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Microsoft RebootedHow Bill Gates and Steve Ballmer Reinvented Their Company
By Robert Slater
Chapter OneA Surreal Halloween
October 31, 2002. The atmosphere that afternoon at Microsoft's main campus in the Seattle suburb of Redmond was surreal. It was Halloween and the costumed children of employees roamed the corridors trick-or-treating. Then word began to spread among the adults of a sudden, new development in "the DOJ trial," and suddenly employees huddled in groups of twos and threes to vacuum up every fresh detail. Inches below them, but seemingly worlds apart, delighted children giggled and gazed curiously at one anothers' costumes, oblivious to the nerve-wracking drama affecting their parents.
For the adults, the dreaded moment was imminent. It had been four years and five and a half months since the U.S. government had brought its antitrust suit against Microsoft. And Microsoft's legal team had just learned that U.S. District Judge Colleen Kollar-Kotelly planned to issue her fateful decision at 1:00 p.m. Eastern time the next day. The question before Judge Kollar-Kotelly was whether to accept or reject a settlement hammered out a year earlier by Microsoft and the U.S. government along with nine states. Already, the courts had found that Microsoft had used its monopoly status in the operating software business to force companies to do business with it. Already, one court had ordered Microsoft to be split in two; but a higher court had then shelved that notion forever, or so it had seemed at the time. Nine other states not party to the proposed settlement were asking the U.S. district judge to impose harsher penalties on the company; Microsoft's worst fear was that the judge might use their recommendations as a springboard for eviscerating the software titan.
Before the crisis, the company had risen to become the most valuable company in America. Just sixteen days earlier, Microsoft's market capitalization had reached $265.1 billion, passing General Electric to gain the top spot. In 1999, Microsoft had become the first company to exceed $500 billion in market value. Its cofounder, chairman, and CEO, Bill Gates, had become unquestionably the best known business figure of the era. Blocking out the deafening giggles of the small children, Gates's executives worried that nothing less than the future of the most visible, most profitable, and most controversial high-tech enterprise in the world was on the line. Tomorrow would certainly be a historic turning point for Microsoft.
Although the Microsoft Windows operating system along with its productivity software was running on more than 90 percent of home and business computers, an outraged Gates had continuously insisted that his company was no monopoly. He further argued that, despite what the Government had charged, his company had broken no law. Brimming with confidence that Microsoft would be exonerated, he refused to talk settlement of the case for most of the trial. (But eventually realizing how much the trial had damaged Microsoft's reputation, Gates buckled ignominiously and the November 2, 2001, settlement was to follow.) Now, on October 31, 2002, the question in the minds of those Microsoft executives hovering over their costumed children was whether Judge Kollar-Kotelly would ratify the settlement. For her to reject the settlement would mean that Microsoft's nightmare would continue and might get worse.
The fifty-nine-year-old judge had been appointed to the bench by President Bill Clinton and had a reputation as a meticulous jurist. She had replaced U.S. District Judge Thomas Penfield Jackson as the judge handling the case; upon taking over, she immediately urged the sides to get into settlement discussions. Asking few questions, she had given little insight into her leanings during public arguments.
In agreeing to the settlement, Microsoft had affirmed that it would not participate in exclusive deals that could harm its competitors, and it would not offer different contract terms to different computer manufacturers. With the settlement terms in place, Microsoft had already begun to comply with other terms by distributing technical data and releasing an update to Windows XP that permitted the removal of Microsoft icons from that operating system.
The Inner Sanctum
As adults and children frolicked noisily in the corridors, Brad Smith, Microsoft's senior vice president for law and corporate affairs, was meeting around a conference table with twenty colleagues on the fourth floor of Building 34, headquarters for Bill Gates and other members of Microsoft's senior echelon. Smith always seemed to have a smile on his face. He was normally sociable and talkative, but not now. Now he was sober and without the usual smile. He looked nervous and worried. Not far away from Smith's gathering were the offices of Bill Gates and Steve Ballmer. This was the inner sanctum of Microsoft, where almost no one treaded uninvited.
