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As Microsoft retools, Ballmer has chance to rewrite his CEO legacy

With Windows Phone 8 and the Surface tablet, Microsoft hopes to beat Apple and Google at their own game. Steve Ballmer's future may hinge on the outcome.

Charles Cooper Former Executive Editor / News
Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.
Charles Cooper
13 min read
Microsoft CEO Steve Ballmer at CES 2012 in Las Vegas (Credit: James Martin/CNET)

A year ago, the influential hedge fund manager David Einhorn was calling for Steve Ballmer's head.

It was time to give someone else a chance, Einhorn, the president of Greenlight Capital, told an investor conference. "His [Ballmer's] continued presence is the biggest overhang on Microsoft's stock."

Microsoft had long been milking its installed base and enterprise business for profits -- Windows still accounts for more than 90 percent of the desktop market -- while rivals swept into tech's hot growth areas. The stock was going nowhere, at the time trading just above $24 per share, not much higher than where it finished in late 2000. Even though the company continues to grow by billions of dollars each quarter -- $5.1 billion in net income on $17.4 billion during the three months ended March -- critics still label the company as hopelessly old guard.

But the one constant in the technology world is change, and with the company's latest announcements, Ballmer has a chance to convince the critics they were wrong. Last Monday, Microsoft surprised the tech world when it unveiled a couple of sleek Windows 8 tablets. Two days later came the official debut of the Windows Phone 8, the operating system that will ship in next-gen Windows Phones. That news was expected, though the existence of a bevy of rumored cool new features -- including a complete mobile payment system was a surprise. So much for technology laggard. (Take that, Apple.)

For the 56-year-old Ballmer, this was a moment to relish. The early buzz on Surface was mostly positive, although there are still unanswered questions, such as price, battery life and apps that will be available for the device. Windows Phone 8, introduced last week, will be technically competitive with Apple's iOS and Google's Android but still lacks apps and carriers, such as Verizon. However, the research firm IDC predicts that Windows Phone will catch up to Apple's iPhone, attaining 19.2 percent market share in 2016, growing from 5.2 percent this year.


This month's show-and-tell could turn out to be a pivotal moment for Microsoft and Ballmer's career. For many, he is the guy who turned Microsoft into a loser. If he can steer Microsoft toward a mobile future where Windows 8 reigns, that would be more than enough to convince many of his doubters.

"Certainly, you think of Steve in a different light than you did a week ago," says Brad Silverberg, a former senior Microsoft exec and now a partner with the investment firm Ignition Partners. "This shows some real product leadership. It also shows vision, desire, and a willingness to take risks. I can imagine that HP, Dell, and Samsung aren't all that happy. But when you're willing to take those kinds of risks, people admire it. It shows guts and courage and they're at a fork in the road. There's really no going back."

Not that Ballmer would ever want to. Whatever their rhetorical excess, Einhorn and other investors are understandably upset at the return on their Microsoft stock. Someone who bought $100,000 worth of Microsoft stock 10 years ago would now be left with holdings roughly worth $69,000. Shareholders, who blame this on Ballmer, who took over from Bill Gates as CEO in 2000, offer a ready bill of particulars. Chief among their complaints:

  • Microsoft fell behind early to Google in search and never caught up.
  • It's still a non-factor in social.
  • The Zune MP3 player was a flop.
  • The likes of Google, Apple, and Facebook pioneered the social and mobile revolution across the globe. And Microsoft? It remained a wallflower.
  • Windows Vista goes into the record books as an expensive failure. (In a candid moment, Ballmer acknowledged that it was "not our finest hour.)
  • Microsoft misfired or has been missing in action in computer hardware's two hottest growth markets: smartphones and tablets.

Longtime Microsoft watcher Nomura analyst Rick Sherlund described it as a left brain, right brain challenge where the company's more analytical bent was getting in the way of creativity and innovation. "It really reflects the personalities of Bill Gates and Steve Ballmer, who are mathematically inclined, and as [Steve] Jobs has said, it's about style," Sherlund told a radio interviewer last fall. "There's probably something in the gene pool at Microsoft that is self-selective and has been left side of the brain, and it needs to be complemented by some right side of the brain."

