“We Now Return You to Our Previously Scheduled Microsoft Bashing”

My expectations are that the chattering classes will be all over Microsoft’s buyback announcement: A $20 billion tender offer for up to 808 million shares (8.1% of the common outstanding). It a Dutch auction running until August 17th. The price range is 22.50 to $24.75. There was an additional authorization for as much as $20 billion more in buybacks through 2011. In after hours trading, the stock popped 5.5% to $24.11.

The NYT claimed this was "Investors encouraged by the quarterly results and the stock buyback announcement," but to me it looks as if it was merely arbitrageurs picking up some free money.

The 24% fall in net was blamed on Legal costs — of course, those
costs are not as innocent as the IR spin makes it sound; they are the direct result of
management’s bad behaviors. 

I am a big believer in variant perception: trying to identify what the
crowd either doesn’t know or is overlooking. My take on big cap tech,
on why the previous bull market stars don’t lead are examples of this.

Micro_20060720193305So what is the variant perception of the Microsoft buyback? We know Mister Softee has been a cash cow, we also note that since their prior $32 billion special dividend, the stock has dropped about 25%. So this time, the thinking went, lets try to financially engineer the stock price higher and reduce the past decades’ stock option dilution.

To me, this as an admission of defeat. In Redmond, the thinking apparently is "We simply don’t know what the hell to do with all of our cash." Outside of Windows and Office, just about everything else they have tried is a bust. SQL Server database can be called a successful moneymaker, but that’s where it more or less ends. Even X-Box — very successful  in terms of unit sales — is a giant money loser.

Every other initiative, project and concept is, to use the more polite phrase, "borrowed." Microsoft is like the rich kid at school trying to buy their way into the cool clique. I still find it astonishing that people call these guys innovators.

Consider the "innovations" they have piled up recently:

• Search (Yahoo, Google)
• Xbox (Sony, Nintendo)
• MSN Spaces (Blogger, Typead)
• MSN VIdeo (You Tube, Google Video)
• The new Microsoft "iPod" (Apple, Creative)
(feel free to list your own favorite MSFT "innovations" in comments)

Hell, even the Dutch auction stock buyback was copied from Google.

As the worlds activity and focus moves from the desktop to the internet, they are hard pressed to keep up. The internet is in a veritable Cambrian explosion of new life forms. I don’t believe the future belongs to YouTube or My Space or Google — but to all of the creative and innovative companies, incrementally experimenting, expanding, and creating new ideas and programs on the internet. 

Microsoft just ain’t one of them.


UPDATE: July 21, 2006 1:15pm

A few items from comments worth highlighting:

"Want to unlock Microsoft’s potential? Instead of buying stock to prop
up the price, have the company spin off the different businesses into
their own wholly owned subsidiaries and make them compete and turn a
profit or die."

Sounds about right to me: Stake the businesses with some cash, and set them free by spinning them off to shareholders to compete in the marketplace (while still owning 50% of them)

Oh, and by the way: its worth noting that Oracle is making 52 week highs today !


Profit Lags as Microsoft Spends to Meet Competitors
NYTimes,  July 21, 2006

Microsoft Net Falls Amid Legal Costs
Investors Are Cheered As Purse Strings Loosen For Share-Buyback Plan
WSJ, July 21, 2006; Page A3

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What's been said:

Discussions found on the web:
  1. deet commented on Jul 21

    “I still find it astonishing that people call these guys innovators”

    That’s because you are not a programmer. What experience do you have with their developer stuff?

  2. chesirecat commented on Jul 21

    I don’t get the innovation dig. I don’t see a lot of innovation in tech. Take the poster children. Google has backlinking for search which wasn’t invented by them coupled with text based ads which wasn’t invented by them. Apple copied Rio’s mp3 players and every new feature in the OS is copied from somewhere else. All of them incrementally change something for the better. But who cares? GE isn’t an innovator. Walmart isn’t an innovator? The best companies are rarely innovators. 3M and pharma companies are the only innovative ones I’ve seen out there.

  3. DBLWYO commented on Jul 21

    Well, prior to reading the previous comments, I was going to point out that Longhorn (Vista) has had a 2-3 order of magnitde de-feature, is now running 2-3 years late with rising uncertainties, is loosing compelling migration arguments and (check out “Microsoft and Code Rode”) has had major problems with the coding processes for the new OS. We’ve always known that MS doesn’t write very good code inside the industry but this was the first time the small-scale hacker’s approach led to the complete shutdown, re-write, new management and entirely new software development methodology in its’ history.

