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Microsoft CEO Satya Nadella speaks in 2016. (GeekWire Photo / Kevin Lisota)

Microsoft, the tech powerhouse once maligned as the “evil empire,” is engaged in a radical shift, taking on the mantle of corporate responsibility and civic leadership. While its actions ring of altruism and stand to benefit the greater good, they also represent one of the savviest business plays in the tech giant’s 43-year history.

“Part of what Microsoft is doing is they see the weakness of their peers and they see an opportunity to take advantage of it,” said David Yoffie, a Harvard Business School professor. “So some of this is an opportunity to stand out from the crowd and to demonstrate that they can take the high moral ground.”

The company, which endured years of public drubbing at the hands of antitrust investigators and consumer-protection authorities, has now positioned itself as an ethical standard bearer in an industry struggling to address problems such as the exploitation of personal data, security breaches and the deceptive use of social media to sway politics.

In 2018, Facebook and Google were hauled before Congress to account for their companies’ roles in the spread of misinformation and propaganda online. Microsoft, meanwhile, took the Justice Department to the Supreme Court in the name of customer privacy.

Microsoft doesn’t cast itself as the white knight of tech. Brad Smith, the company’s president and chief legal officer, prefers the analogy of a white horse.

“When people talk about a white knight, they think that there is somebody who’s going to gallop in and single-handedly save the day. That is not us. We don’t have the ability to save the day,” Smith said in a GeekWire interview in January. “It will take a lot of people riding white horses to start the stampede that’s needed to put this problem in the rearview mirror.”

Microsoft President Brad Smith (right) and CEO Satya Nadella (left) meet with Canadian Prime Minister Justin Trudeau during Microsoft’s CEO summit in May 2017. (Photo via Twitter)

Smith was speaking about the company’s $500 million pledge to help address the affordable housing crisis confronting the greater Seattle region, several months after rival Amazon fought a corporate tax intended to fund homeless services in Seattle. But he could have been talking about any number of Microsoft’s recent socially-minded initiatives and calls to action.

In short, the company has completely flipped the script from the days when a petulant Bill Gates was fighting accusations of illegally squashing competitors.

But even as Microsoft burnishes its reputation as a do-gooder, it’s also positioning itself to shape regulations that could give it a significant competitive advantage. Microsoft leaders including Smith and CEO Satya Nadella are aligning the company with political leaders and routinely calling for rules to tame the tech sector. New regulations appear inevitable, and last week, Microsoft joined with longtime rival Apple in pushing for stricter U.S. federal data privacy laws.

This approach is not without its awkward moments. In late February, for example, Nadella responded to an open letter published by a small group of his company’s employees that criticized Microsoft for building HoloLens headsets for the U.S. Army. In November, the company won a $480 million contract for the project. The employees balked at the use of their technology for warfare.

This week, First Lady Melania Trump flew into Seattle for the sole purpose of visiting Microsoft for 30 minutes to promote her “Be Best” campaign against cyberbullying, an initiative that has drawn criticism given President Trump’s approach to social media.

Microsoft President Brad Smith, First Lady Melania Trump, and Microsoft CFO Amy Hood discuss the ‘Be Best’ campaign. (GeekWire Photo / Monica Nickelsburg)

In effect, Microsoft has put itself in the political and regulatory driver’s seat — a position much preferred to the witness stand.

“It’s not only good business, it’s a necessity of business,” said Michael Cusumano, a professor at MIT’s Sloan School of Management and its School of Engineering who wrote the classic 1998 book, “Microsoft Secrets.”

“It’s better to stay one step ahead of these problems or try to get ahead of them,” Cusumano said, “rather than get run over by them or get dismantled or constrained by government regulation.”

Stronger rules create an advantage

In a country deeply divided by politics, tech regulations appear to be the rare issue that appeals to both sides of the aisle. That unity was on display in last week’s hearing before the U.S. Senate’s Commerce, Science and Transportation Committee on new privacy laws. The lawmakers trotted out numerous tech scandals and described a vulnerable populous.

“We now realize this data sharing is not a bug, it’s a business model,” said Republican Sen. Marsha Blackburn of Tennessee. “And big tech has made a whole lot of money by exploiting this data.”

Facebook and Google, in particular, rely on gathering personal data for targeted advertising and other applications. Last year, 98 percent of Facebook’s revenue came from ads, as did more than 85 percent of revenues for Google parent Alphabet. Amazon, too, is increasingly seeking online ad dollars, though its revenues overwhelmingly come from cloud computing and retail.

