Microsoft announced something very impressive last week: revenue for the company’s 2017 fiscal year (which ended June 30) increased 5% year-over-year. That may not seem particularly meaningful until you realize 2016 was only the second year in the company’s history that revenue declined; the first included the worst economic slowdown since the Great Depression:

Moreover, all indications are that growth will continue, defeating the presumption that tech companies that start to decline do so inexorably. The most famous example that said inexorable decline need not be inevitable is IBM, which, in the early 90s, found itself in far more dire straits than Microsoft, only to recover under the leadership of Lou Gerstner:

Microsoft’s earnings report isn’t the only thing that has made me think of IBM lately; two weeks ago, at Mirosoft’s annual partner conference , CEO Satya Nadella introduced a new offering called Microsoft 365 . Nadella said:

Microsoft 365 is a fundamental departure in how we think about product creation. This is the coming together of the best of Office 365, Windows 10, Enterprise Mobility and Security…

We have decided that the time has come for us as a company and us as an ecosystem to talk about this in the terms that customers can get the most value. We want to bring these products together as an integrated solution. A complete solution that has got AI infused in it with intelligence, whether it is intelligence that is helping end users be more productive and creative and teamwork, or intelligence in security. It’s that complete solution for intelligent teamwork and security that we want to bring about with Microsoft 365.

A cynical take is that this is typical Microsoft, cribbing a successful naming scheme (‘365’) to rebrand a SKU that Microsoft actually announced a year ago. That’s true! A slightly more generous take is that Microsoft 365 is the latest implementation of the company’s decades-old bundling strategy, and, well, that’s true too!

The way Nadella framed the announcement though — associating customer value with integration — that is straight from Gerstner’s IBM playbook.

The IBM and Microsoft Monopolies

When Gerstner signed on as IBM CEO in the spring of 1993, the company had just recorded the biggest annual loss in American corporate history: -$4.97 billion. In his memoir about the turnaround he led at IBM, Who Says Elephants Can’t Dance? , Gerstner noted that 1993 was going just as badly:

At the end of May I saw April’s [numbers] and they were sobering. Profit had declined another $400 million, for a total decline of $800 million for the first four months. Mainframe sales had dropped 43 percent during the same four months. Other large IBM businesses—software, maintenance, and financing—were all dependent, for the most part, on mainframe sales and, thus, were declining as well.

Gerstner expanded on this point in various sections of his book:

Despite the fact that IBM, then and now, was regarded as a complex company with thousands of products…IBM was a one-product company—a mainframe company—with an array of multibillion-dollar businesses attached to that single franchise…It didn’t take a Harvard MBA or a McKinsey consultant to understand that the fate of the mainframe was the fate of IBM, and, at the time, both were sinking like stones.

IBM’s mainframe business was being hammered on two fronts: Unix-based alternatives offered modular lower-cost alternatives for back-end operations, while PCs were taking over many of the jobs mainframes used to do — and, in the long run, threatening to take over the data center itself. IBM was not only stuck with a product that was too expensive for a market that was simultaneously shrinking in size, but also an entire organization predicated on that product’s dominance.

This was Microsoft a few decades later: the company loved to brag about its stable of billion dollar businesses, but in truth they were all components of one business — Windows. Everything Microsoft built from servers to productivity applications was premised on the assumption that the vast majority of computing devices were running Windows, leaving the company completely out of sorts when the iPhone and Android created and captured the smartphone market.

The truth is that both companies were victims of their own monopolistic success: Windows, like the System/360 before it, was a platform that enabled Microsoft to make money in all directions. Both companies made money on the device itself and by selling many of the most important apps (and in the case of Microsoft, back-room services) that ran on it. There was no need to distinguish between a vertical strategy, in which apps and services served to differentiate the device, or a horizontal one, in which the device served to provide access to apps and services. When you are a monopoly, the answer to strategic choices can always be “Yes.”

That, though, is why it is so interesting to think about what happens — and the problems that arise — when the monopoly ends.

Post-Monopoly Problem One: Nature

The great thing about a monopoly is that a company can do anything, because there is no competition; the bad thing is that when the monopoly is finished the company is still capable of doing anything at a mediocre level, but nothing at a high one because it has become fat and lazy. To put it another way, for a former monopoly “big” is the only truly differentiated asset.

This was Gerstner’s key insight when it came to mapping out IBM’s future:

I am not sure that in 1993 I or anyone else would have started out to create an IBM. But, given IBM’s scale and broad-based capabilities, and the trajectories of the information technology industry, it would have been insane to destroy its unique competitive advantage and turn IBM into a group of individual component suppliers more minnows in an ocean.

In the big April customer meeting at Chantilly and in my other customer meetings, CIOs made it very clear that the last thing in the world they needed was one more disk drive company, one more operating system company, one more PC company. They also made it clear that our ability to execute against an integrator strategy was nearly bankrupt and that much had to be done before IBM could provide a kind of value that we were not providing at the time—but which they believed only IBM had a shot at delivering: genuine problem solving, the ability to apply complex technologies to solve business challenges, and integration.

