CEO OF THE YEAR 1994

Your verdict is in. Chief Executive readers have nominated and a panel of peers have confirmed Microsoft’s William H. Gates [...]

July 1 1994 by JP Donlon


Your verdict is in. Chief Executive readers have nominated and a panel of peers have confirmed Microsoft’s William H. Gates III as the 1994 Chief Executive of the Year. A number of factors influenced the selection committee. “Gates is a dynamic business leader whose vision has set the standard for the next century,” says
Deloitte & Touche’s Mike Cook. Adds Mellon Bank Corp.’s Frank Cahouet: “He developed a business, nurtured its growth, and sustained its momentun while maintaining a reputation for providing a high-quality product. Boeing’s Frank Shrontz was impressed by his “vision, leadership and perseverance in a tough industry.” Andersen Consulting’s George Shaheen admires Gates’ adaptability in creating an industry giant ‘where rapid change and technological obsolescence are facts of life. ‘ 

Was Microsoft’s financial performance a factor? A five year net income, compound annual growth rate of 50 percent is heady stuff. But other finalists also had impressive results. In short, the judges sought a CEO who fundamentally changed his industry. As Data General’s Ron Skates sees it, Gates is “one of the dominant influences on the evolution of the entire computer industry.” Liberty Mutual’s Gary Countryman reckons he is “one of those rare individuals with the leadership skill to make a successful transition from entrepreneur to corporate leader.” Ryder System’s Tony Burns feels “he has done a remarkable job of keeping himself and his company on the leading edge of technology and has created great value for shareholders.”

Outgoing 1993 Chief Executive of the year Jack Welch of GM perhaps sums it up best: “Bill Gates’ passionate pursuit of a dream he had 19 years ago created a revolution that has changed the way business is done around the word. 

Chief Executive salutes Bill Gates, 1994 Chief Executive of the Year

Some maintain Microsoft’s Bill Gates is to computing what John D. Rockefeller was to oil, Henry Ford was to autos, and Andrew Carnegie was to steel. With the information highway upon us, Gates is in a unique position to shape the next phase of computing’s future-and, for that matter, everyone else’s.

Though Alexander Graham Bell hardly comes to mind each time a telephone call is placed, without Bell – or someone like him – the history of the 20th century would he quite different. Similarly, folks don’t think of Bill Gates each time they click a mouse on a per­sonal computer; but his imprint is there. Microsoft operating system, MS-DOS, is installed on more than 140 million IBM PC and compatible microcomputers around the world-roughly 90 percent of the total.

Microsoft Windows, which the company turns out at a rate of 2 million copies per month, can be found on over 50 million computers worldwide and generally is regarded as the operating standard for PCs. Its software programs, designed to run under Windows, are best sellers, and comprise almost half the market in such areas as word processing and spreadsheets. Microsoft also leads in applications programs for Apple’s Macintosh PC.

In one sense, Gates has a leg up on Rockefeller, Ford, and Carnegie: Markets for oil, autos, and steel predated the careers the turn-of-the-century trio. In 1974, when Gates and his Seattle ­friend Paul Allen developed a BASIC’ language for the Altair 8080, the world’s first personal computer, few believed there would be a demand. With visions of computers in every home, the two founded Microsoft as a partnership a year later. A turning point came in 1980 when IBM turned to Microsoft for an operating system for its first PC. The deal permitted Microsoft to li­cense the software to other hardware manufacturers, allowing it to collect royalties from a broad range of hardware vendors. Microsoft made the most of this advantage, eventually becom­ing the largest and most profitable compa­ny in the software industry.

Since it went public in 1986, the com­pany’s revenues have exploded from $198 million to almost $3.8 billion last year. Net income has grown at a compound annu­al rate of nearly 50 percent. After five splits, $1, 000 worth of Microsoft stock from its initial public offering in 1986 would be worth $43,000 today. Gates’ 27 percent equity stake is worth over $7 billion. Microsoft employs 14,700 people in 50 countries. It is sitting on $3 billion in cash with no debt and has an annual cash flow of over $1 billion. With a $30 billion mar­ket capitalization, Microsoft is larger than Chevron, Motorola, or Intel.

