Silicon Insider: R.I.P. Microsoft?

Feb. 10, 2005 -- -- Is Microsoft dying?

Business reporters -- like, I suspect analysts and venture capitalists -- develop over time a set of diagnostic tools for analyzing the relative health of companies we encounter. This bag of tricks is mostly subjective, some of it no doubt unconscious, and we constantly test it against experience, most of it bad. That is, every time we get suckered into writing an upbeat story about an evil, incompetent or doomed company, we swear we will never make that mistake again -- then we scrutinize where we went wrong and what warning signals we missed.

This can make us seem cynical after awhile. But let me tell you: there's nothing quite like having some pensioner or widow tell you that they lost their life savings because they based their investments on one of your articles. You will never believe a corporate pitch again.

Needless to say, these diagnostic tools vary with the company. You don't analyze a new entrepreneurial company the way you do a Fortune 500 giant. One of the tools I'm best known for is Folding Table Theory of Start-Ups. It says that when you walk into a new entrepreneurial company and you see a nice lobby and expensive office furniture, that company has its priorities screwed up -- either it is more interested in comfort than success or it is over-capitalized and lazy -- and it will never make it.

By comparison, when you see the start-up team working at folding tables or old army surplus desks, you know that it is properly focused both on getting the job done and financial discipline -- and has a good chance of being a winner. That's what I saw at the beginning of eBay (and Siebel, Tivo, Electronic Arts, Atari and a host of other great companies) and it's telling that Jeff Skoll kept that table near him during his entire tenure at the company.

The health of established firms, especially great ones, is more difficult to diagnose. The balance sheet can give some clues, but, because it captures the recent past rather than the near future, it can fool you. Most veteran reporters look at more subtle clues, like the comings and goings of key employees, slippage in the release dates of new products (or missing features), and subtle shifts in the tone of company news releases, advertisements and executive speeches.

But most of all, at least for me, there is the smell test: the faintest whiff of decay that comes from dying companies.

Looks Can Be Deceiving

Sometimes this smell can surprise you. Years ago, Fortune magazine asked me to do a story about Silicon Graphics, then one of the hottest companies in Silicon Valley. In those days, SGI could do no wrong. It owned the graphic workstation market. It was working with the likes of Steven Spielberg. And its chairman, my old HP boss Ed McCracken, was being talked up for cabinet posts and ambassadorships. I fully expected to write the latest laud on the Valley's hottest young company.

But the instant I stepped on the SGI campus I knew something was wrong. The place just didn't FEEL right. Sure it was shiny and new and filled with shiny and bright employees. The products were great, and the financials were terrific. And yet, the company didn't pass the smell test. It was the little things: the chief executive officer that forgot the meeting with me (who forgets Fortune?), forcing the chairman to vamp for an hour; the much-awaited new product that arrived missing some key features; the sudden loss of some key employees.

I found myself with a serious case of cognitive dissonance. On paper, Silicon Graphics looked great, but in my gut it was a company in desperate straits. I went with my gut, and to Fortune's credit, the magazine backed me. CGI raised holy hell over the article when it appeared -- but subsequent events proved me right.

The same thing happened at Hewlett-Packard. In some very controversial editorials in The Wall Street Journal, I predicted that Carly Fiorina's stewardship of HP would be an unmitigated disaster, and would destroy the world's greatest company. Obviously, Fortune, Forbes and most of the rest of the business press didn't agree -- and all I managed to do was make myself persona non-gratis at HP. But, as this week's news shows, my instincts were correct. [As an aside: If the first words out of the mouth of Carly's replacement aren't "The HP Way is back", the board should fire him, too.]

Is Microsoft Rotting?

That brings us to Microsoft. The other day I had lunch with the CEO of a mid-sized semiconductor equipment manufacturer. SEMs are the forgotten folks of the digital revolution. As the people who make the machines that make the chips that make the electronic products that run the world, they are at the absolute top of the electronics food chain. They typically know about what's coming in the electronics world earlier than anybody else. But their products are so arcane -- who cares about automated wafer steppers? -- the press almost never talks to them.

In the course of the conversation we talked about the coming Intel-Samsung war, the beginnings of a slowdown in the SEM business (presaging a chip turndown next year), and the sad fate of HP. It was in the middle of all this that a notion suddenly appeared in my mind: Microsoft is dying.

Why the sudden thought? Perhaps it was talking about HP; maybe it was the fact we WEREN'T talking about Microsoft (which would have monopolized our conversation a few years ago), or perhaps it was just my instincts were finally putting diverse bits of information together into a single conclusion.

Great, healthy companies not only dominate the market, but share of mind. Look at Apple these days. But when was the last time you thought about Microsoft, except in frustration or anger? The company just announced a powerful new search engine, designed to take on Google -- but did anybody notice? Meanwhile, open systems world -- created largely in response to Microsoft's heavy-handed hegemony -- is slowly carving away market share from Gates & Co.: Linux and Firefox hold the world's imagination these days, not Windows and Explorer. The only thing Microsoft seems busy at these days is patching and plugging holes.

Speaking of Gates: if you remember, he was supposed to be going back into the lab to recreate the old MS alchemy. But lately it seems -- statesmanship being the final refuge of the successful entrepreneur -- that he's been devoting more time to philanthropy than capitalism. And though Steve Ballmer is legendary for his sound and fury, these days his leadership seems to be signifying nothing.

Longhorn's Delayed Release

There are other clues as well. Microsoft has always had trouble with stand-alone applications, but in its core business it has been as relentless as the Borg. Now the company seems to have trouble executing even the one task that should take precedence over everything else: getting "Longhorn," its Windows replacement, to market. Longhorn is now two years late. That would be disastrous for a beloved product like the Macintosh, but for a product that is universally reviled as a necessary, but foul-tasting, medicine, this verges on criminal insanity. Or, more likely, organizational paralysis.

Does anyone out there love MSN? I doubt it; it seems to share AOL's fate of being disliked but not hated enough to change your e-mail account. And do college kids still dream of going to work at MS? Five years ago it was a source of pride to go to work for the Evil Empire -- now, who cares? It's just Motorola with wetter winters.

None of this should come as a surprise to Gates. I remember in the mid-90s he shrugged off the claims that Microsoft was unstoppable by noting that the electronics industry was so cyclical that no company ever stayed on top for long. In that light, Microsoft had a longer run than most. It is still a well-run company, which argues that its fade will be long and slow, like DEC, rather than a sudden death like Wang. And it may yet come back -- there may already be something revolutionary under way in a back lab in Everett or Mountain View -- but, like Yahoo! and Apple before it, Microsoft may have to die in order to be reborn.

For now, though, none of that is obvious. Microsoft is still the dominant company in high-tech, the cynosure of all those things people love and hate about computing, the defining company of our time. It is huge, powerful and confident.

But if you sniff the air, you can just make out the first hints of rot.

Michael S. Malone, once called “the Boswell of Silicon Valley,” most recently was editor-at-large of Forbes ASAP magazine. He has covered the Silicon Valley and high-tech for more than 20 years, beginning with the San Jose Mercury-News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, The Economist and Fortune, and for two years he was a columnist for The New York Times. He has hosted two national PBS shows: "Malone," a half-hour interview program that ran for nine years, and in 2001, a 16-part interview series called "Betting It All: The Entrepreneurs." Malone is best known as the author of a dozen books. His latest book, a collection of his best newspaper and magazine writings, is called "The Valley of Heart's Delight."

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.