Microsoft after Gates

After Bill

Jun 26th 2008
From The Economist print edition

Microsoft knows what it wants to do when Bill Gates leaves—but the road ahead will not be easy

New York Times/Redux/Eyevine

“DOES Microsoft still have a big, hairy audacious goal?” Not everybody would presume to ask Bill Gates a question like that. But Mr Gates was this week due to remove himself from the firm’s day-to-day business, to become its non-executive chairman, and Tim O’Reilly, a noted internet guru, felt emboldened to commit lèse majesté. Putting “a computer on every desk and in every home” had been the original mission of Microsoft, which Mr Gates founded more than 30 years ago. But now the job is pretty much done, at least in the West, and Microsoft is the world’s largest software company. What is its mission now, Mr O’Reilly recently asked at a technological shindig, called “All Things Digital”—other than just to sell as much software as it can?

Mr Gates (pictured with Craig Mundie, Microsoft’s chief research and strategy officer, left, and Ray Ozzie, chief software architect, right) is leaving Microsoft for the charitable foundation he set up with his wife, Melinda, even as his firm is in some disorder. Windows, Microsoft’s all-conquering operating system, has become so complex, some say, that it is collapsing under its own weight. Its latest version, Vista, is not a complete flop, but it is a huge disappointment. Many users prefer the previous one, XP, and Microsoft is already hyping the next, Windows 7. Microsoft is also struggling to keep up with Google, its main rival. It recently announced a product that pays consumers money if they buy something through an advertisement next to its search results—a gambit that smacks of desperation. And the firm’s aborted bid for Yahoo!, an online giant, has done nothing to reassure investors. As a result, Microsoft’s shares continue to do worse than the industry average. Some observers have started to wonder whether Microsoft should not break itself up—for instance into a legacy business, containing Windows and Office, a service unit, and games, where the company has recently been most innovative.

Mr Gates’s reply to Mr O’Reilly was not entirely reassuring. The firm, he said, now has dozens of “quests”—revolutionising television, automating data centres and creating software ten times faster. Perhaps this fragmentation of Microsoft’s ambition is only natural. In its 33 hectic years the company has swollen to nearly 90,000 employees (see charts); revenues this year should exceed $60 billion and net income reach almost $18 billion. Even Microsoft’s own senior executives struggle to grasp its growing empire. The firm now sells 75 different products, many of them in lots of versions.

In fact Mr Gates could easily have given a more pointed answer. Of all that Microsoft hopes to achieve in the post-Gates era, one goal dominates all others—even catching Google. That is to become the dominant force in the forthcoming era of cloud computing—or, to refresh Microsoft’s original mission: “to supply services to every desk, to every home and to every hand”. That ought to be big and hairy enough to satisfy even Mr O’Reilly.

To understand what that means, and the difficulties it poses Microsoft, start with the idea that computing is undergoing one of its great periodic shifts. In its early days, most computing took place on mainframes. Ever-falling costs led computing to shatter—first into minicomputers, then into personal computers (PCs) and, more recently, hand-held devices. Now communications is catching up with hardware and software and, thanks to cheap broadband and wireless access, the industry is witnessing a pull back to the middle. This is leading much computing to migrate back into huge data centres. Networks of these computing plants form “computing clouds”—vast, amorphous, delocalised nebulae of processing power and storage.

Service with a simile

Marc Benioff, a cloud-computing pioneer and the boss of Salesforce.com, which helps firms manage their customers on the web thinks this will spell the “death of software”. Rather than being a big chunk of code sitting on a hard disk on your desk, software will come “as a service” over the internet through a browser. This idea is also espoused by Google. Although the online giant is best known as the world’s biggest online search and advertising firm, it now also offers many other services—plenty of which compete with Microsoft’s PC programs.

Not so fast, says Mr Ozzie. He has been Microsoft’s chief software architect since 2006 and will steer its technology after Mr Gates goes, while Mr Mundie will take over as the company’s long-term thinker and public face. “Whenever these things happen, people think that it is going to be a complete extreme shift,” Mr Ozzie says. “But in reality customers are very pragmatic and figure out the right mix of old and new stuff.” This mix, he argues, will depend on where people are, which device they use and what they want to do. Instead of the death of software, Mr Ozzie speaks of “software plus services”—the title of Microsoft’s new strategy.

He thinks of cloud computing differently. Fewer people will put the PC at the centre of their computing universe; it will be one of many devices connected through the web, which Mr Ozzie calls the “hub”. But what sounds like bad news for a firm making PC software is in fact a huge opportunity, he says—because this new set-up sits well with Microsoft’s DNA. The heart of its business has always contained a simple, powerful idea: find a market that is global in scale—one that is split between lots of vendors and so dysfunctional; then integrate the various parts into a “platform” and develop its chief applications; and finally, build an “ecosystem” of developers writing programs for it.

This has been Microsoft’s approach to its largest products—with Windows as the most successful. Versions of this operating system run on over 90% of the 1 billion PCs in use, because Microsoft has excelled at building an ecosystem around its platform, in particular by giving developers the tools for their job. This supercharged what economists call “network effects”: the more applications run on Windows, the more attractive it becomes for users; that, in turn, attracts more developers, and so it goes on. Although Mr Ozzie hesitates to put it in such terms, his goal is to create a kind of Windows in the cloud. “If you were to build an operating system today,” he explains, “it would not be a single piece of software that operates a single computer.”

