Microsoft finally gets the need for New Business Models, Vanity Fair Interview provides details

Vanity Fair has an article featuring Satya Nadella, Bill Gates, and Steve Ballmer.  The article is pretty long and has lots of details.  The one that got my attention is these two paragraphs explaining Microsoft’s need for new business models.  One of the things I figured out a couple of years after leaving Microsoft is if you focus on creating new business models, then fit the technology it is so much easier than creating innovative technologies to fit legacy business models.  If you go back in history what Bill Gates did licensing DOS to IBM and keeping the rights to license to others is a new business model.  When you paid $2k for a computer, paying $100 for an OS to make it work was acceptable.

Part of why Microsoft failed with devices is that competitors upended its business model. Google doesn’t charge for the operating system. That’s because Google makes its money on search. Apple can charge high prices because of the beauty and elegance of its devices, where the software and hardware are integrated in one gorgeous package. Meanwhile, Microsoft continued to force outside manufacturers, whose products simply weren’t as compelling as Apple’s, to pay for a license for Windows. And it didn’t allow Office to be used on non-Windows phones and tablets. “The whole philosophy of the company was Windows first,” says Heather Bellini, an analyst at Goldman Sachs. Of course it was: that’s how Microsoft had always made its money.

Nadella lived this dilemma because his job at Microsoft included figuring out the cloud-based future while maintaining the highly profitable Windows server business. And so he did a bunch of things that were totally un-Microsoft-like. He went to talk to start-ups to find out why they weren’t using Microsoft. He put massive research-and-development dollars behind Azure, a cloud-based platform that Microsoft had developed in Skunk Works fashion, which by definition took resources away from the highly profitable existing business. “Very gutsy” is how Marco Iansiti, a Harvard Business School professor who wrote case studies about Nadella, describes these moves.

Microsoft’s big bet on an OS was Longhorn, aka Windows Vista where Ballmer admits he didn’t put resources on Mobile and Browser.  Windows XP was the last Microsoft OS I worked on.  When I saw Longhorn coming I knew this is not going to work.  You can’t tell everyone to be innovative because when you put it all together many things simply don’t work.

What Ballmer calls his “biggest mistake,” though, is neither phones nor search. It was a software project called Longhorn, and it happened early in his tenure. Longhorn, which Microsoft began working on in 2000, was supposed to be the next generation of Windows. Gates, who served as Microsoft’s chief software architect from when he stepped down as C.E.O., in 2000, until 2006, led the project. “It was a foolishly ambitious project, more ambitious than could be built,” says a former Microsoft executive. Gates is a big-picture technologist, not a product person—and he couldn’t or wouldn’t listen to the engineers who were telling him that what he wanted couldn’t be done. Worse, Longhorn basically failed just as Apple released Tiger, which did what Longhorn aspired to do. Microsoft had to start over from scratch three years into it. Renamed “Vista,” the operating system was released late, lacked key features, and had many failings that enraged customers.

“The worst work I did was from 2001 to 2004,” says Ballmer. “And the company paid a price for bad work. I put the A-team resources on Longhorn, not on phones or browsers. All our resources were tied up on the wrong thing.” Who shoulders the blame is a matter of debate, but the fact is neither Ballmer nor Gates stopped the failure from happening, even as almost everyone else saw it coming.

In some ways Microsoft needed to get back to its past and write apps for other platforms.  Microsoft used to be the biggest app developer for the Mac with Word, Excel, Powerpoint.

Microsoft’s historical reluctance to open Windows and Office is why it was such a big deal when in late March, less than two months after becoming C.E.O., Nadella announced that Microsoft would offer Office for Apple’s iPad. A team at the company had been working on it for about a year. Ballmer says he would have released it eventually, but Nadella did it immediately. Nadella also announced that Windows would be free for devices smaller than nine inches, meaning phones and small tablets. “Now that we have 30 million users on the iPad using it, that is 30 million people who never used Office before [on an iPad,]” he says. “And to me that’s what really drives us.” These are small moves in some ways, and yet they are also big. “It’s the first time I have listened to a senior Microsoft executive admit that they are behind,” says one institutional investor. “The fact that they are giving away Windows, their bread and butter for 25 years—it is quite a fundamental change.”

VF closes with the perspective of there is a future story unfolding.

Introducing Ballmer at Oxford, his friend Peter Tufano, the dean of the business school there, said, “When we write the history of business for the 20th century and the 21st century, there is going to be a whole chapter on Microsoft.” Of course that’s true. In the next few years, we’ll know if that chapter is celebratory—or a cautionary tale.