A change as Microsoft turns middle age

By Steve Lohr and John Markoff

New York Times News Service

REDMOND, Wash. -- Much of what Microsoft has done during the last year or so might suggest a company settling into middle age.

It has overhauled its management structure, tightened its financial controls, expanded its financial reporting, started paying dividends and abandoned the high-tech currency of stock options in favor of risk-free grants of shares to employees.

All the moves are sensible, pragmatic steps, but they have the feel of concessions to an era of reduced growth and diminished expectations for Microsoft, the premier technology growth company of the last two decades.


So, is this it? Is Microsoft's corporate metabolism finally slowing? The senior management team at the company has a ready answer: not in your dreams.

Execs describe ambition

The recent organizational and financial maneuvers, the Microsoft executives say, are the preparations of an ambitious company on the cusp of a new cycle of opportunity and growth. The changes in how people work, play and communicate using digital devices of all kinds, they say, are really just beginning, and software -- especially Microsoft software -- will make them happen.

"Our innovation challenge is that there's this big opportunity to change many things," said Bill Gates, Microsoft's chairman. "The actual achievement of software in delivering benefits to customers is, say, 20 percent of what it will be even by the end of this decade."

Only Microsoft, Gates says, has the skills, money and focus to put all the software pieces together -- a concept the company calls "integrated innovation" -- to deliver the promise of the digital world, at low cost, to hundreds of millions of people and hundreds of thousands of companies. It is a bold vision, and an inspiring one to those toiling at Microsoft's sprawling corporate campus here, outside Seattle. Yet as Gates himself observed, "Vision is pretty cheap stuff."

Microsoft vs. IBM

Even for a company with Microsoft's wealth and power, the challenges are daunting. For perspective, consider a few of the similarities between IBM 20 years ago and Microsoft today. In the early 1980s, IBM was emerging from a protracted antitrust battle with the Justice Department, just as Microsoft is now. Back then, IBM was reaping enormous profits from its virtual monopoly in mainframe hardware and software, as Microsoft does today from its dominant positions in personal-computer operating systems and personal-productivity software like word processing and spreadsheets. IBM was facing emerging competition from computers using low-cost microprocessor technology. Microsoft is confronting a similar bottom-up assault from Linux, a free operating system, though one supported by Microsoft rivals led by IBM.

Of course, IBM struggled badly trying to make the transition to post-monopoly corporate life, reluctant to abandon its old ways until it nearly collapsed amid huge losses and layoffs in the early 1990s, before it turned around.


No one is predicting a similar fate for Microsoft, and its leaders, Gates and Steven A. Ballmer, are the main reason. In particular, the two appear to have finally adjusted to their new roles, with Ballmer as chief executive and Gates playing the part of technology guru.

The two men, who met as Harvard classmates, have been in business together for 23 years, probably the most effective, and certainly the most lucrative, partnership in modern corporate history. By all accounts, including theirs, the relationship is the business equivalent of an old marriage, tested by time and events but very solid.

They went through a tricky transition for about 18 months, after Gates handed the chief executive's job to Ballmer in January 2000. The move was made to give Gates more time to focus on technology and product strategy, as well as the company's legal troubles. (Those troubles are largely behind Microsoft in the United States, but the European Commission's antitrust investigation continues.)

Ballmer settling in

Yet, Gates had been at the helm since 1975, and some old habits changed slowly. Besides, he was still Microsoft's chairman, chief technology strategist (officially chief software architect) and largest shareholder. And Ballmer had to get a feel for his new job.

As chief software architect and chairman, Gates says he spends 60 percent of his time on technology strategy and product reviews, and 30 percent on business matters like management and budget reviews. (The remaining 10 percent is spent on his philanthropic activities.) The percentages were reversed, he said, when he was chief executive. He says he misses nothing about being chief executive.

Ballmer's stamp on the company is increasingly evident. The changes in management structure, compensation, financial reporting and the effort to improve relations with customers and partners have been mainly his handiwork.

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