The Real Story of Microsoft's Fall

A blog about business and economics.
July 26 2012 4:22 PM

Innovation is Hard: The Real Story of Microsoft's Fall From Grace

LOS ANGELES, CA - JUNE 18: Microsoft CEO Steve Ballmer shows the new tablet called Surface during a news conference at Milk Studios on June 18, 2012 in Los Angeles, California.

Photo by Kevork Djansezian/Getty Images

I can't believe it took me this long to read Kurt Eichenwald's long article on Steve Ballmer and the fall of Microsoft. It's a great piece full of telling detail. But I do think it's worth offering a more analytic take. There's a reason people in Ballmer's position tend to fail.

The basic issue facing Microsoft over the past ten years has been this—innovating is really hard.


The company reached a point where Office and Windows were so popular that wasn't much you could do to increase their popularity by improving the product. They continued to work on improving the product, and kept these divisions very healthy and profitable, but there simply wasn't an explosive growth opportunity left to be had because the previous successes had been so enormous. So you create a situation where the company as a whole is basically a venture capital firm. It has this huge stream of Office/Windows profits and needs to figure out how to invest those profits in exciting new products. But successful venture capitalists are really rare, and for all we know most of them are just getting lucky. The average financial returns from the venture capital sector as a whole are terrible. But Microsoft qua venture capitalist faces the additional burden that the top management of the company has to be good at running the giant existing Office/Windows businesses. It's as if you were trying to hire a tax attorney who could also perform open heart surgery.

One alternative strategy could have been to just give up. Pay huge dividends, keep focusing on incremental improvements to the core products, and basically don't worry if other firms dominate mobile and online services. But not only is that psychologically unappealing to managers, it'd be weirdly demoralizing to the staff. Windows and Office need to be able to hire talented engineers—the kind of people who are going to want to work for a company that aspires to be forever on the cutting edge, not a company that's resigned itself to operating as a boring dividend machine.

So what are you supposed to do? Obviously "kill an early promising e-reader project and bury the team working on it in your office division," "kill morale with a creepy evaluation system," and "lose billions on developing a search engine" seem in retrospect like misguided ideas. But this is genuinely hard stuff. And it's at least possible that Windows 8 will be a huge hit and people will turn in drove to buy smartphones and tablets that seemlessly integrate with the still-dominant desktop PC platform and we'll all look back on the ten-year Apple Bubble and laugh. Financial markets are betting against that, but it's not a crazy story. Anyway, read Eichenwald's piece. Laugh at Ballmer's errors. But just remember that basic reality. Innovation is really hard. Staying on top once your core business has saturated the market is really hard. Having the third-highest market capitalization in America is pretty damn impressive.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


Sports Nut

Grandmaster Clash

One of the most amazing feats in chess history just happened, and no one noticed.

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

Do the Celebrities Whose Nude Photos Were Stolen Have a Case Against Apple?

The NFL Explains How It Sees “the Role of the Female”

Future Tense

Amazon Is Now a Gadget Company


How to Order Chinese Food

First, stop thinking of it as “Chinese food.”

Scotland Is Inspiring Secessionists Across America

The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant

The XX Factor
Sept. 18 2014 11:40 AM The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
Sept. 18 2014 3:19 PM In Defense of Congress Leaving Town Without a New War Vote
Sept. 18 2014 5:09 PM Three CEOs Step Down in 30 Minutes
Sept. 18 2014 4:15 PM Reactions to a Sketch of Chelsea Manning Reveal Transmisogyny
  Double X
The XX Factor
Sept. 18 2014 3:30 PM How Crisis Pregnancy Centers Trick Women
  Slate Plus
Behind the Scenes
Sept. 18 2014 1:23 PM “It’s Not Every Day That You Can Beat the World Champion” An exclusive interview with chess grandmaster Fabiano Caruana.
Brow Beat
Sept. 18 2014 4:33 PM The Top 5 Dadsplaining Moments From The Cosby Show
Future Tense
Sept. 18 2014 5:43 PM Oracle’s Larry Ellison Steps Down, Will Be Replaced by Hurd’n’Catz
  Health & Science
Sept. 18 2014 3:35 PM Do People Still Die of Rabies? And how do you know if an animal is rabid?
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.