablet product, had potential and a massive marketing budget at launch. Apple’s three-year old iPad was the leader, while a slew of popular but fragmented devices running Android occupied the low-end of the market. The overwhelming majority of computers on the market still run Windows, and having a premium Windows-based tablet for mobile computing seemed like a good idea. At the very least, the market was there for Microsoft’s taking.

But last month during its earnings release, the company revealed a $900 million “inventory adjustment” charge on the Surface RT.

So what happened? One, the Surface RT refused the sell, at least at the $499 price point, which was the same as that of the iPad. There were a few reasons for that. The biggest was app availability— or lack thereof—in the Windows Store compared with iTunes. There weren’t any “killer” apps that would push a consumer to choose the Surface over alternatives in the market. 

Next was the hardware itself, which was sluggish and got bad reviews. Lastly, the customers who did buy into the product thinking it was an extension of their PC found that the Surface RT could not install most of the software for Windows 8, despite marketing materials that confusingly touted the device ran “Windows 8.”

Ballmer himself admitted in an internal discussion that the company “built a few more devices than we could sell,” according to an insider familiar with the discussions and quoted by the Verge website.

Ballmer’s retirement closes a long but tumultuous chapter in Microsoft’s history. While there were several well-executed expansions (Xbox, cloud computing) under his watch, his legacy is marred by the failures—especially compared to industry contemporaries such as Steve Jobs and Eric Schmidt. 

Frank Yu is a contributor to the Epoch Times.

Frank Yu
Frank Yu