Microsoft: What could have been

Larry King Live
Aired May 1, 2009 - 9:00 p.m. EDT


KING: Tonight, people are calling it the most important business transformation in a generation. Bill Gates, the founder, chairman, and CEO of Microsoft joins us live. Bill, Microsoft just announced its quarterly earnings, and for the first time your revenue from personal computers actually dropped.

GATES: The economy is very tough, and that's affecting computer sales, just like everything else.

KING: But Microsoft's revenue and profits continued to increase, right? The stock market sure loved what you said last week.

GATES: I think our strategy's really starting to take hold. We don't manage Microsoft for quarterly earnings, but it's nice to see that investors are recognizing the progress we've made.

KING: You mentioned a new strategy. That started what, about eight years ago?

GATES: Roughly. We spent a lot of time looking at our business, asking where we were going, and we realized three important things.

KING: What were they? Lay them out for me.

GATES: Well, the first was that the biggest danger to Windows was Microsoft itself, and they way we were managing the product. Our philosophy for the last decade had been that whenever there was an innovation in personal computers, we copied it into Windows or into Microsoft Office. If there was an important new application, we built it into Office. If Apple or somebody came up with a new personal computer feature, we built that feature into Windows.

KING: You were trying to compete.

GATES: Yeah, but the effect was that Windows and Office were growing exponentially. If you extrapolated out the growth curve -- the number of lines of code and the number of features -- you could see that within about a decade we'd hit an asymptote...

KING: An assy-what?

GATES: A point of diminishing returns, where Windows would become so complex that we'd have to spend all our time just fixing bugs instead of improving the product. We were destroying our own ability to innovate.

KING: But that wasn't the biggest problem, was it? Your behavior also made Microsoft unpopular.

GATES: Not just unpopular, our aggressive business practices made people stop investing in writing new PC software. The entrepreneurs and the VCs were starting to say, "why should I bother writing a new Windows software program? Even if I'm successful, Microsoft will just take over my business."

KING: How's that a problem? It just means fewer competitors for you, right?

GATES: Not really, because people weren't going to stop writing new software overall. They just stopped writing it on Windows. By competing so hard with our own developers, we were forcing them to innovate on the Internet instead. So here we were, Windows was growing so big that we couldn't innovate, and at the same time we were driving all the other innovators to work on the Internet instead of building on our platform. We were in danger of strangling our own business.

KING: You said there were three things you realized. What was the third one?

GATES: That was probably the most painful one for us to face. We had to admit to ourselves that we just weren't very good at managing things outside the PC business.

KING: But today Microsoft is viewed as one of the best managed companies in the world.

GATES: Today, sure. But ten years ago, we were like the repair guy who has only a hammer. Everything looks like a nail. We thought we were a software company, but actually we were a PC company. To us, everything looked like a PC. We thought we could take what we already knew and apply it to any other technology business. Microsoft had this reputation that the third time's the charm...

KING: Your first two versions stink, but on the third try you'll get it right.

GATES: I wouldn't say stinks, know, ten years ago I would have jumped all over a statement like that. But yeah, people said things like that, and I think at some level we started to believe it about ourselves. So we would enter these new businesses, and our first efforts would be a failure, and we'd tell ourselves that it was okay because of the learning curve. But that wasn't it; the reality was that we just weren't very good at those other businesses. You look at all the new things we were investing in...

KING: Let's make a list, there were video games, smartphones...

GATES: Lots more than that. Tablet computers. Music players. At one point we were even creating an operating system for watches, if you can believe that. And we were developing all of these things in-house, and most of them were very mediocre, very uninspiring.

KING: So let me get this straight, you had three problems at once...

GATES: Our products were getting so big that we couldn't innovate, we had driven away the other people who could innovate, and we weren't good at the new businesses we were getting ourselves into. Now, none of this was totally obvious in 2001. You could still rationalize at the start of the decade that all we needed to do was work a little harder. In fact, in a lot of ways it looked like we were stronger than ever. So the pressure to stay the course was pretty extreme.

KING: But that wasn't what you did.

GATES: No. It was the biggest decision of my career, but right when we were at the peak, we decided we had to remake the company. If we were going to diversify beyond the PC market, we needed to figure out how to manage very different businesses within Microsoft. We had to be more like GE, where they can run radically diverse businesses like jet engines and finance inside one corporate entity. And instead of growing everything ourselves, we'd need to acquire some companies with different DNA.

KING: But acquisitions were a problem for you.

