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
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:
"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
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
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."
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
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.
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