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January 29, 2001

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Where The Buck Stops

New dangers and opportunities emerged from Steve Ballmer's first year as CEO, but he's the guy with "the buck stops here" painted on his forehead.

By Stuart J. Johnston

teve Ballmer marked his first anniversary as CEO of Microsoft in January. Though the company once again posted record revenues and profits, it's clear that the madcap growth rates of the 1990s are gone. So what impact has Ballmer's presence as chief executive had on Microsoft?

First, because he felt that the company was losing its customer focus, he reorganized Microsoft into semiautonomous divisions, each focused on better serving a particular customer segment. This helped, somewhat, to streamline the company's reporting structure. He also instituted a belt-tightening regime aimed at wringing any fat out of budgets.

Mindful of Microsoft's reputation as a self-centered, 26-year-old bully, Ballmer set out to try to change that image. He appointed Linda Stone as vice president of industry and strategic initiatives, reporting directly to him. Stone is nothing if not a prolific builder of bridges and, if anyone can help the company communicate better with the outside world, she can. I doubt that we'll hear Steve say anything like "Phooey on Janet Reno" again any time soon, but you never know. He's an impulsive guy.

The company also announced two of the riskiest business initiatives it has ever undertaken.

Last summer, Microsoft announced .Net. Basically, .Net is built on the idea that software will become a Web service that users will pay for on some kind of subscription or pay-as-you-go model. Whether customers will accept a change from the perception that they "own" the software to one where they are merely "leasing" it, however, remains a giant question mark.

The second risky move is Microsoft's entry into the game-console market later this year. Microsoft has been shipping hardware since near its inception, but that has almost exclusively been mice, keyboards, and other peripherals. Building and selling computer hardware, which is really what the X-box is under the hood, is a brand new business for Microsoft, and one that is already crowded.

Unable to convince PC manufacturers to sell the X-box because game machines are almost always sold at a loss, Microsoft will ship the console under its own logo. But the real money is in selling the games, the software.

Though the X-box internally is a souped-up graphics PC, many gamers view a huge system like Windows 2000 as bloatware that slows graphics performance and may shy away from it. Additionally, the X-box will come to market a year after Sony shipped the PlayStation2. So even if the X-box can meet the hype of running three times faster than PlayStation2, gamers may not be willing to upgrade again so soon.

That doesn't account for the bad blood it may cause with PC vendors, either. Even though the PC vendors didn't want that business, they are bound to feel threatened, thus jeopardizing their longstanding relationships with Microsoft.

Given the vast sums and work hours that Microsoft has tied up in those two initiatives alone, one slip could cause stockholders to pummel the company's stock worse than they already have. On top of that, in December, the company issued its first earnings warning since 1989. And last spring, it lost its antitrust case in the lower court.

Obviously, it would be hard to point the finger at Ballmer and say any of that is directly his fault. But he's the guy with "the buck stops here" painted on his forehead.

Then, there are the almost weekly resignations of long-standing company executives. I'm on record as saying that I think this purging of old blood and the infusion of new blood, new executives who are looking at the world from a much more standards-based perspective, is a healthy change. So that is something good that has happened on Ballmer's watch.

Also, don't forget that while he has taken a lower public profile, Bill Gates has not left the building. Besides being chief software architect, Gates maintains his position as company chairman and its single largest stockholder. And given that Ballmer and Gates have been friends since before there was a Microsoft--they met at Harvard in the mid-1970s, and Ballmer has been with the company for 20 years--you cannot look at anything the company does without seeing both pairs of hands working in concert.

So although I see some losses, some gains, and new dangers and opportunities emerging from Ballmer's first year as CEO, you have to remember that we're actually seeing the Steve and Bill tag team at work once again. Look for things to get even more exciting in year two. In the new century, it's going to be a whole new ballgame.

Stuart J. Johnston has covered Microsoft for more than 12 years. He can be reached at stuartj@halcyon.com.

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