I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.

This is a good thing.

One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.

However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.

From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of  32 analysts rating them a "Buy" or "Strong Buy." (BRThat was 2 months ago; Its now down to 21 "Buy" or "Strong Buy," 10 "Hold," and 2 "Sell" or "Strong Sell." ) They
are widely owned by active mutual fund managers and closet Indexers.

Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.

Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds:  A history of the PC industry.

After Gates resignation, Cringely wrote this:

Pulp"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.

Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:

"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."

Fine, you say, but that was Microsoft more than 20 years ago. How about today?

Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.

Microsoft has spent five years and $5 billion NOT
shipping Windows Vista. This reflects a company deliberately built in
the image of its founder, Bill Gates — a single-tasking, technically
obsolete executive with no checks or balances whatsoever who fills the
back seat of his car with fast food wrappers. So Bill has to go,
because as an icon, he’s great, but as a manager, he sucks.

Part of this is Gates, personally, and part of it is his entourage
– a meritocracy based as much on historical proximity to Bill as
anything else. That inner circle has to go, too, and if it doesn’t go
– and go immediately — the required change won’t really happen
because the one true Bill will just be replaced by a dozen or more Bill
clones.

Up to this point, most of the top people leaving Microsoft have gone
because they couldn’t stand the working environment. Look now for a
second bunch of top people to leave because they liked the working
environment too much.

One of the two needed components Microsoft has always lacked is
professionalism. Ray Ozzie and Craig Mundie, as successful leaders in
other professional organizations and supposedly bonafide adults, are
supposed to fix that, which they have a good chance of doing if Gates
doesn’t meddle.

Notice from the announcement that both men are assuming their new
roles immediately? If that’s the case, what will Gates be doing, then,
during that two-year transition? If he’s smart, Gates will do nothing
at all. The two-year transition is based on his paranoid need to keep
his thumb in the backs of both men and be able to return if he chooses
to. But while Ozzie and Mundie are each capable of failure, it is
important to remember that GATES HAS ALREADY FAILED, so coming back
isn’t really an option, though he may not yet get that.

If either of the new guys fail, look for Microsoft to again hire from outside, NOT to bring back Bill Gates."

Cringely,
as you might expect, has a similar view about one other aspect of
Mister Softee that I share: Their challenged sense of right and wrong:

"The other attribute that Microsoft has historically lacked is
ethics, which also comes directly from the cult of Bill, with its
infinite shades of gray. Microsoft has to this point generally thrived
by stealing technology from other companies. But now it is at the point
where there isn’t that much left to steal, so Microsoft is faced with
operating in a whole new manner — actually inventing stuff. This
requires discipline — not just discipline to do the work, but
discipline not to backslide and steal a little of this and that when
the going gets rough.

In short, for Microsoft to have the barest hope of preserving its
monopoly, it has to build a whole new monopoly based on honest,
original work devoid of politics, backstabbing, and lies. This means
not only does Gates have to go, but for all practical purposes CEO
Steve Ballmer should go, too, because he’s as responsible as Gates for
this mess.

So IF THEY DO IT THE RIGHT WAY, look for Gates to move his office to
the Foundation immediately, look for several dozen of his closest and
oldest associates to leave the company in the next four to six weeks,
and look for Steve Ballmer to leave, too, within a year."

>

What more can anyone add to that, other than to say I still believe MSFT is dead money — at least for the time being.

I will revisit the stock again in a few quarters, and see if this perspective needs to be updated.

>

Source:
Taking
One for the Team: Microsoft Has to Change and the Departure of Bill
Gates (AND Steve Ballmer) Is the Only Way to Assure Their Fortunes.

Robert X. Cringely
June 15, 2006
http://www.pbs.org/cringely/pulpit/pulpit20060615.html

Category: Corporate Management, Investing, Markets, Psychology, Technology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Microsoft is in crisis?”

  1. emacdaddy says:

    Cringely? Authority?

