There is an old market saw about how the leaders from one bull market are not the leaders in the next bull market.
That’s true for a number of tech stocks: Dell, EMC, Cisco, Sun — and its especially true about Microsoft:
I have never been a big fan of the Mister Softee. From a tech standpoint, their products are kludgy and unimpressive; Their strong suit is not Innovation — it is relentless, incremental improvement, eventually leading to a decent if underwhelming product. What they end up producing are the lowest common denominator bloatware that can be easily managed by a corporate IT staff.
It is a great cash flow machine. Its the monopoloy, stupid.
From an investment perspective, there are 2 key issues to observe: first, they are a mature company whose fast growth days are well behind them. They are too big to be responsive, too expensive to be a value stock, too slow growing to be a growth stock. In short, they are in the process of morphing from the software PC leadership company to nice, quiet, money machine. I would expect a good entry purchase (i.e., from lower levels) could throw off gains of 10-15% a year, including dividend.
The second thing to observe — and all too many investors overlook this — is that the money is in the monopoly products. Except for Windows and Office, pretty much everything else is 3rd rate money-loser, with SQL as the exception. They have a few products that have slowly began to move up the scale, and their hardware products aren’t bad, but note where the lion’s share of their revenue, and nearly all of their profits come from: the Monopoly.
They continue to lose market share to Google in search (Don’t believe the vaporware hype); Their blogging product is a 4th rate ghetto; MSN continues to lag, losing share and money; X-box is a multi-billion dollar loser (no one else would have/could have thrown so much cash at merely hurting Sony); They keep pushing back Vista — thats a function of how sprawlingly large and apparently disorganized they have become as an institution; Oh, and I am still awaiting their iPod killer, first mentioned by them about 30 months ago.
I remember the days when the mere mention of Microsoft moving into a product area would disrupt the competition, force delays in other company’s purchases, and crush competitor’s stock prices. The vapor announcements have lost their punch; that strategy is no more.
Outside of the monopolies of Windows and Office, there is SQL Server database software — which has been garnering more share — and not a whole lot more. Lest you think I exaggerate, go read their quarterly statement.
While I have no faith that management can aggressively boost future sales outside of their monopoly products, it almost doesn’t matter. If you buy it now, your biggest risk may be death by boredom. This will eventually become cheap enough to buy where it will be reliable if boring old money machine; I just don’t think we are there yet . . .
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Update: April 28, 2006 9:33am
I wrote this up yesterday while awaiting Microsoft’s earnings; MSFT opened down 11% to make a new low $23.60; I would be a buyer in the high teens/low 20s (technically, $22- $22.50) — so we are not quite there yet . . .
Also, see David Pogue’s NYT column on the new Internet Explorer, who notes that the product hasn’t been upgraded in over 5 years!
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Update 2: May 5, 2006 12:38pm
John Dvorak discusses 8 signs that the software giant is dead in the water in The Microsoft malaise
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Update: April 28, 2006 11:38am
Cramer joins the Microsoft skeptics . . .
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Microsoft 5 year chart
Hasn’t MSN posted a net profit for the past few years?
Also doesn’t Visual Studio net the company dollars as well?
Microsoft has never been an innovator. Ever. I mean ever. Bill Gates is not a technical genius. He arbitrated his first deal with IBM that netted him monopoly status while trying to negotiate the purchase of the product on the back end he was telling IBM he had. All because IBM was under the Consent Decree and couldn’t use their own OS or CPU because of the government pressures to break them up. ie MS didn’t come into existence because of any great product. It was because IBM was under threat to be broken up because it was a monopoly at the time. Now, Microsoft has become IBM. Bulky, large and difficult to grow with such scale and internal focus. Both still great companies but not the future leaders.
The best thing for MS would be to split the company up. Applications. Middleware. OS. Gaming. Digital Media/Internet. Or something similar. Gaming may not be able to stand on its own so maybe it stays with another group.
Microsoft is too internally focused and too bloated. The right exec might be able to accomplish more without splitting them up but in the end the shareholders, employees and markets would benefit greatly from many Microsofts.
Nice revisionist history there B.
