Is Microsoft A Slowpoke?

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PHOTO-ILLUSTRATION (GATES: CORBIS; TURTLE: GETTY)

When a company's revenues grow 17%, as Microsoft's did in the past quarter, it might seem a little churlish to suggest its glory days are over. Its chairman, Bill Gates, even reclaimed his title as the world's richest man, after a widely published story claiming that the founder of Ikea had replaced him turned out to be so many Swedish meatballs. And Gates' baby, based in Redmond, Wash., is still by far the largest software maker in the world, with a healthy $56 billion in the bank and revenue conservatively expected to rise 5% next year, to about $38 billion. It has buried the hatchet with Sun Microsystems and AOL with billions of dollars in legal settlements. What could possibly be wrong with Microsoft?

Answer: quite a lot. When you fly as high as Gates & Co. did during the 1990s, growing an average 36% annually, maintaining that altitude is nearly impossible. So Microsoft's growth rate is now no larger than that of the PC industry as a whole. Its stock price has stalled at 1998 levels. A new version of its flagship Windows product, once expected as early as 2003, may ship in 2006, lacking many of the cool new features Microsoft had hoped to include. By then, Windows is expected to be squaring off against its toughest challenge to date, from Linux, a rival operating system that literally gives itself away.


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So as Microsoft began its 30th year last month, investors wondered whether it's a little long in the tooth. "It's clear that Microsoft doesn't see itself as a high-growth company anymore," says Matt Rosoff, a financial analyst with Directions on Microsoft, based in Kirkland, Wash. "The boom days are over." Last year Microsoft CEO Steve Ballmer started giving employees stock grants instead of stock options — a sure sign that the share price is flatlining. Ballmer okayed a minuscule dividend for shareholders, but he has resisted calls to let them dip any further into the $56 billion cookie jar.

That money is reserved for big bets in growth industries — the bigger, the better. "If you can't bring a $100 million business plan to the table, they're not interested," says Alec Saunders, a Windows programmer who recently quit after nine years at the company. Stung by a slowdown in corporate IT spending, Microsoft made a major play for our living rooms and pockets, with mixed results. It sank billions into the video-game business (Xbox and its soon-to-be-announced successor, Xbox 2), the cell-phone business (partnering with longtime ally Intel) and something called smart personal object technology (SPOT), which uses FM-radio bands to deliver sports, weather and stock prices to devices like watches and refrigerator-door magnets for a subscription of $59 a year.

Results have been mixed. With its price slashed from $179 to $149, way below cost, the Xbox is on course to overtake the hallowed Sony PlayStation 2 as the top game system in North America. But Sony holds a strong lead in sales of games, which is where the money is. Microsoft has created three flavors of Windows for cell phones, but none have caught fire. "Windows is just a lot more than a cell phone needs," says Simon Yates, an analyst for Forrester Research. And the clunky SPOT watch — a derisive critic said wearing it is "like having a golf ball strapped to your wrist"—has been a commercial disaster.

Like a kid with a $100 bill in a penny-candy store, Microsoft has been trying too many things at once, critics have long charged. To keep the company focused, Ballmer sliced it into seven supposedly equal and semiautonomous product groups, each with its own CFO. Two of those groups — Windows and Office — account for 62% of revenue and the lion's share of profits. The others deal with mobile devices, business services, entertainment, the Internet (MSN) and server software. Those last two are marginally profitable; the others are optimistic bets on the future. Says Jupiter Research analyst Joe Wilcox: "It's like dealing with two giants and five pygmies." Kevin Johnson, Microsoft's vice president of worldwide sales, who is regarded by many as heir apparent to Ballmer, defends the reorganization: "The value we deliver comes from collaboration between the groups."

Yet even within Microsoft some say the seven-way split is unwieldy. Robert Scoble is the most widely read of a new wave of Microsoft employees who have been allowed to write freely about the company in online journals, or blogs. His blog, Scobleizer, has repeatedly called for the company to voluntarily do what the Justice Department couldn't compel — split into separate, nimbler companies, a.k.a. Baby Bills. (Gates is vehemently opposed to the idea.)

Microsoft appears to be going through a mid-life crisis — buying flashy toys and having prolonged bouts of soul searching. Take this piece of dissent from a rank and filer: "The products are there. The marketing is not. Gates and Ballmer have been our salespeople for so long, but we need more voices out there selling our products." Even the executive suites are not immune to mea culpas. "We need to be more predictable to our customers," says vice president Johnson. "We need to make it easier to do business with us."

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