    HAHAHAHAHAHA HAHAHAHAHAHA HAAHAHAHAHAHA HAHAHAHAHAHA

    What’s next? Using Dvorak to back up your claims?

    HAHAHAHAHAHAHAHAHAHAHAHA

  2. D. says:

    Too funny: you’ve just described 99% of governments and corporations!

  3. Ned says:

    I am no expert on MSFT but as for this “The leaders of the last bull Market are rarely the leaders of the next.” please give us a “rare” example. This is a time when “never” may be appropriate and correct. Competition and creative destruction usually combine to make sure the bull/bubble leaders never return to those valuation levels again. That freeware on the net looked pretty good to me.

  4. B says:

    Ok, I nearly pissed my pants this morning. emacdaddy, I had no clue who Dvorak is so I looked under Google to find this blog.

    http://www.dvorak.org/blog/?p=5801

    This link just made my day.

  5. me says:

    I agree. Vista, if it ever comes out, who is going to run out and buy an OPERATING SYSTEM? Answer, not many. Individuals who own PCs will not be buying a new a PC so they can own Vista. At the same time, business, while slow to adopt XP, has figured out that XP isn’t bad. They may start ordering higher hardware requirements for their new PCs, but don’t look for corroborations to be early adaptors.

    The problem is, PCs are a commodity. There are few geeks anymore. Nobody typing their DOS commands, trying to tweak their PC. XP does all of this for you.

    I dumped BellSouth for Comcast. Among other reasons, Bellsouth only offered me 1.5MB service and Comcast 6MB, so I switched my whole bundle.

    So I immediately began tweaking my PC for cable instead of DSL. I would up restoring the XP defaults because it did a better job of managing broadband than I could.

    So no none cares about the operating system.

    As for Office, the only features they seem to add are collaborative tools that never get used. Instead of using online edit and review, most people e-mail the document to others, who then print it out and mark it up. Annotations? What’s that?

    It was amazing to me the managers at IBM (before my job went to India) that used their Lotus Notes on the server. They were incredibly stupid and couldn’t run a local copy and then replicate when they finally got online.

    So I agree. MSFT is dead money. People that buy a 300 desktop are not going to add 150 bucks for Vista and 300 bucks for Office.

    MSFT has seen its time come and go. Google, Adobe, eBay, Amazon and other qualified challengers are now after them. Intuit has fought them off.

    But the bottom line is, to quote Jonathan Schwartz, “The majority of the world will first experience the Internet through their handset”

  6. Kris says:

    I agree if Ballmer goes, the stock could be worth a look again. ..not until then however.

  7. S says:

    MSFT has no debt, offers an earnings yield of 6.5% (i.e., 16x), has operating margins of almost 40%, and generates $4 billion of free cash flow per QUARTER. The $6B per year it spends on R&D could be cut in half and immediately make it a $30 stock. The monopoly position in both OS and application software is essentially an annuity since everybody upgrades every 3 or 4 years whether they need to or not. The OS and AS are the cash cows MSFT milks for the other initiatives that they have routinenly failed to capitalize on….so far.

    Sony stepped on its own penis with PS3. The hardware part of the XBOX consolde will turn profitable in ’07. If MSFT can incent its army of coders to develop the “must have” games, the software for the XBOX could turn into another muliti year annuity stream.

    And I wouldn’t dismiss the CE. It is gaining much wider acceptance and is viewed as a serious competitor with Symbian. With 1 billion handsets replaced every couple of years, MSFT has a powerful incentivie to get this right as well.

    And of course the biggest opportunity of all is the “software as a service” that everybody is chasing for the online ad revenues.

    There are alot of opportunities available to MSFT. It’s a question of execution. With an earnings yield of 6.5%, it can’t go much lower, so I view it is a stock with very limited downside and a whole bunch of mini call options embedded in it.

  8. Cullen says:

    Barry, I agree. MSFT is no longer a great growth company, yet they insist on trying to be one. They’re like a 45 year old woman who keeps trying to convince people that she can drink and hang out with the 25 year olds….Its not happening.