    One might also mention the .Net initiative which was going to take over the world of componentware programming ala Java beans and J2EE in the last five years.

    MSFT has been, as a business relatively and ruthlessly well run, and it’s code has been good enough. But the core business is saturated in that available products grossly exceed customer requirements while new, major product areas have taken a big hit in terms of speed, quality, market take-up etc. Unless they can get some of these new areas that they are just beginning to explore going things will keep getting increasingly dicey.

    Now how long does it take for the recent Unified Communications announcements to turn into a $10B businesss ?

  4. Robert Cote commented on Jul 21

    Seeing as I am going to a client in 3 hours to pull the plug on Server 2003 and replace it with OS X Server 10.4 I feel qualified to express several opinions. MSFT not only does not innovate it stifles innovation. The entire culture revolves around “more” (for MSFT) rather than “better.” The classic MSFT response to success in the marketplace by others is to announce a competing product. The subsequent market disruption gives MSFT opportunities to either catch up or buy outright what they want at reduced prices.

    As to Cheshirecat’s “I don’t see a lot of innovation in tech.” I’m surprised that his handwritten letter managed to show up so quickly. After all things like email and blogging are innovations he claims not to dig. He probably wonders where the propellors are when flying GE powered aircraft as well.

  5. Kevin commented on Jul 21

    Microsoft is an anomaly of our patent laws. It should have been a temporary project, like the Apollo moon project for example. Its job was to write the standard OS, word processor, spreadsheet, etc. That job was completed long ago. At that point, we would have been better off if Microsoft had dispersed all its cash to its shareholders and ended.
    Say what you want about Bill Gates as an executive, but his activities as an executive emeritus are a real contribution.
    In the mid-80s, someone ran a calculation showing that the value added of the Soviet economy as a whole was negative – they would have produced higher value by just taking all the raw materials they used and selling them on the open market. (And unfortunately for the Russian people, that is pretty much what has happened since.)
    Microsoft has been a sink for value, not a creator of value, for years. Patent laws allows them to continue to demand payment for long-past creativity. When Apollo was done, we stopped paying for it. (Although ti could be argued that there is considerable parallel between the NASA or the space shuttle and latter-day Microsoft.)
    The quicker the pace of technology, the shorter the period during which a technology company is actually productive. Just as the development of the limited liability company was necessary to set free the productive capacities of the 1800s, some kind of short-term company is needed to set free the productive capacities of the 2000s. We need a mechanism for letting companies that have finished their usefullness end gracefully and at the same time allow those companies that can go on for a second round (for example Apple with iPod) to do so.

  6. Andy commented on Jul 21

    First my credentials: I’ve been working with computers for 30 years.

    What innovation does Microsoft bring to the market?

    “The Microsoft Marketing Engine (for Windows)”

    They have made their money by having one of the strongest, most pervasive marketing engine on the block (and on the next three blocks over).

    As anyone in this industry knows: innovation without marketing is usually bound for the scrap-heap of history. Even if the product is not the best in the world, awesome marketing (both direct and in the channels) can overcome that deficiency and create a winner.

    The biggest problem with Microsoft is its size. At a certain point, the demands on the organization get to be too much to keep organized and focused on being the “best”.

    Example: I just got a copy of the latest MapPoint. Looking at the notes and programmer blogs for this release, it seems that they had disbanded the MapPoint development team for a couple of years, then decided they needed to produce a release, brought a team together for 6 months and created whatever features they could in that time and pushed it out the door. And it certainly couldn’t have taken 5 years to produce the latest SQL Server, could it?

    I think they are spending too much time moving the little boxes around the org chart instead of trying to push their brightest minds (and they have a LOT of those) to create and implement new ideas.

    Want to unlock Microsoft’s potential? Instead of buying stock to prop up the price, have the company spin off the different businesses into their own wholly owned subsidiaries and make them compete and turn a profit or die.

    Ok, done with my rant and back to work.

  7. Craig H commented on Jul 21

    Instead of building a video game that doesn’t make money they should have focused on what does make money: Windows.

    Their screwup in not getting Vista to market on time is hurting the entire PC sector.

    Instead of trying to compete with Google on web search, they should have just dropped the browser completely. They could do more harm to Google by bundling Firefox with Windows, along with the Adblock and Customize Google extensions (which would block most Google ads) turned on.

