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Dear Steve: Great Run! Now It's Time To Go.

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Dear Steve Ballmer,

Let me start by giving credit where credit is due. I have to say that, in my opinion, you are one of the most successful executives in the world, and a brilliant human being. Rumor has it that you scored a perfect 800 on the mathematics section of the SAT.

I certainly don’t have enough space here to list all of your achievements, but I’ve selected a few that I felt were worth mentioning in this article:

You came to Microsoft (MSFT) as the 30th employee and you are now the CEO (and one of the richest men on the planet)!

Under your tenure as CEO, Microsoft went from $25 billion in revenue to $70 billion, while net income has increased 215% to $23 billion.

You led and built an incredible businesses at Microsoft such as the .NET framework, the data centers division ($6.6 billion in profit for 2011) and the Xbox entertainment and devices division ($8.9 billion). Not bad at all.

But if there is anything I have learned throughout my life, it is that brilliant people can also be wrong, sometimes very wrong.

Your career has been outstanding. Based on the results that I listed above, you have been one of the best CEOs of all time. With a 16.4% annual profit growth at Microsoft, you have crushed the record of Jack Welch, with 11.2% at General Electric (GE). But Mr. Ballmer, since you became CEO, times have changed and there are other geniuses behind you waiting for an opportunity.

As Steve Jobs once said, “Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new.” This is evolution and regardless of your amazing leadership there are things that others know and understand better than you. That's not because they are more intelligent, but simply because they have had different experiences and learning opportunities.

There are some brain connections and associations that new generations have that we old timers don’t. That’s the nature of evolution--by experiencing new ways of doing things you can come up with new ideas, not before. Creativity is born from experiences and social interaction, never talent or intelligence alone. That’s why it is important to open the door for newcomers. New generations just “Think Different” if you know what I mean.

I believe Microsoft ran out of gas years ago and, unfortunately, Mr. Ballmer you are not helping. Ever since the Microsoft Vista release, things have not been the same. I personally remember paying $300 for the professional version of Vista Ultimate, that was the ultimate waste of money. Vista never worked, it was glitchy even with the same Office products from Microsoft.

I felt robbed. I felt Microsoft stole that money and gave me a defective product in return. I still have the software in the original package, barely used because the truth is it was a useless piece of spaghetti code. Not even the support team you hired in India were able to fix the Vista issue in my computer. I was frustrated and for the first time in my life, I was really disappointed in Microsoft.

I’m not going to call you “the biggest overhang on Microsoft's stock” as David Einhorn did because I have profound respect and admiration for everything you have done at Microsoft. I’m not going to call you, “the worst CEO of a large publicly traded American company”, as Adam Hartung did, because I don’t believe that is true either. I’m simply asking you to create opportunities for those that come behind you and want to take Microsoft to the next level.

You will be remembered both as one of the best CEOs in modern history and also as the leader of one of the most disastrous acquisitions in technology ever--aQuantive--that you acquired for $6.3 billion only to write it off few years later. It is a real lesson in mass capital destruction.

The first thing you did when you bought the company was to change the name and focus on search advertising instead of capitalizing on aQuantive’s display advertising strengths. The rest is history, top talent filtered out, business was lost, and millions of dollars were literally thrown down the drain.

But Mr. Ballmer this was not your fault. You just didn’t understand search engine marketing and display advertising as well as the people you were leading. Your error was not letting them shine. Just look at what Google (GOOG) did with DoubleClick. They kept the name, they kept the talent, they kept the ideas, and the marriage flourished. That is one of the most successful technology acquisitions in the same market and category as aQuantive--with completely opposite results.

Steven Sinofsky abruptly left Microsoft after the Windows 8 release. He was in my opinion the most valuable player you had at Microsoft. He turned around the disaster of Vista with the Windows 7 release, and played a key role in overseeing the development of Microsoft Office, making it the indisputable leader in the industry. He had a lot to give to Microsoft, but he was another star you didn’t let shine.

According to Glassdoor, Microsoft is no longer a part of the top 50 companies to work for. Google (GOOG), Apple (APPL) and Intel (INTC) are there.  Have you ever asked yourself why? Without top talent, you will never be able to be the same again. In the early days of the company, Microsoft used to be first on all the lists.

Unfortunately, people have felt the pain first hand and bad Microsoft products have created a negative market sentiment, tarnishing the admiration and talent of the past.