    MSFT is a growth and income stock. They need to start acting like it, boost the dividend and stary buying back some friggin stock. Otherwise, they need to do something drastic.

    Personally, I think the best thing MSFT could do would be to break themselves up. Spin off the Home and Entertainment business as well as the Business Solutions segment. Break her up into two or three companies and then focus on growth if thats what they insist on being…..

    Thats extreme, but I dont know what else would get MSFT going again…..

  9. gnuman says:

    jesus. another microsoft is on the verge of collapse post. first apple and now microsoft. and referencing cringely? do you realize how clueless that makes you look? be careful when referencing authority to make a case. the general rule goes that they should actually be an authority. and no an authority on tinfoil hat theories doesn’t count.

  10. royce says:

    They need to up the dividend. Them sitting on a whole bunch of cash isn’t confidence inspiring to anyone, so it may as well go out to the shareholders.

  11. Its 17.89X not 16; The dividend yield is 0.360

    Let them cut the R&D in half, and I’ll short them.

    People no longer upgrade every 3 or 4 years — they upgrade when their PCs die. Thats some change from the 286/386/486/586/PII cycle of days gone by.

  12. Bob A says:

    Microsoft is like the post office. What young visionary enterpreneur with what they hope is the next great idea would want to work there? None, nobody. They would and will want to start their own company, while Microsoft will continue to try to copy and clone and suffocate and call their own every one of them. They have a monopoly, but they are limited in what they can charge, not by government, but by free and advertising supported software waiting in the wings that will eat away at their share at various price points.

  13. me says:

    gnuman,

    I would love to know your definition of dead money. I don’t think I am an “expert”, but I can tell you that a quick glance tells me MSFT and AAPL were about 20 in 1999. Now why don’t you be an expert and tell us which one is 60 and the which one is still 20? If 7 years isn’t dead money………..

    b, I have seen that piece and love it. I could add a lot more about Sammy and his Corporation uberalles New World Order. I saw this on another blog:

    :Ex-venture guy Howard Anderson recently opined that the next decade’s most important economic tussle will be between India and China (and China will win). Here are some choice quotes from his speech:

    * There are very few truisms, but one I’ll take to the grave is that IBM is always wrong.:

  14. B says:

    I don’t like Microsoft as an investment and I don’t like Gates’ or Ballmer’s management style. But, this is sooooo old news. So we get some dweeb from PBS who makes forty large ones and works out of his basement as an authority on what is wrong with a $50 billion company? Uh, yeah. Maybe they should hire him to run the company. And, I guess since large cap led the massive assault on the 2000 highs and they are all languishing this cycle, do we conclude they are all down for the count or out of touch? Maybe.

    To be fair, he does point out the obvious but this is nothing new or insightful. It’s basically stream of conscious banter of the clueless. So, was Microsoft troubled when it ran up a 660,000% gain? It sure was. Any company growing that fast has many of the problems he alludes to. It’s a damn good problem to have. For all of his shortcomings, I will say Bill Gates trumped the over loved Steve Jobs who ate a shit sandwich when he refused to license Mac OS and Gates saw the potential and grabbed it. Jobs looks to be making the same shit sandwich again with content although it is too early to tell. And all of MS’s rapid growth pains didn’t keep them from expanding and gaining share in every space they entered. And did they use the desktop to accomplish this? Yep. And how does that differ from Google, which btw, is also an accidental empire, using paid search to try to expand? Or Yahoo? Or IBM with mainframes? Or Dell? Or Apple? Or or or.

    Again, I’m no fan but how many companies would love to change positions with another company that has 90% market share in Wintel servers and desktops, 70% gross profit margins and $50 billion in cash? With this as a base, fixing any problems the company has makes it a hell of a lot easier. (IF they fix the problems which IMO are mostly management.)

