[semi OT] The Computer Industry Comes With Built-In Term Limits

The New York Times
May 18, 2008
Digital Domain
The Computer Industry Comes With Built-In Term Limits
By RANDALL STROSS

MATHEMATICIANS have long tried, and failed, to solve the Riemann
Hypothesis, a stubbornly unyielding math problem. Good luck to whoever
tries to figure it out. For the first correct proof, a $1 million prize
will be awarded by the Clay Mathematics Institute.

Similarly, two successive Microsoft chief executives have long tried,
and failed, to refute what we might call the Single-Era Conjecture, the
invisible law that makes it impossible for a company in the computer
business to enjoy pre-eminence that spans two technological eras. Good
luck to Steven A. Ballmer, the company’s chief executive since 2000, as
he tries to sustain in the Internet era what his company had attained in
the personal computing era.

Empirical evidence, however, suggests that he won’t succeed. Not because
of personal failings, but because Mother Nature simply won’t permit it.

It’s unfortunate, as a $300 billion prize could be collected by
Microsoft shareholders: that would be the increase in market
capitalization, should the share price return to its high of $59.56,
attained in 1999, from its current price of $29.99. (Maybe this was why
Mr. Ballmer flirted with Yahoo.)

That prize, however, seems a mirage. You can’t merge-and-acquire your
way around the Single-Era Conjecture. Just ask I.B.M., which gobbled up
Lotus Development Corporation to no avail.

The Yahoo affair obscures the larger story: Microsoft’s long, long
struggle — since 1993 — to maintain its leadership position while the
Internet grew ubiquitous. Mr. Ballmer, who joined Microsoft in 1980 as
its 15th employee, and Bill Gates, his mentor who will retire next month
as a full-time Microsoft employee, have certainly tried their best to
avert the inevitable decline of the company’s influence.

In 2000, Mr. Ballmer credited Mr. Gates for noting that no company in
the computer business had ever stayed on top through what Mr. Gates
called “a major paradigm shift.” The two men wanted Microsoft to be the
first company to achieve that goal. An interesting challenge, but some
problems are of a size that dwarf the abilities of multibillionaire mortals.

In a 1995 internal memo, “The Internet Tidal Wave,” Mr. Gates alerted
company employees to the Internet’s potential to be a disruptive force.
This was two years before Clayton M. Christensen, the Harvard Business
School professor, published “The Innovator’s Dilemma: When New
Technologies Cause Great Firms to Fail” (1997). The professor presented
what would become a widely noted framework to explain how seemingly
well-managed companies could do most everything to prepare for the
arrival of disruptive new technology but still lose market leadership.

It’s Google, of course, that has developed the musculature to step
forward and lay claim to being Microsoft’s successor as industry leader
in the Internet era. If there had been any way Microsoft could have
prepared for this day, it had ample time to do so. In 1993, fully five
years before Google’s founding and two years before Mr. Gates’s memo,
Nathan P. Myhrvold, then Microsoft’s chief technology officer, wrote his
own memo, “Road Kill on the Information Highway.” It spelled out in
prescient detail how each of many industries would be flattened by the
build-out of digital networks, and it said that the PC software business
would be no exception.

It’s no secret that Microsoft’s online businesses have failed to gain
leading market positions. But what is not widely appreciated, perhaps,
is that the company’s online initiatives have lately been doing worse
than ever.

The last year when Microsoft made a profit in its online services
business was the fiscal year that ended on June 30, 2005. Its MSN unit
used to do a nicely profitable business providing dial-up Internet
access to subscribers. When its users began to switch to broadband
services provided by others, however, the earnings disappeared.
Microsoft’s Web sites brought in a trickle of advertising revenue, which
did not grow fast enough to offset the disappearance of the narrowband
access business. AOL suffered in similar fashion.

In the 2006 fiscal year, Microsoft’s online services produced a $74
million loss after the previous year’s profit of $402 million. Since
then, the numbers have become uglier, as Microsoft’s online segment has
added employees and absorbed growing sales and marketing expenses. In
the 2007 fiscal year, the online businesses lost $732 million. In the
next nine months, through March 31 this year, they recorded a loss of
$745 million, almost double the amount in the period a year earlier.
With $2.39 billion in revenue for the nine months, the online segment
represents only 5 percent of the company’s total revenue.

The numbers at Google, which is nothing but an online services business,
have moved in the opposite direction. For rough comparison, profits in
its 2005 fiscal year, ended on Dec. 31, were $1.5 billion. The earnings
grew to $3 billion in 2006 and $4.2 billion in 2007.

According to Hitwise, an Internet research firm, Google’s share of
searches in the United States has increased to almost 67.9 percent in
March 2008 from 58.3 percent in March 2006. During the same period,
Microsoft’s share has dropped to 6.3 percent from 13.1 percent.

Mr. Ballmer has always been a ham on stage. His comically demonic chants
and dances in recent years have been preserved on YouTube. But even way
back in the day, he had the gift. At the company’s annual meeting in
1994, when he was overseeing sales and Microsoft was enjoying its moment
of triumph over competitors, he shouted at top volume: “It’s market
share — market share! market share! market share! — that counts!” He
continued: “Because if you have share, you basically leave the
competitors” — here he grabbed his own throat for emphasis — “just
gasping for oxygen to live in.”

His mock asphyxiation of competitors was later stripped out of its jokey
context by government antitrust lawyers. But the imagery is no less apt
now than it was then, except that the roles have reversed. As Google
continues to gather market share and the Single-Era Conjecture dictates
Microsoft’s eclipse, it is Mr. Ballmer’s own online services that now
are gasping for oxygen.

Randall Stross is an author based in Silicon Valley and a professor of
business at San Jose State University. E-mail: .

Copyright 2008 The New York Times Company