GATES: Right. Because the government had decided we were a monopoly, we couldn't just go out and buy a bunch of companies. We would've drowned in lawsuits. So first we had to change the way we managed Windows. That's why we signed the consent decree with the government, agreeing to open up all the interfaces of Windows at no charge, and to stop copying the features of other software companies. That got the Department of Justice off our backs -- I mean, that made the regulatory authorities more comfortable with our strategy. You know, Larry, I still don't think we actually did anything wrong, but sometimes the perception is just as damaging as the act...

KING: Of course.

GATES: Then we made it clear to the VCs that instead of competing with the best Windows software companies, we were going to buy them. That turned around the whole investment dynamic -- instead of creating new software companies on the web, they started telling all the entrepreneurs to create Windows software, because they had an easy exit strategy. Plus we were able to make our Windows development more focused, because we weren't obligated to compete with everything all at once. It's like what Cisco did in networking. Get other people to do your R&D for you, and just buy the best ones. So that re-ignited innovation in Windows.

KING: It sounds so simple.

GATES: Actually, it is pretty simple, if you let the companies you acquire keep running themselves. We used to acquire a company and then "align" it with our strategy. In practice, that meant it disappeared like a tuna in a school of sharks. That was probably the hardest lesson we had to learn at Microsoft, that our way wasn't always the best way.

KING: Let's open it up to the phones. Peoria, Illinois, you're on with Bill Gates.

CALLER: Hello?

KING: Yes, you're on live with Bill Gates. What's your question?

CALLER: I wanted to ask about the acquisitions you've made in the last decade. Which one are you most proud of?

GATES: Oh, it's hard to choose just one. But the deal that set up Microsoft North is one of my favorites. People said we were crazy to buy those guys. We had to pay almost $3 billion for them in 2002. It was a huge risk at the time; Ballmer almost threw a chair at me when we discussed it. But today they're responsible for the whole Microsoft Blackberry product line.

KING: You mean that wasn't developed in-house?

GATES: People forget about that today, but yeah we bought this Canadian company that made Blackberry, and put them in charge of our mobile strategy. The analysts thought we were crazy -- they said we could just copy Blackberry and build it into our server and PDA products. But I thought about Microsoft Bob, and decided it was better to spend the money than risk missing the market. You know, that one $3 billion investment is probably worth at least $30 billion today.

Then there was the joint venture with Nintendo. God only knows how much money we would have lost if we'd tried to go into video games on our own.

KING: We're almost out of time. Nine years ago, on January 1, 2000, we had you on this program and you said that the biggest danger to Microsoft was that you would become complacent. How did you avoid that?

GATES: By assuming that we were complacent, and attacking it. Here's the rule: If you even suspect that you're at risk of becoming complacent, you probably already are. I mean, we could have just gone along with business as usual. That would have been the safe decision.

KING: If you had taken the safe approach, where do you think Microsoft would be today?

GATES: It's so hard to say. If we hadn't changed, we probably could have muddled through with high profits for about a decade before things would have started to come apart. I might have even gotten bored and retired, or given away all my stock to a foundation. But by the end of the decade, there we'd be, most of our business would still be centered on the PC, and when that market started to shrink, then we'd be in real trouble.

KING: Could you have fixed the company if you'd waited that long?

GATES: I don't really know. I want to say yes, because you know I'm kind of competitive. But when a company starts shrinking, there's huge pressure from the shareholders to cut costs. And logically, the first thing you cut is the speculative new products that might get you out of the mess. If I had given up my stock, I might not even have enough control over the company to step in and say, "ignore the investors for a couple of years while we fix everything." It was hard enough to do back in 2001.

Once you start to shrink, it's very difficult to turn things around.

KING: Instead, here you are. Sure enough the PC market is shrinking, but Microsoft's still growing...

GATES: Because we changed our strategy to use the talents of others, rather than feeding off them.

KING: Thanks, Bill.

GATES: You bet.

KING: Bill Gates, the founder, chairman and CEO of Microsoft.

Tomorrow night: Monica Lewinsky, where is she now?

Thanks for joining us. I'm Larry King. Good night.

The lesson from OQO

A lot of people online are lamenting the business troubles of the OQO mini-computer. Wired's commentary is pretty typical: "When OQO’s excited developers showed me a prototype behind closed doors seven years ago, it was clear that the company was ahead of its time. Now, its time appears to be up." (Link)

Baloney. OQO's time never arrived in the first place.

I'm always sad to see any startup run into trouble; especially a device company, because they're so rare. OQO did some beautiful things technologically. But in my opinion, they never had a chance as a business. There just wasn't a significant market for a shrunken, compromised PC at the same price as a full-size laptop. At first OQO was supposed to be a horizontal market device, and when that didn't take off the company went after business verticals (the place where struggling consumer technologies go to die). Sometimes that works, but usually it ends up being a gradual way to wind down the company.

