Seattle, January 9, 2020

In a graceful and touching nod

to history, the announcement by company CEO Kevin Gammill that Microsoft was closing its doors

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Microsoft's Last Day

A report from the future on the events that brought down the late, great American monopoly

Seattle, January 9, 2020

In a graceful and touching nod

to history, the announcement by company CEO Kevin Gammill that Microsoft was closing its doors for good was made on the steps of Building 8—now the Microsoft Museum. Building 8, as longtime followers of Microsoft well know, was formerly the nerve center of the Microsoft empire, having been, in the last century, the building in which company founder and former chair Bill Gates held court during Microsoft's glory years. Most of Microsoft's campuses, of course, had sat empty for months, but until today's formal announcement, it seemed scarcely believable that the company, once the most wealthy and powerful corporation on earth , was actually going out of business, its assets having been folded into the gigantic Apple Telephone and Telegraph and its operations moved to AT&T's California headquarters. But as a taciturn and truculent Gammill bluntly put it, the Microsoft era—which, like the Boeing era before it, rejuvenated and redefined the Pacific Northwest—is now officially over.

In one sense, of course, this should come as no surprise. Gates himself issued constant, thundering warnings throughout the 1980s and 1990s against complacency at his company, delivering blistering critiques of even the most successful Microsoft products. He was beset, in the words of confidant Jabe Blumenthal, "by constant angst that someone will catch Microsoft." Gates knew that every company, no matter what its industry and no matter how powerful it grows, is doomed from birth, and he was determined to be the one exception to the rule. Whenever he looked ahead to a future in which Microsoft was, as he put it, "a dinosaur," and "humans"—in the form of new, aggressive start-ups after the fashion of the young Microsoft—were attacking the dinosaur, Gates would say, "Next time, the dinosaur will be smarter."

He was wrong. Eventually, something either will kill the dinosaur/corporation outright or drastically reduce its power. All companies, like all organisms, describe a parabola over the course of their existence. They wax, they weaken, they wane, they die.

It is only in distant retrospect that a company's curve can be accurately drawn by observers. Cast in the light of history, certain events and trends that seemed meaningless, trivial, or otherwise unremarkable are revealed to have been the beginning of the end for a once-indomitable corporation. When they are happening, the curve-bending significance of these moments is obscured by shortsightedness and hype. Only when seen in the light of subsequent developments can they be fully appreciated.

SUCH WAS THE MYTHIC power of Microsoft—and, more particularly, of Bill Gates—that the beginning of the company's demise went entirely unnoticed. By the time competitors, allies, and other digerati began recognizing signs of Microsoft's faltering, Gates and company had long since been in decline.

It is clear now that the pivotal year for Microsoft was 1998—a year, ironically enough, that saw the completion of Gates' mansion complex, and tremendous and characteristic growth in company revenues and profits. Fiscal year '98 ended in June with company annual revenues of $14.48 billion ($22 billion in today's Amerios), a 28 percent increase over the previous fiscal year. The growth slowed only slightly, to 26 percent, over the next two quarters, which saw revenues of nearly $3.95 billion the first quarter, and $4 billion the second. Microsoft's stock price continued its steady and steep rise, closing out the 1998 calendar year at $146 per share, up from $80 per share the previous February, and the company's share of the operating-system market remained at nearly 90 percent. Small wonder that no one considered the year a bad one for the company.

But history has shown that a number of pivotal events only tangentially related to one another proved to be tiny downturning points in the Microsoft story. Back in 1998, no one reporting on the events was able to step back far enough to see them in the context of the Big Picture. Instead, each event was reported and interpreted as if happening in isolation—a perspective that made it look as if Microsoft was growing rather than shrinking in power and influence.

Much of the distraction was provided by industrial paper tigers that were viewed by contemporary commentators as dangerous to Microsoft, but that ultimately proved harmless. Chief among those in 1998 was the purchase of Internet browser manufacturer Netscape by AOL, then the industry's leading Internet access provider. AOL—which discovered, as acquirers of troubled companies invariably do, that in purchasing a troubled company it had purchased little more than a set of intractable problems—began a precipitous decline that led to its bankruptcy in 2003.

Meanwhile, International Data Corp. published a prediction in 1998 that within a few years only 50 percent of computing devices would be PC-based—a statistic that effectively consigned the Microsoft operating system to a declining and soon-to-be-marginal share of the total computing market. It began to look as if Microsoft's ruthless fight to keep other operating-system companies from gaining a foothold in the PC market was forcing greater rather than less creativity on the part of competitors. If they could not compete with Microsoft in desktop and laptop operating systems, they would go off and invent new platforms.

