The downfall of innovation at Microsoft

Microsoft used to be the tech industry leader, now it's playing catch up. Kurt Eichenwald has written about the state of the company in the August issue of Vanity Fair.

Kai Ryssdal: Microsoft closed down today: $29.99 a share. Apple traded up: $613 a piece. Google flat at $585. That's a fairly stark, albeit just a single, indicator of the state of the high tech world right now. A world that might well be summed up this way: Whatever happened to Microsoft? How could a company that was so far ahead, get so far behind?

Kurt Eichenwald digs into exactly that question in the current issue of Vanity Fair. Welcome to the program.

Kurt Eichenwald: Thanks for having me here.

Ryssdal: This is kind of a no-holds-barred hard fall on Microsoft here, what happened to this company?

Eichenwald: Well the worst thing that happened to the company is they forgot what they were. You know when you are a great software company and then become a great server company, and you are watching everybody in the industry with a little bit of jealousy, and thinking well, 'I want to be a device company, I want to be a game playing company, I want to be a search engine company, and I want to be everything everybody else is,' you start doing lots of things and not many of them well.

Ryssdal: Was there something structural though about how Microsoft lost its way? That's the gist of this article, that this company has forgotten what it was and can't get back to where it wants to be. 

Eichenwald: Well the worst thing at the company is, well what you're talking about by taking on all those different product lines and businesses, is a demand for an immense amount of innovation. And the same time they've created an internal corporate culture that actually prevents people from innovating. Probably the worst thing, and they talked about it in the article, is a system called 'stack ranking.'

Ryssdal: These are employee evaluations, tell us about those, because you spent a lot of time on this.

Eichenwald: Suppose you are in a unit with 10 other people. Your boss thinks every one of you is spectacular. Well it doesn't matter because at Microsoft, you have to designate two of them as spectacular, four of them as mediocre, and then the rest as terrible. What you've done is create a system where every employee is not only trying to do their best, but every employee is trying to make sure that their colleagues don't. Creating that environment is the exact opposite of what you want to do in terms of encouraging innovation. 

Ryssdal: The other thing though about Microsoft and innovation is -- and you know, technical experts out there, call me if you think I'm wrong -- but they're always a day late and a dollar short, almost literally. 

Eichenwald: Well that's what's called not having a vision. Starting in the early 2000s, the man who now is their chief executive -- Ballmer -- would say we are going to be last to cool, first to profit. And last to cool, what that means is, we're not going to be cutting edge. We're going to look at what other people do and we're going to do what they do. For example, the people in the search engine division, Bing, were always telling me, all we did was just follow Google. Nobody had time to come up with their own ideas because because there is so much bureaucracy. One of the things I mention in the article is that the iPhone right now, something that didn't exist five years ago, has more in sales than all of Microsoft combined. And you look at that and say what last to cool means is also last to profit.  

Ryssdal: How much of this though is the CEO of Microsoft, Steve Ballmer? Say what you will about Bill Gates, he hasn't been day-to-day hands on in that company for what -- 10 to 12 years now. But a lot of what Microsoft is today is what he built, right?

Eichenwald: Well the whole veering off into devices and search and the rest of it -- I don't think that Bill Gates was stomping his feet saying don't do that, but these were really -- Ballmer was the guy in charge. If you are going to go into those areas, you need to go into those areas with, again, a vision of how you are going to do it differently. Now the wave has passed by them and they are still trying to surf. 

Ryssdal: Kurt Eichenwald, his article on Microsoft is in the August issue of Vanity Fair magazine. Kurt, thanks a lot.

Eichenwald: Thanks for having me here.



About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.
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I am a marketplace listner for almost 5 years now. I did see this report far from reality.
Infact if you see Microsoft is a company who had turned the page in bringing innovative products.
Especially in the last two years. Every product they had released had put a mark of innovation.

Be it Kinect, Windows Phone, Surface Tablet or Windows 8 or Bing.
I love to hate microsoft but fanboysim has its own limits and apple should also realise that
coming up with big small and large iPhones and copies of that is not innovation. Finally the consumer should be the winner. And endrosing any company on a program promoted by public funds is not good precedence too.

Comparing share prices and comparing companies is a dumpest thing one can do to determine "cool"
or "innovation" factor. Apple is a hardware company more and less of a software company. Microsoft
is just opposite, its more like a software house and less of a hardware house. Both are pioneers
in what they do. Beyond doubt When it comes to Software Microsoft is miles ahead of Apple.

I liked iPhone. But that doesnt put me in a stone age den and I should show the courage to
come out of my fanboism to tell facts as it is. I had used Windows Phone now, on a usability
perspective, Windows Phone puts iPhone to shame. By any standards Kinect, Windows 8 with Metro UI , Surface tablet had defined its own niche. Apple is playing catch up and "me too" following many of the Windows Phone features.

