Nokia Deal Marks a New Chapter for Microsoft

Investors applauded Steve Ballmer’s retirement, but any hope of change at Microsoft vanished when it decided to buy a piece of Nokia.

Microsoft To Buy Nokia's Handset Business For $7.2 Billion

Steve Ballmer, chief executive officer of Microsoft Corp., speaks during a news conference at the Dipoli conference center in Espoo, Finland, on Tuesday, Sept. 3, 2013. Microsoft Corp. agreed to buy Nokia Oyj’s handset business and license its patents for 5.44 billion euros ($7.2 billion), casting together the lot of two companies trying to stay relevant against fleet-footed technology rivals. Photographer: Henrik Kettunen/Bloomberg *** Local Caption *** Steve Ballmer

Henrik Kettunen/Bloomberg

On Monday night I sat down to put my thoughts to paper. I was going to pontificate on CEO Steve Ballmer’s departure from Microsoft, saying something along the lines of “With Steve Ballmer gone, at least Microsoft’s capital allocation will be better — no more multibillion-dollar acquisitions and consequent write-offs.” I opened my Chrome browser (I gave up using Internet Explorer a long time ago), and the first piece of news I saw: Microsoft had just paid $7.2 billion for Nokia’s handset business.

Before I get into the Nokia acquisition, let me talk about the two Microsofts: the Bill Gates Microsoft that died in 2000 when Gates retired as CEO, and the Microsoft that was born when Steve Ballmer took over.

Bill Gates built an enormous, one-of-a-kind company with insurmountable competitive advantages. It was not great at innovation but was terrific at copying; it would take a product made by someone else and make it much better. WordPerfect, Lotus 1-2-3, Novel, Lotus Notes, Borland Paradox — all these products and the companies that made them were replicated out of existence by Bill Gates’s Microsoft.

Bill’s Microsoft was not perfect. It almost slept through the Internet revolution, but when it woke up it marched on with a vengeance and reclaimed its relevancy.

Bill Gates retired as CEO in 2000. Although he remained chairman, his focus was on how to give away rather than make money. Steve Ballmer, his former Harvard University dorm mate and faithful No. 2, became CEO. The irony of Ballmer’s Microsoft is that although revenues and earnings have almost tripled since he became CEO — not a sign of a failing leadership or mismanaged company — Microsoft nevertheless became less relevant, missed significant technological transitions, and lost its market dominance in mobile to Apple and Google. It allowed Apple to take over the tablet market; and despite spending over $10 billion on search, its market share in search pales in comparison to Google’s. Yes, the company’s financials look impressive, but they were delivered on autopilot by the Microsoft created by Bill Gates. Microsoft is an air carrier that gained speed in the ’80s and the ’90s, and has been coasting on momentum (inertia) ever since. But momentum is finite, and there are always storms en route.

Blaming Steve Ballmer is easy — after all, he was in charge — but Microsoft’s problems are programmed into its very DNA: Prolonged success begets failure. The more successful you become, the more entitled you feel to success. Bureaucracy gradually slips in, layers of middle management grow, your culture starts to degrade, and you simply become too big to be innovative (or in Microsoft’s case, replicative). You wake up one day and discover that you have 100,000 people working for the company and too many of them are in middle management. Ballmer’s failure is not missing technological transitions; Microsoft missed them in the past and was able to catch up. His failure is his inability to deprogram that DNA fault.

Microsoft’s culture was further degraded by a compensation system that resembles a corporate version of the Hunger Games. Instead of being compensated based on their skills, contribution to the team and success of the final product, employees are rated on a bell curve system that makes employee success to be a byproduct of the debasement of others. Even if every member of a team is of “A” caliber the bell curve system cannot accept that; it needs losers and winners. To be effective and well compensated employees don’t need to be good at their jobs, they need to be good politicians. This turned Microsoft from a technology company into the U.S. Congress and therefore its software products started to resemble legislature by Washington’s finest — bulky and full of pork.

It is hard to stress the importance of culture for a technology company; after all it is a transit system for creativity. In an industry that was moving fast, Microsoft became fat and slow. Its products suffered. This brings us to Windows 8. I installed a preview version of Windows 8 on my computer a few months before it was officially released and was shocked at how horrible the product was. I am a computer geek, but I could not figure out how to use that product. Windows 8 was not just buggy, it was thoroughly terrible. (I penned an article about Windows 8 and my firm sold our Microsoft shares.)

I had nightmares about my father buying a notebook with Windows 8 installed and asking me for help. Only a company that is internally broken can release a product that is so important yet so bad. Microsoft did not have to release to know Windows 8 was a failure; it just had to open a browser page and do a Google search. After the release, Microsoft help sites swarmed with confused and angry people like me.

A friend of mine who used to work for MSN Money told me a story that highlighted how broken Microsoft was. At an editorial meeting somebody pointed out that a portion of the company’s website needed a small tweak. He was told that it would take a month to get it done. Remember, this did not happen at General Motors but at what was supposed to be the most advanced technology company in the world — the one that makes the software that runs the guts of our universe.

Investors applauded when Steve Ballmer announced his retirement, and the stock jumped. But the celebration is premature. Microsoft is not a growth stock that is taking a break from growth; Microsoft is a giant in desperate need of a turnaround. If the company continues to function as it did over the past ten years, it will die. The death will be gradual and at first barely noticeable, because its lock on corporate customers and its cash-rich balance sheet will afford it a slow death, but nevertheless it will have seen its best years and never be great again.

Microsoft needs a new CEO who is an outsider and not entangled in internal politics. It is in desperate need of a Lou Gerstner-like leader — who turned around another tech colossus, IBM Corp., in the ’90s — not a Steve Jobs visionary but a good manager, one who will slowly and methodically fix the broken culture (probably laying off a third of the workforce) and narrow its focus by slimming down the company.

Everyone is fixated on the price tag of Microsoft’s acquisition of Nokia’s mobile business. Most likely, the loss that will result from it is irrelevant, since $7.2 billion is just a few months of Microsoft’s cash flows and less than $1 per share on its balance sheet. But Microsoft needs to fix the culture of its 100,000-person workforce, and Nokia comes with more than 30,000 employees and its own culture ridden with success and subsequent failure (at least both companies have something in common). Microsoft’s turnaround just became at least 30 percent more difficult.

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