He is first tackling device integration. In a recent internal memo, which Microsoft made public, Mr Ozzie talks of “a personal mesh of devices—a means by which all of your devices are brought together, managed through the web as a seamless whole.” This mesh will make sure, for instance, that devices automatically synchronise important files, such as an address book, and that one device can control the others. Windows has other similarities with the platform Microsoft wants to build in the cloud. The firm plans to provide developers with tools to weave services together into new offerings. And it will give them ready-made routines, such as checking a user’s identity, tracking his location and processing payments.

The club in the cloud

As with all big ideas emanating from Redmond, Mr Ozzie’s vision has provoked strong reactions. Here we go again, says one side, who think they have spotted a monopolist’s latest plan for world domination. Welcome to the club, comes the retort from the other. Google, Facebook, Salesforce.com and others are already building similar platforms—Microsoft is just a Johnny-come-lately hedging its bets.

Needless to say, things are a bit more complicated. Mr Ozzie’s plans amount to more than a dominant software company trying to protect its franchise. Building a platform for the cloud does not seem such a bad idea, since it is precisely what many in the industry are trying to do. Yet the cloud will be based more on open standards than on proprietary technology. It is too big and too diverse to be dominated by one provider. And governments would be unlikely to allow one firm to control such an important infrastructure.

As Mr Ozzie rightly points out, it is the very essence of the shift towards services, that computing now allows for applications and data to sit where it is technically most appropriate—or, just as important, where users prefer. And people are not about to throw out their powerful PCs or other “client” devices anytime soon, not least because they will sometimes be offline. Even Google is now offering software that allows its applications to be used off the internet.

The problem is that, so far, Microsoft does not have much to show for its plans, says Brent Thill, director of software research at Citi Investment Research. Take Windows Live, a collection of online services that in 2006 Mr Ozzie called the “hub to bring it all together”. Many of Windows Live’s services are derivative and few have a lot of users. Recently, Microsoft said that it will shut down some services, including Windows Live Expo, a listing service for classified advertisements.

Worse, Microsoft has not got much to show for its huge investments in online search, the killer application in Google’s cloud. The firm’s market share in search is only 8.5% in America, compared with Google’s share of more than 60%. As a result, Microsoft’s online-advertisement platform has not succeeded either. That matters, because even if companies pay for their cloud services, most consumer services will be funded by advertising. This explains why Steve Ballmer, Microsoft’s boss, was prepared to pay $47.5 billion for Yahoo! The online giant would have been an “accelerator” in its quest to catch up with Google in search and advertising.

But those setbacks should not obscure that Microsoft has a plan—and is willing to put a lot of money behind it. It is spending billions to build a network of data centres, a huge infrastructure to cope with the expected demand for all its software-plus-services business. The company does not disclose how many computers now populate its server farms. It says only that it is adding 10,000 servers a month, which is roughly the total number used by a company like Facebook.

What is more, Microsoft has already spent the past couple of years writing software for its new platform. In April Mr Ozzie presented a first chunk, called “Live Mesh”—in his words, the “connective tissue that brings together devices in the cloud.” It will enable users to synchronise files on lots of computers as well as to a web desktop in the cloud, for instance. More will come in the autumn, when Microsoft is likely to publish some new tools for developers.

Microsoft is further along with its new services than most think. Health Vault, launched in October, is not just a place where people can store their medical details online, but a service that can connect to all sorts of monitoring devices, as well as software used by hospitals and doctors. Microsoft is likely to come up with combinations of consumer and institutional data in other areas, such as education. It hopes they will become the killer aps of the new platform, rather as Word and Excel were for Windows.

Microsoft’s familiar products are also being recast for the cloud. Sometimes the change is modest. The latest versions of Office, the software package that includes Word and Excel, enable users to share files and collaborate. Mr Ozzie argues there is no demand for a fully featured web-based version, (though, it has to be said, the old desktop-bound Office is one of Microsoft’s biggest money-makers and one of the main reasons for people to use Windows). Other overhauls are more ambitious. Customers will soon have the choice of running Microsoft’s business programs, such as its mail-server software, Exchange, on their own computers or in the cloud. Chris Capossela, who oversees this shift at Microsoft, expects half of the mailboxes managed by Exchange to be online.

This flurry of activity in Redmond does not guarantee Microsoft success in the cloud. Top of the list of Redmond watchers’ worries is the firm’s culture and management. Mary Jo Foley, a long-time Microsoft correspondent, thinks it will lose something vital when Mr Gates walks out of the door. She concludes in her recently published book “Microsoft 2.0” that if “Microsoft were still the company it was ten or 20 years ago, with the simultaneously ruthless and cautious Gates at the helm,” she would have “no qualms” about predicting its success.

The firm has become bloated, insiders say. “It’s a huge problem. Microsoft has so much raw potential, but it needs extreme leadership to break out of the bureaucratic morass it encumbered itself with,” says the book’s foreword, written by “Mini-Microsoft”, an anonymous blogger-cum-employee who is required reading for Microsoft watchers.

