Programming Windows: Fallout (Premium)

At a regularly scheduled quarterly meeting with Microsoft’s board of directors in early 1998, the board witnessed something they had never seen before. Co-founder and CEO Bill Gates was unraveling before their eyes. “I can’t do this anymore,” he said quietly as he put his head into his hands.

And then he began crying.

By that time, U.S. v. Microsoft was well underway in Washington D.C. and Gates and Microsoft had been hammered by the prosecution witnesses, ample Microsoft email evidence, and Gates’ own depressing and painful taped deposition, key moments of which were played in court, again and again, to hammered home points made by the witnesses. Gates had been painted a destroyer running roughshod over the industry he helped create.

Gates expected his firm’s witnesses, which included key Microsoft executives, to turn the tide. But they only made matters worse, as one by one, their own words in email messages were used against them, proving that they were lying, didn’t remember the recent past correctly, or were simply clueless. The net effect was that Microsoft’s once-stellar image was shattered, and that Gates’ mythological business acumen was laid bare as a lie. By the time the trial ended in 1999, it was clear that Microsoft had been beaten not by the DOJ and its competitors but rather by its own behavior.

As this painful truth emerged, an employee exodus started. Key Microsoft executives, especially those closest to Gates, started leaving the company, the first time the software giant had ever endured such losses.

Chief Technology Officer Nathan Myhrvold was among the first to go: Microsoft’s version of Grima Wormtongue announced a leave of absence on June 1, 1999. He had had Gates’ ear ever since Microsoft purchased his company Dynamical Systems Research in 1986. And this cackling genius madman had lead Microsoft and Gates down innumerable paths, a few hugely successful, most not so much.

Perhaps most infamously, Myhrvold had once publicly bragged that Microsoft would grab a mobster-like “vig” on every transaction made online. But before that, he was Gate’s coauthor on the clueless book The Road Ahead, which barely mentioned the Internet at a time when Netscape, Java, and the World Wide Web were all the rage. The future, Myhrvold had convinced Gates, incorrectly, was interactive TV.

Chief Financial Officer Greg Maffei, another key Gates lieutenant, announced that he was leaving Microsoft in December 1999 to become the chief executive of a Canadian telecommunications company. Maffei had previously engaged in a controversial accounting practice in which Microsoft would even out its quarterly revenues by holding huge chunks of revenues in a new category called “unearned revenues” that would essentially be cashed in when future revenues dipped.

The practice hid the fact that Microsoft’s stratospheric year-over-year earnings gains of the 1990s had fallen through the floor in recent years. But he had a plan to squirrel away unearned revenues from huge Windows and Office product launches, ensuring the type of smooth growth that would appease investors who might normally balk at the uncertainties of the technology markets.

When the Securities and Exchange Commission revealed in June 1999 that it was investigating Microsoft’s accounting practices, the company claimed it had done nothing wrong. But a whistleblower emerged, claiming that he had been fired from Microsoft when he told Maffei that the practice was illegal. In the words of author David Bank, Microsoft looked “more like a bank” by that time, with more and more of its revenues coming from its investment portfolio and not from the sale of its products and services. That portfolio earned the firm $3.3 billion in fiscal year 2000 alone.

And give him some credit, as Maffei bailed at a time when Microsoft’s stock was near its peak, with the Dot Com bubble about to pop. He was, after all, good at running the numbers.

Tod Nielsen, a 12-year Microsoft veteran and a fixture at Microsoft’s public events, also left, in June 2000, announcing that he was looking for a new “outside opportunities.” He was a true insider and Gates golf buddy, and he had been Gates’ eyes and ears in Washington during the antitrust trial. But he quickly jumped at an offer to become the CEO of a firm called Crossgain, which was funded by former Netscape CEO Jim Barksdale.

That irked Gates. But when Crossgain announced that it would use Linux, Sun, and Oracle technologies rather than Microsoft’s offerings, the software giant threatened to sue because Nielsen had taken dozens of former Microsoft engineers with him when he left, and he was violating his non-compete agreement. Nielsen was forced to fire them all at an “emotional” meeting, and the firm lost one-quarter of its employee base in one day.