    Frankly, IMO what they really need is new leadership to transform the culture and unleash their capabilities and innovation potential. You see Microsoft has what all companies eventually get. Big company disease. It is when innovation, flexibility and creativity (the tenets that got them there) go out the window in favor of using heft and their influence to win in the market. It sucks the life force right out of any large company under such a trance. That is why brilliant executives can make elephants dance. They return these behemoth companies to a culture of risk taking, innovation, creativity and enthusiasm that was sucked out of them when they brought in the “professional” managers. Doesn’t mean Microsoft is going out of business or its best days are over. It’s best days as an investment are over but that isn’t because it is a company going under. Carlos Ghosn is a perfect example of one who resurrected Nissan’s insular, risk avoidance culture.

    Eggheads make better managers IMO. They cultivate an environment of creativity and free flowing debate that is so much part of research, science and engineerng yet that most noneggheads simply can’t grasp because they don’t have that innate ability. (You don’t need to be a scientist to be an egghead at heart. You could be a janitor.) So, noneggheads manage by control because they fear the eggheads. Ballmer is a control freak. And so is Gates. He isn’t a true egghead. Microsoft needs to leadership. Maybe Gates realized that. If hindsight proves this out, he should be given some credit for letting go. Only time will tell.

  15. cm says:

    me: Corporate customers won’t buy a product that is end-of-lifed, if solely for CYA reasons. When that happens to XP, and it will, they will switch to Vista. I don’t see how they will force MS to keep supporting XP. I recently read somewhere that XP-SP1 is no longer supported. Incidentally we had a mandatory SP2 upgrade at work recently (which broke Standby shutdown as well as switching off the LCD back light when blanking the screen on my laptop). IT says, tough luck, don’t use it.

  16. trader75 says:

    So MSFT will force its corporate customers to shell out big bucks for Vista, and likely force them to upgrade hardware too, even if XP continues to do the job?

    There is a colorful descriptive phrase for a company that forces to you spend hundreds of dollars on a bloated upgrade you do not want by deliberately killing off the version you already paid for: that phrase is “flaming assholes.”

  17. Kevin says:

    Another way to look at Microsoft is as a copyright rent collector. Perhaps Microsoft is worse run that it has to be, but given that each sub-area of software seems to wind up dominated by one company, I think whoever made the dominant OS was going to wind up looking much like Microsoft.
    The builder of the operating system and of core word processor and spreadsheet applications should have been a temporary project, but it continues past the end of its natural lifespan because we don’t have the structures/social forms to organize it as a temporary project and because copyright rent allows it to continue to receive income even though it is not actually producing anything profitable anymore.
    To use the analogy above of the 45-year old trying to pretend to be 25, if the 45-year old has enough money, there will be no shortage of people willing to tell her she looks 15.
    There is a much broader issue here of how intellectual property is treated and that issue links this Microsoft discusssion with Barry’s post yesterday about Media bullies.

  18. B says:

    Companies don’t need to do anything. That includes upgrade to Vista. They can run old MS operating systems as long as they want and MS isn’t going to stop them. Every software company on earth forces their clients to upgrade if they want to maintain support. Otherwise, they’d have armies of bodies supporting ten versions of software. And, it isn’t just the software companies forcing them to upgrade. Intel and AMD will only support certain OS releases on their latest chips. Device drivers are only tested to work on certain OS’s. Utilities, tools, applications, application development tools, etc, etc, etc.

    This is just bashing for the sense of bashing.

  19. Kevin says:

    Not to pick on Bill Gates – I much admire the work he is doing on world health, but again the structural issue.
    Gates gets to run a huge multi-national company, which he is no good at, because something he did in creating Microsoft was extremely effective. We would all be better off if we had some more effective way of getting people into the positions where they are effective, not ones where they are not.
    Another example is George Lukas being in the position to make a string of very poor Star Wars movies because of his amazing genius at FX from the first one.
    What it takes to be the tiny mammal stealing eggs is very different from what it takes once you are the tyrannosaurus or the brontosaurus.

  20. McSwiggen says:

    In response to “S” above. That really is Cody writing under his ultra ego name “SexGod”

  21. trader75 says:

    “Every software company on earth forces their clients to upgrade if they want to maintain support.”