Inside those offices were Ballmer and Gates, two men whose lives had been upended by the trial and who had high hopes that the end was in sight. They too had solemn looks and they too were more edgy than usual. Nearly two years earlier, they had taken on new roles in the company, but the trial had been a large reason why they had still not fully adjusted to those new roles. Back then, Ballmer had, with Gates's approval, replaced the cofounder as CEO; and Gates had begun to devote himself full-time to overseeing the company's technology as chief software architect.
By now, Brad Smith and his associates had learned that the antitrust case was to be resolved the next day. Suddenly the jaunty laughter subsided. Scooping up their notebooks, they hustled out of the conference room to consider postverdict scenarios. Suddenly stern-faced executives reviewed the previous four years of courtroom wrangling and tried to make a quick assessment. They knew their assessments were beside the point. The betting, unfortunately for Microsoft, favored a harsh decision. Smith thought the whole scene outside the conference room door was bizarre. Stepping into the corridor and locating his wife and two costumed children, he spotted Steve Ballmer with his wife and three children. Ballmer, with his oval bald head and bulky, seemingly towering frame, was always easy to recognize. He had just lost fifty pounds, but no one would accuse him of looking gaunt. Smith gazed intently at the CEO's countenance, hoping to see Ballmer's thin lips curl up in a smile, but they did not. He's frowning, Smith thought. This is not a good sign.
A smile or the lack of one became the key measurement for Microsoft's future. Brad Smith wondered if tomorrow would bring smiles.
For Bill Gates, the Government's antitrust suit had been a disastrous ordeal. It had been his personal hell. News reports surfaced that Microsoft's cofounder had broken down in front of the Microsoft board of directors, but senior executives called such reports "overblown." Whatever the case, he could have ended the nightmare much sooner by negotiating a settlement. But he had chosen to endure it. He did so-he felt in the strongest possible terms-in order to save Microsoft from being torn to shreds, one shred at a time, by jealous, unimaginative, and rapacious rivals. He had no doubt that he could outlast them, and so he had been willing to take his chances with the courts. He had never admitted to being distracted, let alone overwhelmed, by United States v. Microsoft. But, severe distraction it had certainly been. In his own view, Gates had spent far too much time and energy on legal strategies-time and energy that could have been employed much more productively to monitor Microsoft's technology program. For those who cared deeply about Gates, the trial had been an agony. His father, Bill Gates Sr., admitted to feeling "a sense of relief after what he went through." It was no wonder.
Recasting His Image
In the early part of his career, Bill Gates had been in the media's eyes, the supernova of the technology world. He had been the boy genius of technology, creator of the company admiringly dubbed the smartest in the world. As the person who in the 1970s had almost single-handedly created the personal computer revolution, and as the wealthiest man alive during the 1990s, he had become a household name. Many had paid him the rare compliment of being the Henry Ford, the John D. Rockefeller, or the Thomas Edison of his age. At one stage in 1999, worth more than $100 billion, he was richer than many countries. He and Microsoft had sat on top of the heap and nothing seemed likely to budge them from that spot, but then, when evidence piled up of Microsoft's alleged unsavory business practices and the media gleefully applied such terms as predator and monopolist to Gates, his near-perfect image became badly tarnished. Shockingly, Gates could no longer count on history treating him with great reverence.
The verdict on whether he was supernova or predator remained unclear as Time magazine's 1993 profile of him suggested: "Though Gates is famous for his lack of pretension, his habit of flying in coach class, and his easy accessibility, he can also be brash, imperious, and brutally blunt." Five years later, the same magazine acknowledged that the verdict had still not come in on him: "[T]he real battle seems to be between two warring views of Gates. Is he the brilliant innovator who has brought the wonders of the information age to millions of satisfied customers? Or is he the rapacious capitalist leveraging his software monopoly to crush competitors?"