Jobs' posthumous assessment was even harsher: He told his biographer Walter Isaacson, "They've become mostly irrelevant," talking about Microsoft. "Apple was lucky, and it rebounded. But I don't think anything will change at Microsoft as long as Ballmer is running it."

Salesforce.com CEO Marc Benioff wasn't giving Ballmer any kudos for the Surface or Windows 8.

"Our world has become mobile, social, cloud, and local -- not led by Microsoft -- but by an exciting new breed of entrepreneurs who are rewriting the playing rules for the industry away from Windows -- there has never been a more exciting time in our industry," he told CNET regarding Microsoft's recent announcements.

Benioff has a history of taunting Microsoft, which competes with Salesforce.com in selling cloud-based customer-relationship management solutions.

"I think Microsoft is still a dinosaur. More than ever, it tries to hold onto its monopolistic position around technology that they hold, whether it's SQL Server, whether it's NT, whether it's Windows, whether it's Office -- these are their cash cows they don't want slaughtered," Benioff said in 2008.

Microsoft may not be a dinosaur on the desktop or datacenters, but the world is moving to mobile and social, led by Apple, Google and Facebook. Ballmer's team is in last place at this juncture, but the game is not over.

Source: Netmarketshare May 2012

Ballmer doesn't appear to be fazed by the naysayers, at least in public. Despite being the recipient of shareholder vents, he continued to sound the optimistic refrain of Microsoft's No. 1 fan boy. And, he is known to be relentlessly persistent in pursuing a market for Windows.

"You tell me if I lack energy or conviction, or we're not driving all the change we need to drive," Ballmer told the Seattle Rotary Club soon after.

People say that Microsoft always does its best work when catching up and the stakes really high, said Silverberg, who was the executive Microsoft turned to when Bill Gates needed someone to help catch up to Netscape. "They know they have to get their act together if they have a future. And the future is in mobile devices -- and Ballmer's taking full advantage of that," he said.

Wall Street seems to like what it's seeing of late. The company's stock finished Thursday at $30.14, not far off its 52-week high of $32.95, a sign of growing confidence that Microsoft seems to have its head back in the game for the first time in a long time.

Philip Winslow, an analyst with Credit Suisse, suggests that the potential importance of this week's news was under appreciated. He said that "a more tablet-friendly UI" as well as the improved power consumption, Instant-On, and other capabilities was a harbinger that Windows 8 tablets would "have a more meaningful position in tablets than the market appreciates (particularly in the business user segment), which we expect to serve as a catalyst for the stock."

So what's Microsoft doing right? Let's take a closer look.

Though it's a lifetime in tech, it was only three years ago that Windows Mobile was the cornerstone of Microsoft's mobile strategy. And what a befuddlement Windows Mobile was. The user interface was confusing (ugh, that Start button), you never knew where to find anything, and it could be painfully slow. The problem, of course, was that Microsoft took an existing PC OS and shrunk it down to fit a smaller screen. It made no attempt to go the other way around. Yet, even those problems didn't stop Windows Mobile from playing a big role in the fledgling smartphone space. Its market share didn't reflect Microsoft's total dominance of the computer sector -- instead it had to share the roost with Palm, RIM, and Symbian -- but the OS was responsible for putting smartphones in the hands of more people.

For a minute, though, let's reminisce. Remember the Motorola Q? In many ways, it was the classic heartbreak Windows Mobile device. Though it showed a sleek new design -- 2006 was the height of the thin phone craze -- the Windows Mobile 5 OS still defined the user experience. You weren't plonking away at tiny icons with a stylus, but no touch-screen meant that you had to use navigation buttons. Such a smartphone would be laughable today, but back then it generated a lot of hype.

A year later, though, the iPhone blew into town and changed everything. And a year after that, Android changed everything even more. Apple and Google built an OS for smartphones from the ground up rather than just chopping the legs off something they already had. Very quickly Windows Mobile went from just clunky to clunky and antiquated. It was a torturous period for Windows Mobile users, but the folks in Redmond went back to work. It took them a while, but they finally came up with something completely new rather than just a new version of Windows Mobile. Heck, it even had a new name.

