How to crush your enemies, and make new ones

R&D spend isn’t a good way to judge whether a company will thrive. Innovation is hard to pin down. It comes out of a company’s culture and its incentives.

On Tuesday I wrote about Microsoft and the problem with R&D spending.

Microsoft peaked around 2000 when Steve Ballmer took over as CEO. During Ballmer’s 14 year tenure Microsoft still made scads of money, but it lost its spot as technology top dog to Google, Apple, Amazon and Facebook.

Ballmer’s response was to plough billions into R&D in the hope of out searching Google (Bing), outplaying the iPod (Zune), out phoning the iPhone (The Windows/Nokia phone). It didn’t work. And to make matters worse, it blew its early lead in the cloud services business to Amazon Web Services. Now AWS is worth tens of billions.

My point wasn’t so much to pile onto Steve Ballmer – he’s a soft target – but to say that raw R&D spend isn’t a good way to judge whether a company is likely to come up with great products.

Innovation is hard to pin down. It comes out of a company’s culture and its incentives. For example a young startup company will have been created for the very purpose of solving a particular problem. It’ll hire talent on that basis. It’ll design its incentives on that basis. It’ll be focused on the job at hand. That’s why startups with small teams and small resources are sometimes able to beat big companies.

Big companies were startups once upon a time. And they’re usually set up to solve the problem they were created to solve. When times change, and new problems come along, they struggle to refocus. The whole culture of the company, the talent, the priorities, and the incentives are focused on the old problem rather than the new one.

Sure, big companies can afford to spend big on R&D. But a big R&D budget is a poor substitute for a focused group of people who’ve come together specifically to solve a problem.

I’m making it sound inevitable that Microsoft was going to lose to Apple, Amazon, Facebook and Google. But to be fair, Ballmer had reason to believe he could win. Because in the mid 1990s, Microsoft successfully used all the money and dirty tricks in its power to crush a threatening rival startup.

The company was called Netscape – Microsoft’s antagonist in what came to be known as “The Browser Wars”.

Web to the masses

The story starts back in the early 1990s. One summer a young student called Marc Andreessen interned at the National Institute for Supercomputing Applications, where he came across a fantastical new technology called the World Wide Web.

The web was for the pros only back then. But young Andreessen saw the potential in it, and he got to work on software which would let ordinary people get online. The first browser. He developed it in the computer labs of his university along with another fellow called Eric Bina. He called it Mosaic.

Soon enough he was out of University and set up in Silicon Valley, where he started a new company based on his idea. The new browser was called Netscape. And it was a hit.

Andreessen reckoned the desktop PC’s days were numbered. The Internet was going to replace desktop software, he said, and Netscape was going to be everyone’s window on the Internet. The operating system would just happen in the background.

Microsoft, ie the operating system company, barely even noticed anything was happening. There’s a story of Ballmer coming back from a sales conference in 1993 and saying of the Internet “I don’t know what it is. I don’t want to know what it is. But my customers are screaming about it. Make the pain go away.”

By 1995, Netscape controlled 90% of the browser market, and Microsoft was starting to panic. In 1995 Bill Gates issued a call to arms, in a memo demanding all-out war on Andreessen and Netscape. That’s where things got nasty…

I’ll get back to the story tomorrow – in the mean time, keep the emails coming: [email protected]. Occasionally I get backlogged. But I promise to respond to every one!

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