Baby Bills A cadre of young, scary-smart executives is coming into power at the world's most important tech company. Someday one of them will be boss.
By Erick Schonfeld

(Business 2.0) – Shortly after midnight on the first day of October 1997, a small band of young Microsoft soldiers sneaked onto the Mountain View, Calif., campus of then-archrival Netscape and dumped something on the front lawn. When the sun came up, arriving Netscapers were greeted by a 10-foot-high "e"--the symbol of Microsoft's Internet Explorer browser, which had just been released in its lethal 4.0 version. "We thought we'd give it as a gift to the Netscape folks," says Yusuf Mehdi, who, though he was then IE's chief marketer, didn't actually take part in the prank. Chris Jones, who led the team of coders developing IE, remembers loading the "e" onto the tow truck but says "it starts to get hazy after that."

Naturally, the locals didn't take kindly to finding their rival's trademark grazing on their turf. They subsequently defiled it, in fact. But the message had been sent: A new group of Redmond hotshots had arrived, and the competition was about to heat up.

Today Netscape itself is little more than a hazy memory brought up every so often by antitrust regulators. But Jones, Mehdi, and their contemporaries are continuing to leave their mark--both at Microsoft and all over the competition. Mehdi now runs MSN, which has been gobbling online ad share from AOL (this magazine's corporate cousin); Jones is the keeper of one of Microsoft's crown jewels, the Windows PC operating system. Fellow shooting stars include Eric Rudder (leader of the server and programming tools business), Steven Sinofsky (the vice president overseeing Microsoft's other crown jewel, Office), Tami Reller (a key exec in Microsoft's small business initiative), J. Allard (the brains behind Xbox), and Martin Taylor (the point man on Linux).

Remember those names, because you will hear a lot from them before they're through. All hold major posts in Microsoft's most important franchises or most promising growth businesses. Significantly, they represent the first class of Microsoft leaders to have come of age during the Internet's formative years. They are also the first generation to have emerged from a leadership farm system, formalized in the late 1990s, that Spencer Stuart recruiter and author James Citrin likens to the fabled talent nursery at General Electric. Says Citrin: "Microsoft is doing a spectacular job developing a whole cadre of general managers in the technology industry. Such a thing really hasn't existed before." It does now, and its graduates will make Microsoft an interesting company to watch--and compete against--for years to come.

Microsoft chairman Bill Gates and CEO Steve Ballmer have always cared about developing talent, and the process has only grown more systematic over the years. Microsoft has learned that it has far greater success promoting from within than recruiting from without. Past transplants to the executive suite have rarely lasted very long. (Think of Rick Belluzzo, the former Silicon Graphics CEO and Microsoft president and COO, who fled after two and a half years.)

One step in the nurturing of promising Softies is a three-day annual retreat that some of the brass informally refer to as "Star Search" (even though Steve and Bill hate the term). Brad Silverberg, the onetime head of Windows and now managing partner of Seattle venture capital firm Ignition Partners, organized a few of the events in the late 1990s. As he describes it, potential stars were assigned to teams and given a day or so to solve such conundrums as how to improve customer service in a Microsoft division or where to aim Redmond's development strategy three years out. They then presented their solutions to a panel of senior leaders and fielded questions. "Notes were taken, people were observed, and based on those factors and others, people were given big new jobs," Silverberg explains.

The overarching conundrum all Microsoft leaders have to solve today is this: How do you get a company with $32 billion in sales--nearly two-thirds of which is tied to the maturing PC industry--to grow at faster than single-digit rates? All of the company's $13.2 billion in operating profit for the fiscal year that ended in June came from just three divisions: PC operating systems, PC applications, and server operating systems and programming tools. The other four--home and entertainment (including Xbox), MSN, Microsoft Business Solutions, and mobile and embedded operating systems--cost the company a combined $1.7 billion in operating losses. The Xbox division alone accounted for nearly $1 billion in red ink.

For the rising stars profiled in this story, then, there are two main paths up Microsoft's gilded ladder. For Jones, Rudder, and others helping to run the profitable units, the task is to bring new fire to the core businesses. For Mehdi, Allard, and others in the money losers, job one is to squeeze through what group vice president Jim Allchin calls "the knothole of profitability."

Neither will be a cinch, even for the A-list talents you'll meet in the pages that follow. But they didn't get this far by being easily stymied.