Just as Windows Phone 8 signals big changes, so did Windows Phone 7 before it. When Microsoft unveiled the operating system at the 2010 Mobile World Congress, the tech world saw immediately that it was very different.

Colorful tiles replaced icons, swiping and tapping replaced the stylus, and the handsets had large touch-screens with a cohesive and tightly integrated user experience. Promises were big, and plenty of skeptics scoffed, but when the first phones landed eight months later it was clear that Microsoft was on to something. Windows Phone 7 delivered an attractive, clean, and modern interface on handsets that were fast and incredibly user-friendly. Most importantly, it was light years beyond Windows Mobile.

But Microsoft still has a big selling job ahead of it. "There's nothing yet on Windows 8 that says, 'Wow, it's a great mobile phone system," according to Roger McNamee, a co-founder of Elevation Partners. "If you want a great system, you get the iPhone. I don't think much of the market for Windows as Windows in the mobile market. They've tried it over and over again -- which is the definition of insanity."

Reviews were generally positive and customers who actually used the phones reported high levels of customer satisfaction. Still, manufactures and carrier response was lukewarm and sales of Windows Phone 7 devices couldn't keep up with Android and iOS devices even as Palm and RIM began to crumble. The Mango update brought some needed improvements, but the few apps and the OS's inability to support popular features like multi-core processors, NFC, memory cards, and more screen resolutions remained troubling.

Yet, Microsoft didn't give up. With Windows 8 Phone Microsoft it is making another, though less violent, course correction. The new announcements show that the company isn't discouraged that its latest smartphone foray hasn't been wildly successful so far. It's not pulling out of mobile, but instead is doubling down on Windows Phone with loads of new features (including filling the gaps described above), new phones and an enhanced interface and by strongly wooing developers. Users will rightfully grumble that existing phones won't be able to upgrade -- that is pretty maddening -- but even that move shows that Microsoft is pushing relentlessly forward. The story of a successful operating system, after all, is that they're a continued evolution. You don't get everything at once, but piece-by-piece new features and improvements arrive. That's the case with iOS, Android, and now Windows Mobile. You're left always wanting more, but in the meantime you get to savor what you have.

This was Ballmer's big call and it was a gutsy one: Microsoft is willing to blow up decades-long relationship, if that's what it will take to make it in the tablet world. In announcing its own vertically integrated Surface tablets, Microsoft is also competing against longtime hardware partners. That's a first. Acer's Stan Shih has since been quoted as saying this is only a temporary ploy to incent OEMs to get with the program. Perhaps, though once you cross the Rubicon, you don't go back -- especially if it's a success. And Microsoft is betting everything on Windows 8 and the Metro interface.

What's beyond contestation is that Microsoft was late to the game and needed an entry that could excite consumers. At first look, the two Surface models look to do just that. One version runs an ARM processor for Windows, the other Intel's Ivy Bridge chip for Windows 8 Pro. The tablets also compare nicely to Apple's iPad in size and thickness. The Surface RT is 9.3mm thick, and weighs 676 grams, while the Surface Windows 8 Pro is 13.5mm and weighs 903 grams. (For comparison's sake, the iPad is 9.4mm thick and weighs 652 grams.) Each unit has 10.6-inch touch screens and come with built-in stands and magnetically attached, foldable touch covers.

Unfortunately, we're still in the dark about how much the tablets will cost or when they will ship. Microsoft promises that they will be priced competitively. The key will be apps. So far MS claims the Windows Phone Marketplace has 100,000 apps.

Near the end of the lifespan of the second generation of Xbox game consoles, Microsoft can call the Xbox 360 a success years in the making. From a second-place finish in the previous game console generation to devastating hardware problems early in the production run, the path forward was not always clear, but Microsoft's current game console stands alone as a unifying living room set top box, combining video games, on-demand video, streaming live television, social media sharing, and advanced voice and motion controls.

The PlayStation 3 and Nintendo Wii both overlap with many of those features, but neither has had the relentless focus on crossing the bridge to mainstream, non-gaming audiences the way the Xbox 360 has. In hindsight, it's surprising that Sony wasn't able to make more of its film, music, and home theater corporate connections -- much of the early betting was on the PlayStation 3, with its then-rare Blu-ray drive, to be the lead gaming console of this generation.

