Why it's hard for Microsoft to catch the next wave

Over the weekend, I enjoyed reading a New York Times article by Randall Stross titled "The Computer Industry Comes With Built-in Term Limits." It focuses on Microsoft and Google and how:

two successive Microsoft chief executives have long tried, and failed, to refute what we might call the Single-Era Conjecture, the invisible law that makes it impossible for a company in the computer business to enjoy pre-eminence that spans two technological eras. Good luck to Steven A. Ballmer, the company's chief executive since 2000, as he tries to sustain in the Internet era what his company had attained in the personal computing era.

This observation that companies dominant in one phase of a market rarely enjoy the same success through major transitions is hardly unique to the computer industry.

One common explanation is offered by Theodore Levitt's famous 1960 Harvard Business Review article, "Marketing Myopia," which popularized the idea that companies should define themselves in terms of markets and customer needs, rather than products. A common marketing class illustration is how the railroads thought of themselves as running trains rather than providing transportation--with the result that they were marginalized in many respects as transportation technology changed.

There's doubtless a lot of truth to this contention, but, as I discussed in the context of the photo business previously, shifting an entire product foundation is enormously challenging and past skill sets and ecosystem don't necessarily travel well from one generation to another. In the earlier transportation example, what particular expertise or competitive example would Penn Central have brought to running an airline? Very little.

In the case of Microsoft, the technology gap is perhaps less yawning between the type of software on which it made its fortune and that which is widely consumed over the network today. (That said, there are many differences in development model, adoption process, community building, and so forth.)

However, I don't see the issues faced by Microsoft as so much about marketing myopia. As the article notes:

In a 1995 internal memo, "The Internet Tidal Wave," Mr. Gates alerted company employees to the Internet’s potential to be a disruptive force. This was two years before Clayton M. Christensen, the Harvard Business School professor, published "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail" (1997). The professor presented what would become a widely noted framework to explain how seemingly well-managed companies could do most everything to prepare for the arrival of disruptive new technology but still lose market leadership.

Thus, the meme that Microsoft is "dead" (in theory) is based less on an argument that Microsoft is blind to what's going on with network computing than on the observation that it hasn't really effected any major changes in response.

There's a reason for this. It's easy, if only relatively so, to spot major transitions. (Although, to be sure, harder to spot them before they're obvious to everyone and harder still to discern their precise impact and timing.)

But it tends to be really, really hard for cultural and organizational reasons to do what needs to be done about them. And, perhaps even harder and at times impossible, to make the necessary business changes.

I call it the "tyranny of the installed base." I saw plenty of it when I worked at minicomputer Data General in the 1990s. Customers want bug fixes and enhancements to their existing products--even if it's some legacy database that fewer and fewer people used with each passing year. The result is that lots of resources get sucked into supporting the "old stuff," leaving that much less energy, money, etc. for the "new stuff."

But the real issue here is more insidious. A company, especially a public company, can't really "Just Say No" to that installed base and tell them to take their business elsewhere. Imagine if you would this scenario: Ballmer wakes up next Monday morning after having an epiphany over the weekend. He walks into Redmond, tosses a few chairs for emphasis, and announces that Microsoft is going to immediately discontinue selling and developing its Windows operating system and Office products because they're mired in the past and have become too much a distraction from what's really important--its online services business.

I think we know what comes next. Microsoft's stock price falls through the floor and Microsoft's board of directors send the men in the white coats to take Mr. Ballmer somewhere he can get some extended rest. While such a scenario would doubtless cause considerable delight in some quarters, I think most of us can agree it's neither practical nor a particularly good idea.

It's hugely challenging to jump from one wave to the next even when you see it coming with perfect clarity. The next wave may even be bigger in terms of customers, revenues, and everything else. But there's a trough in between.