> Eric Rudder Age (tenure): 36 (14 years) | Senior vice president, Servers and Tools | Claim to fame: Trumped Java with .Net tools

If there is one heir apparent among Microsoft's Internet generation, it's Eric Rudder. A hard-core technologist with a computer science degree from Brown University, Rudder was Bill Gates's personal technical assistant during the critical years between 1997 and 2001--longer than anyone before or since. He helped Gates understand the changes wrought by the Internet, and helped him formulate the .Net strategy that today is the driving technology approach across the company.

"Next to Bill and Steve," one former executive says, "he's the smartest guy in the company." Says another, "He's so confident, authoritative, and confrontational that going into the ring with him is in the not-worth-it category." This recent senior Microsoft expat also notes that Rudder is one of the few people who can get both Gates and Ballmer to back down: "Eric can sit in a meeting with Bill, and without upsetting or embarrassing him say, 'This is going in the wrong direction.'" Good Bill-handling skills go a long way at Microsoft.

Since leaving Gates's side, Rudder has overseen the programming tools business. This is a linchpin in Microsoft's enterprise strategy, since winning programmers away from Java is obviously key to making .Net the standard in the corporate data center. Not surprisingly, a thriving tools business also helps sell Microsoft's server software, which happens to run programs written with .Net tools very well. Appropriately enough, Rudder also took over the server business in March. The company's success in that arena--where sales have gone from nothing in 1990 to $7 billion last year--has proven that Microsoft can prosper beyond the PC. Yet server software's 28 percent operating margin, compared with 81 percent for the Windows PC business, leaves Rudder plenty of room for continued growth. If he can deliver on that, he might be given even more businesses to oversee.

> Chris Jones Age (tenure): 34 (12 years) | Corporate vice president, Windows Client Group | Claim to fame: Led development of Internet Explorer and Windows XP

Chris Jones doesn't help throw down 10-foot-high gauntlets on competitors' front lawns anymore--not that he'll admit to, anyway--but that doesn't mean he's been idle. After leaving the Internet Explorer team in 1999, he led the development of Windows XP and is now in charge of creating the next version of Windows, code-named Longhorn and due out in 2005. Although he doesn't yet have P&L responsibilities, it's difficult to exaggerate the responsibility Gates has placed on Jones's Stanford-educated shoulders. The Windows operating system is Microsoft's flagship and the source of more than half its profits. That trust marks him for greater things.

Jones bristles at the notion that Windows is a mature business. Even in the United States, nearly 30 percent of households don't own a PC. There's no doubt, he insists, that more people will get machines. "The main question," he says, "is how much of our software they will use." He can affect the answer, he believes, by making Longhorn irresistible. Microsoft began leaking news about the new system's features practically before the shrink-wrap had come off Windows XP. Among those that might attract even more people to Windows are improved graphics and peer-to-peer technology that allows every application to include buddy lists so documents, photos, and music can be instantly shared.

The other way to keep Windows growing, Jones says, is to make it simpler. To remind himself how frustrating computers can be for normal people, on his wall Jones keeps a copy of a letter that a 72-year-old woman sent to Gates. Confused by her brand-new computer, she asked Gates whether he sold any easy-to-use operating systems. If Jones can make Longhorn the answer to her question, he might do something quite extraordinary: expand the appeal of a monopolistic product.

> J. Allard Age (tenure): 34 (12 years) | Corporate vice president, Xbox Platform | Claim to fame: Helped create Xbox

In 1999, J. Allard took a three-month sabbatical and, just before returning, had lunch with Ballmer. Over pizza, Ballmer told him, "You get 30 minutes to tell me what you want to do next, but first I get 30 minutes to tell you what I want you to do." Ballmer wanted Allard to help lead MSN. But Allard, who had spent his sabbatical playing videogames, listening to MP3s, and generally becoming obsessed with TiVo, had another idea. In his 30 minutes, he pitched Ballmer on the promise of digital entertainment--the meshing of TV, videogames, and music--and talked himself into a job with the new Xbox group.

At the time, the Xbox was intended as merely a stripped-down gaming PC to be branded and sold by Compaq, Dell, and Gateway. "I was not compelled by that," Allard says. "It was not a big bet."

Instead, Allard pinned Microsoft's money on a versatile, highly designed box jammed with cutting-edge technology like an Nvidia graphics chip and an Ethernet port. The result was a $299 marvel. But Sony responded to Microsoft's incursion by dropping its PlayStation 2 console to $199. Although Microsoft was already losing money on each Xbox it sold, it matched Sony's price the next day. Even so, today there are only one-sixth as many Xboxes in homes as PS2s. Since market size drives game development, Sony can offer far more titles--which in turn drives still more PS2 sales.