The most interesting new platform to emerge was the handheld computer, which made its first tentative appearance in 1995 and began taking off in earnest in 1997, completely independent of Windows. By 1998, it was clear that the popularity of the tiny machines had caused Microsoft to react, belatedly and in a panic, by trying to convert handheld-PC users to new, hastily designed Windows-using devices. By 1998, handheld computers had proliferated to the point where Microsoft found itself selling three different versions of Windows CE—the company's stripped-down version of Windows for miniature computers—in an attempt to compete in three different arenas. In each case, the company offered not a better or more innovative alternative, as it did with Windows 98 in the desktop market, but rather a franchise-protecting lesser alternative. These were designed for one purpose only: to forestall the possibility of a competing system either performing well enough to cause some consumers to prefer it to a Windows-using desktop or laptop computer, or—even worse—gaining enough popularity to create consumer demand for a desktop counterpart to a handheld operating system not named Windows.

The move was almost exactly analogous to the desperate move by mainframe computer-maker IBM in 1980, when the company came to tiny start-up Microsoft in search of a PC operating system. Big Blue was anxious to design, build, and rush a PC into the marketplace in order to keep Apple Computer, whose new product line was winning thousands of converts from mainframes to desktop machines, from eventually driving the mainframe monopolist out of business.

THE MOST TELLING development of 1998 came in the legal arena, where it seemed that Microsoft was fighting off an infinite number of foes. The year saw the expansion of a six-year-old lawsuit filed by temporary contract employees over denial of benefits and stock options; a massive—and, it turned out, overhyped—antitrust lawsuit by the US Department of Justice and 22 state attorneys general; a lawsuit by Sun Microsystems over Microsoft's use of Sun's Java programming language; a suit by Caldera Inc. over Microsoft's alleged anti-competitive practices in the operating-system market; another by Bristol Inc. over Microsoft's refusal to renew a source-code license for Bristol's effort to build software that bridged programming gaps between Windows and another operating system, called UNIX, that now exists only in a version called BSDi; a Y2K lawsuit (1998 and 1999 saw thousands of these lawsuits filed, over a potential disaster that never arrived) involving Microsoft's FoxPro database software; a suit by Blue Mountain Arts over Microsoft's alleged attempts to drive it out of the electronic greeting-card business, in which Microsoft also offered a product; a patent infringement and trade-secrets lawsuit by Goldtouch, which competed with Microsoft in the ergonomic-mouse market; a similar lawsuit by Florida software entrepreneur Mark Tornetta, who said Microsoft was trying to drive him out of the market for software allowing computer users to search for and purchase real estate; and two different lawsuits filed by Microsoft against 14 computer resellers in Missouri, New York, and New Jersey over allegedly pirated versions of Windows.

Individually, none of these lawsuits amounted to anything by way of direct danger to Microsoft. The company settled some of them out of court for small amounts, won outright dismissals of others, and prevailed in its battle with the Justice Department and the states in the now-notorious 2018 Supreme Court decision. But those keeping score in 1998 failed to note the danger signaled by the number and nature of the lawsuits: In addition to the image-destroying temp-worker lawsuit, they involved battles in 10 different computer-industry markets—original content, operating systems, programming languages, Internet browsers, development tools, database software, electronic greeting cards, e-commerce, and used computer equipment.

It was undeniably clear that the computer industry had grown into a huge, complex set of industries, and that Microsoft was still behaving as if the business was what it had been in 1981—an industry for a few million hobbyists. By 1998—the year that Gates first decreed it was no longer necessary for product teams to make presentations to him before getting permission to proceed, as he no longer had time to keep track of all his company's initiatives—computing had far exceeded Microsoft's ability to control its growth and development. Ten years before, Microsoft had been leading and helping grow an industry that consisted of little more than operating systems for desktop computers and a few relatively simple software applications. Now, computers had evolved into such a variety of computing-and-communicating devices performing such a wide array of functions that it was impossible for a single company to participate in, let alone dominate, all of the markets that had emerged. By competing in everything, Microsoft was dangerously overextended. By 1998, it was involved in too many different markets for it to deliver stellar performance in any one of them.

MORE DEVASTATING WAS the beginning of a titanic shift that went unnoticed in 1998 and that was precipitated by an accidental development in the government's antitrust suit against Microsoft. A series of tactical maneuvers between government and Microsoft lawyers over how much time Gates would have to spend being deposed resulted in the government being allowed to videotape its sessions with Gates. Once US attorneys had the Chairman on videotape, they gleefully and disingenuously played excerpts of him squirming, stammering, mumbling, evading direct answers, and denying knowledge of everything from widely known Microsoft practices to e-mail he himself had written.

While the excerpts eventually proved worthless in the court battle itself, they brought on a shocking—and, at first, unnoticed—shift in the world's collective perception of Gates and his company. Up until the videotapes began airing on television news programs, Gates was almost universally perceived as a superhuman genius whose ruthlessness was matched only by his tactical brilliance. But the tapes showed an all-too-human, soft, almost childlike man scrunched down in an oversized chair. The Gates portrayed in the excerpts looked like a classic bully, given to crumpling when his bluster is challenged. The resultant shift in his public image was enough to embolden thousands of competitors who previously had been afraid to take on Microsoft for fear that the company was unbeatable. It also began to change consumer perception of the Microsoft brand name, which once had been synonymous with "best of breed."

