Penetrating Ballmervision

Penetrating Ballmervision

Summary: Microsoft CEO Steve Ballmer gave a disjointed presentation about the company, R&D investments, increasing operating expenses and a pile of cash. But what he really said was far from clear.

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TOPICS: Windows
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I've watched Steve Ballmer in coversations over the years and know he's a smart guy. Everyone has seen his Dance, Monkeyboy, Dance performances, so anyone can guess that his management style borders on the feral. After several hours of reading and rereading the transcript of Ballmer's talk this morning at the Sanford C. Bernstein & Co. Strategic Decisions Conference, I'm stumped as to why Microsoft sent Ballmer to present at this investor conference. He was the feral management bot, defyingWindows and Office are and are not the "core," according to Ballmer. This is emblemattic of a lack of focus. investors need for simple answers to questions about where Microsoft is going, using their money to take the trip.

Ballmer's disjointed presentation about the company, R&D investments, increasing operating expenses and a pile of cash was the subject of several different news reports, each focusing on one aspect of the presentation. But the whole was a perplexing mish-mash. This extract, which takes two sections about Microsoft's "core" investments, is representative:

We have to grow what I called our core. Core doesn't match segments. That kind of threw people off a little bit. But everybody in their heart and soul kind of knows what our core is. It has nothing to do with Windows and Office.... In our core, we've got a lot to do. Windows and Internet Explorer—Windows is a product thats got to be watered every—periodically. We've gone a bigger gap than I would like to go, Windows and IE. There's a lot of innovations still coming in Internet browsing, in hardware. There are so many things we need to do and if we don't keep Windows fresh, Windows will not continue to flourish. The same with our core Office product.

Windows and Office, as you can plainly see, are and are not the "core." This is emblemattic of a lack of focus. Ballmer also started his talk describing how Bill Gates had insisted the company had 60 or 70 things it needs to do within the context of the upcoming year's R&D work. This is alarming to investors, because it doesn't sound like Microsoft has any direction or, rather, way too many directions.

To be fair, Ballmer's describing Microsoft's product development efforts, which are labelled as part of the company's $7 billion in R&D spending but in fact represent product expenses. A very revealing moment in the talk came when Ballmer explained that only a quarter-billion dollars, or about 1/28th of Microsoft's annual R&D spending, is dedicated to pure research that might produce breakthrough technology: "Of course we always have our research group, which I feel super good at. It costs us about $0.25 billion a year roughly and it is the best spent $0.25 billion in our budget perhaps."

I'd be a lot more comfortable with Microsoft's increased spending if more of it were dedicated to advancing computer science, I/O technology, network services and security without regard to specific products, like the MSN/Windows Live software-as-a-service effort, because productization is infinitely more expensive due to the heavy reliance on marketing to take the idea from beta to commercial success. More high concepts from Microsoft Research would yield many more market opportunities.

Marketing for the Windows Vista and the next versions (packaged and "Live") of Office account for most of the additional $2.6 billion in spending Microsoft has slated for the next year. If the company spawned 500 good hacks and put them into the world with their Windows API hooks, they'd drive the adoption of Vista far faster than through advertising.

Ballmer's business logic likewise ran to the impenetrable. His answers to questions about building or buying technology, R&D vs. product development and "big products or little products" were consistently "both." He said being first to market was "more fun," which may be true but doesn't comfort investors who are used to Microsoft's fast-follower approach to software. For 30 years, Microsoft has capitalized on being second and ubiquitous, not first and fun.

The really cogent argument Ballmer did offer for the reliance on internally developed technologies and products was XBox. He pointed out that, if Microsoft had acquired Nintendo (whose U.S. headquarters is just down the street and now surrounded by Microsoft's campus), it would have spent three to four times as much as it will lose in the early years of XBox and "we would have had a business we didn't understand as well, wasn't as good, wasn't as well-positioned and essentially would have cost our shareholders an additional $6 billion, $8 billion." All true, yet it doesn't seem to inform Ballmer's strategic approach to extending Microsoft's business.

If the build-it-don't-buy-it case is proven by XBox, Ballmer should be much stronger in his defense of Microsoft's $35 billion cash reserve, more of which should be going into basic research now to put the company at an advantage later. He called having that much cash a "first-class" problem, but he didn't offer any proof that it was being used better by the company. Instead, Ballmer merely insisted that there was a lot to do. His comments about "role-based productivity" software are interesting, but the fact that is a "big investment" doesn't translate into projectable spending and return on investment.

Of course, that would mean making a promise to deliver product on time, so, well, maybe there is a reason for Ballmer's vague statements.

All in all, the event doesn't give me much confidence that the reorganizations and realignments at Microsoft are translating into better use of assets. There's a lot to do, Steve, but maybe you'd get more mileage from a fanatical focus on finishing one or two "core" products or, even, getting out of some segments that would be better served by third-party ISVs who use Windows technology but could feasibly support cross-platform enterprise environments with a straight face. It seems to me that most of the changes at Microsoft are still to come, and that the fortress office of the executive may be where change is needed. If only Ballmer and Gates do more embrace change than to reinforce Windows, it would be a win.

