Eric Lai

My picks for Bill Gates's 5 dumbest moves

By Eric Lai
June 22, 2008 11:11 AM EDT

You don't start a company at age 21 and spend 33 years at it without making a few bonehead mistakes along the way. Here is my list of the top 5 dumb mistakes made by Bill Gates.

(For my picks of Gates' 5 smartest moves, see this.)

5) Bungling the antitrust case

So much has been written about the case that rehashing it seems unnecessary. But suffice it to say that Gates vastly underestimated the threat to Microsoft. How else do we explain Gates's notorious taped deposition, during which he emanated waves of hostility and condescension?

It sure riled up Judge Jackson, who ruled that Microsoft was not only an abusive monopoly, but that it should be split up into two companies: one selling operating systems and one making everything else.

"Microsoft should've capitulated rather than fight," analyst Rob Enderle said. Instead, "Microsoft went in with a speeding ticket and almost came out with a death sentence."

Lucky for Microsoft but another court later overturned Jackson's decision.

4) Unwillingness to cannibalize its own products, aka greed

Success can be a straitjacket, preventing you from making the best long-term moves. So it has been with Microsoft's two most successful products, Windows and Office. Windows Vista has been accused by many of being a bloated, overly-large mess.

Yet Microsoft can't afford to completely overhaul Windows because it would break compatibility with older versions of Windows. That would anger enterprises, for whom application compatibility is a huge priority. And it would give consumers an excuse to either stay on the existing version of Windows -- witness the outcry for extending XP -- or move to a competing OS, such as Linux or Mac OS X.

Similarly, Microsoft killed a promising Web-based productivity suite called NetDocs because of a reluctance to hurt with its cash cow, Office. The NetDocs team "ballooned to a 400-person staff, then it got folded into the Office group in early 2001, where it died," according to the Wall Street Journal.

Offering NetDocs as a free or inexpensive alternative to Office might have pre-empted any of the current online offerings nipping at Office's heels, such as Zoho Office, ThinkFree and Google Docs.

Instead, Microsoft allowed those companies to emerge, while it created an alternative ‘software+services' strategy. This involves grafting Web-based collaboration features such as Office Live Workspace onto the Microsoft Office client. While there are advantages for many users, rival vendors such as Google argue this is a ‘Franken-software' approach that goes against industry trends.

3) XBox and MSN

If Windows and Office represent Microsoft's most successful moneyspinners, then XBox and MSN must surely represent its biggest financial sinkholes.

A proprietary AOL-type service that morphed into a Yahoo-lite, MSN has always depended heavily on Internet Explorer and Hotmail to provide traffic. By that measure, it's doing well. Microsoft Web properties including MSN recorded 121 million unique U.S. visitors in May, behind only Google and Yahoo, who were virtually tied at 143 million unique visitors each, according to comScore.

But dollar figures tell a different story. Google's take of the U.S. online ad market is expected to grow to $7.9 billion this year, a sixfold increase over 2004, according to eMarketer. MSN's expected 2008 revenue of $1.7 billion is less than double its 2004 revenue, and also far underpaces the market as a whole.

According to an analysis by Silicon Alley Insider last October, MSN had lost about $1 billion on about $2.2 billion in advertising revenue in the past 12 months. In other words, for every dollar of advertising sold by MSN, it lost nearly fifty cents (see SAI's spreadsheets here). Google, by SAI's calculation, was making $4.4 billion in profit on $16 billion in revenue.

The same goes for the XBox, the popular game console that competes with Nintendo's Wii and Sony's Playstation. What started off in 2001 as, according to Horwitz, an "insurance play in case game consoles become more ubiquitous than PCs," has become a pit into which Microsoft, according to a Seeking Alpha analysis last year has shoveled more than $21 billion while recording a cumulative loss of $5.4 billion (though Microsoft co-president Robbie Bach says he expects the XBox to be operationally profitable for the year 2008.

Microsoft should have known it would face problems such as low margins and reliability problems.

"One of Microsoft's best decisions in the PC era was stay out of hardware," Enderle said. "Building the Xbox (and the Zune) are both counter-strategic. By nature, you're setting yourself up to fail. Whenever Microsoft tries to go vertical, much like Intel, it never seems to end well."

2) Microsoft Bob

Despite their still-niche appeal, Gates is a big fan of more 'natural' user interfaces such as pen and tablet computing, and plans to spend his post-retirement 20% time at Microsoft on these areas.

Overseen by his future wife (then a product manager at Microsoft), Microsoft Bob is easily Microsoft's worst effort in this vein. Intended to be an alternative for the standard Windows interface for new PC users, Bob was slow and condescending, repeating instructions over and over again. New users didn't seem to like it much, and techies hated it.

Bob "was a great idea, based on a lot of great research," said Enderle. The problem was that it was "a decade and a half or two ahead of the technology needed to make it really work."

Worse, Bob's failure "made Microsoft think that it should not focus on the user interface," said Enderle. With the release of Mac OS X in 2001, Apple reasserted its longtime leadership in the interface arena. Microsoft is trying to play catch-up with its new Surface tabletop PC and promises of touch-screen-enabling the next version of Windows. But for now, Microsoft is "paying in spades," Enderle said.

1) Ignoring search

Gates actually named search as one of Microsoft's priorities in his 1995 Internet Tidal Wave memo.

But battling Netscape took priority. So Microsoft let search languish. When it did launch MSN Search in late 1998, it relied on a partner search engine -- the popular Inktomi -- to provide the actual results.

Microsoft continued to rely on search partners for the next several years. "I was always told, 'Search is not core to our business,'" Bill Bliss, MSN Search chief during that era, told SearchEngineLand.com. "'Google is not a competitor, Yahoo is not the competition, AOL is the competitor to beat, subscription services is how we're going to win.'"

But then came Google. Its machine-powered search finally put man in its place.

"Google kicked our butts," said Gates, according to a 2005 article in the Seattle Times. Microsoft's strategy, he admitted, was "stupid as hell."

Having missed not just the boat, but also the "dock, the pier and the turnoff to the marina," as the Times put it, Microsoft embarked on a two-year effort to build its own search engine. It relaunched MSN Search in early 2005 using its own technology and then again in September 2006 as Live Search. Users were unimpressed. From October 2005 to April 2008, Live Search's market share has fallen from about 15% to 9.4%, according to comScore.

Microsoft is so desperate to catch up that it is paying companies for its employees to use Live Search, as well as shoppers. And it offered to buy Yahoo for as much as $55 billion during its two-year courtship.

With that chapter closed, Microsoft remains a weak number three in Web search.

"I think if Microsoft could go back in time, they would've done things differently in search," Horwitz said.

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Were these all big Gates's mistakes? Were there more significant ones?

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For more Gates retirement coverage, see here.