Analysis Less than two years into Satya Nadella's tenure as CEO of Microsoft, he's already had to report a lossmaking quarter. It's only the second time that's happened in the software giant's three decades as a public company, and the $8.44bn write-off Redmond posted earlier this week is the largest in its history.
Don't blame Nadella, though. He's just the janitor. The mess he's been forced to clean up was left for him by his predecessor, Steve Ballmer.
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In this case, the source of the red ink was Ballmer's crash-and-burn acquisition of Nokia's phone business, which seemingly has now cost Microsoft more than it originally paid for it. It's emerging as the single most disastrous event in all of Microsoft's history. It was such a contentious move, in fact, that it reportedly destroyed Ballmer's friendship with his old college buddy, Bill Gates.
But this wasn't the first time one of Ballmer's plans cost Microsoft some serious coin. In fact, on several occasions during his tenure he bet big on the wrong idea when he probably should have known better, ultimately costing the company millions or even billions in the process.
While it's true that Ballmer's 14 years in the corner office left Microsoft a more profitable and more valuable company than when he first became chief exec, his legacy also includes a series of bad gambles that didn't pay off. Here we remember a few of the biggest ones – and time will tell whether Nadella can avoid similar mistakes.
It's worth revisiting this one, because it's a doozy. Microsoft paid $7.1bn to gobble Nokia's former Devices and Services business in April 2014. Less than a year and a half later, it would write down $8.44bn in a single quarter, with almost all of the charges related to the Nokia deal.
That wasn't all, though. Just three months after the deal closed, Nadella announced 18,000 layoffs, again with most of the cuts coming from the former Nokia division. That move cost Microsoft $1.57bn in restructuring costs over the next three quarters, bringing the total losses related to the acquisition to $10.01bn.
We're not done yet, though. Even before Microsoft agreed to take the phone business off Nokia's hands, Ballmer was seemingly convinced that he could make the Finnish firm into Redmond's own pet smartphone franchise while keeping it as an independent company.
Best buddies? Nadella showed former Nokia CEO Stephen Elop the door in June
In 2011, Microsoft paid Nokia $1bn to drop Symbian and make Windows Phone its exclusive smartphone OS. Given that Redmond would buy the moribund business outright just three years later, one could easily argue that the billion-dollar investment yielded zero return.
All told, Ballmer's smartphone misadventure looks to have cost Microsoft more than HP spent on its botched acquisition of Autonomy – and that's saying something.
Nokia wasn't Ballmer's first duff deal, though. Microsoft has only posted a quarterly loss one other time, and that was when it wrote off costs related to its $6.3bn buyout of online advertising firm aQuantive.
Ballmer snapped up the ad outfit in 2007, with the assumption that it would get Microsoft an oar into the ad-revenue river that has floated Google's boat so nicely over the years.
It was partly a defensive move. Google had just bought ad-delivery network DoubleClick for $3.1bn, and Ballmer fretted that his Mountain View rival was gaining too much momentum in a market that had never provided much revenue for Microsoft.
As it turned out, buying aQuantive didn't change that. Over the next five years, far from making Microsoft an "advertising company," as Ballmer promised, the gobble delivered little return. Former aQuantive CEO Brian McAndrews quit a year after the deal closed, and ex-aQuantive employees complained of being marginalized.
In July 2012, Ballmer admitted defeat, and Microsoft wrote down $6.2bn of the ads business – virtually every penny it paid for it. The result was a quarterly net loss of $492m, where previously Redmond had been expected to report a profit.
3. Online Services
The aQuantive debacle was such a high-profile misstep, though, that it distracted from other losses going on right in its own backyard.
After acquiring aQuantive, Microsoft folded it into its Online Services reporting segment. That was fitting in two senses: First, because aQuantive's business was online advertising; and second, because nobody else in Online Services was making any money, either.
Online Services grew out of Redmond's MSN business and would eventually include the Bing search engine, Hotmail, maps, and various other efforts designed to make it look like Microsoft was competing head-to-head with Google. Problem was, while Google was raking in money for its efforts, Microsoft was spending it while it played catch-up.
Over the course of its lifetime, Online Services posted an average net operating loss of nearly $1.5bn per year. That's eight years of operation for a total cost of $11.78bn.
And the thing is, Ballmer never actually pulled the plug. Instead, when he got tired of analysts pointing out how much the segment was costing Redmond each quarter, he changed Microsoft's reporting structure. The business units that were under the Online Services umbrella are now scattered among several of the software giant's new segments, so their performance is no longer as visible. For all we know, they're still burning through cash.
The biggest failing of Microsoft's ill-fated Zune media player line wasn't that the first versions were brown, as some suggested at the time. Rather, it was how badly out of step the venture was with the rest of the market.
When Redmond launched the first Zune in September 2006, it did so with prices that matched what Apple was charging for its iPod line at the time. Trouble was, by 2006 Apple had already been selling iPods for five years.
By early 2007, Apple boasted that there were already 100 million iPods in customers' hands. In May of that year, Microsoft said it expected Zune to hit the one million mark in June. Nobody remembers whether it really did or not. June 2007 was when Apple launched the first iPhone, and from that moment, the days of the standalone MP3 player were effectively numbered.