Nielsen didn’t last long at Crossgain, and he later became even more infamous as he bounced in succession from Microsoft competitor to Microsoft competitor, taking jobs at Borland, Oracle, VMWare, and Salesforce over the next 15 years.

But the biggest fallout from U.S. v. Microsoft, of course, was Bill Gates. Gates wasn’t having fun anymore. And he had decided to step down as Microsoft’s CEO.

On January 13, 2000, he made it both public and official, handing off the CEO reins to his college buddy and enforcer Steve Ballmer. Ballmer had been president of Microsoft since July 1998, and he was well known for splitting the management duties at the company with Gates. But Ballmer was also a businessman, and not an engineer, and while their top skills were quite similar, few understood this at the time.

As for Gates, he would remain Chairman and would adopt a new role as Microsoft’s Chief Software Architect (CSA), where he would assume more of a hands-on role with the firm’s software strategy moving forward. In effect, Gates would move into the role long held by Nathan Myhrvold. And that included having the ear of the new CEO.

“This was a personal decision,” Gates said, alluding no doubt to the impact of the emotional rollercoaster of Microsoft’s antitrust travails. “Steve’s promotion will allow me to dedicate myself fulltime to my passion, building great software and strategizing on the future and nurturing and collaborating with the core team helping Steve run the company.”

News of Gates stepping aside was shocking for most onlookers, though many had watched the fascinating and horrifying collapse of the world’s most successful technology firm and the world’s richest man during its year-long trial. But Microsoft’s competitors understood that the transition, especially at first, would do little to change the firm’s culture and anticompetitive nature. Ballmer, after all, was one of Gates’ closest cronies.

Publicly, Ballmer tried to sound the right notes, but he often stumbled in the same way that Gates had, by putting the blame on outside forces and not on the company’s executives. It was a problem that would continue to dog Microsoft in the future when a second and even more damaging antitrust case, this time in the EU, would finally drive real change internally. And not always for the better.

“We have spent the last 25 years thinking of ourselves as a small, aggressive company playing catch-up to large companies, even though at some point along the way we’ve become a large company,” Ballmer said at a press event. “Our passion for being the best has sometimes been misinterpreted.”

Ballmer described his relationship with Gates as “brotherly.” But many years later, long after Ballmer had himself left Microsoft, he started discussing this time period and the difficulties that Gates had had letting go of his leadership position at the firm.

Part of the problem is that letting go of power is difficult, no matter who you are. But another part of the problem was that Gates still owned the largest chunk of Microsoft stock, and his 15 percent share in the firm was worth $85 billion at a time when the company itself was worth $550 billion. Ballmer, the second-largest shareholder at the time, owned 5 percent of Microsoft. Gates, as the co-founder, long-time CEO, and Chairman, still wielded tremendous power within the company, and he used to it undo or undermine Ballmer’s decisions with which he did not agree.

“We’re both pretty good about being two people with one huge job,” Gates said at the time. “Who has what title isn’t a phenomenal element of that.” Increasingly, however, titles did become important, at least to Ballmer, and he was forced to countermand Gates repeatedly to establish his leadership over the firm. As a result of these clashes, the men are no longer friends today.

“Microsoft was kind of the thing that really bound us,” Ballmer said in 2016. “We started off as friends, but then really got quite enmeshed around Microsoft. Since I’ve gone, we really have drifted a little bit.”

But the biggest impact from this change was that Gates would now be walking around the campus and popping in, uninvited, on its engineers. The effect was chilling, since a Gates decision was gospel, and if he wasn’t impressed by what an engineer was working on during a random office visit, the project might get shutdown forever, despite its merits. He was seen as an unwelcome meddler to many of the engineers at Microsoft.

But Gates could also have a positive effect on certain projects, of course, and he began greenlighting those he felt were important to the future of Windows, and of Microsoft. Key among them was a new generation of the company’s COM technologies, which he felt could rival Java as a platform. And with Microsoft’s relationship with Java inventor Sun Microsystems dissolving into a legal battle that would take the language and runtime environment away from Microsoft, Gates figured it was time for the software giant to create its own replacements. All he needed was a better name for the effort, which at that time went by the awful moniker Next Generation Windows Services, or NGWS.

Marketing would figure it out. NGWS might be a terrible name, but it was an awesome vision for the future. And it would be one that Bill Gates directed personally.