    The public is never going to embrace Microsoft search because they think of the company as big brother and don’t trust it, whereas Google has (unfairly I think) a counter-culture, hip image. Ballmer and Gates just don’t understand just how big of an image problem they have with the unwashed masses.

  8. Jay Walker commented on Jul 21

    To be fair, lots of companies have used the Dutch Auction Process – to suggest they copied Google, isn’t quite fair.

    I think that Bill Gates’ buddy, Warren Buffett has used it to good effect many times. It’s a good way to buy back stock without inflating the price. Perhaps Bill talked to Warren and Warren said, “Hey buddy, Dutch auction, that’s the ticket ….”

    Jay Walker
    The Confused Capitalist

  9. foo commented on Jul 21

    I’m not exactly a fan of Microsoft, but the “no-innovation”, “no-value-added” stuff is completely overboard. I remember using Apollo (HP) and Sun workstations costing $50k apiece with CAD packages licensed at $100k/year. And then Microsoft came out with Windows NT, and pretty soon you could be using a $5k computer with $2k software and doing the same stuff. Maybe that’s not value-added for you big-time investors, but that’s the difference between a viable small engineering company and hamburger flipping.

    To say nothing of how SQL Server forced Oracle to bring its pricing down to levels that mere mortals can afford. And, having developed for both Mac (up to OS9) and Windows, I can tell you that Win 95/98/2k/XP introduced stuff that blew the Mac away. Apple rested on it’s laurels for years in the 90’s, and MS did all the innovating. Excel vs Lotus anyone?

  10. matt wilbert commented on Jul 21

    Microsoft’s forte has never been innovation.

    Their SUCCESSFUL products have not been particularly new–Word Perfect was way ahead of them in word processing, Lotus in spreadsheets. You could claim that Access added some significant user-friendliness features to desktop databases, and that Outlook was a somewhat innovative mail/calendaring client, but certainly neither broke any new ground. SQLServer was and is not any kind of breakthrough–they licensed the initial implementation from Sybase IIRC. They bought MS-DOS from another company, and it wasn’t superior to its contemporaries anyway.

    If Microsoft can be said to have a forte, it might be integration–taking disparate pieces of technology and packaging them in a (not altogether) consistent way, and maintaining a fairly impressive level of backward compatibility, and doing that without controlling the hardware platform directly. Apple has done a better job of integration, but they have a much easier task because they control the hardware, and their backward compatibilty stinks.

    I think Microsoft’s problem is simply that their core market isn’t growing much, and isn’t going to. Moving into new markets is hard for any company, and if it takes innovation, then probably Microsoft isn’t going to succeed. But they didn’t use innovation to become successful in the market they have now–who is to say they will need it to be successful in another?

  11. Barry Ritholtz commented on Jul 21

    If their core market isn’t growing much, than why are so many analysts so enamored with them?

    Ist not like they are dirt cheap — they seem to be fairly valued at best . . .

  12. Kevin Payne commented on Jul 21

    This is fun, let’s go through the list of major PC advancements:

    Windows Interface (Apple Mac)
    MSWord (WordPerfect)
    MSExcel (Lotus 123)
    MSAccess (dBase)
    File/Print Sharing (Novell)
    MSN (AOL) We forget how important AOL was.
    Internet Explorer/IIS (Netscape)
    Windows CE (Palm)

    Let us remember that of all the innovations surrounding the Internet, MS has really just watched from the sidelines.

    So how did MS get to where it is today. They were innovative in one major area, development tools. Software that ran on Windows became pervasive. mostly from Microsoft’s support of software development.

  13. matt wilbert commented on Jul 21

    Maybe someone else knows what the analysts are enamored of–I frequently find their thinking incomprehensible. I can tell you why I own some:

    1) Not much downside. Microsoft is, as you say, probably roughly fairly valued, and there will eventually be some revenue/earning improvement from Vista, whenever it ships.

    2) I do not like the prospects for the dollar, and Microsoft has a large foreign revenue stream, which may get larger as anti-piracy measures are strengthened, and few offsetting foreign costs. Unlike a lot of weak-dollar plays, there isn’t a lot of risk if I’m wrong.

    3) Once Bill Gates leaves, management could start allocating capital more rationally.

    4) They are certainly not dirt-cheap by my standard–I am usually pretty much a value guy and they are miles away from fitting into any of my screens–but I believe in diversification, and this is one of the few tech stocks I can stomach. It is also one of my few mega-caps.