Still, Allard is sanguine about Xbox's position. He knew going in that he didn't have a chance to unseat Sony the first time around. "Not only did we not know what we were doing," he says, "but Sony basically got an 18-and-a-half-month head start" on the market. But Allard is settling in for a long campaign. Ultimately, the contest won't just be about videogames, he predicts. Xbox will evolve into an infinitely expandable repository for digital photos, music, and TV shows. Because it can connect to the Internet, it can also help create new forms of digital entertainment, such as the Xbox Live online gaming service, which has gained half a million paying subscribers since its launch last November. Allard's expansive vision is winning admirers for Xbox, and Allard says he's just getting started. "Next generation, we are for real," he promises. "Next generation, Sony does not get a head start."

> Yusuf Mehdi Age (tenure): 37 (12 years) | Corporate vice president, MSN Personal Services and Business Division | Claim to fame: The marketer behind Internet Explorer and MSN

MSN chief Yusuf Mehdi is an MBA, not a programmer, yet when he joined the Windows 95 marketing team in the mid-1990s, he volunteered to work on, of all things, a technical reviewers' guide. Windows marketing boss Brad Chase was impressed. "Yusuf was not technical, and this job was not sexy," recalls the now-retired Chase, "but Yus had the courage to do something hard and unfamiliar." That kind of pluck--and a reputation for being what one former colleague calls "kick-ass smart"--led Mehdi to bigger and bigger jobs. Coming off the Windows 95 product launch, then the biggest in the company's history, he was thrown immediately onto Internet Explorer. Mehdi remembers how the Net challenged Microsoft. "In the blink of an eye," he says, "people went from telling us we were great to telling us we were on our way to irrelevancy." Few at Microsoft have done more to prove them wrong than Mehdi has. In the past eight years, he helped make Internet Explorer the dominant Web browser and was instrumental in building MSN to $2 billion in sales and 8.6 million subscribers.

Under Mehdi's guidance, MSN has almost caught up to AOL in advertising sales. Like its rival, however, it has been losing dial-up subscribers to faster broadband services. Plus, the business still bleeds money--$330 million last year. "The ISP business is not our future," Mehdi admits. Instead of collecting $22 in monthly access fees from a dwindling base of subscribers, Mehdi plans to move the model to 50 percent advertising and 50 percent premium subscription services, including such utility-like features as centralized contact lists, automatically downloaded virus protection, and computer backups. "The same way businesses can outsource their IT departments to service providers, we want consumers to outsource their IT to us," Mehdi says. It's far from certain that ordinary Joes will pay for the privilege. Still, betting that Mehdi can't figure out how the Internet will evolve hasn't been a winning strategy in the past.

> Steven Sinofsky Age (tenure): 38 (14 years) | Senior vice president, Office | Claim to fame: Helped clue in Bill Gates to the importance of the Internet

On a February 1994 recruiting trip to his alma mater, Cornell, Steven Sinofsky found himself stranded by a howling upstate New York blizzard. Waiting out the storm at the university, he made a career-changing observation: A surprising number of students were using the Internet to tap out e-mails and look up course lists. Upon his return to Redmond, he wrote the company's top executives a report about how the Internet was taking over. Since at the time he was Gates's personal technical assistant (the same job later held by Rudder--clearly a nice career steppingstone), he knew his observations would reach the right ears.

About the same time, Sinofsky met a 24-year-old networking whiz named J. Allard. Allard, then in Microsoft Research, had been circulating a memo titled "Windows: The Next Killer Application on the Internet," in which he argued that Windows could "embrace and extend" the Internet to every PC. The one-two punch of Sinofsky's report and Allard's memo was "a seminal event in the company's awakening to the Internet," Silverberg recalls. The young pair's enthusiasm infected Gates, who called a small retreat on April 6, 1994--two days after the founding of Netscape, as it happens--to hammer out an Internet strategy.

Today, Sinofsky oversees most of the product development for the $9.2 billion (in revenue) information worker business, home of Microsoft Office and its familiar suite of Word, Excel, PowerPoint, and Outlook. Shy and precise, Sinofsky wants to make Office the front end for enterprise software from competitors such as SAP, Oracle, and Siebel Systems. He points out that one of the most used features on many of the applications is "export to Excel." Using .Net technologies, Sinofsky has enabled Office to import data automatically from enterprise apps: If an e-mail from a customer includes an invoice number, say, Office can be customized so that clicking on the number will automatically grab the appropriate information from the company's SAP system and display it in Outlook, Excel, or Word. Not only does that save users time, it also gives them one less reason ever to leave a Microsoft application. Like Jones, Sinofsky has already proven himself as a project manager and leader of programmers. To break through to the top layer of the company, he'll have to show that he's just as good at sales and operations.

