Acquired: Microsoft Volume II – A Comprehensive Journey from Dominance to Reinvention

Season 14, Episode 6 | Release Date: July 22, 2024

Introduction

In the season finale of Acquired, hosts Ben Gilbert and David Rosenthal delve into the intricate story of Microsoft from 1995 to 2014. This episode, titled "Microsoft Volume II," explores Microsoft's ascent, the challenges it faced, including antitrust battles, and its strategic shift towards enterprise solutions under new leadership.

Microsoft’s Growth and Initial Strategy (1995-1998)

Post the IPO era, Microsoft experienced exponential growth, scaling annual revenue from $6 billion in 1995 to $80 billion by 2014. This period marked Microsoft's dominance in selling enterprise software and its endeavors into consumer markets with products like Windows XP, Xbox, and MSN.

Ben Gilbert opens the discussion highlighting how Microsoft often had the right ideas but struggled with timing and execution, evidenced by the successes of Windows XP contrasted with the failures of products like Zune and Bing.

Notable Quote:

Ben Gilbert [00:38]: "...Microsoft grew their annual revenue from $6 billion to $80 billion. They became a phenomenally successful company and really cracked the code on selling enterprise software."

Antitrust Cases and Cultural Impact (1998-2001)

A pivotal moment in Microsoft's history was the 1998 antitrust suit against the Department of Justice. While widely recognized, the nuances of the case are often overlooked. Initially, in 1993, the Federal Trade Commission (FTC) found Microsoft to be a monopoly but did not take further action due to a deadlock vote (Ben Gilbert, [55:22]).

However, the Department of Justice (DOJ) took up the case the following month, leading to a prolonged legal battle. Microsoft settled in 1994 with a consent decree, agreeing not to tie application products to Windows sales but retaining the right to integrate features—a loophole that later facilitated the bundling of Internet Explorer with Windows (David Rosenthal, [55:55]).

Notable Quote:

David Rosenthal [03:27]: "The question we sort of asked as we were doing our research was, is this true? And what we ended up learning from the literally dozens and dozens of people that we talked to surprised us a lot and I think will probably surprise listeners too."

The trial, marked by controversial depositions and strategic courtroom maneuvers, culminated in 2000 with Judge Thomas Penfield Jackson ordering Microsoft to break up—a ruling later overturned on appeal. The legal strife not only dented Microsoft's market reputation but also caused internal cultural rifts, leading to significant talent loss and executive changes (Ben Gilbert, [75:08]; David Rosenthal, [84:45]).

Transition to Enterprise Focus and Windows XP Success (2001-2006)

Amidst the antitrust turmoil, Microsoft solidified its enterprise dominance. Windows XP emerged as a flagship product, merging the user-friendly interface of Windows 95 with the robust architecture of Windows NT. This strategic move catered to both consumers and enterprises, reinforcing Microsoft's market stronghold.

Ben Gilbert emphasizes the seamless integration and reliability of XP, which became pivotal for businesses relying on Microsoft's ecosystem (Ben Gilbert, [24:54]). Concurrently, Microsoft ventured into gaming with Xbox and online services like Xbox Live, laying the groundwork for future cloud services.

Notable Quote:

Ben Gilbert [37:04]: "It's such a good quote, and there's so much behind it too, if you really dwell in that quote. What does it mean if one of the things he's saying is Windows is a platform upon which independent software vendors write applications."

Struggles with Consumer Products: Vista, Windows 8, Mobile (2006-2013)

Post-XP, Microsoft faced significant challenges in the consumer market. The ambitious Longhorn project, intended to revolutionize Windows with features like Avalon (a new graphics engine) and WinFS (a new file system), faltered due to overcomplexity and shifting priorities. This led to the release of Windows Vista, which was met with criticism for its high system requirements, user interface changes, and the pervasive User Access Control prompts.

David Rosenthal reflects on Vista as a "disaster," highlighting its negative impact on Microsoft's reputation and internal morale ([34:11]; [42:07]). The subsequent release of Windows 8 attempted to pivot towards a touch-first interface, aligning with the rise of tablets and mobile computing. However, Windows 8's dual interface for desktops and tablets confused users and lacked cohesive adoption, further straining Microsoft's consumer relations ([206:54]; [264:10]).

