Business

The Ballmer Era ends

This week, Microsoft CEO Steve Ballmer said goodbye to the company’s employees. While he will stay on until a new CEO has been selected, we can now assess his legacy at Microsoft based on the 13 years during which he was at the helm of the company.

Financial performance

1999 2013
Share Price  $58.375  $33.31
Capitalization  $612.72B  $277.14B
Revenue in last quarter  $6.11B  $17.41B
Net Income in last quarter  $2.44B  $5.11B
Diluted EPS in last quarter  $0.44  $0.66

When Ballmer took over the company from Bill Gates on January 1, 2000 Microsoft had already started going down past its top valuation. The highest share price in the company’s history was reached on December 23, 1999 when they were priced at $58.719, giving the company a $616.3 billion market capitalization. As of this week’s close of market, Microsoft shares were worth $33.27 for a $277.14 billion market capitalization, a 55% drop.

Without any other historical references, this may look like an utter disaster but one may consider the timing of the transition and subsequent events. When Ballmer took over, the company was riding the dotcom bubble and had achieved this valuation with $6.11 billion in quarterly revenue and a net income of $2.44 billion. This gave them $0.44 in diluted earnings per share. By the end of Ballmer’s first year at the helm, the dotcom crash had wiped out the technology sector, driving Microsoft’s share price to $21.688 by the end of 2000, a low it would not break until its ill-fated effort to purchase Yahoo in March 2009.

The company survived the 2008 financial crisis relatively well, buoyed by strong revenue and a diversified set of products that allowed it to generate cash in an era when credit became very tight. In the last reported quarter, the company’s revenue had moved to $17.41 billion, generating $5.11 in net income and $0.66 in diluted earnings per share.On an annualized basis, Microsoft saw its yearly profits grow from roughly $25 billion a year to around $70 billion a year, or an average of 16.4% in annualized growth, a record that beats the performance of well known CEOs like Jack Welch at GE (11.2%), Lou Gerstner at IBM (2%) but eclipsed by Steve Jobs’ record of 33x growth (from $786 million to $25.922 billion) during his tenure as CEO.

Significant acquisitions

Over his 13 years at the helm, Ballmer approached acquisitions and external investments in a more tentative way than his predecessor did. And here again, we look at a mixed record, with smaller acquisitions often bringing radical new products into the company’s mix (Kinect; the Halo series that propelled the Xbox to leadership…) and larger acquisitions attempts that either failed (Yahoo) or turned out to be disasters (aQuantive). At the same time, Ballmer did not hesitate to flex the company’s muscle to buy large assets with large sticker prices. During his tenure, he completed 7 acquisitions with price tags north of a billion dollars:

Company Price Year Outcome
Visio $1.4 billion 2000 Part of the Office division, it remains one of the top diagramming tools available.
Navision $1.45 billion 2002 Became Microsoft Dynamic Nav, one of the company’s leading offering in the ERP business.
aQuantive $6.3 billion 2007 What was, at the time, the largest acquisition made by Microsoft and one of the largest advertising agencies in the world led to the $6.2 billion writedown in 2007.
Fast Search $1.2 billion 2008 The core technology helped develop MSN Search. MSN search has since been replaced by the Bing search engine, which is a distant #2 behind Google and Fast Search remains in Microsoft’s enterprise search products.
Skype $8.5 billion 2011 In 2012, Skype represented 34% of the international calling market and is now replacing Windows Live Messenger.
Yammer $1.2 billion 2012 Incorporated as part of the Microsoft office division but little news has been made since the acquisition
Nokia $7.2 billion 2013 (expected) Nokia has been the main supporter of Microsoft’s Windows Phone strategy. Will it turn into an aQuantive or a Skype?

Judging from the data, Microsoft under Ballmer did not seem to have a clear direction when it comes to large acquisitions and it could be this lack of focus that has led to difficulties. Attempts to incorporate large players outside of the software industry (eg. aQuantive) have not been successful, which could paint a dark cloud over the potential for the Nokia acquisition.

