Ballmer’s retirement a Pyrrhic victory for Microsoft investors

Microsoft investors were jubilant today as the stock rallied (7.5% at time of writing) on the news that Steve Ballmer will be retiring within a year. I think they’re getting a little ahead of themselves: while Ballmer’s failings have been well chronicled, I think the bigger picture’s getting overlooked.

The small picture is that the man presided over a litany of strategic disasters like Windows Vista, 8, RT and Phone; the Surface surplus; the doomed Zune and Kin; and the monetary black hole that is their Online Services Division. Throw out the guy ultimately responsible, the sentiment presumably goes, and look forward to a return to the good old days.

But the bigger picture is that Steve inherited a company that literally set the agenda for the whole tech industry, and now bequeaths one that struggles to stay relevant. The forces that kept Gates’ company strong through the PC age – being able to destroy competition through existing market dominance – are the same forces that are now keeping Ballmer’s company weak in this new post-PC age, and it would be fanciful to think that a change at the helm has much hope of reversing that.

Gates’ Microsoft was a company that achieved monopoly status over a modern necessity, and wielded its power ruthlessly (even illegally) to crush competition and expand into new market segments. The MO that got them where they were went something like this: find a third party’s software product that looked to be gaining success (Lotus 123 or WordPerfect, let’s say), and throw money at a competing product (Excel or Word) until the incumbent could no longer compete. The odds were always stacked in Microsoft’s favor since the Windows tax enabled them to sustain loss-making products longer than their competitors could survive price competition. Meanwhile the Windows tax itself was protected via threats of punitive license pricing to OEMs who dared to sell non-Windows PCs.

The strategy worked enormously well for the company. While the crushing of Netscape Navigator by IE landed Microsoft in legal hot water, the eventual settlement, negotiated down from a breakup of the company to a legal slap on the wrist, emboldened the new CEO, Ballmer, to continue on the well-trodden path.

Over a decade of me-too-ism followed. Google’s success begat Bing, the PlayStation begat the Xbox, the iPod begat Zune, and so on it goes. To Ballmer’s surprise, no doubt, leveraging the Windows monopoly wasn’t enough to make these products a success. Bing never got close to Google’s market share; the Xbox, though now stable, suffered year after year of ten-digit losses; while the Zune was finally thrown away after the whole portable music player segment entered terminal decline.

Moreover, when the company’s culture is to embrace, extend and extinguish their competitors’ offerings, it’s probably inevitable that vision would be the one trait you’d expect to be absent.

In a classic case of the innovator’s dilemma, Ballmer chronically neglected to innovate in segments that could disrupt Windows’ monopoly (notably, cloud computing, smartphones and tablets). Awakened by the success of Apple and Google, it was already too late: throwing your weight around in the style of Microsoft-of-old just isn’t going to work when you’re playing catch-up.

And let’s face it, having seen how Microsoft behaves once they build a dominant platform, there’s not going to be a whole lot of goodwill towards the erstwhile tyrant of the tech industry in their struggle to conquer the mobile segment. Wounded despots don’t tend to get a whole lot of love from their subjects. They get pitchforked.

For sure, Microsoft’s best days are behind them. Steve’s squandering of their potential chances in mobile has denied them the position to ever again wield the kind of power they had when he took over. And for that I think we all owe the man our deep appreciation.

As for today’s share price spike, look at it this way: through its activity as a patent troll, Microsoft’s future revenues seem closer tied to the success of Android than to Windows Phone. If you’re looking for a recent precedent, may I suggest SCO as a case study?