Earlier this week, I spoke about my belief that Ballmer’s behavior and Microsoft’s performance was likely tied to his envy and anger at being overshadowed by CEOs like Bill Gates and Steve Jobs.
Interestingly, Forbes had another post that same day that nicely dovetailed with what I’d written. I’d argued that this is why he is making several very risky bets at once and that the odds favored a tragic outcome for Microsoft. However, the odds of success are actually better than the odds of creating a company as successful as either Apple or Microsoft in the first place and since those companies exist, there is a chance that Microsoft might pull off what it intends.
So, now let’s assume Steve’s big gambles are successful and talk about the world that would result; it is a world as vastly different from today as the PC world was from the mainframe world that preceded it.
Often, you can get to a goal multiple ways and what Microsoft appears to be attempting is what Oracle is doing with Sun — in other words, building a complete solutions company like IBM but rather than starting from software, starting from hardware. This would directly address one of Microsoft’s most annoying problems: the tendency to be blamed for any failure by the installing OEM regardless of whether it is its fault, and often having little to say about the cause or the solution, yet being held accountable for both.
As mentioned last week, there is an economic penalty to going this way, but, once done, you can create near-air-tight account control and that firmly puts your destiny in your own hands. The most valuable company in the world, Apple, did this and it is likely that Apple will be moving into the enterprise under Tim Cook’s leadership. There is a strong argument that Microsoft must respond in kind since every attempt it has made to block Apple with partners has failed. Having said that, so did its Zune attempt to block Apple without partners, suggesting it wasn’t the partners alone that were at fault.
But we are assuming success, so let’s get to that.
IBM came to market with margins driven by hardware and free software. Microsoft is likely to replicate the Xbox model and move to market with margins on software and services and aggressively priced (read: subsidized) hardware presented as Azure /Office 365 services (which already exist) and appliance-like packages. I expect it will leave the highly custom work to its partners but focus on volume efforts, at least initially, itself.
This would place the company more strongly in the mid-market, which needs more of an appliance/packaged approach to problems and suggests that a likely future merger would be between Dell, which is the most mid-market-focused at the moment, and Microsoft, if the firm doesn’t either buy an ODM or lock one up under contract like Apple largely did with Flextronics and should have done with Samsung.
This would do rather ugly things to the existing Microsoft OEM partners but not immediately and they would continue to have advantages where customization was important at the high end of the mid-market and enterprise. Most could adjust to this, but it might force one or more out of the market during the transition.
Best able to weather this would be firms that don’t overlap much with Microsoft like IBM, EMC, Cisco and Oracle. However, Oracle likely would become a much bigger target for Microsoft than it currently is because the result would be a very similar type of company that could operate on far tighter margins. Oracle would still have an advantage in sales talent and positioning and more experience with hardware, but Microsoft would start out with more resources and the ability to drive prices down more aggressively than Oracle could afford.
Wrapping Up: Ballmer’s Advantage and Problem
Steve Ballmer has a huge advantage in terms of Microsoft’s war chest, the firm’s penetration into business and impressive success with cloud services like Azure. However, standing against this is the fact that he is very focused on numbers and tends to fund things based on what he thinks a reasonable cost is, not on what success might actually cost. He’ll write big checks, but generally he under resources efforts significantly. In short, what he thinks something will or should cost is generally a magnitude below what success would cost, which explains most of the failures of good ideas over the last decade.
If he funds this adequately, Microsoft 2.0 could rival IBM in a relatively short period of time; that just hasn’t been his behavior to date and there is no real indication that it has changed. There is no doubt in my mind Microsoft can do this, but I have every doubt it will fund this effort to success.
In the end, the success of this will come down to Microsoft’s CEO Steve Ballmer. He’ll deserve, and likely get, full credit regardless of which way this turns out. If he pulls this off, he will have done something neither Bill Gates nor Steve Jobs could do; if he doesn’t, he’ll look the fool for attempting it.