Why Steve Ballmer is headed for the exit

InfoWorld has been a vocal critic of Microsoft for many years. But as Steve Ballmer enters the departure lounge, I feel sympathy for him.

Yes, during Ballmer’s bellowing salesguy reign, Microsoft was ridiculously late to take mobile seriously and head-slap bungled two versions of desktop Windows. But even if Ballmer and his minions had executed perfectly, it would have taken extraordinary agility for Microsoft to escape the state of siege that Microsoft and most traditional software companies now face.

[ Read Woody Leonhard’s take on who’s most likely to succeed Steve Ballmer. ]

Markets are regularly disrupted by insurgents who come in at lower price points. But free? Google Apps and LibreOffice have become viable alternatives to the enduring cash cow that’s Microsoft Office. Plus, 20 bucks or less will buy you a great Office alternative for iOS or Android. How does a company that relies on hundreds of dollars per seat for Microsoft Office compete with free, open source, and mobile apps? Microsoft Office 365 is a start, but it still represents a small fraction of Microsoft revenue, it works poorly on mobile devices, and the subscription rate of $60 to $240 per seat per year (the upper and lower limit of various business versions) may not be sustainable.

As for Windows, the real problem isn’t the walking disaster of Windows 8, nor is the PC “dying.” In fact, PCs running Windows 7 are so healthy why would anyone except a serious gamer want a new one? The upgrade treadmill has finally slowed to a crawl, and for a company that relies on hardware replacement for the lion’s share of its Windows licensing revenue, that’s a killer. Windows 8 may have been an epic fail, but can you blame Microsoft for thinking it needed something boldly different to provide new incentive to upgrade?

Forging a new agenda

According to John Thompson, former Symantec CEO and the Microsoft board member leading the committee to find a new CEO, “the board is committed to the effective transformation of Microsoft to a successful devices and services company.”

That statement means the days of shoring up the traditional software business are numbered and the new CEO must accelerate the wrenching transition, already begun by Ballmer, to the new paradigm. (I assume that by “services,” Thompson means cloud services, and by “devices” he means … well, Xbox, Surface, and who knows what else.)

The fact of the matter is that Microsoft serves a broader range of customers with a more diverse array of products than any other tech company. It has already committed tremendous resources to building out cloud infrastructure. Its Windows Azure cloud has evolved to become the most mature cloud next to Amazon Web Services. And its data center offerings, led by Windows Server 2012 and System Center 2012, keep hitting the target. Put all those pieces together in a different way, and Microsoft crosses the chasm, right?

Conflicts inside and out

Except that none of the old guard software companies have yet figured out how to turn their software into cloud services and make a buck — or at least nowhere near the bucks they made off licensed software. Not IBM, not Oracle, not SAP.

I’m convinced Microsoft is in a unique position to deliver everything your average small business needs through the cloud, and it’s clearly headed that way with Office 365. But how do you do that and not screw your channel partners? And if you provide ways to give those partners a slice, as with Microsoft’s Cloud Easy program, how thin do the margins become?

Similarly, the bright spots of Azure, Windows Server 2012, and System Center 2012 offer great potential for small businesses — and Hyper-V is giving VMware a run for its money. The integration between local Windows Server infrastructure and Azure makes the elusive proposition of “bursting to the cloud” increasingly feasible. But Microsoft is also licensing Azure to partners, creating yet another channel conflict.

Not all divisions are working together like the server and cloud guys. I won’t go into the challenges of pulling together Microsoft’s various feudal empires, except to say that few analysts seem to believe Ballmer’s July reorg will turn a fragmented Microsoft into “one Microsoft.” Some are even suggesting the company should be broken up.

The Microsoft board won’t entertain that idea anytime soon. The search begins for a new CEO who can crack the whip, change the culture, and get everyone on the same page.

But that’s only part of the challenge. If you ask me, the new CEO needs to hire Microsoft’s version of Apple’s Jonathan Ive — someone who designs products from the user experience in, rather than from the engineering specs out — and give that person real power. On top of everything else, the new CEO will need to transform Microsoft from an engineering-driven company to a design-driven company.

As Thompson’s statement implies, this will include designing devices people actually want. Among the new CEO’s first acts should be grabbing the Surface by the corner, walking over to the nearest recycling bin, and dropping it in.

For these and other reasons, the new CEO of Microsoft must be unfazed by legions of enemies from day one. To stand fast in the face of that you need to do more than yell; you need a singular vision — which Ballmer lacked — not to mention the coldness to bust heads with extreme prejudice. Retirement was an excellent choice.

This article, “Why Steve Ballmer is headed for the exit,” originally appeared at InfoWorld.com.