I believe that Google is leading the way in attracting young entrepreneurs, not only by integrating them into their app ecosystem, but also by providing financial support and facilitating technology for innovative startups. In my opinion, Google Ventures is a great example of this, with $300 million per year in investments, it is supporting new ideas from incredibly talented and intelligent people around the world.

So far Google has funded over 150 companies. These are people working together to change the world through technology and innovation. In the meantime what have been you doing Mr. Ballmer? Oh yes, you launched BingFund, although the funding amount has not been disclosed by the number of companies you have funded (two so far).

I assume it is not precisely the largest in Silicon Valley. According to VentureBeat, you are investing $50,000-$100,000 in early-stage startups, through standard convertible notes (loans that convert to equity at Microsoft’s option) and offering discounted access to Microsoft’s Azure Data Marketplace APIs. Seriously? Is this a BeatFund instead of a BingFund? It is like you are looking for employees, not entrepreneurs.

Mr. Ballmer, I remember the day I got my first PDA (Personal Digital Assistant). It was a beautiful thing, a Palm with a black and green screen, plastic cover, and a useful stylus. It was the first smart device I ever had and I was so happy. My Palm even had apps, I even remember the Vindigo app, perhaps the first world class app of all time. It used to have a list of nearby restaurants and attractions, exploiting the full potential of new location data capabilities.

Now looking back this app, it feels like a technology from the 80s, but I’m only talking about my Palm in 2004, just few years ago. That innovative brand which had such great potential no longer exists because its software began to feel clunky and no major updates were released. People moved away and sought alternatives. I was waiting for you to give me something that I could integrate with my office products and laptop, but needless to say that never arrived.

I gave up on waiting for you, not because you didn’t give me what I needed, but because others did. I dumped my clunky inefficient Palm (the device I once loved so much), and got something different and revolutionary called the iPhone.

Why did you release the Windows Mobile OS for smart phones 4 years before the launch of the iPhone (April 2002) and were then incapable of building a decent ecosystem and a reliable software that was well integrated with PC and Office products?

Didn’t you believe new thinkers could have taken your mobile division to the next level? I did, but guess what? You never gave them a shot. If Microsoft were a country, I’m pretty sure it wouldn’t be a democracy. I don’t even think it is necessary to mention the disaster of the alliance with Nokia and the depressing sales of Windows powered smart phones. Currently Windows powered smart phones account for just 2.5% of the market share nothing to feel very proud about.

Now speaking about browsers, how can I forget Netscape navigator? The technology that opened the Internet door forever. The first time I used it was like magic, I was able to browse and get information from remote locations around the world in seconds like nothing I have ever seen before.

Unfortunately, as the Palm OS did, the software didn’t improve fast enough, and became slow and clunky. At the same time, you introduced Internet Explorer with much better features and distribution channels. By 2002, you virtually killed what was once the dominant web browser in terms of usage share.

I loved Netscape Navigator but I can’t blame you for its collapse. It is true that your business practices were not the most ethical, and bundling Internet Explorer with Windows was an evil decision. However, Netscape also has to be blamed for stopping technological innovation. This was not the first time you took advantage of your market position to kill a leading product: you practically eradicated WordPerfect and Qpro.

The bundling strategy you used with Internet Explorer and Windows also worked with Microsoft Office. By 1996 Microsoft had 95% of the market for business applications. Ethical or unethical, you got what you wanted: stakeholders celebrated your determination and tactics and the stock price soared.

Those glory days are history. Now, the “slow and clunky” browser is no longer one of your competitors, it is Internet Explorer. You became a follower, not the leader. Other browsers created tabs, synced bookmarks between different devices, and developed interesting ecosystems of browser apps.

Internet Explorer has done very little in those areas and people have taken notice. In 2002 and 2003, Internet Explorer dominated the market with 95% share. Now you barely have 50% of the market. Some studies have shown that the real market share may even be smaller. While Microsoft stopped developing Internet Explorer for Mac (Release 5.2), Google and Apple were releasing their browsers for Windows and Macs.

I don’t think I can call this a smart decision. Why would you want to prevent Mac users from using your browser? Now Internet Explorer just feels obsolete. It is a piece of software that doesn’t allow you to do that much.

Honestly Mr. Ballmer, I believe you never gave Internet Explorer the importance that you should have. Not because you didn’t want to, but simply because you didn’t see opportunities there. There is a fine line between operating systems and browsers and the day they merge you will be in an uncomfortable position.

