Investors should be careful what they wish for in Microsoft chief

When it comes to Microsoft, Wall Street should be careful: it may be about to get what it has wished for.

Dissatisfaction with chief executive Steve Ballmer’s failure to latch on to the next big things in tech, despite spending billions in pursuit of Google and Apple, has left many investors hoping for more caution from his successor. The thought of Ford boss Alan Mulally stepping in and applying his cost-cutting and operational nous has come to be seen as the most Wall Street-friendly outcome to the CEO search. Investors would perhaps prefer a more conservative eye on the future that includes trimming some less promising investments.

But hanging up on growth would risk consigning Microsoft to the tech industry’s low-growth rust belt. The prize for becoming more relevant again to customers and developers — a label that has slipped as Ballmer has fumbled the move to a post-PC world — would come in the form of a far more meaningful share of the next big tech markets.

Finding a replacement is not proving to be easy. Earlier this week, John Thompson, the director leading the search, put out an “update” on how things were going — a sure sign that the process has fallen behind schedule and it was time to reset expectations. The fact that it came a week after Qualcomm elevated its number two, Steve Mollenkopf, to its own CEO chair to head off the risk of him defecting to Microsoft is eloquent testimony to the challenge the software company faces.

It is understandable if shareholders are fed up with many of the margin-compressing investments Ballmer has made, given how little there is to show for them. The shortcoming, however, was not in the decision to invest, but rather in a failure in three areas: explanation, selection and execution.

Take explanation. Ballmer failed to make a convincing case for some of his bets, particularly in consumer markets: each lurch in the direction of higher spending was greeted with a collective groan on Wall Street.

This is a field in which an outsider, starting with less personal baggage, has a chance to reset expectations. The good news is that Microsoft also has the financial wherewithal to keep Wall Street happy without locking itself into a low-growth future. Paying out more of its cash to shareholders while spelling out a more coherent plan (“devices and services”, the phrase adopted this year by Ballmer, is more a vacuous slogan than a statement of strategy) would go a long way to appeasing investors.

That leads to the second investment issue on which Ballmer can be faulted, that of selection. Two of the biggest bets on his watch — the Xbox games console and Bing search engine — amounted to fighting the last war. Regardless of the outcome, these do not look as central to Microsoft’s future as they once might have.

Beside picking the right battles, the next CEO will also need to demonstrate a far surer hand when it comes to execution. The $900 million write-down taken earlier this year against Surface — the device that was meant to propel Microsoft into tablet computing — is the latest example of the missteps that have sapped investors’ confidence.

All of this argues for a new chief executive with a background in product management and marketing to set and steer a more effective course. Mulally, with no tech industry experience, does not fit this bill. At the age of 68, he would also represent only a temporary stopgap.

The leading internal candidates — cloud computing boss Satya Nadella, head of business development Tony Bates and chief operating officer Kevin Turner — also lack the range or depth of experience. And while Stephen Elop, the former Nokia boss and former head of Microsoft’s Office division, has a longer record, Nokia’s struggles on his watch have further eaten into what was already a low personal popularity rating.

But winning over an outsider with a pedigree like Mollenkopf will be hard. Besides seeing through a hugely complex reorganisation, the new boss will have to oversee the integration of Nokia’s handset business. Also, Ballmer will still be looking on from his perch on Microsoft’s board. With 8.5 per cent of the company between them — and a personal history dating back to the company’s beginnings — he and chairman Bill Gates represent a formidable presence.

All of this may leave Microsoft’s future in a safe pair of hands like those of Mulally. Wall Street would no doubt cheer the selection in the short term. But such a move might turn out to be a missed opportunity.

— Financial Times