Does Microsoft deserve its success? Randall Stross reveals his findings in The Microsoft Way

September  1997

Randall Stross, a business school professor with a background in history, became famous as a computer industry chronicler through his book Steve Jobs and the NeXT Big Thing. Recently, Stross got the opportunity to examine Bill Gates and Microsoft and was given unprecedented, unescorted access to documents inside the Redmond, WA, compound. His new book, The Microsoft Way, presents his findings. He says that Microsoft deserves most of its success and little of its criticism. (2,000 words)

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wo years ago, I went to a friend's wedding in Seattle. She was getting married to a Microsoft employee. I was making small talk with one of the groom's colleagues, who turned out to be a developer of Microsoft Money, the company's entry in the personal finance software market. I was (and still am) a user of Intuit's Quicken, so I asked him how they planned to compete with that excellent, market-leading software package. With a glazed, smug, Moonie-like expression, he replied, "Ours will just be better."

It wasn't. Although Microsoft is now gaining ground against Intuit, mainly by distributing Money through banks' home-PC banking offerings, Quicken still has a solid lead, and -- incredibly -- keeps getting better with every release. Nevertheless, Microsoft has a remarkable record of "just being better," if the definition of "better" is leading in market share.

In Randall Stross's new book, The Microsoft Way, he tries to determine how Microsoft does it: whether through legitimate business means or by being, as so many have called the company, an Evil Empire. Stross devotes a good portion of the book to the history of Microsoft's relationship with Intuit: its competition with, and attempts to acquire, that much smaller company. In a rather perverse way, he cites this as a glaring example of Microsoft failing, thereby proving that they are not infallible or unstoppable. For those of us who believe that Microsoft is the Evil Empire (and, I should add in the interests of full disclosure, Sun pays me to believe this), this is pretty thin gruel, considering how peripheral Money is to Microsoft's core businesses. It's like saying that Leland Stanford was "fallible" because the Pony Express delivered packages in a certain part of the Old West faster than Stanford's railroads did.

Nevertheless, Stross paints a convincing picture of a company that deserves its success and not its criticism. The Microsoft Way is a highly literate, very well-written book. Stross is a business school professor with a background in history. He frames many of his arguments in a historian's context: looking at the history of American industry and industrialists to find roots and models for Bill Gates's success, and emphasizing the use that Microsoft strategists like Nathan Myhrvold made of historical precedents in business planning. The book's emphasis, like that of Microsoft itself, is on strategy, marketing, and sheer intellect -- not technology per se.

Stross discusses a few other key Microsoft subjects as deeply as he does the Intuit/Quicken situation. These include the Encarta CD-ROM encyclopedia and Microsoft's role in the rise of consumer multimedia, Microsoft Network, and the impact of the Internet on the company.

Death of the salesmen
The chapters on consumer multimedia are very interesting. They tell the story of how a "by nerds, for nerds" technology company was able to get into the consumer product business. For Microsoft, it wasn't just a question of hiring artists, writers, and other creative people. They had to do two other, more difficult things: first, they had to figure out how to merge these new types of people in with the developer-centric company culture; second, they had to figure out how to compete with businesses that weren't software companies.

The history Stross tells of Microsoft's Encarta encyclopedia is especially revealing, because Encarta was Microsoft's first major foray into consumer multimedia. Moreover, it was one of the most important early entries into that market, competing with "shovelware" products from traditional publishing houses. Encyclopedias were obvious products for the CD-ROM format, and Microsoft knew that every major encyclopedia publisher was thinking about such products. But to produce Encarta successfully, they had to solve several problems. First, and most obvious, was where to get the content. Develop it in-house? Out of the question -- it would take too long, and they didn't have the expertise. So they decided to license the content from an existing publisher. Most refused; one publishing CEO said that his door-to-door sales force was just as important as his content, and he didn't want to alienate them by siphoning business off to another distribution channel. Of course, he would eventually find that his direct sales staff was a ruinously expensive liability, once other publishers got to market with their CD-ROM products.

The next problem was how much to charge. Clearly it could be much less than printed encyclopedias, because publishing costs would be lower. Also, a CD-ROM product would not look impressive on the home bookshelf -- which, after all, is a good part of the appeal of an encyclopedia. Microsoft had to discover, by trial and error, what the threshold price would be that caused sales to explode. Its intent was not only to maximize revenue from Encarta itself, but also to figure out a pricing strategy for the shelves of CD-ROM products to come.

Finally, Microsoft had to develop a quality product on schedule. At this it failed. The product was chronically late, in part because the development team did not have adequate tools and had to develop them on the fly. The trials and tribulations of developing this product have already been documented in another "inside Microsoft" book, I Sing the Body Electronic, by Fred Moody.

Stross's discussion of Microsoft Network and the company's late entry into the Internet centers on one salient fact: that Microsoft employees could not access the Internet from their PCs, except for sending and receiving e-mail, so they could not comprehend the Internet's rapidly growing importance. Giving them access to the Web and other 'Net services enabled them to turn the business around quickly. They reoriented their entire business toward the Internet at blinding speed, not because Gates issued orders from on high that were carried out by a command-and-control hierarchy, but because staffers were empowered to do it themselves and had the necessary smarts.

Intelligence Uber Alles
The point about the intelligence of Microsoft's staff is actually Stross's central thesis. It's easy to state: Microsoft beats its competition because, in great contrast to traditional Fortune 500 corporations, it promotes intelligence rather than discouraging it. Microsoft also takes great pains to hire only the best, choose raw intelligence over specific skills or experience, and provide a working environment in which intelligence can flourish.