    Sure, not disputing that. Seems totally reasonable to let Win 98 bite the dust. But there are fair questions to ask in terms of defining “reasonable,” i.e. how long should a functional product be supported before its support is pulled, what genuine material advantages does the upgrade offer (vs useless new features) and so forth.

    Seemed to me it was being argued that MSFT will force Vista down its corporate customers throats by gutting XP support in short order, which would not be cool, especially if it happens soon after an unknown and highly complicated upgrade is released.

    If MSFT gives XP support a reasonable lifespan on the other hand (say at least a couple years after Vista’s release), and doesn’t require corporate customers to eat OS mystery meat right off the bat by way of support withdrawal, then the force-fed-revenue argument goes away.

  22. Blissex says:

    «People no longer upgrade every 3 or 4 years — they upgrade when their PCs die. Thats some change from the 286/386/486/586/PII cycle of days gone by.»

    Yes, but in America, and for home users.

    Microsoft makes as you say all its money on MS Windows and MS Office, in one of two ways:

    * Per-PC preinstalled bundle. The ”Microsoft tax”.

    * Per-user corporate mandatory updates. The ”Microsoft rent”.

    Now these may not be growing in the USA, but they are still growing elsewhere… Problem is, of course, the growth elsewhere gets average with the huge mass of mature markets.

    Also, one can hope that eventually they will capture Sony’s extremely profitable videogames quasi-monopoly; Microsoft have a good track record at attacking existing very profitable franchises (CPM, WordPerfect, Borland, UNIX, Oracle) and eventually conquering them, via relentless cross-subsidy from their existing base.

    However Microsoft is too big to be a sexy company, and too mature in its original markets…

    Reminds me of a story of some decades ago, when IBM was where Microsoft is now: I was doing some small experiment with Leontief input/output matrices, and one of the papers was from the IBM Economics Research Group. What? Why does a private computer company need their own economics research group? Well, IBM was so large that for some years fully 50% of all capital investment in the USA was in IBM products, therefore they had grown into such a large part of the USA economy that they had become quite sensitive to cycles, so they needed some economics research to see a bit ahead…

    Microsoft is not far from the same (cyclical) fate, if not already there. And I have seen that a large part, even if not 50%, of USA corporate investment was in years part in Microsoft licences…

    So don’t count Microsoft out yet, they can milk mercilessly their installed base for a decade or so more, just like most (DEC? Apple? Sun?) tech companies do in the terminal phase of the career cycle of their management.

  23. Bissex says:

    «Another way to look at Microsoft is as a copyright rent collector.»

    I think that’s exactly how Microsoft executives think, and they even wrote as much in an e-mail to Warren Buffett:

    http://WWW.TheRegister.com/2004/03/18/ms_exec_lists_joys/

    «Although I would never write down the analogy of a ‘toll bridge’, people outside our company might describe this business in that way. Those 40 million licenses averaged about $45 per, for a total of about $1.8BN in revenue.»

    «Today, we get more than $100 per system for NT, but only on a small percentage of the PC’s. But NT will be on closer to 70 per cent of the PC’s sold in FY2000. We can achieve average license revenue of $80. So 90M licenses at $80 per license totals about $7.2B, up from just under $2B in 3 to 4 years. And since there are effectively no COGs and a WW sales force of only 100-150 people this is a 90%+ margin business.»

    «The majority of the rest of the business is called the ‘finished goods’ business. It consists of businesses or individuals buying office productivity software, educational or entertainment software, etc. Again the structure is very simple. A PC is just a razor that needs blades, and we measure our revenue on the basis of $ per PC. In FY96, nearly 50M PC’s were purchased and Microsoft averaged about $140 in software revenue per PC or $7B. This amount is in addition to the OEM royalty business I described above.»

  24. trader75 says:

    “It’s best days as an investment are over but that isn’t because it is a company going under.”