So keeping IBM together was the first strategic decision, and, I believe, the most important decision I ever made—not just at IBM, but in my entire business career. I didn’t know then exactly how we were going to deliver on the potential of that unified enterprise, but I knew that if IBM could serve as the foremost integrator of technologies, we’d be delivering extraordinary value.

In Gerstner’s vision, only IBM had the breadth to deliver solutions instead of products; the next challenge would be changing the business model.

Post-Monopoly Problem Two: Business Model

The natural inclination for former monopolies, at least if Microsoft and IBM are any indication, is to stick with the monopoly-era business model. That meant doubling down on the device (or OS, as it were).

The problem with this approach is twofold:

• First, as I just noted, the nature of the company is set: being big — which in this case means offering services to everyone — is much easier to accomplish than being better, a critical factor in selling a differentiated device in a competitive market.
• Second, as long as the business-model is device-centric, there is a risk in destroying the services component of the business. In Microsoft’s case, that meant holding Office for iPad back to prop up Windows, for example, or building Azure (née Windows Azure) around Windows Server. IBM, in far more dire straights, was, as Gerstner noted, close to splitting up the company so that individual divisions could sell their respective devices on their own without corporate overhead.

The reality is that while changing business models is hard, for both Microsoft and IBM it was necessary to preserve what strengths they still had. This is why defenders of former-CEO Steve Ballmer miss the point when pointing out that Microsoft Azure and Office 365, the keys to Microsoft’s renewed growth, both got started under his watch. Look again at Gerstner’s account of IBM:

If you were to take a snapshot of IBM’s array of businesses in 1993 and another in 2002, you would at first see very few changes. Ten years ago we were in servers, software, services, PCs, storage, semiconductors, printers, and financing. We are still in those businesses today…

My point is that all of the assets that the company needed to succeed were in place. But in every case—hardware, technology, software, even services—all of these capabilities were part of a business model that had fallen wildly out of step with marketplace realities.

This is why I don’t give Ballmer too much credit for Office 365 and Azure: the products of Microsoft’s future were there, but the Windows-centric business model was constricting every part of the company to an ever-shrinking share of the overall market; Nadella’s greatest success has been taking off that straitjacket. 1

Post-Monopoly Problem Three: Culture

Four years ago, while announcing a company-wide reorganization (that I thought was a bad idea ), Ballmer wrote a memo called One Microsoft . This was the key paragraph:

We will reshape how we interact with our customers, developers and key innovation partners, delivering a more coherent message and family of product offerings. The evangelism and business development team will drive partners across our integrated strategy and its execution. Our marketing, advertising and all our customer interaction will be designed to reflect one company with integrated approaches to our consumer and business marketplaces.

I wrote in Services, Not Devices :

The crux of the problem is in that paragraph: no one is asking Microsoft to design its “customer interaction” to “reflect one company.” Customers are asking Microsoft to help them solve their problems and get their jobs done, not to make them Microsoft-only customers. The solipsism is remarkable.

The solipsism, at least if IBM was any indication, was also inevitable. Gerstner writes:

When there’s little competitive threat, when high profit margins and a commanding market position are assumed, then the economic and market forces that other companies have to live or die by simply don’t apply. In that environment, what would you expect to happen? The company and its people lose touch with external realities, because what’s happening in the marketplace is essentially irrelevant to the success of the company…

This hermetically sealed quality—an institutional viewpoint that anything important started inside the company—was, I believe, the root cause of many of our problems. To appreciate how widespread the dysfunction was, I need to describe briefly some of its manifestations. They included a general disinterest in customer needs, accompanied by a preoccupation with internal politics. There was general permission to stop projects dead in their tracks, a bureaucratic infrastructure that defended turf instead of promoting collaboration, and a management class that presided rather than acted. IBM even had a language all its own.

Sounds familiar!

Gerstner’s response was to restructure IBM, change the company’s promotion and compensation policies, and most importantly, push IBM to better understand customers and then leverage its size to offer services they actually needed:

Our bet was this: Over the next decade, customers would increasingly value companies that could provide solutions— solutions that integrated technology from various suppliers and, more important, integrated technology into the processes of an enterprise. We bet that the historical preoccupations with chip speeds, software versions, proprietary systems, and the like would wane, and that over time the information technology industry would be services-led, not technology-led.

This is why the Microsoft 365 announcement and Nadella’s talk of integration is so interesting, and IBM plays a role in this story as well.

IBM’s Cloud Miss

I’ve previously written about how IBM, specifically Sam Palmisano, who succeeded Gerstner as CEO, missed the cloud. Remarking on Palmisan’s declaration that “You can’t do what we’re doing in a cloud” I wrote:

Something that is interesting about most cloud solutions is that few are really doing anything new. Rather cloud service providers are simply taking operations that were formerly done on premise and moving them to a cloud that is available for any enterprise to use. And, as Palmisano realized, the inherent lack of customization in such a model means that most cloud services are on a feature-by-feature basis inferior to on-premise software.