Let’s not forget that Apple is the computing innovator leaving Microsoft in the dust. Mac OS X is the most modern operating system available on the market. Apple’s vision of enabling the digital lifestyle is driving consumers to the Mac platform. More people are making the switch to Apple.
Apple is the growth story for the remainder of this decade.
Have you tried the new IE its great. http://www.microsoft.com/windows/ie/downloads/default.mspx
Im in no way affiliated with ms.
Right on the money! Since the day that Microsoft bought the rights to QDOS for $50,000 and kept the whole deal secret from Seattle Computer Products – Gates became a GENIUS and poor Tim Paterson an average guy. Hope that he had a gooood investment guy on his side and now he is a billionaire!
Obviously “A” is unaware of the facts in Microsoft’s history and buys the pablum that Gates is a master coder who developed DOS. That’s about as truthful as I banged Jessica Alba. But just like Gates, if I think it enough, I might convince myself it is actually true. This is not some conspiratorial mumbo jumbo. It is a fact. Even Gates would tell you it is so. He was more of the Steve Jobs of MS and Paul Allen was the Steve Wozniak.
ohh and they just missed and dropped from 27.50 to 24.50 in afterhours.
Steve Wozniak architected the Apple II hardware, and wrote the operating system and the BASIC interpreter.
Bill Gates and Paul Allen wrote their BASIC in a Harvard computer lab, bought their DOS, never built hardware.
Microsoft never had a Steve Wozniak.
MSFT is banking on a massive new cash conduit; reduced software theft. Why do you think he hosted that dinner last week? SQL is doing what they originally planned to do with other products like IE, tied so tightly to the underlying QDOS that they can force users into both OS and database marriages. Oracle is arguably better and I love Firebird but any problems and MS says; you must buy SQL and the latest server OS. THey also haven’t been called on their obscene pricing where commercial products come with the MS code for thousands less than just a SQL seat would cost. Personally MS is about to buried by a computing paradigm they don’t see coming; appliance computing. AC example; I got a $99 Sempron box on sale at Fry’s, an $8 thumb drive. a $9.99 Gigabit card, 2x160Gb drive and downloaded FreeNAS 0.64. Instant NAS in the closet and iTunes for the whole house. It’s also how the next release of my client’s flexographic printing program will be released (the SQL example above). With a registered MAC address, known fixed hardware and remote admin there’s no end of advantages and except for the SQL program license no MS in the loop. This briefly is AC; networked single function boxes and MS is not going to be there.
Troll,
You are truly a master of the obvious. You get a star on your report card.
B, I am glad to see you write this. I get so sick and tired of hearing how great IBM, Intel, Microsoft, and now Dell are.
The only thing you left out was Mr. Softie’s Adobe Flash Killer. Yeah, I know, you probably never heard of it. Neither had anyone else.
I do not want to re-start the offshore debate all over again, but I have noticed that more these outfits move offshore, the worse they do. I think they lose touch with their customers. There used to be trade shows where customers and company employees discussed needs. Now the designers are offshore and there is no customer interface.
Intel is so far behind AMD why? Becuase India blew the design on their next chip and they had to cancel it and try to move another chip up. That set that behind AMD until 2008.
You’re right on the money B. Gates and Microsoft can’t code themselves out of an infinite loop. IBM was hampered by government intervention and thus gave Gates his big chance. I was using IBM’s OS/2 back in the early ’90’s and XP still doesn’t come close. Back then I could write some hack code that would destroy the operating space but OS/2 wouldn’t even blink and eye whereas XP will crash like a cheap kite. The old IBM programmers really knew what they were doing. They had moved from the old mainframe paradigm and knew how to build bulletproof code. Microsoft code sucks.
Yesterday I updated an XP computer that has run as a stand-alone, single-program dedicated machine since 2002. The OS had never been updated. It took just over 50 update downloads and over and hour and a half to bring this machine up to the latest versions. What a joke! This is how much time Microsoft’s cheap coders have costs everyone running an XP machine over the last four years. An hour and a half worth of time-wasting updates. What a bunch of inefficient crap.
The government should have done everyone (including Microsoft) a favor and broken the company up in the late ’90’s.
Microsoft bough DOS 1.0, they wrote DOS 2.0. DOS and their OEM agreements were their original cash cow that allowed them to incrementally improve their Office, GUI products, and programming tools.
