Why has Microsoft seemingly stopped innovating?/ from Quora

Rob Glaser: on Quora
This is a great question and one I've thought about for a long time. As some probably know, I was at Microsoft from '83-93, still have some talented friends who work there, and have a residual fondness for the place.

First, in fairness, it does need to be noted that in recent years Microsoft has demonstrated a number of interesting innovations -- e.g., Project Natal -- and has created at least one new successful business innovation -- XBox Live, which has an estimated 10 million paying subscribers (@ $50/year that's a very high margin $500 Million business).

Having said that, there's no question in my mind that Microsoft's per capita ability to get effective innovations into the market in 2010 is much more like IBM's or HP's than like Google's or Apple's. So I buy into the question's core premise.

So, why? I'd boil my answer down to a four core points:

1.  PC Software Centricity: Microsoft was, and still is at core, a company built on and financed by a paradigm of PC software.

The two core economic engines at Microsoft -- Office and Windows -- are PC software products. So is Microsoft's 3rd best business -- Server Software. While they go through 2 different primary channels -- Office and Server get sold to enterprises, and Windows principally gets sold through PC OEMs -- the core business is the same, getting paid per unit sold.  

As Bill (Gates) has said many times, "I like businesses where there's a high fixed cost of building something and a very low variable cost per unit." Implicit in the latter, of course, is that one is paid substantially more per unit than the variable cost of making it.  

2.  Post-PC World:  Most of the action in technology innovation nowadays is taking place in areas where (i) PC software strength by itself is not sufficient, and (ii) the business models that lead to success are very different that the model that Microsoft was build on and is still at the core of Microsoft's DNA.

The biggest sources of value-creating innovation in the past 5 years have been:

(a) Search delivered to consumers/end users on the Web for free, supported by extremely valuable targeted ads (Google)

(b) Integrated Hardware/Software/Service device plays monetized both by selling the device and then selling services on top of the device (Apple, RIM)

(c) Social Network Platforms that are free to consumers, based on user-generated information put into highly integrated and extensible structured frameworks, monetized a few different ways (Facebook)

Although Microsoft made serious plays in the first two of these, were very late to the party and allowed the leader to establish a massive competitive advantage and super high market share. Moreover since the leaders (Google, Apple, RIM)) have been very competent and hard charging, Microsoft's catch-up efforts (Zune, Bing) have not been able to get significant traction.    

A note about Android as a competitor to Apple in mobile and tablet devices (b) and Microsoft's attempt to compete in "sort of" the same way (selling a platform).  Google's approach to (b) is to treat it as a business that's fundamentally subservient

 to the (a) business and business model. On the other hand, Microsoft's efforts have been plagued by friction associated with Microsoft trying to sell Windows Mobile/Phone/etc for a positive price versus Google's "Free/Open Source with strings" approach.  

Moreover, Microsoft has a path of debris associated with its decade-long effort to establish Windows Mobile. So even though Microsoft nominally has a large Windows Mobile installed base, from a developer (and hence consumer) standpoint, the Windows Mobile installed base is not a coherent target in the same way that the iPhone and Android bases are.  

To be fair, there is one non-PC area where Microsoft has been successful, and that's Xbox. In that business Microsoft got in relatively early (9 years ago), took an integrated hardware/software/service approach, and made enough commercial traction in its first generation that it could get its 2nd generation (Xbox 360) to critical mass in at least some major markets, and hence profitable. But, at least so far, Xbox is an outlier rather than a repeatable part of the Microsoft playbook.

3.  Monopoly Economics and Culture: Microsoft's 2 core businesses -- Windows and Office -- are natural winner-take-all monopolies. What it takes to maintain these businesses in a financially successful way is very different than what it takes to create successful new businesses.

This further reinforces the dominant culture, and requires extraordinary effort and focus to overcome, especially how fundamentally different the biggest adjacent business opportunities are from Microsoft's core financial engines. Moreover, because the two monopolies are so profitable, any new business will suffer by comparison to these monopolies for many years, especially if there is a viable incumbent already in place.

4.  Leadership: Any discussion of this topic would have to note that Microsoft has had a different leader for the past decade that it had for its first 25 years.   Having known both Steve Ballmer and Bill Gates for 27 years, I certainly have strong opinions on their relative strengths and weaknesses. Both are super smart and hard charging. But there are 2 critical differences, in my view.

(a) Listening and openness to any feedback. In my decade of working with him, Bill would always challenge opposing views, often aggressively and sometime caustically. If you didn't know your stuff, you were toast. If you didn't like his at times aggressively confrontational style, you would likely have your feelings hurt, and you might quit. But if you had thick skin and lots of passion, you could make your case and often really move the meter technologically and/or strategically. And when you did, you knew you had really made your case well.   In other words, Microsoft with Bill at the helm was a company that always tolerated, and often fostered, many different ideas and points of view, including views that the CEO was known to disagree with.

I never worked for Microsoft with Steve as the CEO, so my views here are based on 2nd hand data of Steve as the CEO combined with first hand data that's mostly at least 17 years old. Moreover, Steve was literally the person who hired me at Microsoft and was helpful to me on multiple occasions while I was there.  Having said all that, getting Steve to change his mind once his mind was made up was always extraordinarily difficult and often seemed literally impossible.  Moroever, even trying was often very unpleasant, even by Microsoft standards. As a result, I saw many people, including lots of good people, just "go along" with Steve rather than fighting for what they believed in.    

(b) Loving consumer businesses. Bill was (and is) a polymath who has legitimate intellectual curiosity for almost any topic. This may be one of his 2-3 most remarkable traits. Steve, on the other hand, was always a guy who loved B2B businesses but, in my view, had less of a passion for Microsoft's consumer businesses. That may have changed over the past 15 years, I certainly don't know. But, at least circa 1983-1993, Bill was the chief sponsor of pretty much all of Microsoft's consumer initiatives while Steve was a guy who loved business but seemed less enamored of the whims, fashion, and capriciousness of consumers.

Others have observed these differences as well, for instance http://www.fastcompany.com/magaz...

In making these 4 points, I am trying to convey that Microsoft's current situation is not simply the result of one factor, and that there is not a simple quick fix.   But I do think there are valuable lessons that we can all learn from this situation, hence this rather lengthy (War and Peace like) note.