Just Grow Some Fur

Paul Graham has declared Microsoft dead. Before Slashdot linked to his declaration, I had no idea who Graham was, but having read his thoughts, he seems like a pretty smart guy to me. Of course he hasn’t actually declared Microsoft dead. He has only claimed that they’re irrelevant to the ongoing evolution of the computer industry, and I’m mostly persuaded by his arguments. But his provocative title also points to a claim that I’d like to make: Microsoft has already made, or failed to make, the decisions that will ultimately prove primarily responsible for their demise, whatever form that ends up taking.

I don’t think Microsoft’s demise will be bankruptcy, with Bill Gates and Steve Ballmer begging for food in downtown Seattle. Instead, at some point, the accounting value of their assets (particularly their more than $25 billion in cash reserves, roughly 10% of the company’s total value) will exceed the expected return on those assets–that is, the break-up value of the company will exceed its operating value. At that point, Microsoft will be bought and broken up, and those assets (especially the cash) will be put to more productive uses. So though bankruptcy may seem like an impossibly distant eventuality, this version of their demise could materialize in the foreseeable future. There are only two sources of revenue between the present and that future: sales of Windows and sales of Office. The return on investment in Microsoft’s other product lines isn’t anything special, and in some cases (like the XBox and perhaps the Zune) is significantly negative. With all that cash and all those underperforming assets, Microsoft isn’t really that far from an ideal leveraged buyout candidate. They may be as close as Google and others making operating systems and local office software irrelevant.

As Paul Graham explains, Microsoft has gotten into this position by failing to respond adequately to the evolution of the market around them. And this isn’t simply because Microsoft is stupid. Though they’re not as good at developing software as the average observer might naively assume, they’re nowhere near as bad at strategic management as the average commenter on Slashdot equally naively assumes. The simple truth is that the sort of evolution required of Microsoft is essentially impossible for a company–especially a large, successful company–to make. I’ve mentioned this elsewhere in another context, and my reasoning was met with some skepticism, but I stick to my conclusion: In a rapidly evolving market, large, successful companies are severely handicapped by their success (even more than they are by their size and the inertia that implies). And Graham recognizes that fact in his suggestions as to how Microsoft might respond to their current predicament:

So if they wanted to be a contender again, this is how they could do it:

  1. Buy all the good “Web 2.0” startups. They could get substantially all of them for less than they’d have to pay for Facebook.

  2. Put them all in a building in Silicon Valley, surrounded by lead shielding to protect them from any contact with Redmond.

That second point is the important one, and it’s why Microsoft wouldn’t take this advice even if they heard it. As Graham says:

I feel safe suggesting this, because they’d never do it. Microsoft’s biggest weakness is that they still don’t realize how much they suck. They still think they can write software in house. Maybe they can, by the standards of the desktop world. But that world ended a few years ago.

Or put another way, the misperceptions from which those acquired companies would need to be protected are precisely the misperceptions that will prevent Microsoft from trying that approach at all. But this isn’t meant to be a condemnation of Microsoft. Though I do think that they have significantly hampered the development of the industry that they’ve been at the center of for the last couple of decades or more and that consumers will benefit in direct proportion to the degree to which Microsoft’s power and influence diminishes, I don’t think the dynamic of their decline will be unique to them in any way, and it certainly won’t be a just comeuppance for their apparent misdeeds. It seems to be the fate that will eventually befall all successful companies in rapidly evolving markets. And given that, I wonder if there’s anything that successful companies can do to avoid that fate. Even if a company is lucky enough to recognize that it has reached the pinnacle of success in its current business, is there anything they can do to prevent the decline that would normally follow a significant change in their market?

4 Replies to “Just Grow Some Fur”

  1. The title of Graham’s piece really should have been “Is Microsoft a Dinosaur?” Hyperbole drives traffic I guess. Anyway, Microsoft are far from dead, they have simply become what IBM was back in the 90’s — Dinosaurs. Desktop applications are quickly becoming this generation’s 3270 apps. I can’t think of a killer app released in the last three years that was strictly on the desktop. YouTube, Flickr, Facebook, Digg, and Google’s stuff have all managed to turn desktop apps into “legacy” apps. That’s not so good for a company built on the concept of desktop lock-in.

    Microsoft can create all the YouTube clones they want. The underlying closed atmosphere at Redmond will never allow them to play ball on the modern play field. They’ll make piles of money driving Windows and Office into the ground for sure, but just like Big Iron it’s a concept whose time is up.

  2. You’re right, with one possible exception. I don’t know that the analogy between Microsoft and IBM is completely accurate. While IBM was busy monopolizing the mainframe market, they managed to develop enormous subsidiary businesses in software and service. They were good at those, and those businesses were very profitable. Microsoft hasn’t managed to develop any profitable subsidiary businesses beyond Windows and Office.

  3. Well, with Xbox, Zune, Media Center, etc they are trying with little or no financial success thus far. To throw their own term back at them, it’s simply not in their “DNA” to create successful products which exist outside of the closed Windows ecosystem.

  4. …and, I would argue, XBox, Zune, and Media Center aren’t profitable because they aren’t very good. Microsoft still hasn’t figured out how to make anything that anyone wants–they’ve only figured out how to make things that people need because of the monopoly that IBM basically handed to Microsoft (which, I suppose, is just repeating what you’re saying).

    But you’re right that Microsoft is trying. It’s clear that they recognize the problem in some sense, but that recognition alone doesn’t make them able to solve the it. And that, I think, is the interesting issue here, which applies beyond Microsoft. How does a large, successful company change in response to market changes that would make it obsolete?

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