If Microsoft has made one excellent hire in recent years, it is Mr Ozzie. Although he is unlikely to become a public figure in the mould of Mr Gates, he is more in tune with a style of computing in which everything is connected. He understands that a take-no-prisoners attitude will get you only so far. Mr Ozzie is also level-headed, hands-on and a brilliant technologist. He himself wrote much of Lotus Notes, an early collaborative program, and came to Microsoft when it bought his latest start-up, Groove Networks, in 2005.

Yet some think Microsoft needs more fresh blood in its upper echelons. Although some veterans have recently left and some new executives have been hired, many senior positions are still filled by people who have been with the company for more than a decade, says Michael Cusumano, a professor at the MIT’s Sloan School of Management and the author of a book on the inner workings of Microsoft. Can a veteran leadership team, he asks, foresee how the software business will change? And can it attract a new generation of employees to the company?

Billet doux

Microsoft is no longer the chosen workplace for many young geeks. Second-generation internet firms, such as Google and Facebook, have more “mind share”. The same is true for investors and users, which is partly why Microsoft will launch a $300m rebranding campaign later this year. To make Microsoft hip again, the firm has hired one of America’s coolest advertising agencies, Crispin Porter+Boguski.

EPABye-bye, Bill

Microsoft’s image is still tarnished by the antitrust saga of a decade ago, when it was judged to have abused its Windows monopoly. That would prove a more serious stain if it stops consumers from trusting the firm with their personal data, a necessary part of many cloud services. After similar antitrust woes, IBM took decades to shed its reputation for being overbearing and arrogant. It managed partly by becoming a champion of industry standards and open-source software.

Microsoft is treading a similar path. The firm has already changed—whether the American and the European antitrust actions have tamed it, or customers want different behaviour, or Microsoft has just grown up. It has become more open—it no longer wants to lock the world into its own proprietary technology. “We have matured a lot,” says Mr Mundie, who spearheaded this opening-up.

Microsoft has indeed done many things that would not have seemed possible a few years ago. It has embraced industry standards, published “interoperability principles” that guide its developers, and released thousands of pages describing how its programs work together, so that rival products can join in. To boot, Microsoft has accepted that open-source software is here to stay. It has adopted some of the techniques of volunteer developers, given them code and even put some open-source code in its programs.

Still, many do not believe in the new Microsoft. When Information Week, an American computing magazine, surveyed some 500 technology professionals, more than half said they thought that Microsoft’s openness was mostly a publicity campaign. In a recent speech that was widely interpreted as taking a swipe at Microsoft, Neelie Kroes, the European Union’s competition commissioner, said that governments and businesses would do well to use software based on open standards. And Matt Asay, a blogger and executive of Alfresco, an open-source software company, speaks for many in the open-source movement when he says that Microsoft “is the only major software company other than SAP that has not fully engaged with the open-source community.”

Microsoft’s approach to open source hints that the firm has not yet made up its mind what it wants to be. Even as the company seemed to have made peace with the other camp, signing licensing deals with open-source companies, it accused open-source software fans of violating 235 of its patents and threatened legal action.

The defining test of Microsoft’s openness will be whether it tries to use its monopoly on the desktop to gain an unfair advantage in the cloud by tightly integrating—or “bundling”—software and services. Critics say the firm has already tried to favour its online search service in its Windows Vista operating system, but backed off when Google complained. Mr Mundie, however, is eager to offer reassurance: although Microsoft will make its software and services work well together, it will do nothing unlawful, he says: “The company has been quite clear how we are thinking about interoperability.”

Microsoft is in transition. “The Road Ahead” will not be as straight or as smooth as it was on the cover of Mr Gates’s bestseller, written in 1995. Yet Microsoft is unlikely to hit a wall, as IBM did after Mr Gates steered his own big shift in computing all those years ago—if only because Microsoft has a clearer view of the future. And if the worst happens, watch out for Mr Gates returning to put his creation back in the fast lane.

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Chile Pepper Seeds and Your Financial Harvest

Recently, as I sat with Dr. Oral Roberts in his home, I saw Todd Coontz’s brand-new book, The Miracle of a Chile Pepper Seed. After I paged through it, I knew we had to have Todd teach this subject as soon as possible.

What a great This Is Your Day! program it was!

Todd shared that the title came from a farmer in Albuquerque who told him how four pounds of chile pepper seeds sown in quality soil can produce a 40,000-pound harvest—a 10,000% return!

“Everyone possesses seed,” Dr. Coontz said on the program. “In fact, you are a walking warehouse of seed. So, you must learn to inventory your seed today, and then sow that seed with expectation!”

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Everything Begins with a Seed

In the beginning, God said that as long as the earth remains, there will be seedtime and harvest—“While the earth remaineth, seedtime and harvest, and cold and heat, and summer and winter, and day and night shall not cease” (Genesis 8:22).

Jesus often talked about the power of seed that is planted in faith—“If ye have faith as a grain of mustard seed, ye shall say unto this mountain, Remove hence to yonder place; and it shall remove; and nothing shall be impossible unto you” (Matthew 17:20).

