First Ballmer, Now Gates? Microsoft Investors Demand Big Changes

Microsoft

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At the end of August, Microsoft (NASDAQ:MSFT) CEO Steve Ballmer — who has served as the company’s chief executive since 2000 — surprised the world by announcing that he would retire within the next 12 months. To understate it, the news was a big deal: Ballmer has worked for Microsoft since 1980 and was the company’s 30th hire. He led the company through both the dot-com crash and the late-2000s financial crisis, a period over which annual revenues increased from $25 billion to $77 billion.

But these transitions were by no means easy. Shares of the company have fallen 43 percent since 2000, suffering both in the wake of multiple crises and because of enormous competitive pressures from companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). The technological landscape on which Microsoft was built has changed dramatically over the past decade, and in many ways, Ballmer has failed to keep up with the Joneses.

But Ballmer isn’t the only one facing shareholder pressure. Investors, keen on shaking the dust out of the upper echelons of Microsoft’s executive team, have reportedly put some pressure on co-Founder and Chairman Bill Gates.

People familiar with the matter tell Reuters three out of Microsoft’s top 20 investors have lobbied for Gates to step down as chairman. Although Gates’ influence over the company as a shareholder is diminishing over time — he currently owns about 4.5 percent and is expected to have totally exited his position in 2018 — the investors argue that his continued involvement in the company could prevent new leadership from pursuing a new strategy. Company investors clearly think it’s time to try something new.

While the timing of Ballmer’s retirement was surprising, it is clear that Microsoft shareholders are glad to see him go. Investors are not very pleased with Microsoft’s hardware forays. Not only have the company’s efforts been underwhelming, but the hardware business has much tougher margins that squeeze profits. They have been calling for Ballmer to step down for some time and for a visionary new leader who will focus on innovation rather than salesmanship to take his place. Many see innovation as the secret sauce that has led to the enormous success of Google and Apple.

Last fall, Microsoft launched an overhaul of its Windows operating system, complete with touch-screen capabilities that enabled the company to release a tablet of its own, the Surface, its first step into the hardware industry. But since the beginning, the reviews of the tablet have not been overwhelmingly positive, nor have the sales figures — and that problem is evident in the company’s financials.

In mid-July, the software maker reported that fourth-quarter net income came in at $5 billion, or 59 cents per share, which included a charge of $900 million or $0.07 per share, “related to Surface RT inventory adjustments,” meaning that Microsoft misestimated the number of tablets that should have been manufactured or the price the company should have charged for the device.

Yet, Microsoft remains committed to entering the mobile device business. The company will continue to expand its focus beyond software that is downloaded onto personal computers or on corporate computing network. Investors are more supportive of Microsoft’s efforts to mold its software into downloadable packages for which recurring subscription fees can be charged. Microsoft has said that the subscription version of its Office business software will generate $1.5 billion this year.

However, in July, Ballmer announced a “far-reaching realignment of the company that will enable [Microsoft] to innovate with greater speed, efficiency, and capability in a fast changing world.” In a strategy document titled “Transforming Our Company,” he noted, “as the times change, so must our company.” Basically, the transformation the CEO had in mind was a greater focus on tablets and smartphones, hoping to become a third major player in a market dominated by Google and Apple.

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