All of which means the 38-year-old Gates ought to be the industry’s Cheshire cat. But if so, he conceals the grin well. Pale, with shortish uncombed hair he is no longer a college-student-turned-boy­wonder. Gates is perhaps the only Fortune 500 CEO to he recognized in public places. Travelers to and from Seattle are accus­tomed to seeing his blanket-clad figure in coach class. Most people who know or have dealt with the chairman and CEO put him at the extreme right of the intelli­gence bell curve along with theoretical physicists, gene splicers, and baseball huff’s who comprehend the infield fly rule.

A smile at greeting vanishes quickly. Gates turns to business, rocking backward in his chair, elbows on knees. His glasses are in need of a cleaning. His mind races like a projectile aimed at the future, and he’s eager to banter about Microsoft’s game plan and the evolving computer in­dustry. The company’s vision of a comput­er in every office and home has been ex­panded to include every pocket, car, and wallet. Microsoft’s newest goal is ‘pulling information at your fingertips,’ Gates says, meaning users would have universal access to all information in a digitized form.

The company also is focusing on us­ability – making Microsoft products more accessible – both in operating systems and applications. For example, graphic icons now come with descriptive phrases reintegrated office computing by linking computers with phones, copiers, and printers. Traditionally, the company has excelled at marketing software to individ­uals. But under a dramatic restructuring launched last March, one out of four Microsoft employees is now engaged in consulting or product support. “We want to be a strategic supplier of technology to companies,” says Bob McDowell vice pres­ident, Microsoft consulting.

What IBM used to be, Microsoft has be­come. So absolute is the software company‘s grip on the industry that the Department of justice is investigating it for alleged anti­competitive behavior. Rivals including WordPerfect and Lotus Development allege Microsoft is unreasonably restricting access to its forthcoming operating system, called Chicago, to gain an advantage in its sales of applications software such as spread­sheets and word processors.

In any case, the question remains: Can the software giant excel in computing’s next battleground, multimedia, an area where its dominance is by no means cer­tain? Gates has spent $150 million so far to develop an end-to-end multimedia sys­tem. Nonetheless, smaller more nimble competitors boast of stealing Microsoft’s thunder in this field. Competitors call Tiger, its current approach to inter active media file-server software, a “paper tiger.” But as industry expert Patricia Seybold president of Patricia Seybold Group, ob­serves, “One of Gates’ strengths is his abil­ity to run around and get in front of the parade.”

Gates argues that one of Microsoft’s key resources is the loyalty and cleverness of the people around him and, some would add, their foresight. Steve Balmier, execu­tive vice president for sales and support and the company’s effective co-No. 2, told the Financial Times, “We are certainly paranoid enough about the potential to fail that we are looking very hard for the potholes in the road.” Gates himself is a hard-charging leader. “Cold, calculating, and extremely knowledgeable, ” observes Alex Jacobson, chairman of Inference Corp., an artificial intelligence software firm that has dealt with Microsoft. CE’s J. P. Donlon recently talked with Gates in his Redmond, WA, headquarters.

REPEAT PERFORMANCE

For a long time, Microsoft was the upstart, David rather than Goliath. Now that it is the leader-and a very profitable one at that-how will you maintain that position and capitalize on your success?

In terms of software, we’ve never really been David. We’re only the 20th largest firm in the computer industry, but we are the largest software company. Even when we only had two employees, we were the only microcomputer software company out there. We’ve always had strong prod­ucts. We run the company on graphical interface by supporting Macintosh and Windows, because we thought graphical interface was the way to go.

In the long term, we probably won’t be able to maintain the profit percentage we’ve enjoyed recently-that’s what hap­pens when you’re bringing in 25 percent after taxes for a number of years. In the finest industries you can name, 15 percent over any period of time is pretty good.

Nevertheless, there are so many oppor­tunities out there, so much we haven’t done yet. In our business, the unbeliev­able improvement in microchips and communication technology allows us to take on new projects. Software is the key-it enables people to use their PCs to communicate, to make market decisions, to learn, to be entertained.

In this industry, looking more than five years down the road, the challenge is to broaden your skill set and to determine what new partnerships and research you need. The rewards go to the company that can peer into the fog of the future and sort through the opportunities.