But they became a monopoly when the Windows GUI became useable enough that they could integrate it with the OS without alienating customers. From that point, all their programming tool competitors became dependent on Microsoft libraries to compete in that space and had to play catch up. That’s also when Microsoft Office apps started to look like they were shoulders above all the other competitors that struggled to convert to their DOS apps to Windows. Broadly, that period was ’90 to ’95.
Since then, they’ve tried variations on that strategy with IE, ActiveX, and .NET but they’re competing against fewer, weaker companies so they can’t get the same pay-off as they once did.
Without competitors, Microsoft just isn’t exciting as a technology company. But notice that Microsoft’s strategy is all about uneven competition. The result is and will be that any area that Microsoft choose to compete in stagnates.
This will eventually become cheap enough to buy where it will be reliable if boring old money machine; I just don’t think we are there yet . . .
That’s MSFT as tech’s equivalent of a utility stock.
I like the analysis. Microsoft seems indeed a bit overpriced. The brand is valuable, but the growth is no longer there, percentage wise, and the monopoly will not last forever.
It looks to be a bit like IBM in the early eighties…
BTW, the greatest stock market mystery is still what happened around 1995 that made stock prices go up so much, and IBM is a good example:
http://finance.yahoo.com/q/bc?t=my&s=IBM&l=off&z=l&q=l
IBM today is a large but fairly banal mostly consulting company, and its share price is twice as high as when it was an infinitely profitable mainframe monopoly.
Microsoft, IBM, Intel and Oracle are the four horsemen of the apocalypse. They are fantastic companies to work for and make fairly good products but they have big company disease. Plus, they compete in a legacy business along with the other duds Sun, HPQ, MS, etc.
That business has no growth driver. What? New refresh based on an OS upgrade cycle? Are you kidding? That is pathetic. The innovative destruction in legacy areas is intense and the pace of deployment is abating. ie, They need the next killer app, killer technological innovation or something to spur a legacy business. CRM, ERP, Network Computing, Thin Clients, Client/Server, Outsourcing, Business Process Outsourcing, Supply Chain, Portals, Middleware, blah, blah blah. It’s all burned out with incremental advances that aren’t spurring growth. It isn’t so much a company specific problem as it is the business is now stagnating. It’s becoming a zero sum game where companies are beating the hell out of each other to take their existing business away rather than generating new business.
There is a chance the digital content revolution will eventually spur significant growth but I don’t see that maturing to the point of reaching critical mass for a few years. So, what will drive these companies to outperform again? Btw, AMD is in the same boat. They are growing by taking share. Not because they are a creative engine developing new business lines or new solutions.
B,
I am going to strongly disagree with you about IBM being a great company to work for.
No raises for most people, stolen pension, disappearing healthcare, and US jobs moving offshore by the 10s of thousands does not make this a great company to work for.
Don’t believe me? Check out the Fortune 100 Best companies to Work For 2006:
http://money.cnn.com/magazines/fortune/bestcompanies/full_list/
IBM is a churn and burn shop.
Ok, I give. Uncle. The company has become a difficult environment since Gerstner’s mid term.
One thing you can say for Microsoft: the stock did not go down much during the last bear market.
only a mere 70%
MSFT as tech’s equivalent of a utility stock.
That’s pretty much it!
I work for these guys and I am ashamed of them.
I think the root problem is that we overhired layers of bad middle management during the boom years. We settled for ‘B’ players, who entrenched themselves and in turn brought in ‘C’ players who wouldn’t threaten their fiefdoms. Worst of all, we hired a seemingly large number of ex-IBM jokers who presided over that company’s downfall in the early 90s. They got their revenge for OS/2 alright.
Just as an example, 1997, as a lowly peon, there were 4 clicks on the GAL separating me from BillG. Now, there are at least 12 and no one has a clear idea what the guys more than 3 clicks away actually do.
Our middle management was always kinda lame. But a decade ago, meritocracy trumped title. If someone was an obvious bozo, I could bypass or ignore him until he went away. Nowadays, the organizational lines have hardened and something like that might be a career-ender.
