Steve Ballmer Makes For A Convenient Distraction From Microsoft's Real Problem

Last week, Microsoft CEO Steve Ballmer announced he was retiring.

Microsoft's MSFT stock, which has been dead money for 14 years, jumped 7.3 percent on the news as if Microsoft's problems are largely due to incompetence at the top, and now that a new leader will be brought in, the future will once again shine brightly.

Steve Ballmer has his supporters and opponents inside and outside the company.

His supporters argue he took over at the height of the dot com bubble, and given the ubiquity of PCs worldwide, realistically it would have been impossible for the company to maintain its trajectory.

Opponents will argue that during this same time span, Apple AAPL went from $10 to its current level at $500 by creating the iPod, iTunes, the iPhone and the iPad - all of which didn't exist 10 years ago. Google GOOG went from a start-up to its current market cap of almost $300 billion by dominating Internet search and getting into mobile with Android. Amazon.com AMZN was on life support after the bubble burst, but it has bounced back and has gone beyond core retail operations to become a dominant force in tablets. The list goes on. Facebook FB and LinkedIn LNKD didn’t exist 10 years ago. Neither did Salesforce.com CRM or NetSuite N - both businesses that are doing great in an area Microsoft could be doing business, but doesn't.

Yhe argument over Ballmer's performance on whether Microsoft was doomed to a decade of mediocrity only works to distract investors from the company's biggest problem right now in 2013: its reputation.

For over 20 years, Microsoft was the elephant in the room. It did whatever they wanted and wrote off lawsuits as the simple cost of doing business. It made products that were allegedly just good enough and that didn't have to compete on the open market because the company did everything in their power to squash any would-be competition with its brute force rather than with superior tools.

This worked - Microsoft was at one time the most valuable company in America. But along the way, it burned a lot of bridges and created a lot of enemies. It didn't matter 10 years ago, but now it matters a lot. The company has spent the last 20+ years developing a reputation for offering subpar products that consumers had little choice to buy. But now it's coming back to haunt them because consumers have a choice.

Microsoft vs. General Motors

In the late 1990s, banter between then CEO Bill Gates and the CEO of General Motors was passed around the world. Gates said if cars progressed in the same fashion as computers, we'd all be driving cars that cost $25 and got 1000 miles to the gallon.

GM supposedly responded by saying, among other things, that if GM had developed cars like Microsoft, for no reason at all, your car would crash twice a day. And every time they repainted the lines on the road, you would have to buy a new car. And occasionally, executing a maneuver such as a left-turn would cause your car to shut down and refuse to restart, and you would have to re-install the engine.

The list, which has circulated around the Internet millions of times for 10+ years, went on to poke more fun at Microsoft. But here's the catch. It never happened, and this gets to the point.

In order for a list like this to be passed around the world, it has to be believable. And that's Microsoft's problem; he entire list is a joke. It never happened. The CEO of GM never responded to Bill Gate's initial computer vs. car industry comparison. But because it's entirely possible he could have responded like this and because Microsoft's reputation is bad enough that the company could be the punch line for all these jokes, it happened.

Apple could never be the punch line of a completely fabricated response - its products are too good to some.

Google could never be the punch line to such a joke - its reputation is too high.

To pull a prank like this, the story has to be believable, and because Microsoft's products have always been sub-par, they get the honor of being the punch line.

The rest of us can laugh, but if you were on Microsoft's team when the list first started to circulate, you should have been scared. You were winning because you were the elephant in the room, because you could literally out muscle everyone. But in tech, where today's hot product won't exist in five years, it should have been worrisome that your reputation was so undesirable. It should have bothered you that it was even possible to attach your name to a list of such nonsense.

Now Microsoft is no longer the elephant in the room. The company cannot just push everyone around and get its way. They have to actually compete on a somewhat even playing field. Amazon is big. Google, Apple and Samsung are huge. They all make products that are at least as good as Microsoft, and more importantly, they all have much better reputations.

An Exercise

Let's go back a few years. You're driving down the road. There's a Linen's-n-Things on one side of the street, a Bed Bath & Beyond on the other. They sell the exact same stuff, but one of those companies doesn't exist today; the other is doing great.

You continue down the road. There's a Circuit City on one side, a Best Buy on the other. Again, they sell the same stuff, but one went bankrupt several years ago; the other is doing just fine.

Fast forward to today. You're driving down the road. You're looking for a smartphone or tablet computer. You see Amazon, Google, Apple and Microsoft. If history is any guide, even though the products offered are converging and will soon be virtually indistinguishable from each other, we're told not every one will survive. Right now, based on its poor reputation, most money is on Microsoft not finding a chair to sit on when the music stops.

This is not a prediction that these companies will go belly up; but more speculation that they may become a fraction of their current size, and it may not matter who the new CEO is - unless Bill Gates himself steps in. Gates may be the only person who is both competent and has the celebrity status to right the ship. Otherwise, the Ballmer debate is a distraction from Microsoft's real problem - that they have a terrible reputation for producing quality products.