The Computer Industry Comes With Built-In Term Limits
By RANDALL STROSS
New York Times Published: May 18, 2008

This incredibly insightful article summarizes the challenge of every large, successful company across all industries and markets. The underpinning of Clayton M. Christensen’s thesis discussed below is that companies who grew from very successful business models tend to over protect them and get blindsided even when business leaders have a sense it is coming. My experience is that the most difficult challenge of business leaders is to really convince themselves (to the point where they will dedicate significant resources early enough) and their organizations that they are in trouble when their current business is still a huge money machine. It IS doable but tough. Clayton M. Christensen’s work is brilliant but his predicted outcome does not have to be your result.

MATHEMATICIANS have long tried, and failed, to solve the Riemann Hypothesis, a stubbornly unyielding math problem. Good luck to whoever tries to figure it out. For the first correct proof, a $1 million prize will be awarded by the Clay Mathematics Institute.

Similarly, two successive Microsoft chief executives have long tried, and failed, to refute what we might call the Single-Era Conjecture, the invisible law that makes it impossible for a company in the computer business to enjoy pre-eminence that spans two technological eras. Good luck to Steven A. Ballmer, the company’s chief executive since 2000, as he tries to sustain in the Internet era what his company had attained in the personal computing era.
Empirical evidence, however, suggests that he won’t succeed. Not because of personal failings, but because Mother Nature simply won’t permit it.
It’s unfortunate, as a $300 billion prize could be collected by Microsoft shareholders: that would be the increase in market capitalization, should the share price return to its high of $59.56, attained in 1999, from its current price of $29.99. (Maybe this was why Mr. Ballmer flirted with Yahoo.)

That prize, however, seems a mirage. You can’t merge-and-acquire your way around the Single-Era Conjecture. Just ask I.B.M., which gobbled up Lotus Development Corporation to no avail.
The Yahoo affair obscures the larger story: Microsoft’s long, long struggle — since 1993 — to maintain its leadership position while the Internet grew ubiquitous. Mr. Ballmer, who joined Microsoft in 1980 as its 15th employee, and Bill Gates, his mentor who will retire next month as a full-time Microsoft employee, have certainly tried their best to avert the inevitable decline of the company’s influence.

In 2000, Mr. Ballmer credited Mr. Gates for noting that no company in the computer business had ever stayed on top through what Mr. Gates called “a major paradigm shift.” The two men wanted Microsoft to be the first company to achieve that goal. An interesting challenge, but some problems are of a size that dwarf the abilities of multibillionaire mortals.
In a 1995 internal memo, “The Internet Tidal Wave,” Mr. Gates alerted company employees to the Internet’s potential to be a disruptive force. This was two years before Clayton M. Christensen, the Harvard Business School professor, published “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (1997). The professor presented what would become a widely noted framework to explain how seemingly well-managed companies could do most everything to prepare for the arrival of disruptive new technology but still lose market leadership.

It’s Google, of course, that has developed the musculature to step forward and lay claim to being Microsoft’s successor as industry leader in the Internet era. If there had been any way Microsoft could have prepared for this day, it had ample time to do so. In 1993, fully five years before Google’s founding and two years before Mr. Gates’s memo, Nathan P. Myhrvold, then Microsoft’s chief technology officer, wrote his own memo, “Road Kill on the Information Highway.” It spelled out in prescient detail how each of many industries would be flattened by the build-out of digital networks, and it said that the PC software business would be no exception.

It’s no secret that Microsoft’s online businesses have failed to gain leading market positions. But what is not widely appreciated, perhaps, is that the company’s online initiatives have lately been doing worse than ever.

The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. Its MSN unit used to do a nicely profitable business providing dial-up Internet access to subscribers. When its users began to switch to broadband services provided by others, however, the earnings disappeared. Microsoft’s Web sites brought in a trickle of advertising revenue, which did not grow fast enough to offset the disappearance of the narrowband access business. AOL suffered in similar fashion.

In the 2006 fiscal year, Microsoft’s online services produced a $74 million loss after the previous year’s profit of $402 million. Since then, the numbers have become uglier, as Microsoft’s online segment has added employees and absorbed growing sales and marketing expenses. In the 2007 fiscal year, the online businesses lost $732 million. In the next nine months, through March 31 this year, they recorded a loss of $745 million, almost double the amount in the period a year earlier. With $2.39 billion in revenue for the nine months, the online segment represents only 5 percent of the company’s total revenue.

The numbers at Google, which is nothing but an online services business, have moved in the opposite direction. For rough comparison, profits in its 2005 fiscal year, ended on Dec. 31, were $1.5 billion. The earnings grew to $3 billion in 2006 and $4.2 billion in 2007.

According to Hitwise, an Internet research firm, Google’s share of searches in the United States has increased to almost 67.9 percent in March 2008 from 58.3 percent in March 2006. During the same period, Microsoft’s share has dropped to 6.3 percent from 13.1 percent.

Mr. Ballmer has always been a ham on stage. His comically demonic chants and dances in recent years have been preserved on YouTube. But even way back in the day, he had the gift. At the company’s annual meeting in 1994, when he was overseeing sales and Microsoft was enjoying its moment of triumph over competitors, he shouted at top volume: “It’s market share — market share! market share! market share! — that counts!” He continued: “Because if you have share, you basically leave the competitors” — here he grabbed his own throat for emphasis — “just gasping for oxygen to live in.”

His mock asphyxiation of competitors was later stripped out of its jokey context by government antitrust lawyers. But the imagery is no less apt now than it was then, except that the roles have reversed. As Google continues to gather market share and the Single-Era Conjecture dictates Microsoft’s eclipse, it is Mr. Ballmer’s own online services that now are gasping for oxygen.