The reality, though, is that the businesses IBM served — and the entire reason IBM had a market — didn’t buy customized technological solutions to make themselves feel good about themselves; they bought them because they helped them accomplish their business objectives. Gerstner’s key insight was that many companies had a problem that only IBM could solve, not that customized solutions were the end-all be-all. And so, as universally provided cloud services slowly but surely became good-enough, IBM no longer had a monopoly on problem solving.

To put it bluntly, enterprises don’t need a systems integrator for their data center if they no longer have a data center. Once again IBM is stuck competing for a shrinking market, which is why the company’s revenue has now declined for 21 straight quarters. 2

Microsoft’s Cloud Opportunity

Still, the fact that enterprises no longer have data centers doesn’t mean integration is no longer valuable; rather, the locus of needed integration has shifted to the cloud as well. The average enterprise customer uses 20~30 apps , data is often scattered on and off premise, or stuck in email or personal accounts, and while IT departments may be happy to no longer upgrade servers, managing identity and security across all of these services and on a whole host of new devices far more likely to be used outside a company’s intranet calls for the same sort of integrator Gerstner wanted IBM to be.

This seems to be the long-term goal of Microsoft 365. Microsoft said in a blog post :

[Microsoft 365] represents a fundamental shift in how we will design, build and go to market to address our customers’ needs for a modern workplace. The workplace is transforming—from changing employee expectations, to more diverse and globally distributed teams, to an increasingly complex threat landscape. From these trends, we are seeing a new culture of work emerging. Our customers are telling us they are looking to empower their people with innovative technology to embrace this modern culture of work.

With more than 100 million commercial monthly active users of Office 365, and more than 500 million Windows 10 devices in use, Microsoft is in a unique position to help companies empower their employees, unlocking business growth and innovation…

Microsoft 365 Enterprise:

• Unlocks creativity by enabling people to work naturally with ink, voice and touch, all backed by tools that utilize AI and machine learning.
• Provides the broadest and deepest set of apps and services with a universal toolkit for teamwork, giving people flexibility and choice in how they connect, share and communicate.
• Simplifies IT by unifying management across users, devices, apps and services.
• Helps safeguard customer data, company data and intellectual property with built-in, intelligent security.

Wait, inking?

Here’s the big concern I have about the Microsoft 365 rollout, and Microsoft generally: Nadella and team deserve plaudits for working through the first two post-monopoly problems. Microsoft has embraced its bigness and focused on services, and has the business model to match (although, it should be noted that it was Ballmer who was responsible for shifting most of Microsoft’s enterprise business to a subscription model years ago). That’s great!

I’m troubled, though, that I just articulated what I think is the Microsoft 365 strategy — or what it should be — far more clearly than either Nadella or Kirk Koenigsbauer, the corporate vice-president for the Office team that wrote this blog post. Indeed, Gerstner articulated the strategy best of all, and he wasn’t even talking about Microsoft or the cloud!

Then again, I’m not entirely sure a focus on cloud integration is Microsoft’s strategy after all: maybe the cynical take — that Microsoft is just stealing a successful name for yet another enterprise licensing bundle — is closer to the truth. It is striking that the primary reason Microsoft gives for Microsoft 365 is that it already has a lot of users.

Stepping back even further, Nadella loves to say “Our customers tell us” or some derivative thereof, but an actual articulation of customer use cases is consistently missing from his presentations. This keynote was not dissimilar to Nadella’s Build keynote , which featured a full 30 minutes of theory about the future of computing, that, while fascinating, seemed much more like a justification for Microsoft’s continued relevance as opposed to an articulation of demonstrated customer needs.

Can Culture Change?

The most bittersweet paragraph in Who Says Elephants Can’t Dance? is the final one:

I was always an outsider. But that was my job. I know Sam Palmisano has an opportunity to make the connections to the past as I could never do. His challenge will be to make them without going backward; to know that the centrifugal forces that drove IBM to be inward-looking and self-absorbed still lie powerful in the company. Continuing to drive change while building on the best (and only the best) of the past is the ultimate description of the job of Chief Executive Officer, International Business Machines Corporation.

Palmisano completely failed the challenge: what was the aforementioned reliance on IBM’s seemingly impregnable position as a systems integrator and dismissal of the cloud anything but the result of being “inward-looking and self-absorbed”? The same point applies to Palmisano’s obsession with profit-per-share: customers, Gerstner’s obsession, were totally forgotten.

That is why Gerstner’s IBM should be a inspiration to Microsoft, but Palmisano’s (and current CEO Ginni Rometty, who has hewed far more closely to Palmisano’s example than Gerstner’s) IBM a warning: culture is a curse , and for better or worse, a company can recover but never be fully cured.

1. Update: A few folks have written in to note that I’m being a bit harsh on Ballmer. After all, not only did he start Azure, he fired the well-respected and successful head of the Server and Tools Business, Bob Muglia, because he wasn’t moving fast enough in the cloud. Muglia’s replacement? Satya Nadella [ ↩ ]
2. By the way, Gerstner predicted the public cloud in the first appendix of his book, which was published in 2003, four years before AWS was launched: