How Microsoft Thrived as '90s Rivals Flailed

Jon Markman

Microsoft, Intel, Cisco and Dell were the four horsemen of the 1990s tech bubble. Yet, twenty years later, Q2 earnings reports show that only Microsoft is still ahead of the game and fully disruptive both for customers and investors.

It didn’t have to be this way. Back then, getting on the “information super highway” – as the Internet was then described -- was the only story. The horsemen were the best way to catch a ride. But they got fat and complacent.

They stopped innovating, and started standing in the way.

Microsoft ((MSFT) -Get Report) was not an exception at first. The Redmond, Wash.-based software company was a legacy-focused business as recent as 2013. Managers were desperately trying to cram Windows onto everything, including its Xbox game consoles and smartphones.

The big course correction occurred when the company bought the Finnish smartphone maker Nokia in desperate response to the euphoria over the iPhone introduced by Apple.

With astonishing speed, the Nokia deal was deemed a spectacular $8 billion failure for Microsoft, and its management was purged by the board.

Microsoft re-emerged a year later as a services company. Satya Nadella, the new chief executive officer, focused squarely on selling Microsoft services as multi-platform, digital products. Azure, its cloud computing division, became the connective tissue.

By March 2018, Windows wasn’t even a division at Microsoft. Its software engineers were split up between Azure and Office 365, the cloud-based version of its popular productivity suite.


It was a brilliant, super-gutsy move. The company thrived. Sales ballooned from $86.8 billion in 2014, to $110.4 billion by the end of 2018.

Microsoft succeeded because managers dared to disrupt their legacy Windows business.

Corporate strategy at the other horsemen has been more timid. Intel, Cisco and Dell remain shackled to large, but dull legacy businesses. Managers are not pushing innovation. They’re spending most of their time trying to head off competition from more agile competitors. 

For example, Intel ((INTC) -Get Report) once commanded 94% of the lucrative market for PC microprocessors. But Advanced Micro Devices ((AMD) -Get Report) has slowly been eating into that lead with faster, cheaper processors. In the second quarter of 2020 Intel’s share had dwindled to 64.9% of the market to AMD’s 35.1%.

Intel managers also completely missed the smartphone revolution, ceding leadership to Qualcomm ((QCOM) -Get Report), and ARM Holdings, a British chip designer. Intel’s competing product was cancelled in 2019, but not before the company racked up $10 billion in losses, according to a report at Bloomberg.

The tale is not any better at Cisco ((CSCO) -Get Report). The company cut its teeth building the routers, switches and other gear to put together reliable networks. Unfortunately, while company managers were focusing on network traffic, they missed cloud computing, the single biggest computing innovation in a generation. Doh!

Missing the cloud meant Cisco managers were woefully unprepared for the demands of the big cloud companies like Amazon Web Services and Azure. Cisco’s hardware-centric networks were not scalable, flexible or fast enough. More important, they were not cost efficient. So Arista Networks ((ANET) -Get Report), a company that pioneered the use of software defined networks, became a major player in the high performance computer networking ecosystem.

Another software company, Zscaler ((ZS) -Get Report) began picking away market share from Cisco’s cybersecurity business.

Dell ((DELL) -Get Report) is really a story of two distinct businesses. There is the fast growing startup that began in Michael Dell’s University of Texas dorm room and went on to become the best stock of the 1990s, rising 55,000%. Then there is the current iteration that returned to public markets in 2016, indebted and bloated.

Dell Technologies still has $48 billion in debt, thanks to binging on EMC Corp, a legacy data storage business. Today the company is a mishmash of virtualization, cybersecurity and networking companies.

So far, investor reaction has been meh. The stock is up 34% since its December 2018 debut. That’s not exactly a ringing endorsement as a disruptive growth company.

Put Cisco and Intel in the same camp. Stock performance has been middling. Since 1994 Cisco and Intel shares are up 3,325% and 1,904%, respectively, while Microsoft is up more than 3x that amount at +12,409%. The S&P 500 is +594% in the same stretch.

The story of the four horseman is about ultimately about aging. As young companies they were firebrands. The businesses were disruptive, willing to shake things up a bit. However, as the money started to roll in, managers became soft in the middle. They stopped innovating to win business, and started putting up roadblocks to keep customers locked-in.

Well, all of them except Microsoft.

When the company reported second quarter numbers July 8, we learned that revenues rose to $38 billon, an increase of 13%. Nadella was typically upbeat. He talked about how the Microsoft stack was powered by the technologies of tomorrow, cloud and artificial intelligence. He talked about winning new business.

Growth companies don’t rest on laurels. They continually disrupt stale business models to stay ahead of competitors. Microsoft disrupted Windows, a business that controlled most of the world’s computers, killing its old self but emerging from the fire like a phoenix. It’s now in the right place to dominate software services of the next generation as well, and a buy on pullbacks.