The apostle Paul pointed to the law of sowing and reaping—“Whatsoever a man soweth, that shall he also reap” (Galatians 6:7).

Throughout Scripture, the Lord tells us what to do if we want mountains moved—plant your seed in faith!

The Urgent Need for Your Seed

The nations of the world are ready to receive the Gospel as never before.

There are millions who are calling out for God, seeking answers, and pleading for deliverance.

They are looking for hope, but no hope is in sight. They are begging for answers, but no answers are found. They are searching for light, yet they are imprisoned in darkness.

Will you stand with me? 

Will you act in faith with me to reach them?

I am asking you to sow a generous gift today. The expenses of the international crusades are so massive; many hundreds of thousands of dollars are due right now to pay for arenas and travel and the evangelism materials we give to all new believers.

And when you sow your $1,000 seed-gift (or your best gift to reach souls), I want to send you Dr. Todd Coontz’s new book, The Miracle of the Chile Pepper Seed. It will change your life!

Please be generous during this unprecedented season of harvest and outpouring as we continue to share the Gospel through crusades, broadcasts, and mission outreaches around the globe.  

Let’s do it together while there is still time!

For it is “Not by might, nor by power, but by my spirit, saith the Lord of hosts”
(Zechariah 4:6)…

Preaching the glorious Gospel of Jesus Christ,
teaching the unchanging Word of God,
and expecting the mighty and miraculous
power of the Holy Spirit,

Click here to watch Pastor Benny and Todd Coontz on This Is Your Day!

Plant your best seed gift for souls and receive a copy of The Miracle of a Chile Pepper Seed.

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	As Bill Gates formally leaves his day job at Microsoft to start work full-time at his family foundation, all eyes in the nation’s $300 billion philanthropy sector are focused on the man that many in the field now call “the Rockefeller of our time.”  View related photos
Denis / Redux Pictures

There’s a story about Bill Gates that his wife, Melinda, likes to tell. Shortly before the couple established their philanthropic foundation in 1997, Bill carried around in his briefcase for a month an emotional letter from an American family asking him to help a sick child who needed a kidney. “Bill agonized over it,” Melinda recalled at a digital industry conference last month in California. “Do you spend $20,000 on a single transplant or buy vaccines for many children in Africa?”

For the past 10 years, the Gateses have opted for the latter: “How can we do the most good for the greatest number with the resources we have?” Bill asked a sea of Harvard University graduates at their commencement ceremony last year.

The answer? If you’re Bill Gates — with $37.5 billion in your foundation’s coffers and as much as $100 billion to contribute over the course of your lifetime — you do it very, very carefully, say philanthropy leaders. With that kind of wealth comes unprecedented giving power: you have the world’s biggest foundation — the Wal-Mart of the global charity sector — and you’ve got the single most powerful leadership platform in philanthropy today. “One out of every 10 foundation dollars spent is going to have the Gates name on it, and that gives (Gates and his foundation) an influence that is impossible to calculate,” says Rick Cohen, the former executive director of the National Committee for Responsive Philanthropy. Adds Steve Gunderson, president of the 2,000-member Council on Foundations: “Bill Gates is now the face of philanthropy for the country, if not the world” — and like it or not, Gunderson told Contribute Media, “the Gateses will have an obligation to lead and deliver for decades to come.”

Indeed, as Gates formally leaves his day job at Microsoft next week to start work full-time at his family foundation (“not to retire,” Gates says, but to “reorder my priorities”), all eyes in the nation’s $300 billion philanthropy sector are focused on the man that many in the field now call “the Rockefeller of our time,” the 52-year-old ex-computer nerd-turned-richest man in America (after Warren Buffett) — the guy who helped spawn the last century’s personal computer revolution and who now, with the same brainiac zeal, wants to make social problem-solving profitable, too.

The Rockefeller of his age
He’s definitely got the cash. Like Rockefeller, Gates is his generation’s richest; his personal assets are valued at an estimated $50 billion, and he remains the largest single shareholder in Microsoft, with 9.6 percent of the stock, a stake currently worth $21.6 billion. That makes for a total fortune greater, in inflation-adjusted currency, than his famous Gilded Age predecessor. Also like Rockefeller, Gates’ journey from tech-industry bad boy and cut-throat business strategist to philanthropist has been a slow and not-always-comfortable transition: Gates, early on, refused to give money away, afraid it would diminish his ability and focus on making money, he told Bill Moyers in a 2003 interview. (“I mean, is it going to erode your ability, you know, to make money? Are you going to somehow get confused about what you’re trying to do?”)

Years later, Gates still is making adjustments. During a recent trip to Africa to visit AIDS patients with Melinda, journalists wisecracked privately about Gates’ decidedly awkward “bedside manner” with patients compared to that of his wife’s during visits to the health clinics that the couple’s philanthropy is supporting. (“It’s awkward for me to be out in the field,” Gates told Moyers. “I’m not, you know, particularly good at it. Maybe I’ll never be good at it … but I know it’s important. If [more] people got out like that, you know, these problems would get addressed.”)

Yet also like Rockefeller, Gates believes in his own hyper-logical way that charity can and should have its biggest impact in the areas of health and education, since this can give people everywhere a better shot at overcoming their disadvantages. A Rockefeller gift led to the first successful vaccine for yellow fever: a Gates donation is supporting the quest for a vaccine against malaria, and the couple has joined fellow American philanthropist Eli Broad in his multibillion-dollar mission to reform the nation’s public school system over the next decade. Besides global health and U.S. education, the Gateses have made global development — anti-poverty work — a third key category for their giving.

Shield-bearer for new entrepreneurial class
But unlike Rockefeller, Gates epitomizes a new and expanding global class of people that didn’t exist at the turn of the last century — a young, impatient new group of entrepreneurial, first-generation millionaires and billionaires in established and emerging economies around the globe who see as their personal mission the goal of changing the world in large and measurable ways during their lifetimes. Gates “is on track to becoming their poster child,” says Harvard philanthropy historian Peter Dobkin Hall.

To be sure, Gates — though getting better at addressing a non-tech crowd — will probably never acquire the rock-star appeal of, say, a Bono or the easy eloquence of a Bill Clinton or the creative vision of ex-eBay President Jeff Skoll, whose philanthropic leadership of the social enterprise movement and support for today’s documentary film craze is seeding a hip new social consciousness among today’s cause-wired youth. But the sheer size of the Gateses’ charity enterprise — along with the couple’s willingness to take risks with its dollars and share what works and what doesn’t in their quest for systemic change — will only become more meaningful to fellow philanthropists over time, sector leaders say.

“I meet many high net-worth individuals that are watching Gates and what he does and how he does it, and that’s really exciting in a behavioral way,” says Jacqueline Novogratz, the founder and CEO of Acumen Fund, a nonprofit global venture fund that uses entrepreneurial approaches to solve the problems of global poverty. “It opens up people’s minds to what’s possible with philanthropy today.” Jeff Raikes, the Microsoft executive who was recently named as the foundation’s new CEO, told Fortune magazine in June: “Bill has an incredible opportunity to help shape the thinking of other multibillionaires by getting them to think about the process, the structure, the best practices” of giving money away.

Will he deliver? There’s no question that Gate’s move to focus on his foundation comes at a critical time. Buffett’s decision to give the foundation most of his $45 billion fortune over the next decade is, at least for now, proving to be both a blessing and a curse: already some $3.4 billion of Buffett’s money has been funneled into foundation coffers since 2006, with more coming soon — a rapid capital jolt that has turned the Gates foundation, practically overnight, into the largest private philanthropic foundation of all time. The Buffett mother lode is triggering enormous, startup-style tumult at the foundation and is exacerbating some existing uneasiness in the philanthropy sector over the sheer enormity of what the Gateses are building. Bill himself acknowledged the size challenge — “scale is a challenge” — when he announced he was leaving Microsoft on the heels of the Buffett gift to devote more time to the foundation.

Is giving scalable?
Can it scale well? It’s a fair question. The foundation, which began in 1997 in a small office above a pizza parlor near Microsoft, now has some $37 billion in assets and is nearly four times the size of the next largest foundation. Buffett’s pledge also effectively doubles the Gates foundation’s annual spending requirement — the government requires all private foundations to spend at least 5 percent of their endowments annually — and this, for Gates foundation employees, has unleashed a mad scramble to spend more, faster, and all while retaining effectiveness standards amid a staff expansion that will take the foundation from 543 current employees to more than 800 by year’s end. According to Gates Foundation spokeswoman Heidi Sinclair, the foundation distributed some $2.007 billion last year, roughly 5.4 percent of its endowment, and, to keep pace with its growth from the Buffett gift, will be required to give some $3.5 billion away next year, almost twice the 2007 amount. “One of our greatest challenges is making effective grants,” Sinclair says.

“One of the key questions now becomes, do they decentralize?” says Glen Macdonald, director of the Wealth and Giving Forum, an organization of wealthy philanthropists who run their own foundations and regularly give more than $15 million per year to their causes of choice. “Gates as an entrepreneur and innovator has dealt with scale before. The thing to watch now is how he manages that rapid growth and tension that comes with it. One option is to focus on many areas (of giving versus the three existing ones); another is to build collaboration ties with established public and private foundations, NGOs, social enterprises, and corporations.” Macdonald may as well be speaking for many in the sector, as well as Gates, when he says, “What matters most at the end of the day is outcome.”

Three offices
For months now, Gates has been setting up his three new offices from which to tackle his new job: one will be located at Microsoft in Redmond; a second one, about 15 miles away, will be at the Gates Foundation in downtown Seattle, and a third will be sandwiched between the other two, and located much closer to home. Gates spokeswoman Sinclair says Gates has carved out precise blocks of time in each location: a day in Redmond, two at the foundation and two at his personal office, which Gates told Fortune will probably be his “real center of gravity.”

While he’ll remain chairman of Microsoft, his workload at Microsoft will plummet while at the same time, his work at the foundation will increase sharply. Gates’ official title, which he shares with his wife and father, is co-chair, but his day-to-day role will be as the foundation’s chief strategist.