  14. Steve Goulet commented on Jul 21

    As a principal for an MS Gold partner I try to be as unbiased as possible regarding the prospects for Office 2007. We don’t actually sell MS products, but we engineer customized solutions that utilize their server platforms. While my paycheck does indeed depend on MS technologies, I agree with many of the points made on this site regarding MS and it’s incompetencies.

    I can tell you that there is a great deal of preparation underway for Office 2007 right now. I would strongly recommend that the bashers take a look at SharePoint 2007 and how it integrates enterprise Web applications with Office. SharePoint is becoming the most talked about MS product for good reason, and SharePoint 2007 has the potential to be _very_ disruptive in the domain of business processes (intranet, extranet, and internet). Companies that successfully deploy SharePoint 2007 will have huge advantages in their ability to collaborate and interact in meaningful ways with customers and business partners using tools that they already take for granted (Outlook, Word, Excel, etc). We all know that MS profits come mainly from Office and therefore this strategy is potentially a huge money maker for the company.

  15. Greg commented on Jul 21

    About being innovators – lets not forget Internet Explorer (Netscape) and the biggest non-innovation of all DOS – which was purchased for $20,000. They never have been innovators and they never will.

  16. Robert Cote commented on Jul 21

    Mr. Goulet does exactly what everyone complains about. He is touting WinFS… errr… now Sharepoint as really cool software coming really soon now and so really important you’d better wait for WinFS… err… Sharepoint to come out rather than use competing technologies. Sharepoint sure is disruptive to business processes, it has frozen the entire sector until the white elephant decides to sit somewhere or more likely wander around trumpeting “real soon now.”

  17. Richard commented on Jul 21

    Sharedpoint 2007? Sounds like the same olde song from Microsoft. If you only buy into this or that product hook, line and sinker, it’ll do all these wonderful things. That’s more or less true with any vendor’s products. One of Microsoft’s biggest achilles heels is the lack of partnership/integration with other vendor products. Integration isn’t Vendor X’s product runs on a Microsoft OS. I’m talking true integration of capabilities. Microsoft is all-inclusive and is unilateral in their solutions. Always have been, seems they still are. This is the age of the Internet with pockets of innovation growing organically with natural organizing structures developing every day. The beast that is Microsoft has no place in this world except for government like entities who want to continue to do the same things with little risk and no waves.

    Sharepoint 2007 is nothing but the same old tune with

  18. matt wilbert commented on Jul 21

    Sharepoint is definitely Microsoft’s best attempt so far to leverage desktop applications into a differentiated Web product.

    It is quite compelling in intranet applications, and I can imagine it becoming well accepted for the extranet. I have a hard time seeing it widely used for internet apps–the internet hasn’t been very friendly to applications requiring specific clients.

    Lots of people don’t use Windows, and lots of windows machines don’t have Office.

  19. Kevin commented on Jul 21

    You don’t need to be an innovator to be a good cash cow. Patent/copyright protection in a couple of markets that are natural near-monopolies is enough.
    Microsoft does not figure to be a good growth stock, but it is a good utility.

  20. Steve Goulet commented on Jul 21

    Robert — SharePoint and WinFS have absolutely nothing in common. SharePoint has been around since 2001 so you don’t have much of a case for claiming that it will never materialize. Do you honestly think that Office 2007 is a white elephant? By the way, what products compete directly with SharePoint in your estimation?

  21. trader75 commented on Jul 21

    What I wanna know is, when is a certain hipster doofus of the ‘net long microsoft’ persuasion finally going to STFU?

  22. Steve Goulet commented on Jul 21

    Matt — good point about the compatibility with Windows and Office being a limiting factor. But check this out: http://www.thecounter.com/stats/2006/February/os.php (you’ll have to register to get the most recent stats).
    As you can see, less than 3% of users on the Web are using machines other than Windows.

    Nevertheless, SharePoint 2007 is in Beta and it is totally compatible with Mozilla Firefox and Mac Safari. You can publish spread sheets from Excel to a Web server and make them editable through a Safari browser with a few clicks. So I think the Internet option will be much more attractive for this release. And they have integrated content management into the SharePoint code base.

    The point I’m trying to make is that businesses who use this techology will have a huge advantage and that will drive sales of Office even higher.