Remember us? While Apple was working on the iPhone, Ballmer's Microsoft brought you these
But Ballmer didn't take the hint. Despite widespread derision from Apple fanbois, the Zune line lumbered on. The last model, the Zune HD, was released in 2009 – although it's a bad sign when your product's top marketing exec quits mere weeks before it launches. And the Zune line itself wasn't officially discontinued until 2011.
It's hard to say just how much Redmond's misguided media-player play cost it, because it never disclosed hard figures. But at the outset of the effort, an eager Zune boss said Microsoft planned to spend "millions of dollars" establishing the brand and that it planned to lose money over the next few years in the process. We bet it did.
5. Danger Inc / Kin
With the iPhone turning heads and Zune dying on the vine, Ballmer reckoned Microsoft needed to get in on the smartphone business, and fast. What better way than to buy up a company that had already established itself in the game?
The company in question was a plucky outfit called Danger Inc, and the price tag was $500m. Danger was best known for its flagship product, the T-Mobile Sidekick handset. It wasn't as sexy as the iPhone and it didn't sell as well as Research in Motion's BlackBerry line, but hey – Paris Hilton had one.
Alas, Microsoft dropped the ball almost immediately. Shortly after shifting over the Sidekick service to its own data centers, Redmond experienced a major outage that wiped the data from countless customers' devices. Some of the data was eventually recovered. Most never was.
But the Sidekick was never meant to be the endgame. Ballmer put Danger's engineering staff to work on a pair of new devices that were meant to give Microsoft its big break into the smartphone market.
Unfortunately, that effort was a disaster almost from the beginning. Ex-Danger staffers complained of upper management interference, and the devices that eventually resulted from the effort received failing grades in early user testing.
They were brought to market anyway, albeit briefly. The devices, dubbed the Kin One and Kin Two, were soon recognized as being so awful – and potentially so damaging to Redmond's reputation – that they were pulled a mere six weeks after launch, resulting in the shortest lifecycle of any product in Microsoft's history.
Just how much the whole episode cost the software giant is hard to judge. But Microsoft's erstwhile Entertainment and Devices division posted a $172m operating loss for the quarter in which Kin was killed, while it had reported an average operating profit of $284m per quarter for the previous nine months.
6. Surface RT
Having been late to market with a media player and late to market with a smartphone, Ballmer's next trick was to try to take on the iPad. While Microsoft's Surface line has since gone on to be a successful business, particularly with the launch of the Surface Pro 3, the first model to ship was the utterly misguided Surface RT.
Sporting an underpowered ARM processor, an OS that looked like Windows 8 but wasn't, and an app store worthy of Old Mother Hubbard's kitchen, the Surface RT showed every sign of being a flop before it ever launched. Acer CEO JT Wang even urged Microsoft to abort the idea, saying, "It is not something you are good at, so please think twice." Microsoft pushed ahead anyway, and the rest is history.
Almost nobody bought Surface RT. But that may have been just as well, because Microsoft was said to be so bullish on the devices that it was selling them at a loss, expecting to make up the difference later by hooking customers into its media store and online services.
No amount of advertising would get you to buy one of these. We know because you didn't
When he finally had to admit the blunder, a sheepish Ballmer told an audience at a company event, "We built a few more devices than we could sell." That was something of an understatement, as Redmond had been forced to write down $900m of unsold inventory.
And that's not to mention the extra $1bn the software giant pumped into its marketing budget to promote the devices, which were flogged everywhere from bus stops to TV ads in desirable time slots. Needless to say, it didn't work.
Postmortem of an era
Steve Ballmer stepped down as CEO of Microsoft in February 2014, after holding the position for 14 years. In August 2014 he also resigned his seat on Redmond's board to concentrate on his new role as owner of the Los Angeles Clippers basketball franchise. He remains Microsoft's largest individual shareholder.
During his time in Redmond, Ballmer oversaw numerous projects and initiatives. Many succeeded. He preserved Windows' position as the dominant desktop operating system and Office as the leading productivity suite. He built Microsoft's enterprise business and he brought the company, at long last, into the cloud.
You might ask why some of the other missteps aren't on the above list. Where are Windows ME and Windows Vista? What about Microsoft Bob? But before Windows XP there was Windows ME; after Vista was Windows 7. Bob, meanwhile, may have been silly, but it didn't even make a blip on the financial radar.
In hindsight, however, one thing the major errors – the costly ones – have in common is that they are often the result of reactive management, where Ballmer sought to chase down one of Microsoft's competitors when it reached into a market that Redmond hadn't already conquered.
Apple makes money from iPhones? Microsoft should make its own phones. Google makes money from ads? Microsoft should be an ad business, never mind software. Apple makes iPods and iPads? Microsoft should be in media players and slabs that don't run Windows.
So in that sense, it's probably a good thing that Nadella has had the courage to euthanize what's left of the Nokia phones business, rather than putting it on life support. There's something to be said for sticking to what you're good at. And with any luck, Nadella – who oversaw Microsoft's Azure cloud business before being named CEO – may be the man to keep it on the right path from now on. ®