Foundation insiders expect that Bill and Raikes — the Microsoft business software systems division whiz who will take over as CEO of the foundation in September — will join forces to ease the size challenge. Both Gates and Raikes declined to be interviewed by Contribute for this story, but philanthropy and business leaders expect the two to strategize over new ways to use software and leading-edge applications of information technology to both manage the Gates foundation’s growing complexity, if not the rapid growth of the sector itself, as philanthropy enters a new era of globalization.

“For those who have been criticizing the Gates Foundation on its need to grow faster and operate more effectively, one could say they made the best possible choice” when they chose Raikes to replace Patty Stonesifer as CEO, says Diana Aviv of the Independent Sector, a Washington, D.C. coalition of some 600 charities, foundations and corporate giving initiatives. “Raikes is someone who isn’t intimidated by Gates’ immense wealth and who has, in his own right, been extremely successful” in amassing his own fortune — as well as working with Bill at Microsoft on key strategy, marketing and systems engineering initiatives. Indeed, Raikes is widely credited for racking up much of Microsoft’s profits in recent years as head of its business software division, the company’s cash cow.

“One thing to understand about the foundation,” Melinda Gates told BusinessWeek in 2006, “is that it’s a lot like Microsoft in the sense that we do expect results. We are going to measure things as we go along. We are going to make changes. Sometimes you get other people who come in and do small pieces of this and then their money’s spent and they go away. They don’t stop to say: What did we learn here and how do we change or how do we replicate that in a new way somewhere else?’” Foundation insiders and philanthropy sector leaders say they expect this kind of performance measurement standard to include how well the foundation itself tackles its own internal challenges.

Laudable? No question. But critics say it’s not enough.

They say that in order for the Gates Foundation to earn its mantle of global leadership and contribute real value to the sector, it will need to make some critical leadership and governance reforms — and just as rapidly as it’s giving money away and expanding its ability to do so.

Size matters
The loudest voices pushing change as Gates steps into his new job are those of sector leaders who complain that the Gates Foundation, despite is enormity, has only three trustees — Bill, Melinda and Warren Buffett — and that those three alone should not be charged with deciding how all of the billions get spent. “That is much too small and narrow a board to run a foundation whose combined assets will one day exceed the budgets of all but 30 percent of the countries in the world,” says Pablo Eisenberg, a senior fellow at the Georgetown University Public Policy Institute. “This offers little protection to America’s taxpayers or the national interest.”

Last fall, the foundation, responding to the criticisms, announced the creation of three advisory councils, one for each of its three program areas of focus — global health, global poverty and U.S. education. According to Sinclair, the Gates Foundation spokeswoman, the expert panels will help Bill, Melinda, and Warren screen and direct funds for maximum effectiveness. But is it enough? Aviv, the Independent Sector CEO, thinks not. The advisory councils will help, she says, but “boards are wiser when they have a large number of people —because they provide people coming from different backgrounds and experiences” that provide the necessary “checks and balances” required for good decision-making and oversight.

Eisenberg says he doesn’t like the precedent it sets.  “There are going to be other billionaires in the future who are going to establish $40 billion, $50 billion, $75 billion foundations,” he says. “The danger to our democracy is that we’re going to have an increasing number of these mega-foundations run by two or three family members who will dictate how these assets are spent. … Their decisions are going to be made without any political process, public discussion, and that is not good for democracy.”

A second size challenge is that the Gates Foundation, by its presence alone, threatens to monopolize activities in the sector and steamroll other players — the so-called Wal-Mart effect applied to the charity sector. In February, for example, The New York Times published excerpts of an internal document from the World Health Organization, a letter from the agency’s chief malaria expert to the agency’s director, Margaret Chan, alleging that the Gates Foundation was having an adverse impact on research into killer diseases. The letter, the Economist magazine reported in an article the following week, said the super-sized clout of the Gates Foundation was “distorting research priorities and quashing independent thinking by sweeping up the best scientists and keeping them ‘locked up in a cartel.’” However unintended, the Gates Foundation’s giant footprint “is squashing the peer-review process because researchers are now bunched into groups competing for Gates funding, and each member of such a group has ‘a vested interest to safeguard the work of the other,’ the magazine reported, quoting from the memo. “Gates can solve problems with money,” the memo said, “but a lot of money leads to a monopoly and discourages smaller rivals and intellectual competition.”

The Gates’ didn’t answer the charges, but foundation spokesmen say they’re mostly off-base. The foundation often collaborates with other charities, including Bono’s group, the Global Fund to Fight AIDS, Tuberculosis and Malaria. The WHO’s criticisms, some say, belie a fear that that the Gates Foundation is setting itself up to topple WHO’s authority in the public health field: the Gates’ recent grant of over $100 million to the University of Washington to evaluate health treatments and monitor national health systems is a job, some at WHO believe, better left to WHO and the United Nations.

Split intentions
But perhaps the most stinging criticism of the Gates Foundation so far is that it (and Buffett) has been investing its considerable charitable assets in corporations that, in many instances, have been contradicting its charitable goals — from companies responsible for heavy air pollution in the Niger Delta to pharmaceutical firms whose pricing policies have tended to keep antiretroviral drugs out of reach for HIV/AIDS patients in developing nations. Some even allege that Gates Foundation investments — as well as Buffett’s — are indirectly supporting the Sudanese oil industry, whose profits, some say, help to support the Sudanese government’s genocide in Darfur.

