Microsoft After Ray Ozzie May Be a Little Less Magical

A few months ago, Steve Ballmer and Ray Ozzie (pictured) shared the following exchange on stage at the D8 All Things Digital Conference. It captured perfectly the dichotomy between Ballmer, the crusty and strategy-obsessed CEO of Microsoft (MSFT), and Ozzie, the far-eyed visionary who served as the company's Chief Software Architect.

Ballmer: I don't really understand why Google has to have two different mobile operating systems. Chrome? It's like "two, two, two operating systems" -- but they're not in one!

Ozzie: On the Android-versus-Chrome issue, Android is a bet on the past; Chrome is a bet on the future. When you install an app, you're targeting a device. When you use Chrome, you're looking at a cloud-based future.

Ballmer: So why do two? Why not focus on one? Having two OS's is confusing. You need coherence.

Just those few sentences reveal the philosophic gulf between the executives. They also show in a nutshell why Microsoft will be a lot worse off without Ozzie, who announced Tuesday he's leaving Microsoft.

Helping Microsoft Behave Like a Startup

Ballmer's way of knocking Google for having two mobile operating systems was to compare Google to a Certs commercial popular in the 1960s. In Ballmer's mind, an operating system is a breath mint and strategy is a half-a-century-old TV commercial. To Ozzie, a mobile OS is a thing in flux, a constant work in progress, and an uncertain bet that it's sensible to hedge. And on the mobile Web, coherence is a luxury that not even Microsoft can afford.

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Ozzie thinks like a startup entrepreneur, spotting nascent but potentially huge market opportunities like cloud computing and setting up initiatives inside Microsoft to capitalize on them. Ozzie was instrumental in creating Microsoft's Azure, a cloud-computing service that runs enterprise software for clients in Microsoft data centers. In this role, Ozzie helped steer Microsoft from the anachronistic world of proprietary business software into the era of software as a service -- no small accomplishment.

Ozzie has long been highly respected in the community of software developers for his role in developing Lotus Notes, a pioneer in collaborative software. After IBM (IBM) bought Lotus, Ozzie left to found Groove Networks, a new collaborative-software venture that Microsoft bought in 2005. Although Microsoft had other tech visionaries in its ranks, it was the newly arrived Ozzie who was seen as the successor to Bill Gates as the big thinker about Microsoft's technology.

Shortly after coming to Microsoft, Ozzie wrote a 5,000-word memo arguing that the software industry was undergoing a tumultuous transition toward ad-supported, Internet-based services, that Microsoft must focus all its fragmented teams on a seamless experience for customers, and that the company's engineers must "internalize the transformative and disruptive potential of services" or risk falling behind.

A Head in the Clouds

While Ozzie overestimated the importance of ads supporting online services, his other arguments have proved true. In the past few years, Microsoft has seen a revival of innovation that, while hardly revolutionary to the industry at large, was remarkable for a technology company of Microsoft's size and age. It made gains in Xbox Live, its online gaming service. It recovered from the disaster of the Vista operating system to deliver a much-improved Windows 7. And it's close to replacing the archaic Windows Mobile OS with a new offering, Windows Phone 7, that could be a strong competitor to Google's (GOOG) Android and Apple's (AAPL) iOS.

But Ozzie's strongest contributions were felt in Microsoft's cloud technology, which strengthened its enterprise business. Microsoft's Server and Tools division, which includes much of its enterprise software, brought in revenue of $14.9 billion in fiscal 2010, which ended June 30. That figure marked a 54% increase over four years. Operating profit at the division rose 74% to $5 billion over the same period.

Enterprise software became a larger part of Microsoft's overall business under Ozzie's guidance. Revenue from the Server and Tools division made up 23.8% of total revenue in fiscal 2010, up from 21.8% in fiscal 2006. Operating income from the division grew to 20.7% of that category's total, up from 17.4% four years earlier.

That growth was strong enough that analysts lamented the loss of Ozzie in notes to clients. Sarah Friar of Goldman Sachs said, "Ozzie's departure causes us some concern given his vision and leadership here." And an analyst at William Blair wrote, "We view Mr. Ozzie's departure as a significant loss."

No Easy Man to Replace

In the press, though, news of Ozzie's departure from Microsoft was greeted by mixed reviews. Some at Microsoft feel he never really filled Bill Gates's oversized shoes and didn't inspire Microsoft's developers enough. Others feel that Microsoft's culture was so inimical to his entrepreneurial approach that he could never be an ideal fit.

Ozzie, after all, was given a thankless task: Graft the innovative spirit of a startup onto Microsoft's aging corporate culture while keeping tens of thousands of employees focused on providing a simple, seamless customer experience. It's hard enough to do this at a startup; it's nearly impossible to pull it off at a corporate giant.

Still, it's unclear if anyone will be able to accomplish that thankless task better -- or even as well as Ozzie did. Others may fill his role, but finding a successor will be harder given the recent departures of Stephen Elop, the former head of Microsoft's business group who is Nokia's (NOK) new CEO, and Robbie Bach, who retired from his post as head of entertainment and devices. Ballmer reportedly has no plans to replace Ozzie.

That would be too bad for Microsoft. Ballmer, for all his quirks and bluster, is good at running the entire massive corporate machine smoothly, delivering new products and keeping investors happy with dividends and growing profits. But he needs a brainy foil, someone with big ideas and an instinct for how the future will play out.

Someone who knows a mobile OS is not a breath mint.