Don't Blame Ballmer for Microsoft's Misery
Outgoing Microsoft chief executive Steve Ballmer has endured a lot of criticism for falling behind competitors such as Apple and Google. The technology juggernaut's problems, though, stem in part from a decision made long before Ballmer was in charge.
In the early 1980s, Microsoft and Apple defied the expectations of industry experts by choosing to build proprietary operating systems for personal computers, rather than relying on Unix, a system initially developed in 1969 at Bell Labs. The extremely flexible Unix, which could be adapted to any hardware, became the domain of open-source geeks. They tweaked it to produce Linux, a free operating system popular largely among network administrators and Web developers.
When Steve Jobs returned to Apple from a long exile in 1996, he changed the company's course. The successful Mac OS X operating system evolved from the Unix-based system used by Next, Inc., the company Jobs founded after his ouster from Apple in 1985. Clearly, the advantages of Unix, particularly its stability and processing power, had not been lost on Jobs.
Today, Unix-like systems dominate the smartphone market. Both leading mobile operating systems, iOS and Android, are based on Unix. The latter uses a Linux kernel at its core. Technology analyst Benedict Evans recently notedin his blog that at the end of 2012, about 900 million of the world's 1.1 billion smartphones were running either the iOS or Android versions of Unix.
"It is pretty striking that almost a fifth of the earth's adult population has a Unix box in their pocket," wrote Evans. Unix has won a technological victory over Microsoft's approach, largely based now on Windows NT, a platform originally developed in 1992.
It's hard to fault Ballmer for Microsoft's defeat. By the time he became CEO in 2000, Microsoft was firmly locked into a business model that excluded the use of open-source software. License fees were -- and remain today -- the company's main revenue source. Of Microsoft's $77.9 billion in revenue in fiscal 2013, only $13.4 billion came from other sources.
By contrast, Apple makes most of its money selling gadgets, and almost all of Google's revenues come from advertising. In both cases, it is much easier to build on open-source solutions than if your business depends on selling software.
"Some companies compete with us using an open source business model by modifying and then distributing open source software at nominal cost to end-users and earning revenue on advertising or complementary services and products," Microsoft wrote in its latest annual report. "These firms do not bear the full costs of research and development for the software."
Access to more nimble technology, which builds on the experience of a large, creative developer community, has allowed Microsoft's competitors to get their products to market much faster. Windows Phone 8, based on a Windows NT kernel, had some technological advantages over Android and iOS, but it came out too late for users to care. The system has garnered only a 3.3 percent share of the smartphone market.
Within the constraints of Microsoft's business model, Ballmer has performed well. Corporate customers are not switching to alternative open-source products, because they like to deal with a specific, established supplier. Ballmer can hardly be blamed for refusing to chase technological leadership at the cost of undermining a lucrative core business. The company has been extremely profitable, accumulating a cash position of $77 billion as of June. Despite its underperformance in the stock market, its price-to-earnings ratio, at 11.3, is similar to Apple's 11.8.
Ballmer is also right not to give up on consumer products. At the very least, working on them allows Microsoft to better understand its business customers' needs. In the corporate market, speed is not as important as in the consumer segment, and Microsoft certainly has the money to keep developing its proprietary platform. Lagging a step or two behind may be irritating, but it's still profitable.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Leonid Bershidsky at email@example.com