Though many foundations in America similarly invest their assets in companies that don’t always stand for their own goals as organizations, the Gates Foundation has come under particular criticism for this type of disconnect: the endowment is managed by Bill Gates Investments, which handles Gates’ personal fortune. A January 2007 investigation by The Los Angeles Times found that 41 percent of Gates Foundation’s investments, totaling at least $8.7 billion, have been in companies “that countered the foundation’s charitable goals or socially concerned philosophy.” In addition, much of these investments have been in companies that “have failed tests of social responsibility because of environmental lapses, employment discrimination, disregard for workers’ rights or unethical behavior,” the newspaper said. For example, the foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time the foundation is funding inoculations to protect health, The Times found, the Gates foundation has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France — the companies responsible for most of the flares blanketing the delta with pollution.

Writing in the May/June 2007 issue of Contribute, a New York-based news magazine and Web site covering the sector, fundraising executive and New York University fundraising lecturer Naomi Levine criticized the foundation for failing to use its considerable financial clout to influence companies to change their policies. “(The Gates Foundation) hasn’t tried to influence other foundations to divest from companies that don’t share their socially responsible ideals,” Levine wrote. “…The foundation’s poor example here should be a siren call for reforms and stepped-up oversight.”

Perhaps most aggravating to Gates Foundation critics is the way it has dealt with their concerns, which some analysts suggest is a carryover from Microsoft’s highly independent and autonomous culture. When the investments story first broke in the Los Angeles Times, for example, the Gates Foundation’s chief operating officer, Cheryl Scott, told a reporter that the foundation would, for the first time, conduct a methodical review of its investments to determine whether it should divest from companies doing harm. She also acknowledged that the way the foundation had been investing its money was not “100 percent effective.” Days later, however, outgoing CEO Stonesifer said any changes in the foundation’s investment policies would probably not occur. Why? Her answer: “Changes in our investment practice would have little or no impact on the suffering identified in The Los Angeles Times article. [We] don’t own big-enough stakes in companies to influence their behavior through shareholder activism.”

To many in the foundation community, the episode represented a time when the Gates Foundation blew an important opportunity to seize global leadership in the philanthropy community worldwide. While the Ford, John D. and Catherine T. MacArthur, Rockefeller and Charles Stewart Mott foundations all make social justice, corporate governance and environmental stewardship key considerations in their investment strategies, the Gates Foundation has not, and does not — to the frustration of leaders in the field across the board. “With the resources that the Gates foundation has at its command, it could provide an extraordinarily important leadership role for the field if it were willing to shift its investments to more socially responsible companies,” says philanthropy historian Kathleen McCarthy. Adds Doug Bauer, senior vice president of Rockefeller Philanthropy Advisers, a nonprofit that counsels foundations: “When the No. 1 foundation is rethinking something, others are going to look at it more carefully.” The Gateses, he added, have the power to “cause a seismic shift in the field.”

An unlikely journey
Nobody, not even Bill himself, expected to find himself such a catalyst outside the technology industry. The socially awkward upstart — who at the age of 12 began effectively debating with his father the logic of doing some household chores — became a billionaire from Microsoft’s 1986 IPO. He had initially resisted the idea of philanthropy: lawyers and accountants advised him to start a foundation “but he refused,” William H. Gates, Sr., told Fortune writer Patricia Sellers in a January 21, 2008 cover story profile of Melinda. “(Bill) said he didn’t need another entity.”

It wasn’t that Gates didn’t know any better: Gates Sr. was head of Planned Parenthood when Bill was growing up; his mother was on the United Way board and continuously urged Bill to form a United Way team at Microsoft, which he eventually did. But the young Gates, for many years, actually feared the dichotomy, seeing the push to make money and the act of giving it away as contradictory, rather than part of the same value system.

According to Gates family lore, it was Bill’s courtship and marriage to Melinda French — a girl from a middle-class family in Dallas who worked her way up to an executive at Microsoft before dating Gates — that turned Gates around. Bill’s mother, Mary Gates, also had a huge influence on Bill’s evolution, urging him, relentlessly, to become more active philanthropically: ironically, it was she who introduced her son to Buffett at a Fourth of July barbecue in 1991 that Bill only attended after Mary begged him to come. Later, at Melinda’s wedding shower in 1993, Mary presented her with a letter that, in so many words, said: “From those to whom much is given, much is expected.” Mary Gates passed away the following year; a short time later, the family created the first Gates charity, The William H. Gates Foundation, named for Bill’s father. The elder Gates, with $94 million or so worth of Microsoft stock, ran it out of his basement.

Initially, the Gates’ foray into philanthropy sought to put laptops in classrooms — which some had seen at the time as a self-serving gesture by a software tycoon. But Melinda realized, Fortune’s Sellers wrote, that while volunteering in a couple of schools in Seattle at the time, the technology gap was only part of the problem. She and Bill then decided to take on education reforms more broadly, focusing on secondary schools. “No one was touching high schools,” she told Fortune. “… Bill and I like to work on the problems that nobody else seems to want to face because they’re so hard.”