    By the way I agree with you 100% on this. They certainly aren’t about to kick the bucket, not sure who’s insinuating they were.

    From the standpoint of a trade or even a value investment, there is plenty of potential in MSFT given the right entry point. Freaking General Motors is up 40% over the past nine weeks… just about any company can appeal if the circumstances are right.

    I thought this debate was more about whether MSFT will rise and shine once again, not whether they will throw off an investable opportunity once in a while. Ray Ozzie might teach the elephant some new dance steps, but he can’t bring back the past or fend off the future.

    p.s. what’s so wrong with working from the basement?

  25. TexasHippie says:

    I agree with emacdaddy – the only thing Cringely is truly an expert on is writing dramatic (borderline inflammatory) articles to attract a lot of pissed of readers by word of mouth. Slashdot flame wars happen all the time after a new article by Cringely or Dvorak.

    If Microsoft wants to grow it may not be able to innovate, but much as IBM has successfully done recently MSFT could become a skilled integrator of independent (and open source?!) software into business service packages. MSFT *has* to reinvent some aspect of the way it does business, it can’t simply keep trying to be everywhere (which is the only reason they’re interested in the money-losing venture of game consoles).

    If they keep trying to put their fingers in every pie, they will lose. Watch for attempts to create an iPod killer or any real competition to iTunes for movies and music. They will lose that war. The music industry doesn’t trust MSFT not to try to monopolize that area, and while they hate Steve Jobs’ stubbornness they also know that Jobs has very limited/specific empires that he’s trying to build.

    If MSFT can reinvent itself as a supplier of business and personal productivity/efficiency software then it can focus on the *style* of things it does best. Technological monopolizing is known as “integration”, and it can be extremely beneficial to the consumer unlike business monopolies. Just look at the reason’s for OS X success in turning around Apple.

    Let’s see the old hats leave, and a new focus on producitivity (including the efficiency gains of not having to fight against viruses, worms, etc.), and MSFT can turn around.

  26. Blissex says:

    «Gates gets to run a huge multi-national company, which he is no good at, because something he did in creating Microsoft was extremely effective.»

    Well, I am a tech guy who does not love Microsoft, but I think that Bill Gates has been an awesome company head. Sure, Microsoft is as disfunctional as they come in terms of internal organization, but BillG has always focused on doing the right (profitable) thing, not doing it well or efficiently.

    His main strategies have been two:

    * Mastery of the so called ”platform game”, which involves achieving customer lock-in via horizontal APIs.

    * Targeting incumbents with a very profitable near monopoly in a large market, by coming up from below, protected by the incumbent price umbrella.

    So far focusing on platform lock in and segment attacks from below has been far more important than petty distractions like efficiency.

    Besides I suspect that some aspects of Microsoft’s inefficiency are not invisible to BillG, and they are intentional: for example it it well known in the tech industry that buggy, opaque and complex products achieve stronger customer lock-in than quality, documented, designed ones, and that complex and opaque organizations produce software in their own image; it can’t have escaped BillG’s notice that in the past 30 years Microsoft has added a management layer roughly every 2-3 years (not linearly: it had around 5-6 around 10 years ago, and it has 11-12 now). But endless layers of ”management” mean that time servers can be rewarded more cheaply than by giving them lavish stock options (which are no more).

    «We would all be better off if we had some more effective way of getting people into the positions where they are effective, not ones where they are not»

    But this runs counter to the very essence of property rights, which is to confer control, right or wrong, efficient or inefficient. Often ownership results in husbandry, almost (or perhaps more) as often in neglect. But then trusteeship (as in ”sharecropper” CEOs for example) has its own problems :-).

  27. S says:

    I tend to think in terms of E/P, rather than P/E. Makes it easy to do a very quick and dirty comparison with competing investments priced on a YTM basis.

    And I’m using next year’s (FYE 06/07) estimates to get a P/E rounded to 16x, which translates to an earnings yield of about 6.5%.