Apple, which earns most of its money from the sale of iPhones, iPads and Macs, is more insulated from data-related troubles. It, too, has long been a leader in privacy protections, and Apple CEO Tim Cook has directly criticized Facebook for its business model. He has also called for regulations.

Microsoft makes its money from products and services like Microsoft Azure, Office 365, Windows, Xbox and Surface hardware. It’s in the social media sphere as the owner of LinkedIn, but the business social network relies on subscriptions for much of its revenue. Its search engine, Microsoft Bing, has grown into a respectable advertising-based business, but even with that, advertising made up only 6 percent of the company’s revenue in the last fiscal year.

Microsoft is “not involved in a lot of the problems that Facebook and Google are involved in,” Yoffie said. Calling for regulations is “a lot easier if you don’t have to potentially impact millions or billions of dollars of your business if you’re going to make certain types of decisions.”

Microsoft President Brad Smith announces a new $500 million affordable housing fund. (GeekWire Photo / Monica Nickelsburg)

That makes Microsoft’s call for stricter digital oversight a more subtle way, perhaps, for the company to poke its competition in the eye than the overtly aggressive strategies that it wielded in the past. Likewise, a critical look at Microsoft’s charitable acts suggests that more than altruism is sometimes at play. As is often the case in philanthropy, the recipient of the gift as well as the donor can reap benefits — and Microsoft is no exception.

  • Microsoft provides a variety of cloud services, software and mobile devices to nonprofit organizations and schools for free or discounted prices, giving the company a chance to recruit new users and build customer loyalty.
  • Microsoft’s vocal opposition new anti-immigration policies could protect its ability to hire skilled talent from abroad.
  • Support of affordable housing helps address a homelessness emergency that has reduced the livability of some of their employees’ communities.

That said, much of the company’s philanthropy creates few obvious gains for Microsoft beyond the positive PR, including initiatives to reduce the company’s carbon footprint, college scholarships and job training programs. Archie Carroll, a professor emeritus at the University of Georgia and scholar on corporate sustainability, called the company an “exemplar” for its engagement.

“This is what cutting-edge firms do,” he said. “They try to identify problem areas in society or in the community and address them, particularly ones that are not being addressed by other companies.”

‘Original gangster of big tech’

Created in 1975 by Gates and Paul Allen, Microsoft was a dominant player in the early days of computers. But more than two decades in, the company’s winner-take-all drive landed it in court in the U.S. and Europe, accused not just of aggressive business practices, but also illegal ones, to edge out competing operating systems and web browsers.

The cases were eventually resolved — though not before Microsoft was threatened with being broken up as a remedy. Gates stepped down as CEO in 2000, and Steve Ballmer took the reins. Over the decade that followed, Microsoft’s dominance slipped as mobile devices dashed ahead of desktop computers.

But during that same era, the company started a radical course correction that ultimately kept it relevant, laying the groundwork for its transition to cloud technology.  Microsoft was shifting from an off-the-shelf, consumer-oriented software business to a higher security, enterprise focus targeting bigger customers. It was pivoting to online services and building significant corporate and government partnerships. It had to demonstrate that it was a stable, reliable enterprise.

“They really had to make that transition, [to show] that buying Microsoft software was not a legal liability, that they weren’t going to be shut down by the Department of Justice, that they could be a long-term, safe partner,” said Cusumano, who is a co-author of the upcoming “The Business of Platforms” with Yoffie and Annabelle Gawer about digital strategy.

The maturing company risked repelling customers as well as employees if it didn’t shift gears from the “original gangster of big tech,” as dubbed by one scholar, toward a more respectable operation.

Microsoft’s image arguably got a boost from Gates as he moved into his post-Microsoft career as the world’s leading philanthropist, along with his wife Melinda Gates, focused on solving fundamental global challenges. Pictured smiling in pullover sweaters, the avuncular Gates strikes a gentler persona. In a recent appearance with Melinda on “The Late Show with Stephen Colbert” the couple seemingly won over the show’s audience.

In 2014, Nadella took over as CEO, doubling down on the cloud and refocusing the company on productivity technology. Nadella, who started at Microsoft in 1992, often receives high praise from employees who talk about the company’s high energy and empathetic, inclusive culture under his tutelage. By 2018, Microsoft was undeniably back on top. In November, it reclaimed the title of world’s most valuable company, surpassing Apple, which had knocked it out of the top spot in 2010. Microsoft is now valued at roughly $860 billion. To give a sense of scale, that’s more than the GDP of Saudi Arabia or Switzerland.