Strategic investments

But what about strategic investments? Prior to Ballmer, Microsoft was very active in making significant investments in outside businesses, with large positions in cable companies, telecom companies, creating a TV channel (MSNBC) and even bailing Apple out for the good of the industry. But under Ballmer, we’ve seen the company retrenching from making significant investments in other companies. The focus has been largely internal with a few rare exception. Throughout most of the early 2000s, the company sold its positions in other companies (most notably divesting its $150 million investment in Apple, which would have been worth around $8 billion today) but it did make three notable investments in the last few years:

  • In 2007, the company bought 1.6% of Facebook for what was considered to be an outrageous $240 million (this would be worth around $2 billion today)
  • In 2012, the company bought 17.6% of Nook Media for $300 million, buying itself a seat in the e-reader and tablet market. To date, little integration with Microsoft products has resulted from this investment.
  • In 2012, Microsoft also put $20 million in Klout, a company focused on establishing a user score based on their social media activity. Klout has been integrated in Bing search as a result.

Outside of those three efforts, there has been little by the way of external investments coming from Microsoft under Ballmer.

Products

And what about products? When Ballmer took the helm, Windows was at its top, controlling over 90% of the PC market and leading to an antitrust lawsuit that damaged the company’s reputation. But as new devices like tablets and mobile phones emerged, the market share of the company’s flagship OS has dropped significantly.

However, it is not for lack of trying.

Microsoft was, surprisingly, the first company to create tablet computers, starting in 2002 with the ill-fated tablet-PC, then through the early 2000s with the UMPC, and eventually pushing the tablet concept into their OS with Windows 8 and the Surface tablet long after Apple came to dominate that market. The company was forced to write down $900 million as a result of its failure to sell more Surface computers.

In the same way, Microsoft was a proto-player in the smartphone market with its Pocket PC phone line, which was first presented in 2000, and its touch screen-based windows mobile operating system throughout the 2000s. Because it tried to push for an interface that was consistent with the experience its users had on regular PCs, the company could not go through the radical reimagining that the iPhone was and moved too late to address that issue, leaving it with a relatively small portion of a market it once dominated. The company’s acquisition of Nokia is widely seen as an admission that Apple’s strategy of integrating software and hardware may be the best approach moving forward.

Similar false starts existed in audio players (the Zune) and watches (the SPOT watch, which received data from the internet and could be see as a grand-parent to the Pebble Watch, Sony and Samsung’s smart watches and the much rumored about iWatch), two lines of product the company eventually abandoned. While competitors are readying product offerings to go after the watch market, no word has come out about future roadmap in that space from Microsoft.

But it was not all disaster.

On the consumer end, Microsoft achieved supremacy in the gaming console world with its Xbox and Xbox 360 (a refresh, the Xbox one, is slated for the fall). When it was first introduced, most industry pundits believed that the company would be crushed by the existing players: Sony, Nintendo, and Sega. Since then, Sega has left the box business, Nintendo is struggling, and only Sony remains as a major contender for the top title. From an innovation standpoint, the Kinect, which tracks a player’s motion and mirrors it in the game, has helped reestablish Microsoft as an innovator.

And the company has become a strong player in the cloud computing space with its Windows Azure cloud services, playing runner-up to a dominant Amazon in the space.

A mixed legacy

All things told, Ballmer legacy will be seen as a mixed one: while he helped the company grow to a new size in terms of overall revenue and created significant new businesses beyond its core OS and Office suite offering, a failure to adapt to substantial changes on the consumer side of the computing industry may have damaged its future prospects. Microsoft’s new CEO will be faced with a company that is radically different from any of its competitors: one that derives a substantial part of its revenue from the enterprise software world but also one that plays a substantial role in the consumer arena. Whether it should be treated as a single company or split up will be one of the hard choices he or she will have to make.

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