What happened to Internet Explorer is a reflection of what is happening more broadly at Microsoft. You are making poor bets and you are missing opportunities because the creative people at Microsoft don’t seem to have a vote.

Bing is an absolute disaster, losing $1 billion a quarter, with no sign of letting up. Microsoft has lost $5.5 billion on Bing since the search service launched in June 2009. In fact, Microsoft has never made money from its online services division. Since Microsoft began breaking out that unit's finances in 2007, the company has lost a total of $9 billion.

Regardless of your efforts, Microsoft hasn’t been able to move the needle. The advantages and superiority of Google in this field are so absolute that I doubt Microsoft will ever catch up.

You need players that can change the game, forget about putting pretty pictures on the home page to make people click on them so that you can inflate the search activity numbers, you need to create a new playground, develop your own game and come up with a new strategy.

All this requires serious new ideas from serious young smart people, and I believe you have the power to make that happen.

Regardless of all these challenges, I believe you and Microsoft can turn things around. You still have a couple of products that are exciting and extremely well positioned to put Microsoft back on track. The first one is Microsoft Office, which still commands 95% of market share in the productivity software market. Office is your biggest revenue driver, generating approximately $23 billion in revenue in 2011.

The division has the highest margins for Microsoft at around 60%. That alone justifies an investment in Microsoft at the current price level. I have tried to walk away from Office many times, but I haven’t been able to do so.

I have tried NeoOffice, OpenOffice and Google Docs, and none of them offer the integration and capabilities that make Microsoft Office best in class. I believe the new cloud model of Office 365 and Windows Intune will generate millions especially because of the dependency on Microsoft products.

I believe this will offer Microsoft a steady stream of income where updates will be no longer discretionary. Once companies adopt Microsoft technology to manage their infrastructure, it will be very difficult to move away. The cloud model will also allow you to prevent piracy, and that alone may double Microsoft sales in a few years. According to The Software Alliance / Global Software Piracy, well over half of the world’s computer users (57%) admit they pirate software.

While the global software piracy rate hovered at 42% in 2011, the steadily expanding marketplace in the developing world drove the commercial value of software theft to $63.4 billion. In North America the software Piracy Rate is only 19%, while in other parts of the world such as Indonesia it is a whopping 85%.

In a recent investigation, Microsoft purchased 169 PCs from shops in China and found that all were installed with pirated versions of Windows. According to the Business Software Alliance (January 2008), lowering the piracy rate by just 10% would create an estimated 600,000 new jobs worldwide and contribute $24 billion in additional tax revenues to local and national governments.

The biggest beneficiary of piracy eradication would be Microsoft. Regardless of public awareness, modern intellectual property laws, strong enforcement and governments leading by example, piracy is still on the rise. Cloud computing could finally change that. If every user has to authenticate through the web to use an application, there is no way they can get around purchasing a license. In the next decade, we will see a big shift in how computers are being used.

The second major revenue gem for Microsoft is the Xbox. Since the launch of Xbox in 2005, 67 million consoles have been sold generating $56 billion at retail. The Xbox has 47 percent share of the current-generation console market in the U.S. hitting this mark largely as a result of the success of Kinect for Xbox 360 and a flood of new entertainment options through Xbox LIVE (40 million members worldwide). Although Xbox makes up very little of Microsoft’s revenues and profits, I believe it is one of the products with a bright future.

So Mr. Ballmer I bought recently shares of Microsoft because I believe you still have a chance to empower your people and make a change. This may require a drastic reduction of your voice and vote within the company. But if you think about it, this is what Microsoft needs right now. I believe you are one of the most intelligent and successful executives in the world, but remember that there are thousands of people who also scored a perfect 800 on the math section of the SAT that are waiting for a chance.

I believe, now is the time to hire a visionary and let him/her shine, now is time for Microsoft to stop letting opportunities fly by, now is time to renew the old and embrace new ideas and innovation. Now is time for you to let that happen.

And finally Mr. Ballmer, thanks for abandoning the “Scroogled” campaign. It was painful to watch those ads, you should invest those millions in finance young entrepreneurs instead.

The investments discussed are held in client accounts as of March 1, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Libardo Lambrano

Libardo Lambrano

I am a value investor, an investment philosophy that boils down to investing in undervalued, under-researched and unpopular companies. Reasons

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