  23. Barry Ritholtz commented on Jul 21

    Bottom line is that I’d rather wait for them to break out ot their base then merely guess

    Incidentally, its worth noting that Oracle made 52 week highs today

  24. Steve Goulet commented on Jul 21

    << Bottom line is that I'd rather wait for them to break out ot their base then merely guess. >>

    Agreed. My rants have really been aimed at the long term PPS since Office 2007 is not due out until January and at this rate it will be postponed yet again. But my question for Robert was genuine: Does anybody know of a product that can/will compete directly with Office SharePoint 2007? It’s almost a rhetorical question because it’s really not possible to compete with it unless you own the source code to MS Office.

  25. Robert Cote commented on Jul 21

    “As you can see, less than 3% of users on the Web are using machines other than Windows.”

    Since 4% of web browsers are Mac OS alone that’s a strange claim. I never said Sharepoint “will never materialize.” I said you are doing what Microsoft is famous for; early announcements touting fantastic features to freeze the market. There are numerous claimed technical features of WinFS that with its cancellation are promised to be backfilled by Sharepoint 2007 features by Microsoft itself. Regardless, the WinFS/Sharepoint comparison was one of potential defeaturing and delay.

  26. matt wilbert commented on Jul 21

    I wouldn’t interpret the browser os stats at counter.com the same way Steve did. What I see is that (if we believe the July stats) is that 92% are identified as using Windows.
    Probably almost none of the rest are, since identifying Windows users is relatively easy, and people who set their browsers to spoof their identification are much more likely to pretend to be running IE than vice-versa.

    I find that a plausible percentage, and I don’t think the percentage will be going up. Windows is certainly the dominant desktop OS, but I don’t see it becoming MORE dominant.

    I’ve also seen estimates that Office is installed on about 65% of “main home Windows PCs”, as opposed to over 90% of business PCs. At my house we have 3 Windows PCs and 1 Linux box, but only one of them has Office. Most people probably won’t want to spend the money to put it on all their PCs.

    Assuming this is correct, 65% of 92% is 57% (ignoring homes where the extra PCs don’t have Office), and I think internet applications, at least ones aimed at home uses, are not likely to find Sharepoint an appropriate platform unless that changes.

    Intranet,yes; extranet, probably; Internet, probably not.

  27. Steve Goulet commented on Jul 21

    Robert – since SharePoint 2007 is in Beta and I’m running it now I don’t think these features I’m touting are fantastic, they are factual.

    I would appreciate a link to information regarding the MS promises for SP2007 features that would backfill WinFS, as I was not aware of this situation.

    You are right about the browser and OS stats, that link I posted earlier is not correct. This one looks to be correct, however. 90% Windows, 10% for the rest…


  28. Steve Goulet commented on Jul 21

    Matt – I totally agree that SharePoint will not be a driver of Office purchases for home users. When I refered to “internet” users I should have clarified them as business internet application users. Companies will expose their business processes to customers and suppliers over the internet using SharePoint, they will gain market share as a result, and the Office suite will be upgraded by many in order to enjoy the advantages of SharePoint 2007.

    I think you and I would probably agree on the reality of this potential if we could get over the differences in semantics.

  29. larry commented on Jul 21

    link is in Hebrew, but the bottom line:

    Not best of the beasts, but pretty good DELL desktop (dual core, etc.) at 2,399NIS (4.44NIS=1$), but the most interesting part, that it comes without Windows. Win® XP Home Edition will cost you additional 550NIS and XP Pro 750NIS.

    This is not a direct sell from Dell, but a large reseller. And if you think that the price is low, it is not. Dual core AMD Athlon with similar mother board will cost you about the same money and will perform better.

    How about MS feeling some heat when suddenly consumer discovers what the real price of Win32 ?

    dell ad

  30. mentalmodel commented on Jul 21

    The revenue growth for SQL Server is a pretty clear indication that this is a company that despite its faults innovates in the area of development tools. Microsoft’s competitors create an easy competitive environment by retaining cultures that are dominated by elitist software engineers (Oracle, Sun, Google, IBM, …). Laugh all you want at the Embalmer Miami Sound Machine video, but strangely he has a point. Creating products that can be programmed and customized by people that care less about some bureaucratic morass of manuals and Asperger’s gestalt is progress in my mind.

    Some of the most virulantly anti-Microsoft software companies are (in denial) adopting Sharepoint/Outlook for internal organization. The web based word processing outfit that Google recently acquired was created with Microsoft technology.

  31. Jon H commented on Jul 22

    “while still owning 50% of them”

    I would suggest that for best results Microsoft should own only 49% or less, perhaps with the right to quash any proposed mergers or sales.

    I think Microsoft’s culture would lead them to interfere too much if they have 50% or more ownership.

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