    For most tech companies, cutting R&D would be a kiss of death. But then, most tech companies don’t have $6B R&D budgets. Shareholders see MSFT spending $6B per year on R&D and wonder what they are getting in return. Cutting R&D by $3B would clearly move the net income needle, but will it compromise its competitive position? Barry thinks yes. I’m not so certain. I tend to think it might force them to be more focused and disciplined in how they allocate R&D dollars…rather than taking the “throw a bunch of shit on the wall to see what sticks” approach.

    Guess that’s what makes a market.

    I characterized it has having limited downside with a bunch of mini call optioins embedded in it…and we all know most call options expire worthless, so……

    Regards,
    SexGod

  28. Blissex says:

    Just remembered that there is an old 1991 memo by BillG about strategy, which is one of the few glimpses people outside Microsoft’s executive ranks have had in his way of thinking, and it is quite exceptionally clear and insightful as to the business side of things; one copy here:

    http://Pauillac.INRIA.FR/~lang/libre/reperes/local/Challenges.and.Strategy

    For example his take on software patents:

    «PATENTS: If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today. I feel certain that some large company will patent some obvious thing related to interface, object orientation, algorithm, application extension or other crucial technique. If we assume this company has no need of any of our patents then the have a 17-year right to take as much of our profits as they want. The solution to this is patent exchanges with large companies and patenting as much as we can.»

    BTW, the Autodesk papers referred to in the memo are also pretty entertaining…

  29. Lord says:

    Success brings its own problems, those of being too profitable to undermine their own position, of doing something truly new, of the not-invented-here syndrome. It was envitable. They probably won’t really innovate until they have run out of cash and their monoplies are irrelevant anymore.

  30. a says:

    All these comments about forced upgrades and XP end of life support cutting out right away are wrong. You people are just babbling. You don’t have any of your facts straight. Come back with a link that supports any of your bullshit FUD.

  31. BB says:

    hey Barry , are you short the stock ? that will tell us all we need to know

  32. me says:

    “I don’t see how they will force MS to keep supporting XP.”

    a is right. When I was with AT&T (before cable) MSFT was coming out with a new version of Office and it was not backwards compatabile. I was on the beta testing team and can tell you that AT&T told MSFT if we couldn’t open old office documents with the new Office we wouldn’t buy it. They changed.

    If prospects for Office are so bright, why do they give away for 100 bucks Microsoft Office Student and Teacher Edition?

    Go into your local Borders or B&N and take a look at the computer books section. It is 1/4 of what it used to be. Nobody cares about computer anymore. What they have does what they want.

  33. whipsaw says:

    Some of you guys don’t seem to understand that M$ is not a software company, it is a marketing company. They’ve never developed anything on their own that was of any value- name the successful product and it came from elsewhere for repackaging.

    Most of this occurred via outright purchase or licensing, but they’ve also had a long, long string of pirate adventures that have cost them dearly. The current one involves stealing some poor dumb jerk’s Excel database interface. He showed it to them, they said no thanks, then used it anyway. At least he gets $65million. http://www.theregister.co.uk/2006/06/19/ms_loses_excel_patent_appeal/

    Symantec is next up in the batter’s box which I find kind of ironic given their own history. But my underlying point is that of all the players in what is an essentially specious industry, M$ is at once the least innovative and most insubstantial. Oh, and I am in the software business and have been for 15 years now- trust me, it is just showing you the same movie every day with the occasional bump in speed because hardware has gotten faster and cheaper. Nothing to see here, move along.

  34. D says:

    “…I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard.”

    Agree. But is this any difference from Google, that so many believe as the anti-Microsoft?

    The Google’s mystique is based entirely on the company’s deliberate secrecy, and its stock on hypes. Except for initial contribution to search algorithms, what other “innovations” have originally come from this overhyped company that is supposed to have sucked up all the brightest minds on the planet? If this were true, and the company itself knows it were true, then why all the nervousness regarding every moves from Microsoft (or any other company for that matter)?

