Why is Microsoft one of the most valuable companies of all time?
A deep dive into Microsoft’s rise, challenges, and comeback
This week’s post (and the next one) is going to be different from usual. Hopefully, I’ll be on holiday around Peru by the time this is published. So, due to the nature of this newsletter, and the fact that I don’t want to take my laptop with me on holiday, I thought it was a good idea to craft two articles about topics mentioned very often in the current tech scene. God bless scheduled posts. This might be a little bit longer than usual, but I hope you like it.
Welcome to Tech Pills, the weekly newsletter about technology, innovation and startups. My name is Jose, and you can follow me on LinkedIn or Twitter (X). Let’s begin!
From a Small Startup to a Tech Titan (1975-2000)
Microsoft was founded in 1975 by Bill Gates and Paul Allen. They released the first version of Windows in 1985, which is when they started to take over, and the company went public in 1986. The success of Windows was on its graphical user interface and the introduction of the first basic applications like “Paint” or “Calendar”. Up until that moment, operating systems weren’t very user friendly because they were based on command prompts. Nonetheless, the internet wasn’t as spread as it is today, so their target audience was smaller.
From that point, until the late ‘90s, the American company capitalized Windows. They built innovative products that revolutionized industries such as Microsoft Office, as well as newer and better versions of Windows. They launched the first versions of Word and Excel in 1983 and 1987, respectively. A few years later, in 1990, they released Microsoft Office, which initially was a bundle including Word, Excel and PowerPoint. Suffice to say, these tools completely changed knowledge work, and it even feels awkward trying to imagine a world without them.
Although these products were highly profitable, it wasn’t enough for leading the industry. Remember, the internet wasn’t what it is today. The name of the game at that point was getting as much market share as possible. And sure enough, they managed to do it pretty well:
In case you are interested, this is the source of the video.
Turbulent Times (2000-2016)
The millennium change started with the burst of the dotcom bubble. It was an omen for a technological company in the business of selling computers. Nonetheless, Microsoft was the undisputed king of the market so, after a few years of recovery, the tech industry just skyrocketed with the internet starting to be more widespread and offering faster connections. Therefore, it was the right time to find alternative ways of growth while they ensured they held their crown.
We can summarize these years in Microsoft making bad decisions after bad decisions with one exception. Although they had good intentions, the execution was terrible. Some of the unsuccessful initiatives were:
Digital Music: Microsoft tried to compete with Apple and the iPod by creating their own portable media player named Zune in 2006. Zune’s holiday quarter sales in 2009 were around $117 million, compared to Apple’s 23 million iPods sold, worth $3.3 billion. Zune was discontinued two years later. This wasn’t the only try, they developed a music streaming service named Groove. At first, it was an optional monthly subscription exclusive for Zune owners, after killing it, it became Xbox Music and then Groove Music, which would be its last name before being cut by Microsoft in 2017.
Tablets and Smartphones: In 2006 Microsoft launched Origami, which was a kind of a first version of what a tablet would look. A year later, Apple released the first iPhone and the rest is history. Do you remember Origami? Me neither. Once again, and I start to reckon a pattern, they thought it was a good idea trying to penetrate the smartphone market in 2014, when iOS and Android were already dominating. For that, they first bought Nokia for $7 billion in 2014, and they used Lumia as their flagship smartphone model. Microsoft nixed Lumia by 2016.
Mobile Operating System: Microsoft developed its own mobile OS named Windows Phone, which was released in 2010. Long history short, Microsoft’s mobile OS shared the same destiny as Lumia. Its peak was a 5% market share. I personally owned a phone running Windows Phone and it was worse than bad. By 2017, it was officially dead.
Web Browser: Perhaps the biggest opportunity missed by Microsoft. It’s very hard to grasp how despite practically owning the market of desktops and laptops, they didn’t invest in offering a reliable web browser. Internet Explorer wasn’t only bad, it’s also one of the most hated browsers in history. Imagine if Microsoft owned the hardware market and, on top of that, had the most popular internet browser. Microsoft Edge is certainly not a bad option, but it came way too late.
Wearables: They launched a fitness wristband with some smartwatch features named Microsoft Band by 2014. Users reported design issues making it uncomfortable to use. These issues weren’t fixed with its second generation and Microsoft decided to just bin the whole project in 2016.
