Gates's Glorious, Qualified Legacy
The impending departure of Bill Gates from the company which is nearly synonymous with his name represents the end of an era—for both Microsoft (MSFT) and the tech industry. In 2008, the world's richest man will step back from day-to-day oversight of the company he founded with former schoolmate Paul Allen in 1975. While he remains chairman, Gates will center his attention on the Bill and Melinda Gates Foundation, the $29 billion philanthropic juggernaut that has pledged to spend billions on health, education, and community development (see BusinessWeek.com, 6/16/06, "Bill Gates' Long Goodbye").
There is no doubt that history will judge Bill Gates' contribution as among the most significant of his era—as a technologist, a businessman, and a philanthropist. As of the summer of 2006 approaches, more than 61,000 people in 102 countries draw a paycheck from Microsoft. The company's software is used on somewhere between 900 million and a billion personal computers worldwide. Its success has tracked closely with the huge upsurge in computer use in the U.S. and around the world and in which more than a billion people now use the Internet. For better or worse, the role that Microsoft and Bill Gates played in such a vast societal change cannot be understated.
But in the last six years, Gates has assumed the role of technical architect for the company's many products. In that position, history may judge him more harshly. After stepping down as CEO in 2000 and handing the title to Steve Ballmer, Gates created for himself the title of chief software architect. It was a vague title which Gates has used to serve as a sort of spiritual guru to Microsoft's rank-and-file.
What is Gates' track record? While holding this job, Microsoft's software, especially its core Windows product line, has suffered from a condition often called "feature creep" in which programs encompass functions that are by some measures unimportant to most users. Google has blossomed into a search engine giant, and perhaps even more shocking, taken from Microsoft the mantle (or at least the perception) of America's most innovative tech company. What's more, there have been few product or technical achievements that Gates can point to as having boosted Microsoft's stock price.
To be sure, has Gates has had some successes. He sought to impress upon Microsoft developers the importance of such issues as security. In one e-mail sent in 2002 to all Microsoft employees—at a time when the company's operating system was being widely blamed for being riddled with holes that hackers could exploit to sow chaos—Gates pronounced security Microsoft's “highest priority” and said that “as an industry leader we can and must do better.”
It wasn't long before Microsoft was acquiring security software companies and integrating anti-virus, anti-spyware, and other security measures directly into its Windows platform. (see BusinessWeek.com, 6/1/06, "Microsoft Sweeps Into Security"). Over time, the result has been software that is by many measures more secure, but the work of securing Windows has turned out to be an enormous task that will likely never be complete.
But Gates's achievements in his latest role aren't as impressive as other accomplishments earlier in his career. With Gates as architect, Microsoft has sought to push Windows beyond its traditional role as the basic software underpinning 98% of the world's personal computers, to having a direct role in how consumers entertain themselves, search for information, and communicate.
This focus on adding unnecessary features to the Windows platform has wreaked havoc on Microsoft's ability to deliver key products on time. The latest example is the constantly slipping delivery date of Windows Vista, Microsoft's next-generation operating system. Microsoft last said it would release Vista in early 2007, after postponing it from a late-2006 release date, which followed plans to scale back its features.
TOO MANY DELAYS.
Indeed, software delays have in recent years become almost as synonymous with Microsoft as security vulnerabilities. In March, 2003, Microsoft released Windows Server 2003, having missed no fewer than three different delivery dates over the prior two years. While Windows XP shipped earlier than expected—in the fall of 2001—this took place amid calls by lawmakers and many state attorney generals for a court-ordered injunction seeking a delay.
The release went off as planned—the September 11 terrorist attacks took up nearly all of Washington's attention and the calls for the injunction ceased. But updates meant to fix XP—notably an update known as Service Pack 2—was delayed at least twice in 2004. It finally shipped in August, 2004. A third service pack update is now expected in early 2007.
The product delays have had many costs. Customers—home consumers and corporate IT managers alike—held off on purchasing decisions until they could rest assured that they wouldn't regret spending money on faulty products. Entire sectors of the technology industry—from PC makers like Dell (DELL), Gateway (GTW), and Hewlett-Packard (HPQ), to chipmakers like Intel (INTC), Advanced Micro Devices (AMD), Micron Technology (MU), and Infineon—would often look to an expected upgrade cycle hinged on a new version of Windows.
Memory-chip makers had especially high hopes tied to the release of Windows XP to turn their fortunes around. More often than not, all their hopes would be dashed in the short term, as consumers and companies alike upgraded their computers on their own schedules and according to their own needs. In time, upgrade to Windows they did, but never in the hoped-for waves.
THE GOOGLE THREAT.
What's more, it has been during Gates' tenure as software chief that Microsoft saw its role as the tech industry's agenda setter usurped by Google (GOOG), the onetime search engine upstart turned $6 billion (2005 sales) Internet juggernaut. More recently, Google has expanded from being the world's favorite search engine to one of the world's favorite e-mail providers—once a Microsoft stronghold. Additionally, Google has offered many other new products and services—some acquired, some developed from within—that can't help but be aimed squarely at established Microsoft products: Google Talk, Google Maps, the Writely word processor, and even spreadsheets, to name only a few. (see BusinessWeek.com, 5/11/06, "Google's Desktop Offensive").
Seeing the threat posed by Google, Gates sent another company-wide e-mail in 2005. He told employees to think about a “services wave of applications and experiences available instantly.” Additional resources have been poured into a new attack on Google's home turf of making money from Internet advertising. (see BusinessWeek.com, 5/18/06, "Microsoft's Search For Success").
Then there's the world of digital entertainment, where Microsoft's efforts have lacked cohesion while Apple Computer (AAPL) and its iPod digital music player and iTunes Music Store have seemingly conquered the world. Apple has left Microsoft and hardware partners ranging from Creative Technology (CREAF) to Samsung eating its dust. Meanwhile, that's causing something else to happen that most tech pundits never would have thought possible a few years back: iPod-toting consumers are showing a small but growing willingness to ditch their Windows PCs in favor of an Apple Mac (see BusinessWeek.com, 6/15/06, "Apple's Growing Bite of the Market").
All these factors have left Microsoft a challenging stock to own. Having grown at a predictable clip through the 1980s and 1990s, it closed out 1999 at a split-adjusted $50.77. It's been all downhill or flat since then, trading in a range between $22 and $38. Sales growth has been steady, from $28.3 billion in 2002 to $39.8 billion in 2005. But profits have been uneven, ranging from $7.8 billion in 2002 to $12.2 billion in 2005. It finished trading on June 15 at $22.07, but shed 12 cents in after-hours trading after news of Gates' plans to step back emerged.
The numbers tell the tale of a once vibrant and fast-growing company, struggling in mature success to come to terms with a quickening pace of technological change better met by more nimble rivals. That sounds like the cue for some new blood, new thinking, and new ideas. Today's pundits and tomorrow's historians can now start debating the true nature of the Bill Gates legacy, and history will no doubt give him plenty of credit for the role he played in the stunning technological and societal revolution that has taken place over the last decade. But the Microsoft of 2006 is far different from what it was in 1995. Gates should also be credited for knowing when to step aside.