We take a long-term view of things-especially in terms of hiring people, work­ing with customers, and investing in re­search. So, we’re beginning some ambi­tious projects related to this phenomenon called the information highway. Think of the impact this might have. The very way we organize business-what’s inside a corporation versus research you find out­side, for example-will he affected. We’re investing enormously more in developing software products and tech­nologies for the information highway than anyone else. We’ve spent more than $100 million so far this year on it. And that amount will keep increasing. The same way Windows enabled the software in­dustry and Microsoft to grow, this information highway will enable software companies to renew themselves.

Look at encyclopedias. When most people grew up, encyclopedia meant “World Book” or “Britannica.” During the 1993 holiday season, more Microsoft Encarta units were sold than any other CD-ROM encyclopedia program.

Look at banking. We’re working with banks to enable users to complete trans­actions at home; to record all checks, credit-card payments, investments; and to analyze all transfers to their records.

Banks have been talking about that for quite some time. Will it finally happen?

Absolutely. Cheap communications and intelligent devices, mainly the PC and a little bit of software, can make it happen. Now that most households have PCs, peo­ple already have made the investment in the machine, and they are familiar with how it operates.

The world of consumer banking will he revolutionized. And that’s just one exam­ple. The applications of this type of tech­nology-intelligent screen-based de­vices-can extend to choosing movies, teaching students, filing complaints with businesses, and ordering products.

Perhaps I’m something of a zealot in believing in these opportunities. If I’m wrong, Microsoft won’t be able to grow as much in the future as it has in the past.

LET’S GO TO THE VIDEOTAPE

Microsoft has joint ventures and relationships with multimedia companies such TCI and AT&T. What does the future hold in this area?

As the PC rapidly improves and is con­nected to networks, such as corporate E­mail networks, online services, or the Internet, it moves into the arena of video signals. For the first five or six years, this technology will be popular in business, which already has a large base of PCs and networks, where the collaborative work, customer service, and marketing will justi­fy the cost.

The Holy Grail is going beyond the business market into the home, especially in areas such as education, travel, shop­ping, and entertainment. Obviously, many companies such as Microsoft, Time Warner, AT&T, MCI, and TCI, want to lead this new industry-either by provid­ing software or networks. So, a lot of pilot testing is going on now in terms of types of services, user demographics, nec­essary hardware, and how much people will pay for the services. This won’t hap­pen overnight.

It’s sort of a $100 billion question: Is it worth spending $1,500 dollars to hook up each of the, say, 60 million cable house­holds? Does the revenue flow for transac­tions and movie viewing justify the capital cost, which funds the box in the home and the network upgrade?

No one has found an answer yet. We do know the software will have to be pretty darn good, and many companies will have to participate.

The software industry is changing: Prices are tumbling, and banks and other busi­nesses are creating their own, proprietary products. How is Microsoft dealing with these changes?

We’re at the center of the in­dustry in the sense that we encourage software develop­ers to create new applications that drive market growth, such as CD-ROMs with home or educa­tional software. In 1986, we began “evangelizing” these new applica­tions at confer­ences. It is fun stuff. If I demon­strate Microsoft Complete Baseball or Cinemania to an audience, people recognize they’re seeing something neat. The industry is still growing. We’re just getting into the U.S. home-education market. And we eventu­ally will move into the international arena. The growth will he somewhat higher in­side the U.S. than outside, because the PC saturation level is substantial in the U.S., so there are more customers to sell to.

It’s a competitive business. The Mac is very popular, and IBM alone is writing four different operating systems to com­pete with us and other vendors. And soft­ware rapidly becomes obsolete within two or three years. If we don’t redo a product, then somebody else will come along with something that replaces it. Ironically, the software that has made a difference for us is that which people ini­tially didn’t think was that important, such as MS-DOS or Windows or our network­ing software.

Our original vision of a computer on every desk must be amended to include a computer in every pocket, car, and wallet.

Is this the future of personal computing?

Yes. The key is screen size. You’ll have a pocket-sized computer, a tablet-sized computer, a desk computer with the key­board directly wired to the optic fiber, and one whose screen covers an entire wall.

The wallet PC will hold your schedule, financial data, hundreds of digital photos of your kids, and whatever else you carry around in your wallet. Credit cards and keys will be replaced by this digital device that also knows the locations of restau­rants and can take messages. By the end of the decade, this device will cost a few hundred dollars and will be widely used.