Topic: Windows

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5 comments
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  • using the 'XBox' as a model? Investors should see RED

    I'll ignore the Balmer specifics, love the man. He's just misguided.
    XBox sucessful?
    How can Microsoft keep making statements about their XBox being a success? No other compnay would allow a product line to consistantly loose $1 billion annualy, if that company could stay in business. They can keep throwing other people's money at it for a while it seems as they had to correct their initial XBox launch 3 years into it's life span and relaunch with XBox 360. But the XBox 360 uses dual layer DVD disks that only contain upto 8GB (roughly) of data, movies etc. This is the same drive in the original XBox. This DVD standrard as everyone knows does not support high definition encoding. Which ironically is the corner pin in the XBox 360 startegy, high definition. So HD-DVD and Blue-Ray formats have emerged to replace the aging DVD standard. So how can Microsoft say that the XBox 360 is really a high definition gaming system when the console doesn't support it. And to confuse consumers even more, they plan to release a HD-DVD add-on for the XBox 360 to play movies. No games, movies only.
    So in 3 years from now, when Microsoft is still issuing games on Xbox 360 at 8gb DVD and Sony is distributing all games for PS3 on 50gb Blue-Ray media, which company will abadon all their installed user base, shun developers targeting current platforms and release a another console to catch up? Maybe Microsoft should have bought Nintendo, they could of learned how to turn a profit (in the XBox division) from the ONLY console company currently generating one.
    scole39
    • Two points

      I don't agree that the console is a failure, because the goal has
      been to claim market share. It's Microsoft's business model to
      get a base and defend it?granted they won't get anything like
      the 90% share of the PC market, but they've carved out a lot in
      four years. I think they can migrate to whichever hi-def format
      actually wins with plenty of leeway, because the games can be
      "upgraded." There's no reason to think that Halo 2009 couldn't
      ship for a new Blue-Ray XBox, offering gamers 40 new levels and
      with advertising that keeps the cost of the game below
      competing Sony titles. The challenge is having the installed
      base, even if just to get it to migrate (see the history of MS-DOS
      and Windows).

      Second point, Ballmer made that argument well, in my opinion,
      but doesn't use it to support any other aspect of the business
      vision he laid out. The guy could really use more rehearsal and a
      better writer.
      Mitch Ratcliffe
  • Being understanding.

    The quote sounds like Mr. Ballmer was thinking on his feet. And haphazardly selecting the explanations that went to the audience. They are comprehensible, though.

    Let's take the easier part first:

    "Windows and Internet Explorer?

    Windows is a product thats got to be watered every?periodically. We've gone a bigger gap than I would like to go,

    [On Windows, too long a gap between XP and Vista]

    Windows and IE.

    [IE is part of Windows, but it's also an entree into markets. So he has two topics to juggle.]

    There's a lot of innovations still coming in Internet browsing, in hardware. There are so many things we need to do ...

    [... including to win at search. But back to the first point:]

    and if we don't keep Windows fresh, Windows will not continue to flourish. The same with our core Office product."

    Core has two meanings, one for the company, one for products. Core for the company means essential to its spirit. Core for a product means it supplies significant revenue.

    So now we can look at the first part of the quote:

    "We have to grow what I called our core. Core doesn't match segments. That kind of threw people off a little bit. But everybody in their heart and soul kind of knows what our core is. It has nothing to do with Windows and Office?. In our core, we've got a lot to do."

    Here he's talking company direction as opposed to product strategy. The core is finding different ways to use software and making them happen.


    So then you write:

    "Windows and Office, as you can plainly see, are and are not the 'core'. This is emblematic of a lack of focus.

    [It's definitely emblematic of a paucity of useful words when he's thinking and speaking. As well as a compartmentalization; one room for company direction, one room for product strategy.]

    Ballmer also started his talk describing how Bill Gates had insisted the company had 60 or 70 things it needs to do within the context of the upcoming year's R&D work. This is alarming to investors, because it doesn't sound like Microsoft has any direction or, rather, way too many directions."

    It may be alarming to investors, but it's the "core" of the company. Microsoft's gotta do what Microsoft's gotta do.

    The company does sound like Bill Gates's toy sometimes. And if he hadn't remade the world like no one except John D. Rockefeller, I'd have to wonder whether he knows what he's doing.

    The irony is that for all the esoteric software uses examined in R&D, Microsoft usually ends up producing products with an obvious, near-proven demand and in a manner consistent with prior examples. As you said.

    Companies have psychology, no?!
    Anton Philidor
    • Bill was like this once, too

      Anton, I agree he was thinking on his feet. Unfortunately, his
      thinking is confused. Bill used to be like this. He changed after
      he married, at least that's when I noticed that he took far more
      time to prepare for public appearances and relied less on his
      confidence in his own intellect to get him through anything. He
      became "polished" and it improved the presentation of his
      intellect when he was thinking on his feet. Ballmer's married,
      too, so I am not suggesting that marriage would "fix" this
      problem.

      I know a lot of folks who do amazing stuff at Microsoft Research.
      A lot of it is far more practical than esoteric, surprisingly or
      perhaps not. The company's psychology seems to militate
      against some of their best thinking and, certainly, in the case of
      Ballmer, against providing a straightforward explanation to
      investors as to why to continue to trust the company with all
      that cash.
      Mitch Ratcliffe
      • You're right.

        Rereading my post, I realized that I overstated in an attempt to show the contrast between all the possibilities Microsoft pursues simultaneously and its practical - and usually successful - products. Allowing for faults at the start.


        Microsoft will use its cash for development that's likely to result in profitable products. At the time of Sun's announcement of layoffs, possibly of staff needed to help assure the company's future, Microsoft's decision appears even more worth endorsement.

        Wall Street can be dangerous to a company's health.
        Anton Philidor