Ballmer plays into it inofar as a lot of these hires were made in his image and there’s not really room for dissent in his org. Under Gates, we could have rancorous disagreements without repercussions, the right thing for the company would fall out of it and we’d move on. Ballmer has been about centralization and things being dictated from the top.
Every healthy technical organization needs a balance of power between technicians and marketers. Microsoft doesn’t have that balance anymore. There’s a near-total disconnect between management and line employees.
The current organizational Kool-Aid is that process is a substitute for competence. Therefore, we’ve outsourced, offshored and downsized to the point where no one knows anything anymore. Some really key people are voting with their feet. I don’t think the rest of the world realizes the extent of the brain-drain yet. Other teams are almost in open rebellion. I have heard of incidents where managers were physically threatened, and while I’m shocked it’s come to this, in a smirky kind of way, I also understand completely. I can think of a couple I’d like to take a swing at as well.
It’s hard to describe the atmosphere in there right now.
On almost every front, middle management is pushing a Jonathan Livingston Seagull fantasy – as if the last 6 years have just been an anomaly, a return to ’98 is imminent, and if I really, really believe I can fly, well, it simply *must* be so. Recent example: after cutting a US department by 2/3 to offshore some processes, an important defect rate increased by a factor of 350%. It was presented as: “if we arbitrarily throw out 2/3 of the data points, the offshorer’s performance was within a standard deviation of the US’s and improved significantly over the past year.” God help you if you try to have an honest discussion about it.
At a higher level, a few weeks back, Allchin emailed the company about the Vista delay. He spun it that were really just bogartin’ the consumer version so we wouldn’t interrupt Dell/Lenovo/HP’s busy Christmas selling season. It seemed completely disingenuous to the rest of us. Gates/Ballmer were silent on the subject, which indicated to us they see it purely as a departmental issue.
Technically, they made a lot of terrible calls as well. The biggest albatross around our neck is the .NET framework. It was really unfortunate that its introduction coincided with the rock-bottom point of the tech bust. I was in consulting then, and I think it was almost 3 years before we had a significant amount of managed code to write.
Since “push” marketing wasn’t working, Ballmer mandated that every team produce a server product in
.NET. This is how we wound up with these dozens of cutesy money-losing peripheral products. Existing
server products had to incorporate .NET in some way. This is why you get SQLCLR.
It’s gotten to the point where the only successfuly endgame I can see is that we die and are reborn, like IBM in the 90s. The problem is, there’s so much money, they can continue to sputter along for years, maybe decades.
We’ve lost sight of it, unable to see beyond the PC. Scoble’s recent blog entry is essentially saying that to fix the problem we just need a round of new hardware for employees and a new rallying cry: a terabyte of email space for every man, woman and child on earth. WTF? Not only is that a hardware problem, but these guys need to spend more time out in the world. The next generation of users consider email something that old people use to communicate.
Cut me and I bleed Microsoft blue. I love my coworkers but despise what its management is doing to it right now. For as long as I can remember, I have given it 14 hours a day, nights and weekends, but it’s now becoming plain that I’m fighting a tsunami of mediocrity. Right now I think the best thing that could happen is for Vista to fall flat on its face and force the resurrection issue quickly.
Now they’ve brought Sinofsky in to try to unscrew Vista. He’s got a rep for making the choo-choos run on time in Office. But this strikes me as another example of Microsoft’s cult of the superman. I really don’t think there’s any way in 6 months he can do much more than become a part of a problem set that’s been forming over 6 years.
So, Microserf, you are simply repeating history? Really, success breeds mediocracy. You are Kmart, IBM, Sears, Digital Equipment, Pfizer, GM and on and on. Your comments about hiring dolts is not really relevant in my opinion. The reality is there simply is a limited supply of exceptional talent. So, as you grow to tens of thousands of employees, you will have thousands of mediocre performers. There is no way around that. The goal is to create an environment where even mediocre talent can excel. That is what separates a great manager from a manager. Microsoft likely has more talent than nearly any tech company in the world. It is unlocking that talent which you seem to understand quite well.
It’s easy to find a numbers person to run a retailer or a finance company because their success is not predicated on a rapid destruction of their own business model. People who work outside of the fast paced world of tech don’t get it. GM is still selling cars and banks are still making loans and brokers are still selling stocks. Yes, they apply technology to make it better but in tech, your goal every day is to innovate your way to something that will make your existing product obsolete. You might attempt to argue that point across nontech industries but it simply isn’t the same.
