Deflating Microsoft

Magnitude aside, there is evidence indicating that Redmond-based Microsoft is not the pre-eminent software power it was even two years ago.

Exhibit A: The DOJ Debacle. Whatever the outcome, the antitrust case has colored public opinion. Microsoft, at this point, is seen by many as an arrogant, overreaching monopoly, said analysts and industry watchers.

Exhibit B: The Brain Drain. Microsoft no longer is the no-brainer destination of the nation's top graduates. Internet start-ups, with the lure of faster payoffs fueled by initial public offerings (IPOs), have supplanted Microsoft as the destination of choice, said financial analysts.

Then there is the well-documented exodus of top managers. Nathan Myhrvold, Sam Jadallah, Pete Higgins and Paul Maritz have either left the company or pared back their jobs. Meanwhile, the fact that executives such as Peter Neupert, who went to Drugstore.com; David Risher who joined Amazon.com; or Rob Glaser, who jumped ship for RealNetworks Inc., "didn't shrivel up and die," shows that there is life beyond the campus, said one financial analyst.

Apparently, not even Bill Gates and Steve Ballmer can force multimillionaires to stay put if their bliss lies elsewhere.

Exhibit C: As the lure of Web riches continues, Microsoft's use of stock options in lieu of high pay has to change. The company now must offer competitive salaries, Microsoft executives acknowledged.

Exhibit D: When software vendors make their rounds on Wall Street, Microsoft no longer is Topic A. Jeff Matthews, general partner of Ram Partners, Greenwich, Conn., said he recalled an Oracle Corp. meeting at which "the 'M' word" was not uttered once.

Exhibit E: The sizzle in today's OS market is not coming from Windows 2000, but from Linux, the open source alternative.

Relax. No one is saying Microsoft is on its last legs. It is just that those legs seem less sturdy now, said analysts.

Industry watcher Judith Hurwitz, president of The Hurwitz Group, Framingham, Mass., sees strong parallels between the Microsoft of today and the IBM Corp. of 10 years ago. When IBM started making mistakes, it "wasn't as omnipotent and all-powerful as it had been," Hurwitz said. Competitors sensed weakness and moved in, just as is happening now with Microsoft, she said.

The DOJ Debacle
The epic antitrust trial took its toll on Microsoft employees, if not the company itself, said Steve Kleynhans, vice president of The Meta Group, Stamford, Conn.

"Most of us would have a hard time having our E-mail dredged up from years before and then asked what we were thinking when we wrote them," Kleynhans said.

The legacy of the U.S. Department of Justice vs. Microsoft is people will never see the company the same way again, Hurwitz said. Ironically, the case fulfilled Microsoft's wish. The vendor became a household word, but not in the way it had hoped. Where it would like to be considered a technology leader that is ethical and consumer-focused, many consumers now associate Microsoft with another "M" word,monopolist.

"In the consumer space, people saw Microsoft as a hero and the one thing this suit has done is show [its] true colors," said Hurwitz.

Goliath Syndrome
Many industry insiders now cite the company's sheer size as a hurdle. Even Microsoft insiders admit the company has had difficulty finding and hiring people of "Microsoft caliber."

Liz Buyer, vice president of Credit Suisse First Boston, Palo Alto, Calif., agreed. "It used to be the best and brightest from all the best engineering and business schools wanted to go to Microsoft. Now they want to go to Internet companies either to get rich or to get experience to go off and become entrepreneurs," she said.

The fact that Microsoft upped its salaries seems like wish fulfillment to competitors who years ago talked wistfully of an inevitable "death spiral" for Microsoft.

"They pay average salaries and give a decent amount of stock," said Spencer Leyton, then senior vice president of Borland International Inc., Scotts Valley, Calif. "Those salaries keep expenses low, which helps earnings, which boosts the stock. But if there is a downward turn, people look at their paychecks. . . . That pressures the stock and the earnings," he said.

The Politics Of Size
Many comment on the increased internal politics at Microsoft. The rift between the Windows and the Web teams is a case in point. "In the old days, life was simpler. Everyone was on the same page," Hurwitz said. "Now you've got strategy coming from a few directions."

Others agreed the move into the enterprise, where customer expectations are different, is a drastic change for the company that had focused on personal computers. Enterprise customers expect a lot more from a software company than constant niggling upgrades, said analysts. They want extremely high-level service and support, a concept with which Microsoft has struggled. The enterprise mindset is a lot different than the consumer mindset and Microsoft has set its sights squarely on both.

Most managers with any tenure at Microsoft now are wealthy enough to leave the company. Headhunters did not even try to recruit from Microsoft years ago.

"Anyone who was interested [in leaving] you didn't want, and no one good was interested in leaving. That has changed," said one former Microsoft manager.

And ISVs now are writing to Web APIs, rather than to Microsoft's own, creating a sea of change in software development, said Ram Partners' Matthews. Internet protocol, not Windows, is where all the action is.

"No one cares what the next spreadsheet is," he said.

And, Web companies seem cooler than Microsoft, said analysts. Even two years ago, Microsoft was starting to be seen as "stodgy and bureaucratic," and that perception has grown with the proliferation of flashy start-ups, said Dwight Davis, analyst at Summit Strategies Inc., Boston.

But Then Again . . .
Still, no one is relegating Microsoft to the dustbin of history.

With the bloom fading from Web IPOs, traditional profitable companies may become popular again. Last year, "E-companies" were the place to be. But as a result, people are "sitting on stock options [the value of which has] plummeted," said one San Francisco-based VAR. "They are working at 70 percent of industry comp levels, pulling 60- to 80-hour weeks and locked in for three- to four-year vesting schedules . . . all for an amount that won't even cover the down payment on a mediocre house in the Bay area."

Some suspect Microsoft relishes its relatively low profile,perhaps even engineered it to shun the spotlight that has been so cruel.

"The biggest mistake you can ever make is to underestimate [Gates]," said James Domengeaux, president of Comspace.com, a Houston-based VAR. "I bet they like sitting back, watching what everyone else is doing," he added.

Others even speculate that Microsoft propagates an air of vulnerability to disarm trust busters.

Marianne Allison, a Microsoft spokeswoman, scoffed at that notion but acknowledged that the company may have been obscured by more visible dot.com companies. The high-tech business has widened to now include telcos and cable companies so Microsoft doesn't stand out as singly, she said.

But many think Microsoft has peaked. "Going back to the IBM analogy, IBM is still a very big company and doing great. I'm not suggesting that Microsoft is hurt in any significant way, but . . . I don't believe they'll ever have that [power and control] again," said Hurwitz.

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