But why, if OQO is failing, are netbooks taking off? Two words: They're cheap. It's one thing to ask someone to pay $900 for a less functional notebook. It's quite another to ask them to pay $300.

The lesson: Don't build something just because you can. Make sure there's a real market for your device before you create it. Geeky coolness will impress Wired reporters, but it won't get you a lot of sales from real people.

Checking in on smartphone and Twitter usage

Over at Rubicon, we just did a quick consumer survey to check the status of a couple of hot topics in the tech industry, smartphone adoption and use of Twitter. I thought you might be interested. Here's a summary of what we found, and links to the full articles:

Smartphone adoption: RIM leads. In the US, about 10%-11% of the adult population uses smartphones. RIM has just under half of the installed base, followed by Apple at about a quarter.

The users of different types of smartphone have different feature priorities. iPhone users rate web browsing as their #1 feature, followed closely by e-mail. RIM users rank e-mail the most important feature, Palm users choose calendar, and Google phone users are partial to mapping. The profile for Windows Mobile users is similar to RIM's, but less enthusiastic about e-mail.

Mobile phone feature priorities of iPhone users compared to all mobile phone users. Percent of US users ranking a feature in their top four.

I think this is more evidence of something that I've been saying for a while -- most people buy phones more like they do appliances than like computers. They decide which functions are most important to them, and then pick the phone that does those things best, rather than looking for the best general-purpose device.

That's not to say that flexibility doesn't matter at all, but it's secondary. For example, adding third party apps is the #4 priority among iPhone users, and close to tied with several other features. It will be interesting to see how the priority evolves as Apple continues to advertise the daylights out of the app store.

For the full article, click here.

Twitter is a form of entertainment. Usage of Twitter is rising very rapidly -- as of April, it gets more daily visitors than in the US, according to

Our survey showed that the Twitter user base has more than doubled in the last six months. About 10% of US computer users have tried Twitter so far, and about a third of those people have stopped using it. You can decide for yourself if that's a big number or not, but a certain amount of churn is inevitable in any new web service.

Twitter awareness and usage among US PC users.

Most Twitter users say they are casual users of the service, and that it doesn't play an important part of their personal or business lives. The most active 10% of Twitter users say it does play an important role in their personal lives, but not in their business lives.

The overall pattern of usage indicates that for most people Twitter is currently a form of casual entertainment. There's nothing wrong with that, but the future of Twitter will depend on how that usage pattern evolves. Will Twitter become as important as e-mail, or will it be a fad like citizens' band radio (link)? It's too early to tell. But it's already clear that it's a separate medium with its own rules. Companies looking to use Twitter should make sure they understand how it's used; it's not the same as blogging.

For the full article, click here.

The ugliest logo ever, but maybe it makes sense

Logo creation is a thankless task. Almost all of the interesting shapes and doodles were trademarked years ago. Unless you have hundreds of thousands of dollars to spend on artists and lawyers, and a lot of time, you usually settle on using your company name with no artwork at all.

Or you can take the approach adopted by the newly-formed Symbian Foundation, keeper of the Symbian OS:

Yes, that's really the new Symbian logo. I guarantee no one's going to sue them for it, unless it's the producers of the movie Juno:

I've already gone through a couple of stages of reaction to the logo. The first was horror. Not only is the font something out of 1974, but the color is one of the least popular in the world (step outside and count how many yellow cars you can see, or click here or here). I know I've seen uglier logos in the past, but I can't remember where, probably because I tried to block out the memory.

The discussion on All About Symbian has been amusing (link).

Once I got over my reaction, I reminded myself that the folks at Symbian are smart and very deliberate. Let's assume they have a good reason for choosing this logo. What would it be, and what would it tell us about the company and its business strategy?

The new Symbian is an open source software project. They need to appeal to open source developers, many of whom have a reflexive hatred toward slick and calculated marketing. After all, these are the sort of folks who, when allowed to choose their own logos, spontaneously chose a fat, stoned-looking penguin and a drunken ox:

The GNU Gnu Head and Tux the Linux penguin (link)
Tux drawn by Gnu head reproduced under the copyleft license (link).

To the open source community, Symbian has historically been kind of an antichrist -- controlled by some of the biggest tech firms in the world, bureaucratic, closed, and incredibly complex. If you're going to win over the open source crowd, you have to overcompensate by being excessively informal, friendly and "childlike." (That's Symbian's word for it, not mine.)

