Bill Gates' worst nightmare

Gates has been famously fearful that if it makes a wrong move Microsoft could be out of business in no time. This is one of his arguments in support of establishing and maintaining a monopoly. He won't be able to say that anymore. Microsoft has reached middle age.

Microsoft is slowing down. It is bigger, more lumbering and less profitable than it was five years ago. Its sales are up 73% in five years, but profits are up only 30%. Payroll has doubled in the last six years. In the fiscal year just ended, sales rose only 8%, the first time the company has ever reported less than double-digit growth.

In the dog years of Silicon Valley, Microsoft, at 30, is in advanced middle age. The company relies on Windows and a suite of desktop applications--products released a decade ago--for 80% of sales and 140% of profits. Newer products--the Xbox videogame machine, the MSN online service, the wireless and small-business software--collectively have racked up $7 billion in losses in four years.

It's going to need a different management approach.

What has gone wrong? Microsoft, with $40 billion in sales and 60,000 employees, has grown musclebound and bureaucratic. Some current and former employees describe a stultifying world of 14-hour strategy sessions, endless business reviews and a preoccupation with PowerPoint slides; of laborious job evaluations, hundreds of e-mails a day and infighting among divisions so fierce that it hobbles design and delays product releases. In short, they describe precisely the behavior that humbled another tech giant: IBM