Gates-Ballmer Succession Watch

Who should be Bill Gates' technical successor at Microsoft?

It's not CEO Steve Ballmer, who at last month's D6 Conference admitted, "I am not an engineer." I'll say. Steve is a marketing guy who has put other marketing guys in charge of Microsoft.

Should it be Bill's handpicked successors, Chief Software Architect Ray Ozzie or Craig Mundie, chief research and strategy officer? For an upcoming eWEEK story about Microsoft after Bill Gates, I asked several analysts about the logical technical successors. None mentioned Craig, while some worries defined Ray's possible Microsoft future.

Forrester Research analyst Rob Koplowitz described Ray as a "brilliant technical visionary." Problem: He "might still be a bit of an outsider after just a few years. Also, he was Gates' man, and with Gates gone ..." Koplowitz didn't finish the sentence. But the implications are hugely important. It wouldn't be the first time I've heard concerns that Ray isn't Ballmer's man.

Several analysts surprised me with their pick for technical successor: Bob Muglia, senior veep of the Server and Tools division.

"Bob Muglia particularly stands out because his organization is profitable, growing in double digits, is facing tough competition against open-source alternatives, and is a major factor backing Windows and Office on the desktop," said Directions on Microsoft analyst Rob Helm.

Koplowitz described Muglia as a "technical genius like Ozzie, but with better Microsoft cred."

Roger Kay, president of analyst firm EndPoint Technologies, shared similar sentiments. "I've been spending time with Bob Muglia, and I think [the Server and Tools business] is the most functional unit at the company. It's a $13 billion business dropping $4 billion to the bottom line."

He continued: "It's responsive to its customers and lives in a competitive environment. Bob motivates his troops and inspires confidence in his customers. I think he continues to do what he does in a post-Gates world. STB could almost split off as a stand-alone company, but it does share some technologies with other units."

Server and Tools certainly is having a busy year, with releases of Visual Studio 2008, Silverlight 2, Windows Server 2008, Hyper-V virtualization, SQL Server 2008 and new "Essential" Server products. While the division's margins are smaller than the Office and Windows (e.g., Business and Client) groups, year-over-year growth is consistently stronger and contribution to sales of volume-licensing contracts is more significant. Server and Tools products will also drive new Microsoft hosted services.

Where Client is doing OK—hampered by Windows Vista—and Business is doing well, Server and Tools' performance is exceptional. According to a Forrester report published on Friday, "80 percent of firms cite the Redmond software giant as their primary server OS vendor." The division has posted more than 20 consecutive quarters of growth.

Bob took over Server and Tools in October 2005. It has been boom time pretty much since, building on an already strong foundation and diversifying into new areas, such as hosted services.

But he's not alone as the man who could wear the Gates mantle, or at least share it sometimes. Other future technical successors the three analysts said to closely watch:

• Steven Sinofsky, senior vice president, Windows and Windows Live
• David Thompson, corporate vice president, Microsoft Online
• Bill Veghte, senior vice president of the Online Services & Windows Business group
• S. Somasgear, senior vice president, Developer division
• Kurt DelBene, senior vice president, Office Business Platform group
• Chris Capossela, senior vice president, Information Worker Product Management group
• Satya Nadella, senior vice president, Search, Portal & Advertising group
• Stephen Elop, (incoming) president, Business division
• Scott Guthrie, corporate vice president, .NET Developer division
• Eric Rudder, senior vice president, Technical Strategy
• Rick Rashid, senior vice president, Research

Why does this post's title include Steve Ballmer? Because Microsoft has in place no clear successor to its CEO, and it's unclear whether marketing execs should be running a company with such strong technical expertise. As for Bill Gates, today begins his last week as a full-time Microsoft employee.

Microsoft Licensing: Get Smart!

Surely there is some hidden meaning to Forrester Research releasing a new Microsoft licensing report the same day the movie "Get Smart" opens.

"Successfully Negotiating Microsoft Licensing Agreements" doesn't mention the movie, but it should. Because many Microsoft customers are either Maxwell Smart or Agent 99. The bungling Smart might get a good deal by accident, but it's Agent 99 who is all business and the shrewder operator.

Timing is important for another reason. It's the time of year when the most licensing agreements are up for renewal, through July 31, particularly.

Report authors Duncan Jones and Christopher Voce are clear that negotiating licensing with Microsoft can be arduous, in part because of the "unique terminology, complex pricing structure and rapidly changing product portfolio" that "can confuse unprepared negotiators." They emphasize that "preparation is key to success."

I won't review all, or even most of, the report's contents. Forrester charges clients for reports. It's not my place to give away all the contents for free. From Forrester's report and my own research, I want to provide four things enterprises must be aware of when negotiating Microsoft licensing renewals.

Microsoft negotiates aggressively, and not necessarily fairly. Fair is a subjective term. What seems fair to you might not seem fair to Microsoft. To Microsoft, fair starts with getting paid for every single license, and the company is quick to use noncompliance as a negotiating tactic.

Enterprises must make sure that every single license is accounted for before sitting down with Microsoft reps to negotiate new contracts. The report authors warn: "Companies that own up to noncompliance will see some flexibility, while those that try to hide it from Microsoft can lose some significant potential discounts or concessions."

True, maybe, but the better position is assured full compliance and ability to negotiate from strength. Because of an enterprise's potential legal liability, Microsoft can use noncompliance, even admitted, to gain concessions. Get smart. Be compliant.

Last-minute negotiations can weaken bargaining. Some businesses are disorganized or simply waiting, hoping to pressure Microsoft into cutting a better deal. But time is two-edged. The report authors explain: "Some reps may even try to use your deadlines against you, forcing you to sign suboptimal deals because you can't afford to let [Software Assurance] lapse or delay a major project."

Get smart. Plan ahead, but don't be hostile. The report authors warn: "Buyers should not let the negotiation become overly adversarial by assuming that Microsoft is out to mislead or bamboozle them with artificial complexity." Let Microsoft make the mistakes, not you.

Microsoft wants you to buy as much as it needs. Most enterprises upgrade, at best, on three-to-five year cycles. But long upgrade cycles aren't good for Microsoft's bottom line. The company wants recurring revenue from annuity contracts—and that means Software Assurance added onto Open or Select agreements or paying for Enterprise Agreement.

Bottom line: Software Assurance requires an extra-cost commitment, annually, 29 percent of the desktop software cost and 25 percent for server products, typically for three years. The break-even point is three-and-a-half years. After that, it's cheaper paying full price. Microsoft provides incentives, like support and training, to attract annuity contract sales, which won't suit enterprises only interested in discounted software.

That said, Microsoft has aligned product cycles with annuity contracts. Some enterprises may want a product's interim version, or what Microsoft calls "R2." Software Assurance customers get the software for free. Everybody else pays.

Get smart. Only buy as much software upgrade protection as needed.

Microsoft wants to help you buy more of its stuff. Both sides benefit when the enterprise thinks in terms of the big picture. From the Forrester report:

Successful Microsoft contract negotiations go beyond the line item costs and consider the additional consulting and support services available. For example, if a sourcing team's organization is embarking on a Vista migration, Microsoft might be willing to throw in discounted planning services and training—items that could have a material impact on the overall IT budget.

Get smart. Identify products you need that Microsoft really wants to sell. Vista's not doing well, so it's a good starting point for deals that ease deployment costs or acquisition of supporting software. Enterprises can expect Microsoft dealmaking for SharePoint Server 2007, Windows Server 2008 and Hyper-V. Any company even considering virtualization deployments should negotiate hard for planning, deployment and training services.