> Martin Taylor Age (tenure): 33 (11 years) | Platform strategist | Claim to fame: Cracked the whip on customer satisfaction

While Martin Taylor is not yet at the same level as some of the other rising stars, his thinking is already being felt across the company. As Ballmer's recent chief of staff (or "chief of chores," as he likes to put it), Taylor spent six months figuring out how to improve Microsoft's poor reputation with customers. There was, he says, "lots of room for improvement."

In 1993, three months into his Microsoft career, he got his first taste of customer ire. Ballmer was coming to the Washington, D.C., office, and Taylor, then a 23-year-old sales associate, was assigned to assist him onstage at a Windows NT presentation for small resellers. After just two slides, a reseller screamed from the audience, "I don't care about NT. You don't have keyboards in stock." Others shouted out complaints about how hard it was to make money selling Windows. Ballmer and Taylor looked at each other, abandoned the presentation, and started taking questions. The pair were standing at the bottom of an arena-style lecture hall, and "it had this weird Roman gladiator feeling to it," Taylor recalls. Ballmer, too, may have left the experience with a certain comrade-in-arms feeling for Taylor--he hired him as his assistant in 2001.

Last year Taylor traveled the country to see what Microsoft could learn from companies that excel at customer service. (The short version: Enterprise Rent-A-Car does a good job with segmentation, Northwestern Mutual gives insurance agents incentives to keep policyholders happy, and Chick-fil-A makes a fetish of responding to customer feedback.) As a result of Taylor's survey, the top 600 officers at Microsoft now have their compensation tied to satisfaction scores.

Although he still plays basketball with Ballmer every Wednesday morning, professionally Taylor has left the CEO's orbit for an even bigger job: finding ways to neutralize Linux. It's going to be tough, to say the least, to compete on price with open-source. Customer service, on the other hand, may give Microsoft an edge, and Taylor already knows a thing or two about that.

> Tami Reller Age (tenure): 39 (19 years, most at Great Plains) | Corporate VP, marketing and strategy, Business Solutions | Claim to fame: Helped integrate Great Plains into Microsoft

She has never worked in Redmond (she lives, in fact, in Fargo, N.D.--1,400 miles from the Microsoft campus) and doesn't yet have a strong relationship with either Gates or Ballmer. Yet Tami Reller is helping to lead what is perhaps Microsoft's most crucial growth opportunity: its foray into enterprise software for small and midsize businesses (SMBs, in marketing-speak). Microsoft plans to invest $2 billion in the area over the next few years. In return for that, the SMB group has been given the mother of all stretch goals: to build sales from $600 million to $10 billion.

Redmond has reason to feel ambitious. Unlike ERP-and CRM-weary giants, many small companies are so underteched that Microsoft is confident that applications like accounting and customer relationship management can clearly increase productivity. No provider dominates the market, and there are a ton of potential customers: an estimated 40 million SMBs.

A key step in Microsoft's assault on the market was its acquisitions of two software firms already there: Great Plains in 2001 and Navision in 2002--which explains how Reller became a Softie. The onetime receptionist who'd worked her way up to CFO of Great Plains was assigned to ensure her former company's smooth absorption into the Redmond machine. Working alongside another impressive female exec, Jodi Uecker-Rust, she held the attrition rate to single digits. Now, Reller is helping Great Plains founder Doug Burgum, her direct boss, reach that $10 billion goal.

"Where do you get that growth?" she asks rhetorically. "Everywhere." That means hiring more salespeople, putting out more products, and adding more partners to the 6,000 small value-added resellers and IT integrators who now make up Microsoft's most effective SMB sales channel. Expanding that channel is a delicate operation, however. Existing partners fear that Microsoft will sign up too many new resellers, on top of its in-house sales force, and spoil it for everyone.

Microsoft's answer is part technological, part diplomatic: Partners should regard Microsoft's SMB apps not just as off-the-rack products, but rather as platforms they can customize for dentists, construction firms, and other small-business clients. "As we build out the channel, we need to make clear to our partners that we're preserving a business opportunity for them," Reller says soothingly. It's a tall order, but if Reller can help pull it off, her next stop might be Redmond and a tryout for a far grander job.

Erick Schonfeld (eschonfeld@business2.com) is editor-at-large at Business 2.0.