Notable Quote:

David Rosenthal [83:50]: "They did not tell their story right and so much of what we think of as the losses from this timeframe and certainly everything baked into the stock price not moving was because of that."

The Rise of Azure and Rebuilding (2006-2014)

Recognizing the shifting technological landscape, Microsoft under Steve Ballmer began investing heavily in cloud computing, leading to the development of Azure. Spearheaded by industry veterans like Ray Ozzie and Dave Cutler, Azure was positioned as a hybrid cloud solution catering to enterprises transitioning from on-premises infrastructures.

Satya Nadella's appointment as CEO in 2014 marked a transformative era for Microsoft. Emphasizing a cloud-first, mobile-first strategy, Nadella steered Microsoft towards integrating Azure seamlessly with existing enterprise solutions like Windows Server and Office 365. This strategic realignment not only revitalized Microsoft's market position but also set the stage for its dominance in the cloud computing arena.

Notable Quote:

Ben Gilbert [185:25]: "Microsoft knew they had onto something with their server and tools division, but they hadn't nailed the go-to-market strategy. Under Nadella, Azure became the cornerstone of Microsoft's enterprise offerings."

Conclusion and Key Takeaways

Microsoft Volume II encapsulates a tumultuous yet pivotal phase in Microsoft's history. From legal battles and internal struggles to strategic pivots and cloud dominance, the episode underscores the resilience and adaptability of one of the world's leading tech giants.

Seven Powers Analysis:

1. Scale Economies: Microsoft's vast user base allowed for significant amortization of R&D and operational costs, fueling sustained growth.
2. Switching Costs: Deep integration of Windows and Office in enterprises created high barriers for competitors.
3. Branding: Despite consumer setbacks, Microsoft's strong enterprise brand remained untarnished.
4. Process Power: Under Nadella, streamlined processes facilitated agile cloud development.
5. Other Powers: While Microsoft's network economies and cornered resources were less pronounced, their strategic partnerships and enterprise relationships fortified their market position.

Cultural Shift: The antitrust era and subsequent leadership changes catalyzed a cultural transformation within Microsoft, fostering a more collaborative and innovation-driven environment under Nadella.

Strategic Reinvention: Microsoft's pivot to cloud computing with Azure exemplifies its ability to reinvent itself, ensuring relevance in an ever-evolving technological landscape.

Notable Quotes

• Ben Gilbert [00:38]: "Microsoft grew their annual revenue from $6 billion to $80 billion. They became a phenomenally successful company and really cracked the code on selling enterprise software."

• David Rosenthal [03:27]: "The question we sort of asked as we were doing our research was, is this true? And what we ended up learning from the literally dozens and dozens of people that we talked to surprised us a lot and I think will probably surprise listeners too."

• Ben Gilbert [55:22]: "So here is a slightly different version of this history with different players, and I want to underscore it for one big reason. It will come up later in antitrust."

• David Rosenthal [84:45]: "I think there's this whole thing of like, we're gonna fight everything they say, like, all right, we're fighting this, we're gonna fight it hard."

• Ben Gilbert [87:46]: "They had to print the disk, which had actual real costs, especially on floppies. You had to put it in the box, you had to ship it to the retailer, you had to split profits with the retailer, you had to pay the sales and marketing costs. I mean, it's like real material cost. This is not a zero distribution cost, zero marginal cost business in the box software retail world. But when they're selling through an OEM channel, their gross margin was 75% because you just ship the bits to the OS once and then the PC manufacturer and takes it from there. Not only is it amazing because you get that 75% versus 29% of gross margin, it's also an amazing way to scale because you do a deal with every OEM as you're going down the line. It's the Visa Networks of Networks thing."

• David Rosenthal [84:45]: "I think all of the credit for the vision for it and the championing it for the initial seven years within Microsoft goes to Steve and to Ray."

• Ben Gilbert [187:57]: "But they were their good products, just the enterprise products. They weren't the good consumer products."

• David Rosenthal [259:56]: "If you could think about it, you could have figured out that Microsoft wouldn't win in mobile."

Acquired effectively paints a nuanced portrait of Microsoft's journey through phases of dominance, adversity, and reinvention, offering listeners invaluable insights into the strategies and cultural shifts that have shaped the tech giant's legacy.