The Greatest Challenge Facing Bill Gates Right Now

You’re fired! Why Gates dismissed Ballmer from Microsoft Corporation (NASDAQ:MSFT) and where he might find a successor

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One day last week, investors in Microsoft (NASDAQ: MSFT.US) saw their shares jump more than 7%. The reason? The departure of the man who has led the company since 2000, Steve Ballmer.

Initially, as you’ve probably seen, the news was that Ballmer was retiring, stepping down so that he could spend more time with his billions.

But a different version of events has since emerged: Ballmer had been fired – and fired by a board of directors still dominated by Microsoft’s biggest shareholder, co-founder Bill Gates.

There from the beginning

And certainly, the nature of the announcement does indeed point to Ballmer being fired. Just days earlier, he was reiterating his determination to lead Microsoft during its transition to a ‘devices and services’ company.

A former college buddy of Gates, Ballmer went on to join Procter & Gamble after Harvard, before Gates lured him back to become Microsoft’s employee number 30. In other words, he’s a Microsoftie through and through, there almost from the very beginning.

And now he is ‘retiring’ – and Gates will join a hastily convened panel of directors who will begin the months-long search for a replacement.

So what’s going on?

Bill, Steve – and me

As it happens, I’ve had the opportunity to view both men at close quarters, chatting at some length to them on issues that at times became very personal.

Gates, several times. And in front of me as I write these words is a signed copy of his book The Road Ahead, which he gave me as we sat in his office.

Ballmer, I shared a long car ride with, my tape recorder running as we talked about all sorts of things. Such as the example he set to his kids by getting out of bed each morning and going to work – as one of the world’s very few billionaire employees.

Think about it. With $15 billion in the bank, would you go and work for a boss?

Hits and misses

Larger than life, Ballmer is one of life’s enthusiasts. Have you seen that video clip of him bouncing around on stage, like a monkey?

The trouble is, he’s perhaps been too enthusiastic.

For a company whose fortunes are so closely linked to computer operating systems, the damp squib that was Windows Vista shouldn’t really have happened. To follow it up with Windows 8, which both consumers and businesses seem to be avoiding in droves, is unfortunate.

Windows 8 RT, meanwhile, looks to have been responsible for the recent whopping $900 million write-down – almost a billion dollars – in respect of unsold Surface RT tablet computers.

Microsoft has developed some truly great products. Its Microsoft Dynamics suite of ERP and CRM products, for instance. SQL Server. Windows XP. The Xbox. Office 2003. And cool ergonomic keyboards and mice, like the ones on my desk right now.

But the duds are beginning to mount. And with them, a sense that maybe – just maybe – Microsoft is losing its sense for what its corporate and consumer customers want.

Visionary competition

That wasn’t a charge that could be levelled at Steve Jobs, of course. Jobs was passionate about driving Apple to develop products that consumers would love. Ballmer, his critics carp, has focused too much on selling whatever is on the shelves.

Google, too, has built up an impressive track record – and has managed to do it, what’s more, without attracting the kind of ‘monopoly’ headlines that have dogged Microsoft.

One way or another, most of us use Google products, and its Chrome browser is now the world’s most-popular way to surf the web. Likewise, Google is behind the Linux-based Android operating system, which powers huge numbers of the world’s tablet computers and phones.

And then there’s Linux itself. Forget the consumer flavours of the operating system, beloved of bearded-and-sandalled enthusiasts (including yours truly), but instead look at corporate Linux, powering the server farms of companies such as Google, Facebook and Twitter, as well as airline reservation systems and supercomputers at NASA.

These, in short, are the reasons why Gates pulled the trigger.

Fear of failure

And here’s how I know. Because he’s haunted by past examples of once-great companies that didn’t keep up with what their customers wanted.

Which I talked to him about, years back, sitting in his office. Take it away, Bill:

“Throughout my youth, the hot computer firm was Digital Equipment Corporation, known as DEC. For twenty years, its positive spiral seemed unstoppable. Ken Olsen, the company’s founder, was a legendary hardware designer and a hero of mine, a distant god… DEC grew to a $6.7 billion company in eight years by offering a wide range of computers in different sizes.”

So what happened?

“Two decades later, Olsen’s vision faltered. He couldn’t see the future of small desktop computers. Eventually, he was forced out of DEC, and part of his legend now is that he is the man famous for repeatedly, and publicly, dismissing the personal computer as a passing fad. I am sobered by stories like Olsen’s. He was brilliant at seeing new ways of doing things, and then – after years of being an innovator – he missed a big bend in the road.”

The turn in the road

Those words come from Gates’ book The Road Ahead, of course. But chatting to Gates while sitting on the sofa in his office, I read them back to him, and asked him how he thought Microsoft could avoid the same fate.

“It’s a good question,” he told me. “There’s no easy answer. Perhaps companies don’t last forever. So some time in the next 100 years we will probably miss a turn in the road – although we’re trying to delay that as long as possible! But we hire smart people, we work with the best universities, we listen carefully to customers, and we look at what new, small competitors are doing.”

And he also offered a clue as to how he and his fellow directors might go about recruiting Ballmer’s replacement. Microsoft, he revealed, had a policy of deliberately recruiting talented managers from failing companies.

“Being in a successful company is easy,” he told me. “But when you’re failing you’re forced to be creative, and to dig deep and think. In failing companies you always have to question assumptions. I want some people around who have been through that process: people who can reason from basics.”

Wealth creation on an enormous scale

To some people, of course, none of this matters. They’ve already written Microsoft off. They won’t touch the company’s shares, and they don’t want the company’s products.

For investors like you and I, I think that view is mistaken. Microsoft has been an enormous wealth-generation engine, not just for its investors, but for the people and businesses that use its products.

Vast numbers of businesses use its Dynamics suite of enterprise management tools, for instance, using them to cut inventories, run their factories more efficiently and serve their customers better. Its server products are the most widely deployed in the world.

These things matter, not just to the businesses that use them, but to everyone who comes into contact with those businesses.

So on all sorts of levels, to investors like you and I, the question of who will replace Steve Ballmer is a question that matters deeply.

Out there right now are companies that have the potential to be the next Microsoft – not just in computing, but in exciting sectors such as 3D printing, bio-pharmaceuticals and other branches of applied science. Our analysts at Motley Fool Share Advisor run the rule over such businesses daily.

I want to invest in them. And so do you. But we both want to know that they won’t be a one-generation wonder: founder-led businesses that fizzle out when the baton passes to the next manager in the chain.

That’s why the question of who follows Ballmer is so important.

> Malcolm does not own any share mentioned in this e-mail. The Motley Fool owns shares in Apple and Google.

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