Here's how Symbian explains the logo (link):

It is a brand that’s human and playful and friendly, where you feel the human hand. A brand that enables you to discover unlimited creative possibilities, that wants to share and talk A brand that’s fun, that isn’t fixed, but free to constantly evolve. A brand that’s owned by all the people that create and build with Symbian. A brand that celebrates new ideas and creativity in all forms. A brand that’s truly alive and refreshingly different, because it is! A brand that’s human to the core and that underneath beats a human heart.

In other words, the slick and calculated marketing approach is to give the company the most artless logo imaginable. And from that perspective, I think they succeeded.

I am wondering, though, what they'll do when it's time to use the logo for something other than just decorating a website. OS logos are generally used as compatibility marks. In that role they need to be displayed on screen, and preferably printed on the back of the phone, to let the user know that he or she can run Symbian applications on the device.

Picture a meeting where the folks at Symbian try to convince a product manager at Nokia or Samsung or SonyEricsson that they should print that logo on the backs of their phones, or that it should be displayed prominently on the screen. I don't think it'll go over very well. And even if they did agree to include the logo, the tiny details in the lettering won't show up well when reduced in size. The logo just isn't designed to travel.

So Symbian app developers should ask how they'll be able to market their applications when Symbian OS users don't even know what their OS is. Symbian has never had a good answer to that, and I think the new logo doesn't move them any closer to solving that problem.

Maybe the assumption is that all Symbian phones will have application stores built in, so developers won't need to communicate compatibility. Maybe, but that will still put a big marketing burden on an application developer to explain model by model which phones their apps work on.

The bottom line is that any logo artless enough to please the open source community would be problematic as a marketing tool. As is often the case in marketing, you can't please all your audiences, so you can either be universally bland or you can optimize for one audience. I think the folks at Symbian decided that open source street cred is the thing they need most.

And maybe they're right.

Thoughts on the tech industry bailout

I presume the big topic of discussion at the CTIA conference this week is going to be the government's emergency bailout package for the tech industry. I was surprised this morning when US Treasury Secretary Tim Geithner replaced RIM CEO Mike Lazaridis at the CTIA keynote to announce the package, and ever since I've been scrambling to sort through all the details. A lot of it's still fuzzy, but here's what I've been able to figure out so far:

--The largest single element in the bailout seems to be the $20 billion in subsidies for Motorola. I think the biggest shock here was President Obama's decision to replace Moto's co-CEO Greg Brown with Steve Wozniak. "We tried to get Steve Jobs, but he demanded control over the Seventh Fleet as compensation," Geithner explained. "So we went for the closest substitute we could find. Besides, Woz was available since he just got kicked off Dancing with the Stars."

Geithner said the subsidies to Motorola were originally designed to protect high-paying phone manufacturing jobs in the United States, but then the government discovered that those were all outsourced to China a decade ago. So the government settled on a requirement that the guy who glues the bat-wing logos onto Motorola's phones has to be an American citizen. He has already been hired, his name is Joey Carbonic, he lives in Wenonah, Illinois, and the crowd at CTIA gave him a nice ovation when he was introduced during Geithner's keynote.

There's a rumor at the show that the government also agreed to buy 500,000 unsold ROKR handsets and give them free to poor countries as a gesture of friendship, but that was denied by a government official who spoke to me off the record. "We're trying to get people in those countries to like us," he explained.

--In the spirit of the forced mergers between failing banks, Geithner announced the combination of Sun, Sprint, AOL, and 3Com. Called 3Sprun and combining the best of all four companies, the new firm will specialize in Java-based 56kbps wireless modems.

--I haven't been able to confirm this yet, but Palm has apparently been offered $2 billion in loans if it adapts the Pre to run on biomass power and merges within 30 days with either Black & Decker, Digg, or SonyEricsson. Ironically, reports from Stockholm say that the Swedish government has offered SonyEricsson 20 billion kronor if it merges with Airbus Industrie, so we may get a three-way deal that would see Treos built into the seat backs of every A380.

--Geithner also said $40 billion in grants have been reserved for use by Yahoo and/or Microsoft. "We like to plan ahead," he explained.

Those are just the highlights. There are apparently a lot more deals being arranged, with venture capitalists and members of Congress competing to get subsidies for various firms. The most intriguing rumor so far is the plan to provide three Twitter accounts to every American as part of the stimulus package, to produce the illusion that the country's population has suddenly tripled. And then there's Cisco's buyout of Six Flags to advance the creation of networked roller coasters (hey, it makes at least as much sense as their purchase of Pure Digital).

I don't know how those will turn out, but things are certainly going to get more and more interesting now that the government has decided that the free market can't be trusted to run the tech industry.

By now you've probably realized that this is April 1, and like the extended iPhone survey last year (link), the Spitr announcement in 2007 (link), and the Google-Sprint merger in 2006 (link), nothing I wrote above is true.

I hope.