You are simply lacking leadership. Whether it’s a CEO, coach, manager or President of the United States, great leadership qualities are always in short supply. It is a rare bird that can take an insular company like Microsoft and turn it on its ear and allow the rampant, controlled chaos and constant state of paranoia needed to rejuvinate the culture without blowing up what made MS great. Balmer doesn’t think that way. Andy Grove did. Carlos Ghosn does. Steve Jobs does. Jack Welch, even though he is a pig, did. Google today……does. The best way to reinvigorate MS is a split. The molasses has set in.
Great post MicosSerf. Thank you for sharing.
I don’t think that people have a total understanding of what is happening in the real world. I try to explain in and you have done a good job.
I fear it is a ticking time bomb and we as a country have one hell of a bill coming due for all the shoirt sightedness.
I am sure you could find someone at Dell to echo our comments. The disconnect within companies is like republicans not understanding why they get no credit for the “booming” economy.
Microsoft is now like the Postal Service.
Really smart kids don’t aspire to go to work at Microsoft… they aspire to start their own company.
Boring workaholic academic clones go to work at Microsoft. Spoiled multi-millionaire managers run Microsoft. The Postal Service is not going away, neither is Microsoft. The Postal Service is not going to come up with next great idea. Neither is Microsoft.
Don’t know how relevant this is, but Microsoft seems to dominate the internet in China, HK, and Taiwan in terms of webpages and messenger.
Microsoft isn’t now and never was a monopoly. They are the overwhelmingly dominant player in a couple of niches. That gives them some powerful leverage, but it is a double-edged sword. A true monopoly requires some barrier to entry that is for all practical purposes insurmountable. One would be a patent stranglehold. Microsoft can’t achieve that. IBM, Sun, etc. have too many patents in their portfolios. They can force cross-licensing.
What Microsoft has is a dominant position heavily reinforced by the network effect and huge economies of scale. That makes their products the default answer to the question of what OS and office suite to put on an end-user computer. The problem is that both of those advantages disappear if the balance tips to an alternative. That is exactly why Microsoft can’t allow open source alternatives to ever be more than niche players. Linux and OpenOffice are free alternatives to Windows and MS Office. With a market share in the low single digits (for end-user desktops, not servers) they aren’t an immediate threat.
The reason that open source becomes a threat if it ever gets big is because it is a commodity item. The same open source software can be downloaded for free from the project websites, or sold with support by anyone who can put together a company to support it. That means that it can be sold at a tiny margin at every price point. The same bundle of features and support can undercut Microsoft … once the market is big enough.
Okay, that’s not too bad. They own 90-ish % of the desktop market with Apple getting almost all of the rest. Except that there isn’t a single desktop market. There are lots of different niches. Microsoft can’t individually taylor solutions to all of them. They lose their economies of scale that way. Open source can go after them.
Microsoft’s solution to that has been to agressively respond in any situation where they are in danger of losing a credible piece of their marketshare in an identifiable niche. That means that they are throwing people, and often money at those niches, which cuts into their profit margin on what so many people are calling monopoly products.
If Linux and open source were owned by a single company, Microsoft would have bought it or buried it by now. They have the manpower and the cash to accomplish that. But if they were to buy Red Hat next week for a huge premium, they’d lose most of the employees in a heartbeat. And because the code is open source, any piece of it that the buying public wanted would pop up in another Linux distribution immediately. There wouldn’t even be any lead time for the project to start up because those other distributions already exist.
I don’t for a minute believe the hype that open source is poised to take over the world tomorrow. However, it is not Microsoft’s traditional competition. Microsoft can’t buy the competing product. Instead, they have to buy the distribution chain (pre-installation on new hardware) and customers through discounts.
Yes, Microsoft has plenty of cash. They can keep doing exactly the same thing for an awfully long time. But that cuts into their profits on those supposedly monopoly products.
Great piece on why Microsoft is dead in the water: http://tinyurl.com/jwhgm
The Carnival of the Capitalists
The Carnival of the Capitalists