How Microsoft got hip

After years of flops, the software giant is making a comeback

How Microsoft got hipFor the past 18 months, the future of the world’s largest and most powerful computer company has been lugged around in the backpack of a 14-year-old schoolboy in Seattle, Wash. His laptop is loaded with a new piece of software, and he’s been told to use it and abuse it and then give his impressions to one very important person-—his dad, the CEO of Microsoft Corp., Steve Ballmer. Ballmer says his son has been his toughest critic—someone who has been helping find bugs in the company’s new operating system and pointing out the kinds of flaws and errors that made the previous version of the software, Vista, such a monumental failure. A lot is riding on his small shoulders.

The new operating system, called Windows 7, is the one thing that could finally shake the company from a nightmare of embarrassing flops and image problems under Ballmer’s tenure. Vista was not only sluggish and bug-filled, it drove many users to distraction and into the arms of rival computer companies, like Apple. And that was not the company’s only problem. Its MP3 player—the brickish-looking Zune—was a poor copy of the iPod, and its XBox 360 gaming system was plagued with technical problems in its early days-—troubles that cost the company an estimated US$1 billion in warranty repairs. And as consumers began a critical shift to mobile computing, Microsoft missed the boat completely on smart phones, handing the market to Apple and Research In Motion. Having fallen well off technology’s cutting edge, this year the Redmond, Wash.-based company suffered its first drop in revenue since going public in 1986. It also announced it will lay off 5,000 workers, another company first.

But there are signs that Microsoft is on the verge of a comeback. The early reviews of Windows 7, which comes out Oct. 22, are glowing (Ballmer’s son, it seems, has a future in software development). Microsoft has also launched Bing, its entry in the online search business, and after reaching a landmark deal to make it the search engine for Yahoo, some analysts estimate Microsoft could grab 30 per cent of a market that’s long been dominated by Google. New XBox gaming technology and a new Zune have also been generating buzz. Next up, Microsoft is setting its sights on the growing netbook and tablet market—something it believes will eclipse smart phones as the mobile device of the future. All these new offerings represent a kind of renewed innovation “beyond anything we have seen from Microsoft for multiple years,” noted a recent Goldman Sachs report.

Perhaps most importantly, the company says it is refocusing on the one thing it most neglected: consumers. “We lived through a period as a company—you can almost think of it as our teenage years—where maybe we had a bit of arrogance,” says Darren Huston, the vice-president of Microsoft’s consumer and online division, in an interview with Maclean’s. “This new way forward is about listening to consumers, creating things that people really want.”

That might seem a tall order for a company that just a year ago was running the now-infamous Windows ads, featuring Jerry Seinfeld and Bill Gates doing things like buying shoes. The spots baffled viewers, and came across as clueless and confusing—kind of like the company at the time. “Windows was a train wreck,” says Rob Enderle, a technology analyst at Enderle Group, who says that under Ballmer, the company seemed to completely lose control of the brand. But this year, Microsoft is back with new Windows ads that suggest it really has been listening. Featuring a four-year-old girl named Kylie using Windows to make slide shows and email digital pictures, they convey a key message: whether you’re six or 60, you will enjoy Windows again.

Microsoft has long had success as the platform that businesses use. It now wants to do the same for families. “Windows 7 will automatically recognize all the wireless products in your home: TV, phone, toasters, whatever,” says Huston. Connecting all these kinds of digital bits and pieces in a meaningful way is one of the holy grails for the software company, he adds. The aim is to create what he calls “moments of magic”—where the software takes care of complex tasks without you having to ask it to. Things as simple as merging the numbers on your cellphone with the address book on your computer.

To get to that point, Microsoft has had to rethink and simplify not just Windows, but the way it does business. For starters, it’s no longer off-loading anti-virus coverage to third-party companies. Virus protection is built into the operating system and also offered as free, additional software. And to make programs quicker and easier to update, they’ll be offered in both off-line and online versions. Microsoft has also been changing how it markets Windows. It used to leave that job almost entirely to the PC makers like Dell and Sony (one reason it lost control of the brand as customers soured on Vista). “Vista was an important step back for the company, both relative to the way we do our development, but also in the way that we manage perceptions around our products,” says Huston.

Regaining its clout in the PC market is crucial. Despite Microsoft’s various side projects and subsidiaries, software is still the big money-maker. Windows sales totalled $3.4 billion in its latest quarter, down from $4 billion a year earlier.

But the turnaround effort also comes at a time when the industry is at a crossroads. Much as Microsoft might like to be the company that manages the digital home, the reality is that consumers are quickly abandoning the home computer and going mobile. Sales of traditional PCs are down nearly 20 per cent. And mobile is the one area where Microsoft is still behind the curve, says Rob Helm, an analyst with Directions on Microsoft. Last year, Microsoft bought a company called Danger, which makes the smart phone brand SideKick. There has been some speculation that it will launch a Zune-branded phone of its own to chase after the iPhone. That would be a logical bet, given Microsoft’s reputation as a company that tends to play catch-up more than it innovates.

This time, though, Microsoft seems to be trying a different tack. Huston says the real focus is on making Windows 7 the software that runs the next wave of netbooks and tablet computers. Both the smart phone and PC industries are quickly merging toward these larger devices, which will be sold by mobile carriers much like cellphones are today (cheaply, and attached to long-term data contracts). “In five years it’s going to be hard to tell what’s a PC and what’s a phone,” says Huston. “It may be more a conversation of what screen size do you want, or do you want a hard drive or a flash drive?”

The potential stakes here are massive. While there are 1.4 billion PCs in the world, there are three billion phones, notes Huston. Mobile is one area where “we can’t afford to lose,” he says. Of course, Microsoft isn’t the only company with an eye on this emerging market. Apple has been developing its own tablet computer, which is rumoured to look like an oversized iPhone. Google already has a mobile operating system called Android, which Microsoft sees as its biggest threat.

Both these companies have also proven capable of doing real damage to Microsoft. Apple has scored with its long-running series of cutesy “I’m a Mac” attack ads, which have proven to be a major embarrassment for Microsoft. Google, meanwhile, has been rolling out a series of competing products—from online software that mimics Microsoft Office to an online operating system called Chrome OS. “One of Google’s goals is to put Microsoft out of business and they’re hardly being subtle about it,” says Enderle.

But as Microsoft gets its act together, those attacks may come back to haunt Apple and Google, adds Enderle. Microsoft has shown lately that it’s willing and able to fight back. With Bing, its share of the hugely profitable online search business was up nearly 20 per cent in August. In just three months, it’s become a brand that’s recognized by half of Americans, says Microsoft. A new video game system called Project Natal, which uses motion sensors to follow a player’s movements, is grabbing attention among young video gamers, helping the company win back some of the cool factor that Apple has long enjoyed. And new ads that embrace the PC moniker have helped take the sting out of Apple’s attacks.

Over the past year, the mood at Microsoft was often sombre. Those attacks against Vista and Microsoft’s image problems took a toll on morale, says Huston. But that too, has changed. Nowadays, employees walk with an extra kick in their step, he says. Even the often highly critical blog Mini-Microsoft, which is written by an anonymous employee, is on board. “I’ve got to say: in my opinion, Microsoft has turned The Corner,” it said.

Microsoft still shows hints of its old, unhip self. It has been running an online ad campaign for Windows 7 urging people to host their own launch parties in their homes. The cringe-worthy ads have been widely mocked online. Make fun of them if you will. Huston says for all the criticism, Microsoft is, at the end of the day, just a bunch of “geeks” whose only mission now is to make great software.

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