But it’s not an outlier in the sector. Last year, Amazon and Apple soared even higher, hitting and falling from record-setting market cap valuations of $1 trillion. Microsoft, Apple, Amazon and Google parent Alphabet are currently the most valuable companies in the world, with Facebook not far behind in the rankings.

Microsoft’s Redmond campus. (Photo by Stephen Brashear/Getty Images for Microsoft.)

The quintet dominates the digital world and beyond. Microsoft’s Windows operating system still runs on three-out-of-four PCs worldwide. Amazon controls about half of U.S. online commerce. Facebook had 1.52 billion daily active users on average as of December. Google processes 40,000 search queries per second. Apple’s OS is on 44 percent of U.S. smartphones.

Their collective reach and power are mind-boggling. When a reporter last year tried to quit using products and services controlled by the big five, she was shocked to discover how deeply their tendrils crept into every corner of her life. She called the experience “hell.”

“These tech giants with big or dominant market shares in various spaces are very much warranting careful scrutiny,” said John Kirkwood, a Seattle University law professor and antitrust expert. “They should be watched.”

The challenge of staying above board

For all of its efforts to stay above board on privacy and other issues plaguing the tech sector, Microsoft can’t duck every controversy.

Employee opposition to the HoloLens military contract is the latest high-profile example. “We are alarmed that Microsoft is working to provide weapons technology to the U.S. Military, helping one country’s government ‘increase lethality’ using tools we built,” the group of more than 50 employees wrote in their letter. “We did not sign up to develop weapons, and we demand a say in how our work is used.”

Nadella responded on CNN, “We made a principled decision that we’re not going to withhold technology from institutions that we have elected in democracies to protect the freedoms we enjoy.”

In December, the New York Times created an uproar with a report that Facebook had provided Microsoft and other companies information about its users’ “locations and religious and political leanings.” That data gave Microsoft, for example, the opportunity to customize what people saw on Bing. Microsoft has deleted the data, according to accounts in the Times.

An Irish report published last year revealed that LinkedIn was applying algorithms to personal data to suggest network connections, and that it used email addresses for 18 million non-members of its network to send them targeted ads via Facebook. Dutch officials this fall revealed that Microsoft collected personal data without informing users. In each case, the company responded to say that it has stopped the practices or is making modifications to comply with privacy rules.

Not in every case, but in many, Microsoft responds to the criticism with a tone of repentance, rather than defiance, and pledges to do better.

Microsoft CEO Satya Nadella, center, observes as Rainier View Elementary School students take part in the Hour of Code on Monday Dec. 7, 2015 in Seattle. Hour of Code introduces to programming and computer science throughout the world. (Stephen Brashear/AP Images for Microsoft)

“Every day we see headlines about the anxiety people have about technology,” Smith said at the Microsoft Inspire conference in July. “We see people questioning whether they can trust technology.”

The company, he said, is working on tangible solutions.

“We need to engage in conversations with people around the world,” Smith said, “and we need to back up those conversations, not just with words, but with deeds.”

‘Equity for more people’

Even with the self-serving benefits of becoming an industry leader and a force for good — the PR, the ability to win customers and woo employees, meeting public expectations and influencing regulations that could give it a competitive edge — academics agree that Microsoft’s executives also need to truly believe in this mission for it to take hold.

Ante Glavas, a University of Vermont professor in the Grossman School of Business, has worked internationally on corporate social responsibility. “Leaders that we work with and talk to really do care about this stuff and want to leave the world a better place,” he said. They might make a business case for doing good, but there’s more to it.

“They use the language of self-interest as a rationalization and a way to convince the board and others that this is OK,” Glavas said, “but the original motivation is emotional.”

Nadella, Smith and other Microsoft executives are passionate when they talk about these social-good initiatives. They emphasize the need to make priorities resonate across their 135,000-employee company.

Last fall, Nadella told the Microsoft Ignite conference that reshaping both the company and the tech industry could benefit the world. The goal, Nadella said, is to “ensure that the surplus that gets created by digital technology is equitably distributed throughout our economy, throughout our society, because that’s what we need.”

It won’t work if there are only a few winners, he said.

“What we need is a real concerted effort to ensure that this next big revolution, driven by technology, creates more equity for more people across the globe.”

GeekWire reporter Monica Nickelsburg contributed to this report.

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