The soul of a new Microsoft

By Jay Greene and Peter Burrows

updated 6:10 p.m. ET Nov. 28, 2006

At 3:32 p.m. on Oct. 19 an e-mail flashed across the screens of the 230 Microsoft employees working slavishly to bring the Zune music player to market. The sender was their brash team leader, J Allard, 37. The message included a link to an old video of Steve Jobs on YouTube, mocking Microsoft's creativity. "The only problem with Microsoft is that they have no taste," the Apple Computer boss says. "They have absolutely no taste."

Allard was using one of the oldest motivational tricks in the book--his version of a football coach posting an opponent's quote on the locker room wall. "I for one...want to see this guy eat his words," Allard wrote. "Those are fighting words. He is speaking to every one of us and saying that we don't get it."

Zune hit store shelves on Nov. 14 -- a mere eight months after Allard's team got the go-ahead for the seemingly impossible task of toppling Apple's iPod music player. Contrast that with the five years and some 10,000 Microsoft Corp. workers it took to give birth to the latest version of the company's Windows operating system, Vista, which begins selling to corporate customers on Nov. 30 (and to consumers in January). From the start, Vista has seemed like an anachronism -- packaged software in a Web 2.0 era where ever more applications are moving off the PC and onto the Internet, some springing forth in a matter of weeks. Microsoft Chief Executive Steven A. Ballmer vows that this time-consuming process of cranking out code, which created complexity and bogged down development, will never be repeated.

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No one's suggesting that Zune will have anywhere near the impact of Vista. In its early form, it is clearly no iPod killer. It's bulkier and more of a battery hog, and the Zune Marketplace doesn't offer as many songs or videos as Apple Computer Inc.'s iTunes does. Plus, you pay for them with a confusing point system instead of dollars and cents. Zune will be lucky to sell 3 million units its first year and is sure to lose money for the foreseeable future. Vista, on the other hand, should run on about 76 million PCs by the end of 2007, says Roger Kay, founder of research firm Endpoint Technologies Associates. Vista sales should help fuel an $11.5 billion contribution to operating profits from Windows in the current fiscal year, says Credit Suisse First Boston analyst Jason Maynard.

But maybe the point is that Microsoft needs to find its un-Vista. Several of them, in fact. The software giant is entering perhaps the greatest upheaval in its 30-year history. New business models are emerging--from low-cost "open-source" software to advertising-supported Web services--that threaten Microsoft's core business like never before. For investors to care about the company, it needs to find new growth markets. Its $44.3 billion in annual sales are puttering along at an 11% growth pace. Its shares, which soared 9,560% throughout the 1990s, sunk 63% in 2000 when the Internet bubble burst, and they have yet to fully recover.

Reigniting growth will require a cultural shift at a company that has long shaped its strategy around maintaining its Windows operating system and Office word-processing and spreadsheet monopolies. That calls for a new breed of leaders who can push the company in directions it hasn't gone before. "Things are different from the desktop world that most of the Microsoft guys grew up in," says Michael A. Cusumano, a management professor at Massachusetts Institute of Technology who has written extensively about the company.

No one leader will replace William H. Gates III, the iconic software geek who came to define an era and plans to leave the company in June, 2008. But a cadre of execs is positioned to step up. Steven Sinofsky, the longtime head of the Office unit and onetime Gates technical assistant, has been put in charge of speeding up the Windows product cycle. Ray Ozzie, a relative Microsoft newbie and computing industry icon, is working to Web-ify many of Microsoft's products.

The soul of the new Microsoft, though -- its Geek 2.0 -- may just be Allard, the vice-president for design and development at its Entertainment & Devices unit. Allard looks and acts nothing like the prototypical Microsofty. Over the years he's swapped his plaid shirt and khakis -- something of a Microsoft uniform -- for edgy jackets made by Mark Ecko and other designer wear. He loads up his nine iPods, and now his Zune, with songs from hardcore bands like A.R.E. Weapons. And he's a downhill mountain biking maniac who has broken several bones after flying off his bike.

More important than his cool quotient, though, is that Allard gets things done -- fast. Zune is only the latest example. At the turn of the decade, he led the software giant into the video game business with Xbox, a risky gambit that's just starting to pay off. Xbox is now a solid No. 2 to Sony Corp.'s PlayStation, and analysts expect it to turn its first profit in the next fiscal year.

Allard is one of more than 100 Microsoft vice-presidents, but he has played an outsized role in shifting perceptions about whether the company can innovate in areas other than packaged software. In June, when Gates announced his plan to focus full time on his charitable foundation, he anointed Allard, along with a handful of others, as the leaders he expects to clear new paths.

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Already, Allard and those like him are having an impact. They're showing that strategies to move the company beyond Windows can emerge and be accepted by top brass as nonthreatening. A key moment came six years ago, when Allard insisted that the new Xbox video game console be developed without using Windows. In one meeting, Gates berated him for suggesting that the operating system wasn't up to snuff. But Allard argued that it wasn't specialized enough to handle video gaming. Gates eventually relented, in a decision that is widely seen today as a key to the console's success.

Even Ballmer, once pigeonholed as a micromanager, seems increasingly willing to distribute power and let those underneath him try new approaches. "I would have been hell-bent and determined six years ago to call Xbox the Windows Game Machine," he says. "My natural tendency would have been to call Zune something that was related to Xbox, since we had some consumer franchise. And yet we're really building consumer marketing muscle, and those guys are really teaching and educating us on new ways to do things."

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