Cloud Web Services: Microsoft Azure is, in my opinion, the exception to all the bad decisions made during these years. It was announced in 2008 and launched in 2010 under the name “Windows Azure”. In 2014, they transitioned into Microsoft Azure and they started to focus on big data, Machine Learning and AI, technologies that eventually will be key in the sector. As of today, Azure is the second largest cloud provider worldwide.
The list goes on and on. I’m leaving big names out of the list to not overextend (yes Cortana, I’m looking at you). But the point is, every single one of these projects requires an obscene amount of money. The majority of companies, especially in tech, would most likely go kaput after three or four bad years like these. Microsoft went on for more than 15 years.
When it comes to the cause of these setbacks, bad management is very often mentioned. Microsoft growth made them have to hire more people. A company on the rise usually has a larger pool of candidates to choose from, and allegedly, Microsoft changed its internal hiring policy to favour candidates with higher education. However, I believe it was deeper than that. After its value exploded in the early days, Microsoft had over 2,000 new millionaires among its employees. That was one of every five employees. Managing people (and egos) on that context must be hard, to say the least.
So, you might be wondering how they could cope with so many failures. Remember when I mentioned how they focused on getting market share back in the ‘90s? It paid off. Windows was holding the fort for Microsoft while they were burning way too much cash trying to diversify. However, even gargantuan companies have limits so, it was time to make some changes.
I am inserting an infographic with the most important dates mentioned in this article. You can click here to enlarge the image:
The Modern Microsoft (2016-Present)
Microsoft’s resurrection has a clear protagonist, his name is Satya Nadella. He joined Microsoft in 1992 and had multiple leadership roles across different departments within the company until being appointed as CEO in 2014, replacing Steve Ballmer. If the early two thousands were packed with bad decisions, the post-Nadella era has been the complete opposite. From 2016, Microsoft got back the throne as one of the most valuable companies through a series of very smart strategic decisions:
LinkedIn Acquisition: Microsoft finally penetrated the social media industry buying LinkedIn in 2016 for $26.2 billion. Nowadays, LinkedIn is one of the most powerful social media platforms and the default option for professionals.
Microsoft Teams: Skype was being eaten alive by Zoom and Slack so they decided to replace it with Teams. Essentially, Microsoft Teams was done following a very clear and simple rule: replicate what works from the competition and get rid of what users don’t like. Currently, Teams is one of the most popular messaging and video-call tools in the world, especially in office environments. In part, thanks to being so well integrated with the Microsoft ecosystem.
GitHub Acquisition: Microsoft bought GitHub in 2018 for $7.5 billion. They remain as an independent platform for developers that allows storing, managing and sharing code. They confirmed having over 100 million users a few months ago, and GitHub Copilot is, by far, the most popular code assistant tool among developers. By the way, Microsoft also owns NPM, TypeScript and Visual Studio Code, which are very popular tools for web development.
Gaming: They bought Activision Blizzard and Bethesda. And they also have the rights of Minecraft, the best-selling videogame of the history. At least, from a financial point of view. Sure, Xbox has had ups and downs, but, as we are going to see in the next section, the profitable acquisitions made by Microsoft in the gaming territory over the last years make the gaming division one of their economic engines today.
OpenAI Partnership: Microsoft invested $1B in OpenAI in 2019. They invested more over the years, with a significant $10B in 2023. Microsoft also powers OpenAI with IT infrastructure. It’s really hard to estimate how much Microsoft’s position is currently valued, but this is meant to be one of the most significant operations made in Microsoft’s story, if not the most. Today, Microsoft owns a 49% stake in OpenAI, so they do have a huge influence in the company.
Unlike in the early two thousands, we can see a clearer picture here. These actions are oriented mostly toward professional environments. And they are woven with the consolidated successful products from the previous years - Windows, Microsoft Office, Microsoft Azure, Xbox, etc. The result? Judge by yourselves:
Looking Forward: Lessons and Legacy
Just to be clear, and quoting Steve Jobs, you can only connect the dots looking backward. What I mean by that is that it was extremely hard to predict the future of technology in the early ‘00s. Sure, mistakes were made, but the purpose of this article isn’t to diminish the actions of the past, but rather, learn from them. The modern Microsoft stands on the shoulder of giants. As we already mentioned, despite the inconveniences, they managed to keep their position in an extremely competitive sector.
If I had to pick one, the main takeaway of the article is really simple: It’s better to do one or two things well than ten things poorly.
Nice one Jose! I ran enterprise growth for MS Teams 🤩