It takes years, of course, for such shifts to begin to translate into loss of market share and stronger performance by challengers. But there is no question that almost immediately after the summer 1998 airing of those taped excerpts, competing products in a wide variety of computer-industry segments began making inroads against Microsoft. First Linux, then BSDi starting eating away at the server operating-system share of the market held by Windows NT; by 2001, a revived Apple was dominating the first-time computer-buyer market; tiny upstart BeConn first began taking off in 1998, and by 2005 had parlayed its stripped-down browser and eccentric corporate charm into a market sensation that owned 62 percent of the browser market; and the "voluntary simplicity" movement in software, first identified by name in late 1999, had consumers turning away by the millions from the bloated Office suite and adopting various simplified freeware solutions instead.

The Gates on the tape—defensive, hesitant, suspicious, confused—embodied an essential change in the nature of Microsoft. For years, it had been an evangelical, nimble, agile, aggressive, innovative company, growing an entire industry along with its own product lines and profits. But until seeing Gates hunkered down under the relentless questioning of hostile attorneys, no one had realized that Microsoft had shifted from an aggressive proselytizer of new technology to an aging, strangely infantile defender of an old franchise. Once constantly trumpeting the virtues of the new, Microsoft now was tiresomely defending the virtues of the old. Everything it did in 1998 was in reaction to a threat to the growth of its hard-won, prized Windows market. No longer was Microsoft resorting to energy and imagination to unseat an older, more conservative rival; now it was that older, more conservative rival, defending the status quo against more agile and daring enemies.

Once a company shifts from offense to defense, it loses the energy and edge that helped elevate it to its position of power, and its decline is inexorable.

THE SINGLE MOST telling development of 1998 was revealed in January 1999, at Apple Computer's annual MacWorld exposition. Deposed Apple co-founder Steve Jobs, brought back two years before to keep the pioneering personal computer company alive, revealed an astonishing and telling statistic that came years later to be seen as the death knell for Microsoft. In August 1998, Apple—at that time all but out of business—had released a new computer, dubbed the iMac, that looked as if it had been stolen from the set of The Jetsons. A bulbous, translucent, ice-blue, toylike machine, it was imbued with a strange kind of charm reminiscent in a comic way of the first Macintosh. Apple was phenomenally successful with the iMac, Jobs said at MacWorld, selling 800,000 of them by year's end. Industry analyst PC Data reported at the same time that the iMac was the best-selling PC during Christmas season 1998, with a 7.1 percent market share against an array of established, less expensive competitors.

That the iMac outsold every brand bearing the Windows operating system was astonishing. More astonishing was the fact that 29 percent of its buyers had never before owned a computer, and that 13 percent of new iMac owners had previously owned a Windows machine. For the first time in the 1990s, a Macintosh had gained market share against Windows.

From the time in the mid-1980s when he first began agitating inside Microsoft for the company to shift to a graphical user interface, Gates had been hammering on the same theme to his troops: In order for Microsoft to succeed, it had to get people who knew and understood nothing about computers to buy one. And in order to get them to buy one, Microsoft had to make computers as easy to use as televisions or toasters. The drive from MS-DOS through Windows, Windows 3.0, Windows 3.1, Windows 95, and Windows 98 was a consistent and relentless drive to make computers so easy to use that an utter neophyte could buy one, turn it on, and start using it without consulting any manuals or asking for any kind of help. The success of the iMac signaled that Microsoft, for all of its successes and for all of the market growth it had fostered and enjoyed, had failed utterly. Had Windows evolved into the operating system Gates had envisioned 10 or 12 years before, there would have been no market for the iMac.

Microsoft was to go on from 1998 and continue enjoying 25 percent or greater growth per year through 2000, with its growth thereafter slowing in such tiny increments that no one noticed until relatively recently that the company had been dying for years. But year by year, new upstarts rose up in ever-greater numbers in areas Microsoft once had dominated, and new platforms and computing areas rose up that caused Microsoft to scramble ever more desperately to compete in and try to dominate new technological arenas. The company grew gradually more tired, gradually more desperate, and gradually weaker as it worked constantly in the service of its dream of defending a franchise the world had long since grown tired of. No longer innovating, Microsoft devoted its energies in the last years of its existence to trying through tactical brilliance and brute force to make consumers endure, rather than enjoy, Windows. It had turned, in other words, into a latter-day IBM, the very dinosaur it had supplanted in the early days of its rise to power. By the end of 1998, the transformation had already begun: No longer an upstart on the rise, the company Bill Gates wrought had turned into Big Bad Bill, the 1990s answer to the '80s' Big Blue.

 
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