Eric Lai

My picks for Bill Gates's 5 smartest moves

By Eric Lai
June 22, 2008 10:53 AM EDT

You don't build a company from the ground-up into the dominant software firm of its era without making a lot of smart moves. Here are my top five.

(For my picks of Gates' 5 least-good decisions, click here.)

5) Overcoming his inferiority complex to IBM

People forget, but Gates was once young Luke Skywalker, chafing under IBM's empire, and eventually rebelling against it.

But Gates was also heavily beholden to IBM, which had licensed Microsoft's MS-DOS operating system for the IBM PC. Without that key deal, Microsoft would "probably still be this small tools company up in Seattle, maybe making Mac software," joked Enderle Group analyst, Rob Enderle.

Gates in his early 20s may have already had the temerity to bully much older executives at other MS-DOS licensees, but not IBM.

"Bill would go to a very senior person at these other OEMs whether it was DEC or Tandy or Compaq or whoever and yell at them or tell them it had to be this way, or if you don't do this we'll make sure your software doesn't run on your box," Scott McGregor, head of development for Windows 1.0, told Jennifer Edstrom, author of 1998's Barbarians Led By Gates. But when he went to IBM, "Bill was very humble and would speak softer. There was a definite difference in the tone of his voice."

The turning point was IBM's entry into graphical-based operating systems, OS/2. As a more technically-refined competitor to Windows, it "was going to kill Microsoft," said Enderle, who worked in IBM marketing at the time.

At first, Gates tried to neutralize IBM by having Microsoft co-develop the first several versions of OS/2. With the launch of Windows 3.0 in 1990, Microsoft started overtly going its own way, pushing hard to get IBM competitors such as Compaq and Dell to install it. By the mid-1990s, Windows had triumphed.

"IBM was vastly more powerful, but we beat ourselves," said Enderle. "If we could've gotten out of our own way, we could've handed Microsoft their hat."

4) The foresight to be worldly

Before Gates became a global philanthropist, he was also the PC industry's first global citizen. Actually, call him the industry's Caesar, for Gates was obsessed with conquering foreign markets.

Gates signed a deal with a Japanese distributor two years after Microsoft's founding.

According to 1992's Hard Drive: Bill Gates and the Making of the Microsoft Empire, "the reward was millions of dollars in revenue for Microsoft's coffers, almost as much as that pouring into the company from all its U.S. sales."

Going international early also helped Microsoft defeat its then-biggest foe, Lotus Software. According to Rob Horwitz, a developer and later marketer in Microsoft's applications group, one of the reasons Microsoft Multiplan, and later Excel, were able to eventually beat Lotus's dominant 1-2-3 was by outselling it heavily in Europe.

To make software easier to localize, Microsoft was one of the first vendors to re-engineer its development process so that language-only changes could be done, Horwitz said, "without getting the developers involved."

"This is an underappreciated part of Microsoft's brilliance," said Horwitz, who is now CEO of the independent analyst group, Directions on Microsoft.

In 1985, international sales made up 40% of revenue, or almost $50 million a year. Last year, foreign sales still made up 40% of revenue, though the dollar figure has grown to $20 billion.

Though Microsoft loses plenty of revenue from software piracy, even that seems to work out in the end.

"As long as they're going to steal it, we want them to steal ours," Gates told an audience at the University of Washington in 1998, reported the LA Times in 2006. "They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade."

3) Recruiting Steve Ballmer

As a solo act, Ballmer has his critics. But as Gates's partner during Microsoft's empire-building years, it's hard to imagine anyone better suited to the task than Ballmer.

It started with a bit of luck. Dorm-mates and poker buddies at Harvard, the dropout Gates had lost touch with Ballmer -- remember, this is the pre-e-mail/cellphone/Google/LinkedIn era -- who had graduated and then gone on to spend several years as a junior exec at Proctor & Gamble, where his cubicle-mate was future General Electric CEO, Jeff Immelt.

Gates tracked Ballmer down to Stanford Business School, where he was on the safe route onto the management track at his father's employer, Ford Motors. Gates doggedly pursued Ballmer until the latter agreed to join the startup in 1980 as assistant to the president, that is, himself.

With Gates's first partner, Paul Allen, retiring from Microsoft in 1983 after developing Hodgkin's Disease, Ballmer quickly became Gates's trusted second in command -- Bill's "1.5," the Post called him -- helping Microsoft through innumerable crises.

Ballmer, according to a 2000 article in the Washington Post, was so shy as a child that he used to hyperventilate before going to Hebrew school. But the Ballmer everyone knows -- and the one that perfectly complemented Gates' hyper-brainy, hyper-critical style -- is the over-the-top cheerleader who ruptures his vocal cords trying to inspire Microsoft's employees and outside developers.