At a certain point during the trial, he began to disgorge himself of billions of dollars of his net worth, in the process creating the richest foundation in the world. Undoubtedly, he was deeply moved by the plight of millions of poor people and wanted to help them. And there seemed little reason to doubt his assertion that he was giving away most of his fortune to keep his children from having to bear the burden of living with inherited billions. What he did not say, however, what he could not say, was that he was emerging as the world's most generous philanthropist in order to recast his image, an image shattered into a thousand tiny pieces by the daily barrage of trial-related verbal abuse heaped upon his persona.
Because the Bill and Melinda Gates Foundation's largesse had the undeniable effect of saving thousands of lives, its creation led some to suggest that Bill Gates might become better known for his philanthropy than for his pioneering work in the development of personal computer software. From such utterings, Gates hoped to repair his reputation. He hated being called a devil. He loved being known as a savior.
The judge's decision the next day, November 1, 2002, if it went the right way for Gates, would help him erase or at least bring to a halt the constant battering against him and against Microsoft. Hence, her decision was crucial to their futures. It seemed ironic that Gates would worry how history would judge him. He had, after all, despite his relative youth (he had turned forty-seven three days earlier), already made more of a mark on this planet than most others had.
Though he had clearly made that mark, he was so fanatically devoted to building what he called "magical software" that any thought of his departing Microsoft seemed unimaginable. Consequently, long after many of his contemporary founders of companies, especially wealthy founders, had drifted away from their businesses, Gates remained in charge of Microsoft. He had never quite adjusted to having all that wealth and he certainly had no interest in using that wealth to retire to some island. He had, however, easily adjusted to ruling the software world, and he had no desire to give up the crown.
His Worst Crisis
His climb to the top had not been easy. The trial had not been his first crisis, only his worst. Confronting much larger, much more powerful rivals, he had forced himself to read the burgeoning computer market carefully, trying to spot emerging trends. When he did, unlike far more conservative business leaders, he was prepared to shift the company's product strategy on a dime, reorganizing whole divisions overnight. He lived in fear that another company was secretly devising its own product strategy that would bring Microsoft to its knees. With little choice in his mind, he raised paranoia to a new art form in the business world.
That paranoia led Gates to turn the reinventing of his company into one of Microsoft's core competencies, suddenly dropping the MS-DOS operating system in favor of Windows and shifting personnel from other projects to Internet work overnight. "It is deep in the culture that success is never guaranteed," observed Pam Edstrom, explaining Bill Gates's paranoia and his reinventing strategies in one neat sentence. She joined Microsoft back in 1982 with the task of handling the company's public relations (in 2003 she was still running its PR through her own agency, Waggener Edstrom).
To Bob Herbold, the company's executive vice president, Gates's savvy and guts reflected in his reinventing strategies were all the more remarkable after Herbold's twenty-six years at Procter & Gamble. Perhaps because of the slower innovation rate of the consumer products industry, or perhaps because P&G had been so bureaucratically entrenched, nothing happened fast at his former employer. But Gates was able to move with the speed of lightning. Herbold remembered vividly, "After the launch of Windows 95, I was at a board meeting and Bill explained how, in the next two or three weeks, he was going to take hundreds of people from existing divisions and quickly define a new product division to jump on a new opportunity-very impressive." Impressive, yes; but the reinventing strategy was risky as well. Gates knew the risks were high. He always felt like he was in a fight for his life.
* * *
Now, on October 31, 2002, by his own personal choice, he was in another fight for his life. It was in fact the fight of his life. He hoped for a positive decision, one that would give him a welcome sense of closure to the four-year trauma and that would permit Steve Ballmer and himself the freedom to devote their full energies to the company. For all sorts of reasons, of which the trial was only one, Microsoft had not been running up to speed for a while. The company's annual growth rate, as high as 49 percent in 1996, had slipped tellingly to a mere 12 percent this year as its annual revenue stood for the fiscal year ending the previous June 30 at $28.37 billion.
Despite valiant efforts, the company remained a one- or, at best, a two-product firm (Windows and Office), and only three of its seven business segments (Client, Information worker, and the Server platforms) were showing profits. It seemed a minor miracle that the company was doing that well for the place was in turmoil. Senior executives were jumping ship.
Excerpted from Microsoft Rebooted by Robert Slater Excerpted by permission.
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