This is an attractive thesis; one that (as a self-confessed high school nerd who was constantly picked on by football players) I would love to believe. But it's too simple. It's true that large American companies have had an anti-intellectual bias. In the command-and-control philosophy that governed management for a century -- from the post-bellum Reconstruction to the 1980s -- it was thought that workers needed to be unquestioning peons for large businesses to run efficiently. But networked information technology has changed that, empowering knowledge workers and making those companies who embrace that trend the most likely to succeed. Empowered knowledge workers can adapt to today's rapidly changing market conditions much easier than command-and-control workers; therefore, organizations that hire the most and best knowledge workers, and empower them the best, will be the most successful.

The problem with this argument is that many companies nowadays have smart people, empower them, and actively promote intelligence... but fail anyway. For instance, many technology startups with super-programmers produce gee-whiz technology that goes nowhere in the marketplace. Raw intelligence is not enough. Reality is more complicated. Microsoft was started by a group of smart people, to be sure, but it had two additional factors in its favor. First was luck. They got insanely lucky when IBM grossly underestimated the potential of the personal computer business and handed Microsoft an enormous cash cow in the form of a licensing deal for MS-DOS on the IBM PC platform. Then they had a combination of critical mass, notoriety, and existing talent that enabled them to attract the best people. From that point on, a "positive feedback loop" has ensured that they can continue their incredible rate of success. Stross does explain all of this in The Microsoft Way.

Microsoft has incredible business acumen, despite its developer-centric corporate culture. Microsoft eschews the traditional corporate pecking order, in which fancy titles and luxurious offices are status indicators. Instead (as we saw in Bill's Bookshelf, July 1997), it has its own pecking order, in which software developers are gods and everyone else is mortal. Yet the company has succeeded in terms of business and marketing acumen, rather than in terms of great technology, and Stross does not account for the gap between Microsoft's developer-worship and its business orientation, apart from the assertion that Bill Gates has a natural talent for business (Gates prides himself on his ability to read code and on his lack of formal business training).

Stross also offers weak arguments against the U.S. Justice Department's failure to make restraint-of-trade charges stick to Microsoft. They are largely arguments by repetition (i.e., repeat an argument over and over again until the reader is convinced), and there are bits of evidence that Microsoft has been singled out unfairly for doing questionable things that everyone else does anyway. For example, Microsoft is often accused of "pre-announcing" software (i.e., publicizing the impending release of a piece of software as a way of forestalling competition). In contrast, Intuit was praised by marketing pundits for doing the exact same thing a few years ago, when its Intuit for Windows was several weeks behind Microsoft's initial personal finance offering for Windows. By pre-announcing, Intuit was able to keep existing Intuit (for DOS) customers from switching to Microsoft Money. Clever marketing tactics or shady business practices? You decide...

Stross begins his book by stating that Microsoft largely deserves its success -- and then claiming his personal embarrassment about having reached that conclusion. It seems that he began his research for the book with the intention of proving, through disinterested factual reporting and analysis, that Microsoft is the Evil Empire, but found himself unable to do so.

The Microsoft Way advertises itself as a serious business book, one that tries to objectively distill the management principles that led to Microsoft's enormous success and thereby provide some lessons for readers, as opposed to more lurid Gates exposes like James Wallace and Jim Erickson's Hard Drive. Unfortunately, it spends a lot of time dealing with the "moral" question of whether the company is an Evil Empire and, ultimately, whether Bill Gates deserves his billions in any objective sense. A real business book would not address these latter issues at all.

Overall, Stross's book is a welcome addition to a body of Microsoft literature that will surely grow rapidly as the company continues its mission of world conquest and domination, and as more and more people become jealous of, frustrated by, and desirous to emulate Bill Gates's success. I can only assume that Stross shares some of these feelings -- otherwise, he would not have wasted an entire chapter (apart from the Henry Ford comparisons, which at least are entertaining) on Bill Gates's fortune and whether or not he deserves it. Apart from that, The Microsoft Way could be a textbook on high-tech marketing in the 90s and beyond.

Title: The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition
Author: Randall E. Stross Publisher: Addison-Wesley
ISBN: 0201409496 List price: $25.00

Resources

• The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition, by Randall Stross, http://www.amazon.com/exec/obidos/ISBN=0201409496/sunworldonlineA
• I Sing the Body Electronic: A Year with Microsoft on the Multimedia Frontier, by Fred Moody, http://www.amazon.com/exec/obidos/ISBN=0670848751/sunworldonlineA
• Hard Drive: Bill Gates and the Making of the Microsoft Empire, by James Wallace and Jim Erickson, http://www.amazon.com/exec/obidos/ISBN=0471568864/sunworldonlineA
• Steve Jobs and the NeXT Big Thing, by Randall Stross, http://www.amazon.com/exec/obidos/ISBN=0689121350/sunworldonlineA/
• "Death March author Ed Yourdon admists he was wrong," July 1997 Bill's Bookshelf column http://www.sun.com/sunworldonline/swol-07-1997/swol-07-bookshelf.html
• Full listing of Bookshelf columns in SunWorld http://www.sun.com/sunworldonline/common/swol-backissues-columns.html#bookshelf
• Bill Rosenblatt's Client/Server columns in SunWorld http://www.sun.com/sunworldonline/common/swol-backissues-columns.html#cs

About the author
Bill Rosenblatt is Market Development Manager for media and publishing industries at Sun Microsystems. Reach Bill at bill.rosenblatt@sunworld.com.

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URL: http://www.sunworld.com/swol-09-1997/swol-09-bookshelf.html
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