His style didn't always succeed. Taking over development of the troubled launch of Windows 1.0, Ballmer's "modus operandi for dealing with technical issues was to pound on the developers until they caved in to his own unrealistic expectations of what the ship date should be," according to Edstrom's Barbarians Led by Gates. Windows 1.0 still shipped a year and a half late.

But Ballmer succeeded far more than he failed. He was somewhat belatedly rewarded, only becoming co-president in 1992, sole president in 1998, and CEO in January 2000 (see a list of other pretenders to the Microsoft throne here).

Nevertheless, while Gates was the "actual and intellectual head of Microsoft, but Ballmer's was the heart above the belly of the so-named Beast from Redmond, and his soul is its soul," wrote Fredric Alan Maxwell in his 2002 unauthorized biography, Bad Boy Ballmer: The Man Who Rules Microsoft.

While some outside Redmond call for Ballmer's head, he remains popular internally. An anonymous poll of Microsoft employees at a new career Web site, Glassdoor.com, found 55% of respondents approving of Ballmer (and 21% disapproving of him).

And others say that for all of Microsoft's recent missteps, it'd be hard to find some better than Ballmer to run Microsoft.

"He is one of only two guys who understands Microsoft from the beginning," said Creative Strategies analyst, Tim Bajarin. "He has an uncanny understanding of the industry and Microsoft's role in it. And he's willing to adapt. He is the right leader, from a visionary and execution standpoint, during this significant time for Microsoft."

2) Belated but total move into Web 1.0

Like many others in the early 1990s, Gates was seduced by the fuzzy-wuzzy theory of convergence: interactive TV interwoven with a proprietary online service powered by superfast broadband.

"He balked at the whole idea of the Internet being the center of universe, and he was blinded by that," Bajarin said.

Gates's blind spot was so pronounced that, according to Barbarians Led by Gates, he ignored a promising communication technology called Remote Information Protocol (RIP) being developed at Microsoft that could've pre-empted Netscape Navigator by delivering a Web browser with far faster graphics rendering -- key in the era of 56 Kbps modems.

Gates may be hyper-critical -- his catchphrase was "That's the stupidest thing I've ever heard!" delivered with a sneer -- but he is also intellectually honest enough to realize when he's wrong. On May 26, 1995, Gates sent out an internal memo to senior executives that later became known as the "Internet Tidal Wave Memo."

"The Internet is the most important single development to come along since the IBM PC was introduced in 1981," he wrote. "I want to make clear that our focus on the Internet is critical to every part of our business."

Gates spelled out where Microsoft should invest, and how it would beat the competition. At the end of the year, with -- the Windows 95 launch behind it -- Microsoft revealed its Internet strategy to the general public.

"It was amazing because he really did turn an elephant on a dime," Bajarin said.

Some of the moves, inevitably, have been less than spectactular: MSN, for example. And Enderle argues its 'browser war' with Netscape, which it won, was unnecessary and led directly to their legal troubles with the government.

"Netscape was going to fail, regardless. It had no revenue model," he said. "Microsoft misplayed it."

But on many other fronts, Microsoft stood and delivered, becoming the second-most powerful dot-com player behind Yahoo. Windows Live Mail (formerly Hotmail), Windows Live Messenger, and IE all became number one or two in their categories. Though it is a laggard in Web 2.0 and affiliated areas, at least it is a contender, which is more than can be said about IBM, HP or Oracle.

1) Moving out of PCs into the enterprise

Once Microsoft realized it could take on IBM in the PC software business, Gates started to think bigger: take on IBM (as well as Novell, Oracle, Sun Microsystems and others) in the enterprise arena, too.

Its early attempts were comical. A collaboration with 3Com on a network operating system called LAN Manager failed to beat Novell's Netware, and led to accusations by 3Com CEO Bob Metcalfe of a Microsoft double-cross, according to Hard Drive.

Initial versions of SQL Server marketed by Microsoft were simply licensed ports of Sybase Inc.'s product brought to OS/2 and then Windows NT. NT, meanwhile, remained a little-respected imitator of Unix until 1996's release of NT 4.0.

A decade and a half later, things are far different. Microsoft's Server and Tools division, under senior vice-president Bob Muglia, is one of Redmond's brightest spots.

Propelled by Windows Server, SQL Server, Visual Studio and System Center, the division is growing 18% year-over-year.

"Server & Tools is knocking the ball out of the park," Enderle said.

Taken alone, Server and Tools is equivalent to a $13 billion-a-year enterprise software firm -- nearly equal to SAP AG and a pre-buying spree Oracle Inc.

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Do you think the above were smart moves by Gates? What would you nominate as alternatives?

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For more coverage of Gates's retirement, please see this.