The trouble for Microsoft started soon after the 2005 release of the Xbox 360. There were wide reports of hardware failures, and the infamous Red Ring of Death error ended up affecting many more consumers than the usual 3 percent to 5 percent failure rate for consumer electronics. Estimates ranged from 14 percent to more than 50 percent of first-gen Xbox 360 consoles had to be repaired or replaced, and Microsoft was forced to offer a no-questions-asked warranty extension, which cost the company a reported $1.15 billion.

From that inauspicious start, more than 67 million Xbox 360 consoles have been sold worldwide, and a sizable minority are not used primarily as gaming machines, but instead as streaming hubs for Netflix and Microsoft's own video sales and rentals. Recent additions of streaming live TV through certain cable providers, plus HBO Go and ESPN (access is dependent on your local internet access provider and/or cable company) make the Xbox 360 a poster child for cable cutters. Or at least for the freedom to avoid renting a second cable box for whatever television your Xbox 360 is hooked up to.

Additional video content partners like Amazon Instant Video have added even more features previously relegated to set-top boxes like Roku.

The Kinect, which launched at the end of 2010, started as a controller-free competitor to the Nintendo Wii, but the motion-sensing advanced camera is only part of the Kinect's equation: its high-end microphones and the voice-recognition software baked into the Xbox 360 function as Microsoft's very own Siri competitor. Some games use the Kinect's voice recognition to impressive effect, but the real killer app has been integrated Bing-based search, introduced in the last system update, that enables users to voice-request content by title or artist and find content across multiple services and apps, a feat that really points the way towards the future of television. The Apple TV is still a promise more than a reality, but a Kinect and an Xbox 360 are already an effective Apple TV competitor.

Smart Glass is the final piece to the puzzle: teased and demoed at E3 this June, Microsoft is planning for Windows 8 tablets, laptops, and phones, and even iOS and Android devices, to act as second screens for content, helping cement a place in living rooms for the Xbox 360, even after its game-playing hardware is outdated.

Time is not on Microsoft's side
More than ever before in its three decades-plus history, Microsoft is racing the clock: When it comes to smartphones and tablets, the company is very late to those markets, relative to current market leadership. And it's not as if these are markets looking for someone to take the lead.

"The rules of the game are already established and the first rule of the game is that these are consumer products, not the enterprise," said Elevation Partners' McNamee. "That's a huge issue for Microsoft because Windows is an enterprise product; the only consumer product Microsoft sells is Xbox."

But as Apple proved, you don't necessarily need to be first into a category to win. You need to be better. What's more, the burden of proof is on Ballmer to tame Microsoft's own worst instincts. Can Microsoft stay nimble and focused enough to compete in this brave new world? Can it consistently ship products on time? And can it turn out the kind of software that makes peoples' heads turn?

And as it proved with the Xbox, Microsoft doesn't suffer from an absence of creativity. The temptation is that may continue looking through the lens of what they've already done, rather than what consumers want, said McNamee.

"They've got four to five more years where they can milk Windows but you know how to tell whether Windows is dead? Ask kids under 21," he said. "Ninety percent will ask for iPhones or iPads. Windows' days are numbered. It's been a great ride but they need to milk it and move on."

Ballmer's response to McNamee's critique would likely be the same one he gave when writing to the Microsoft troops about competing with Google in the search arena in July 2008. "This is a long-term battle for our company -- and it's one we'll continue to fight with persistence and tenacity," he wrote.

Microsoft has fought hard over the last four years, but Google still rules search. In July 2008, Google's share of search in the U.S. was around 63 percent, and is at 66.7 percent as of May 2012, according to ComScore. Microsoft's Bing went from 9.2 percent July 2008 to 15.4 percent in May 2012.

Ballmer will once again have to muster all his persistence and tenacity to get the wind behind Microsoft's sails in the battle to win the hearts, minds and money of the mobile masses.

Additional reporting was contributed by CNET's Kent German, Dan Ackerman, and Scott Stein.