Wednesday, February 5, 2014 — Tweet this article

Steve Jobs and Bill Gates, once pirates, now legends, are forever linked in tech history. You know the lore: both collaborators and competitors in the 80s; Gates dominant in the 90s; Jobs triumphant in the 00s. Their career arcs were different though: Gates went out on top, retiring to a life of philanthropy, while Jobs spent a decade in the wilderness, returning to Apple at its darkest hour and leading it to impossible heights.

It turns out, though, the story may not be over.

Yesterday Satya Nadella was named CEO of Microsoft. In the same press release, though, was Gates:

Microsoft also announced that Bill Gates, previously Chairman of the Board of Directors, will assume a new role on the Board as Founder and Technology Advisor, and will devote more time to the company, supporting Nadella in shaping technology and product direction.

It’s been widely reported, particularly by Kara Swisher at Re/code, that Gates has been increasing his involvement at Microsoft, has been driving the CEO search, and has favored Nadella from the beginning. Moreover, it’s highly likely that Gates was the ultimate factor in Steve Ballmer’s abrupt retirement.

Taken together, it’s difficult to escape the conclusion that Gates is back, with Nadella on board to handle the non-product and time-consuming aspects of being public-company CEO. It’s positively Jobsian. To be clear, unlike Jobs, Gates has remained involved with Microsoft even after his departure, and Microsoft is in much better shape financially then Apple was in the 90s. In other ways, though, the challenge Gates and Microsoft face today are far more formidable.

Even in the 90s, Apple had a sustainable target market, particularly designers and publishers. That is whyAdobe Photoshop was, along with Microsoft’s $150 million investment into Apple, a central focus of Jobs’ first keynote back at Apple. More importantly, though, thanks to painful layoffs instituted by Gil Amelio, Apple was a small enough company that such a limited market was enough if only they could start making good products. And good products is exactly what Jobs helped deliver. Moreover, considering Apple’s marketshare and the portable revolution to come, growth opportunities were effectively infinite.

Microsoft has strong positions in much larger markets, namely PCs running Windows, productivity softwarethat runs on those PCs, and enterprise data center software that serves those PCs; but a much larger employee base as well – over 100,000 currently, before you add in the 30,000 being added in the Nokia acquisition. Unlike Apple in the 90s, there isn’t much headroom: PC sales are collapsing, and threaten to drag down Office and Server sales if not now, then in the long run. Meanwhile, efforts in search, consoles, phones and tablets aren’t even close to making up the slack, particularly from a profit perspective.

The issue for Microsoft is that the problem – and relatedly, the solution – is not (just) the quality of the products, or lack thereof. The same kinds of network effects and developer support that Microsoft leveraged to dominate with Windows now work against them in phones and tablets, and it’s too late to build an OS that will contribute in a material way to the bottom line. Meanwhile, PCs are being relegated to specialist devicesby more accessible devices like the iPad, which, when combined with the reduction in meaningful advances in computing power for day-to-day use, has stretched out the replacement cycle, effectively reducing Microsoft’s income from Windows. Neither better phones nor a better version of Windows can change these structural headwinds.

Given this reality, if Gates’ impact is limited to “technology and product direction”,1 then his return is likely to be more Michael Jordan with the Wizards2 than Steve Jobs with Apple. What is needed is a fundamental rethinking of Microsoft’s role in technology:

Admit Google and Apple have won the OS war for phones and tablets

Refocus Windows on securing the (shrinking) PC market

Massively accelerate the buildout of services like Azure and Office365 on all devices, especially iOS and Android

Simple, right? Unfortunately, anything but, especially for Gates:

Gates is insanely competitive, and there is a massive gulf between the reality of the market for phone and tablet OS’s and Microsoft’s perception of itself as an OS company. Moreover, Microsoft’s recent moves, particularly the purchase of Nokia, work in the opposite direction. A sale-off of Nokia3 is not only in order, but almost certainly won’t happen

Gates is the chief proponent of Windows everywhere, the opposite of Windows on PCs only

Azure and Office365 are competitive with many of Microsoft’s own server products. It’s impressive that they have been as successful as they are, but there remain significant obstacles in getting full buy-in from Microsoft’s field and sales teams who make much more money off of on-premise licensing than they do from SaaS

However, what is most difficult of all is that pursuing the above strategy, while appropriate for the long-term health of the company, would almost certainly come with significant restructuring and thousands of layoffs. A profitable and growing Microsoft is a smaller Microsoft, and, in all likelihood, that’s not what Gates signed up for.4

So now we come to Satya Nadella. By all accounts he is a great guy, super sharp, and responsible for Azure, one of those foundational services I mentioned above. Still, he traces his recent success as head of Microsoft’s Enterprise and Cloud group mostly to the Enterprise part – aka on-premise server software – which is intimately tied to Microsoft’s current business model of PC + Office + server, not it’s necessary new model of any device + Office365 + Azure. Moreover, he’s inheriting the current leadership team of which he was recently a part, raising questions about just how much authority he can exert.

And, ever present, will be not just the specter but the very personage of Bill Gates, pirate, legend, and someone who probably should have stayed retired; as age is to basketball players, disruption is to technology companies, and Microsoft is on the wrong side of 30.

Two previous pieces on Stratechery that are worth reading in light of yesterday’s news:

Skating Towards the Goal, on Gates’ impact on Microsoft’s culture and the problem of having already achieved the goal of “A computer on every desk and in every home, running Microsoft software”

Services, Not Devices, which explains how Microsoft is better suited to horizontal opportunities than they are to vertical ones (I explored this further in this piece on the Nokia acquisition)

For what it’s worth, I hope I’m wrong. I have many friends at Microsoft, and it’s difficult to overstate how important the company is to the Seattle area. Moreover, I think it’s good for tech that they succeed and act as a counterweight to Google in particular.

And hopefully better product direction than that exhibited during the development of Windows Vista, née Longhorn 

Michael Jordan, the greatest basketball player in history, retired from the Chicago Bulls in 1998. However, in 2001, he returned to play two seasons with another team, the Washington Wizards. Jordan was old and frequently injured, and the seasons were mostly forgettable 

Which isn’t even closed yet 

The best thing Steve Ballmer could have done for Microsoft would have been to make cuts last summer while restructuring the company, even if said reorganization was a bad idea. Instead he added another 30,000 employees while a lame duck in a deal that made no sense 


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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