I agree with most of the comments below. Microsoft got where they are largely through luck and clever marketing (legal) and through bundling (today, mostly illegal). It stuck in their craw when the IT world didn't revolve around them, which lead to products like the .wav file, Internet Explorer, MSN, their proprietary version of Java, Bing, etc. None of these are unique technologies, but they gained traction because they came from Microsoft, and because the company had the money to push them long-term. (Concerning the .wav file, find the docs for the Unix sox program for insight into how it was perceived in the early 1990's.)

Today, perhaps there is either too much competition or Microsoft is just...tired. Instead of constantly trying to one-up everybody else, perhaps their only course of action now is innovation? Give users the lean, modular OS they always wanted, instead of a slow, bloated OS designed to manipulate users' behavior to Microsoft's benefit.

Speaking for myself, I have never been a fan. They've seen to that themselves through their history of dirty tricks. (Can we say "embrace-extend-extinguish" ?) Bing may be a wonderful search engine, but I will never use it out of extreme spite. It may be the path of all big, consumer-oriented tech companies to think they have a manifest destiny, but Google still has a leg up. Guess who they were referring to when they wrote their corporate motto?

OK Kai, you asked; I am a technical expert (35 years in the software industry, and not really much of an Apple fan since I'm in the high end business segment the market), and yes you are right about Microsoft when you say that “they're always a day late and a dollar short”.

But there appears to be a misconception here: Microsoft was never a "great software company", and they have never been known within the computer industry for innovation. [And they are Not (and Never have been) a "server company"; that's hardware: Intel or HP or Dell or IBM or Oracle]. They were a mediocre software company, that just happened to be in the right place at the right time; at a time when IBM had invented the PC & Xerox had invented windows, but neither had any idea how to sell to a home market. And to give credit where it is due, Microsoft knew exactly what to do ("first to profit").

Unfortunately Microsoft has never had a great product. They have never contributed a major innovation to the field of computing; all their ideas came from other companies (big companies that spent large sums on research, and small companies with a single great idea). They have grown bigger, but not better. Now they are simply mediocre at many more things; but they are no longer in the right place at the right time.

Innovation? Microsoft? It's not in Microsoft's DNA and never was. Microsoft is a corporation which owes its very existence to one of the all-time colossal corporate blunders: Apple had proven the market for personal computers but conformist corporate buyers were not going to purchase from a company named "Apple". But from a company named IBM on the other hand… And so IBM entered the market, but without an operating system of its own, so it leased MS DOS from Bill Gates. Leased it instead of bought it (thus the colossal blunder), enabling Microsoft to lease its OS again and again to any and every other hardware maker (except Apple and a couple of others) thus depriving IBM of a dominant position in the PC market.

MS DOS was itself just a tweaked version of CP/M, so the very roots of the company are grounded in knocking-off somebody else's product. And so when Lotus produced 1-2-3, the first "killer app", Microsoft knocked it off with Excel. Then Apple produced the Macintosh, so Microsoft (badly) knocked it off with Windows, and then Netscape proved a market for web browsers so Microsoft knocked off Nestcape Navigator with Internet Explorer, etc., etc., etc. Not one innovative product has ever come from Microsoft.

Thank you Steve; it is so rare to hear from someone who actually knows the historical facts.

The sentiment is reciprocated, dmulliga.

I have been a listener of Marketplace for the last 10 years but this is perhaps the worst reporting I have seen. There are several facts you got wrong,
You can't compare companies by just the stock price.
In addition, you can't just compare revenue alone. You also have to compare profit margins of a software company with a hardware company. A hardware company will have a larger revenue just because the hardware costs more.
Thirdly your reporting only reports one side of the story. It looks like you only talked to Kurt Eichenwald who obviously wants to push his side of the story.
Fourth, every company needs some sort of process for evaluating employees instead of evenly spreading the salary to everyone. Kurt didn't provide any solid evidence that this specifically killed innovation. In fact Microsoft followed the same evaluation process during its boom time as well.
Fifth, you don't mention the fact that Microsoft created hit products like Xbox, Kinect, SharePoint etc. during the decade that you think that there was no innovation.
I am quite disappointed in this reporting from you.

downfall of innovation...? Really..? Spoken like a true apple fan.. Windows 8 with the Surface and new windows phone..? Are those not innovations?? Xbox is leading in home entertainment/gaming so not sure where they have a problem there.. This BTW typed and posted with a windowsphone, which I went to after using iOS and Android, and its much better and MORE INNOVATIVE than either.

Innovation is what I think the issue is....Windows 8. Please, how many years later and still UNPROVEN. The xbox, wasn't Nintendo defining that market till Microsoft came along. Windowsphone? Not even worth commenting.

Taking an existing idea and making it better is a good thing in and of itself, but it is not strictly speaking innovation; it is not the creation of something fundamentally new (and in case your wondering I am not an Apple user or fan; just someone who is not particularly impressed with Microsoft).


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