    Let’s see, apart from search, what other “brilliant ideas” have come directly from Google: gmail, base, desktop, earth, map, froogle, video, calendar, picassa, talk, finance, page creator, writely, etc. and now, spreadsheets? Any of those copycats? Oh yes, their business model somehow reminds me of Overture.

    Talking about a company changing the world with originality and innovation! Looks like it has a list of every Web applications ever invented (by someone else) and go through it one by one, then produce one of those “beta” Google app. Curiously, this “strategy” closely resembles “embrace and improve” tactics (nice decorations for “copycat”, and greatly admired, i might add!) from Microsoft; however, unlike Microsoft, i’m sure they do no evil – at least that what they claimed.

    Yet, every time a well-timed “company announcement” occurs as the stock is being depressed it’s immediately touted by financial networks and pumped up by Wall Street’s crooks as another “brilliant innovation” that’ll surely either “seriously challenge” or even “kill” other companies, including Yahoo, Ebay, Microsoft, etc., and bring enormous revenue to the company “some time in the future.”

    I wonder why they have this obsession with “the destruction of Microsoft”, so to speak? Could it have something to do with their CEO’s humiliating experience in fighting Microsoft before, when he was still with Sun and Novell?

    And what with all this “cry wolf” about Microsoft using MSN as their default search engine in the new IE? Shouldn’t ANY company have the right to promote their own product in another product of their own? Firefox is not even a Google product, yet what’s the default search engine in Firefox? How convenient! As long as something benefits them, that’s the right thing to do, otherwise, it must be wrong.

    I think the obsession this company has with Microsoft is due to the fact that they’re two of a kind. At least Microsoft doesn’t pretend to be a nice guy. Please, I don’t want another version of Microsoft!

  35. whipsaw says:

    “Google” was indeed innovative and cool, GOOG is not. Same thing happened to Redhat, once the IPO happens the cancer is there.

    I like garage-band software because it is useful and free, once it gets into the hands of the sharks, it doesn’t matter if it is useful and, in one way or another, it is no longer free in any case.

    Eventually, maybe somebody will figure out that the best way to kill good ideas is to monetize them. Really smart people who create things don’t do it for money, they do it because they can. Once they become corrupted, the smart side gives way to either the lazy side or the greedy side.

  36. mz says:

    I’m not sure how you can look at msft on an EV/FCF basis and not say it’s at least in value ‘territory.’ A straight PE ratio is kind of misleading for a company with this level of cash.

  37. Bill Gates leaving Microsoft

    i like this run down of events

    and this frog putting on airs, linked to in that bit:

  38. Blissex says:

    «All these comments about forced upgrades and XP end of life support cutting out right away are wrong.»

    Sure, as to the strict technical point, but the sense is quite right: Microsoft has been ”gently nudging” (the understatement of the week) corporate accounts a few years ago to moce to the ”new improved” licensing model, which apart from including a hefty rise in fees, essentially switched those accounts to a ”constant upgrading” pattern.

    Sure, you can choose not to switch to licensing 6.x and its Software Assurance Program, if you are a CIO who does not care about covering his ass… :-)

    Microsoft has some very exceptionally smart and ruthless people in its marketing and licensing staff, and their get paid a whole lot to spend 100% of their time studying how to extract the maximum value from Microsoft’s captive customers…

    http://www.cio.com/archive/011502/meter.html
    http://www.pcworld.com/news/article/0,aid,116207,00.asp
    http://www.eweek.com/article2/0,1895,1649933,00.asp

    And so on…

  39. ali el mezouar habib says:

    slt mes amie je m’apel ali habib j’aime beaucoup votre societe est j’espere de visité la je suis agé de 26 ans algerien ambitieux comptable principal analyste a l’entreprise nationale des industries electroniques j’aimerais bien de faire une visite de votre socite est pouquoi pas de faire une formation chez vous bon courage je vous souhaite les bone chance a vous est votre societe dear

    Ali Elmezouar Habib
    cité de la liberté n 180 sidi bel abbes 22000
    algerie