Next steps
One big part of Bill’s new job will be to make more public appearances and do more schmoozing with governments and corporations as part of the couple’s new advocacy for the world’s poor. “I’m uniquely able to reach out to the big companies, to ask them not just to write checks but to offer more of their innovative power,” Gates told Fortune editor Brent Schlender in a June 20 piece on the transition. “There’s a big category of my time for talking to drug companies, cell phone companies, banks and technology companies as well as talking with other people who are lucky enough to have super-big fortunes about how they want to give those back to society.”

Melinda, meanwhile, will continue to size up ways that technology — and not just software — can be engaged to further the goals of the foundation. At a recent digital tech conference in California in June, Melinda pointed out to conference attendees that of the 6.6 billion people in the world, 3.7 billion have access to a cell phone. “This opens an opportunity to use mobile technology for reworking banking for the poor,” she says. “…Technological revolutions or advances — as the price of (cell phones) really get down — how can we change things for people who live on less than $2 a day?”

Yet along with the passion and curiosity, both Bill and Melinda seem acutely aware of the daunting challenge they’ve created for themselves. “We will make mistakes,” Gates told Moyers in the 2003 interview. “But then again you’ve got to take risks and that’s one of the things a philanthropist can do that governments aren’t as well-suited to do. We in philanthropy should be doing the things that the normal approaches can’t do, whether it’s approaches to the AIDS vaccine or malaria or delivery systems. We’ve got to be out there and accept some kind of failure rate.”   

Gates — who dropped out of Harvard to create Microsoft — returned to the university last year to accept an honorary degree and to deliver the 2007 commencement speech to graduates. It was, Gates-watchers agreed, probably one of his finest speeches ever, an eloquent reminder that success doesn’t always mean following the rules. Among other things, Gates told Harvard students that technological achievement is critical in the years ahead, but that “humanity’s greatest advances are not in is discoveries but in how those discoveries are applied to reduce inequity … reducing human inequity is the highest human achievement.”

No question, Bill Gates — innovator, rule-breaker, geek-turned-philanthropist — is just getting started.

URL: http://www.msnbc.msn.com/id/25332025/

Investment banks

Sachs appeal

Jun 19th 2008 | NEW YORK
From The Economist print edition

Regulation may hurt Goldman Sachs more than the markets seem able to

FOR anyone hoping this would be the week when Goldman Sachs's mortality was exposed, it must have been crushing. Net income in the second quarter—a period that included the Bear Stearns debacle—fell by a mere 11% from last year's solid pre-crunch showing, beating expectations by a mile. It looked all the better for being sandwiched between Lehman Brothers' $2.8 billion loss and a sharp profits fall at Morgan Stanley (see chart). This produced a spectacle rare these days: analysts raising their profit estimates for an investment bank.

Goldman is the beneficiary of a flight to quality. Its prime brokerage, which finances trading by hedge funds, posted record revenues as questions arose about other broker-dealers' strength as counterparties. It also saw a sharp rise in assets under management. The underwriting business was strong, too, largely thanks to the rush by writedown-saddled banks to raise new capital. (Fifth Third, a large regional bank, joined the queue this week.)

The seeds of this outperformance were sown before the crunch. Goldman saw trouble coming early and began hedging its mortgage book at the start of 2007, six months before the market turned. This allowed it to sell assets while others were still happy to buy them. It was also an early commodities bull.

As a disciple of fair-value accounting, moreover, Goldman was very conservative in “marking”, or valuing, its holdings of illiquid assets. As some markets recover slightly, it is now reaping gains: virtually all of the securities Goldman sold in the latest quarter fetched prices higher than their valuation on its books, David Viniar, its chief financial officer, told analysts. He revealed relatively little else, a luxury Goldman can afford because it is under less pressure than rivals to provide more data. Lehman's earnings presentation lasted 48 minutes, Goldman's 10.

With most of its peers reeling, Goldman is well placed to leap on opportunities. Mr Viniar hinted at the possible growth in the bank's “level-three” assets (the most illiquid sort) as it snaps up distressed debt. Goldman agreed this week to take on the assets of a defunct structured investment vehicle, or SIV. In another show of chutzpah, it plans to increase staff this year, even as others cut back.

It is not all going Goldman's way. One sign of fallibility was a $500m hedging loss on leveraged loans. Its results would have looked less good (though still beaten expectations) without some one-off gains. A longer-term worry is the tougher regulation investment banks can expect, especially curbs on their leverage, now that they have access to Federal Reserve cash. As a firm built on trading prowess, Goldman has more to lose than its peers. It has already cut its leverage, though only grudgingly and, it stresses, in response to pressure from shareholders and regulators rather than its own reading of its businesses.

All in all, though, Goldman remains an enviable outlier. Not only are its investment bankers weathering the storm, but its analysts, so often in tune with their trading-floor colleagues, have unparalleled power to move markets—as this week's pessimistic opinion of regional banks showed. Mr Viniar said the firm's managers are in two minds, one obsessed with defensive risk management, the other with aggressive risk-taking. They may feel torn, but for the moment they continue to get the balance just about right.