Besides screen size, the only thing real­ly distinguishing machines will be whether data is communicated in a wire­less way or not. Communication is much faster when you’re wired in. But, of course, wireless gives you the flexibility to carry it around.

BULLY BOY?

It’s been said Microsoft looks at other com­panies’ products, setting up the expectation it may buy them, then it borrows the ideas and develops them alone.

There’s no need for us to borrow any­one’s secrets or approaches.

What about the Micrografx case, in which Microsoft sought to acquire the source code for a software called Mirrors, which trans­lated Windows programs into programs for OS/2, the operating system Microsoft and IBM had been developing as a potential suc­cessor to MS-DOS?

That happened about six years ago. Micrografx is a Texas company that de­velops graphics software for PCs. It was the first independent software company to put a product on for market for Microsoft Windows – In A-vision, a draw­ing program. We signed an unusual con­tract with Micrografx, in which we paid it $50,000 to look at its code and evaluate it. Depending on what we saw, we had the right to give it back to the company with no residual pollution-meaning that our people who looked at it could do some more work. We examined the code, and it wasn’t directly applicable to what we were trying to do. So we sent it back, and the company went public, claiming we didn’t have the right to do anything with the code at all.

So is Microsoft the sil­icon savior or the sili­con bully?

Neither. We create software products. We put them in a box, and people decide whether to buy them. Our success comes through great products such as Windows, Excel spreadsheet, or Word.

THE NEXT FRONTIER

Microsoft seems to be mainly in the desktop market, but some have indicated that the next frontier is net­work computing, an area in which you lag larger companies such as IBM or Unisys. How will you meet this challenge?

Our business-computing division focuses on this. The key to our success would be to bring powerful software onto the same kind of grade price-performance platform we have for the desktop.

One of the industry buzzwords is “client/server”-which means the main­frame and the desktop machine work to­gether. Thus, combining our product, Windows NT, with the new generation of servers that companies such as Compaq are creating provides one solution.

We’ve dome an immense amount of R&D in this area and we are starting to make some real strides, getting banks, manufacturers and investment companies to buy into this Windows NT approach. We kicked it of less than a year ago, so getting all the consultants and the soft­ware up to speed is a time-consuming process. But so far, the people investing in it have given us positive feedback.

Is the mainframe dead?

It depends on what you mean by those two terms. Corporations will always store their databases on a big set of computers. In terms of new purchases, though, far more efficient, cost-effective machines are available now, even for the most de­manding user, such as an airline reserva­tion center or a credit€’card company.

That doesn’t mean we don’t need to accommo­date the mainframe, be­cause companies already have paid for it. They run their applications on it, and they store their databases on it. We have to ensure that the new tech­nology can co-exist with the mainframe. But in terms of any new sales, the buying hinge is over.

Should the people who currently operate main­frames junk them?

No. Once you’ve paid for something like that, your marginal cost to keep it running is mostly maintenance. The main motivation for replacement comes when you want more flexible soft­ware systems. For instance, when busi­nesses re-engineer their processes, they often want customer-services representa­tives to be able to access all the informa­tion about customers who call with a complaint, so they can solve the problem online.

To do tasks such as this, companies need to upgrade their information sys­tems. That often means rewriting the soft­ware for client/server applications.

You were once quoted as saying that IBM has seven to 10 years to live. How would you judge its prospects today?

That quote was not accurate. In fact, we worked with IBM in the creation of its PC business. In terms of software, IBM is still one of our best customers because of the volume of PCs it sells. It is the highest vol­ume seller of PCs in the world and gets over $12 billion of its revenue from that.

GOING PC

Do you think the use of personal computers is an area in which CEOs should lead by ex­ample, and if so, how?

I could never come close to doing my job if I didn’t have E-mail to stay in touch with a broad set of people. My employees want to know what I’m thinking, and they want to be able to tell customers how we see things. They want to write an E-mail message that goes around the world to all the managers affected. I, on the other hand, want to be able to call up any prod­uct in any country and see how it com­pares to budget.

The world moves very fast, and CEOs have many demands on their time. I can’t imagine being without a tool like this. Even at a meeting, I often take my com­puter, and as I listen, I create E-mail mes­sages. But to make it work, the CEO must be comfortable with the system, and all employees must use it. Everyone must have access to the same data.

Some CEOs have Executive Information S