David Einhorn on Microsoft Management vs Apple (and others)

  • Posted: 12 July 2011 12:25 PM

    He’s trying to explain why he thinks Microsoft is a good buying opportunity.  Then he goes into great detail contradicting himself.  This kind of conventional thinking on the part of hedge fund managers is why Apple gets no credit for its growth.

    From the full article here:

    Before the 2001 season, the Texas Rangers signed A-Rod to a record 10-year $250M contract. He spent the three years in Texas and did not disappoint, hitting 156 homers and batting over .300, but the team never won more than 73 games, and the Rangers management and overall resource allocation decisions were more Charlie Brown than Sandy Alderson.

    That?s not only precluded them from winning despite A-Rod?s heroism, it eventually pushed them into bankruptcy. Now Microsoft suffers from Charlie Brown management, as evidenced by its miserable capital allocation plan. It makes no sense to invest the terrific cash flows in pricey acquisitions, losing businesses, and mostly unproductive R&D, particularly in a corporate culture where even when the team does develop a product, Microsoft is unlikely to bring it to market if it conflicts with Windows.

    In the five years since I first spoke about Microsoft, the most common question I?m asked is what about Ballmer? My initial reaction was to say Ballmer does not care what Wall Street thinks, and maybe that?s a good thing. Wall Street has lots of bad ideas, and people can get rich by ignoring them. It?s more important that he does a good job running the company.

    But having now owned Microsoft for half a decade, and having watched the company carefully, I can say that the problem with Ballmer isn?t his attitude toward Wall Street. While the financial results have been good compared to other companies, I believe this reflects an incredibly strong market position that Ballmer inherited rather than his skill as a manager.

    Ballmer?s problem is that he is stuck in the past, and is at best a caretaker in an industry demanding constant innovation. He?s allowed competitors to beat Microsoft in huge areas including search, mobile communication software, tablet computing, and social networking. But even worse, his response to these failures has been to pour tremendous resources into efforts to either buy or develop his way out of these holes.

    The best example of this behavior was his 2008 attempt to throw several years of Microsoft profits into premium priced purchases deteriorating Yahoo! business. Here Microsoft was only saved by Yahoo!?s then management, which proved by to be even crazier by rebuffing the offer. But the risk that on any given day we could wake up with the announcement of another bad and very expensive acquisition has an ongoing dampening impact on Microsoft?s PE ratio.

    For another example, let?s consider this quote from a 2006 interview with Fortune.

    Q: ?Do you have an iPad??

    A: ?No I do not. Nor do my children. I?ve got my kids brainwashed. You don?t use Google and you don?t use an iPod.?

    Or this quote from a 2007 interview in USA Today:

    ?People get passionate when Apple comes out with something new. The iPhone of course, the iPad, the iPod. Is that something you?d like people to feel about Microsoft??

    Ballmer says, ?It?s sort of a funny question. Would I trade 96% of the market for 4% of the market?? And he laughs to himself. ?I want to have products that appeal to everybody. There?s no chance that the iPhone is going to get any significant market share, no chance. It?s a $500 subsidized item. They make a lot of money. But if you actually take a look, the 1.3B that get sold, I prefer to have software in 60% or 70% or 80% of them. I?d rather have that than the 2-3%, which is what Apple might get.?

    Now the Pincher came for me in a Fortune article this March. It began with a description of what happened to Microsoft?s development of a tablet computer that they called the Courier. According to Fortune, the Microsoft team working on Courier was equally jazzed.

    ?We had a breakout product that had the potential to really delight the user,? says Rebecca Norlander, a star programmer inside Microsoft who quit last June after 19 years with the company.

    So when Robbie Bach, who led the company?s entertainment and devices division at the time, presented his idea to CEO Steve Ballmer and Microsoft?s senior leadership, he expected enthusiasm and additional funding for the project. There was just one problem: The Courier prototype borrowed from Windows, Microsoft?s vaunted computer operating systems, but had an operating system all its own.

    Bach learned the hard lesson about the power of Windows within Microsoft. Not only would Bach not receive the extra funding he sought, said Ballmer, who personally delivered the blow, but there would be no Courier because it was unnecessary

    Every year Microsoft invests $9B in shareholder money and R&D. Much of it is wasted on product that will never see the daylight, or worse, is spent on products like the Kin, which was pulled from the market after just 48 days.

    But a good chunk of that goes to developing future generations of Windows and Office. Perhaps if Ballmer eased up on brainwashing and let his kids play with the most popular devices, he would see the opportunity in making available a version of Office for the iPad and the Android devices.

    [ Edited: 12 July 2011 12:27 PM by Zeke ]      
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    Posted: 12 July 2011 01:56 PM #1

    Wow, Einhorn has a serious case of split brain.

         
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    Posted: 12 July 2011 07:13 PM #2

    Pffffffft!

    “The Kick Heard Round the World.”  LOL

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    Posted: 12 July 2011 08:24 PM #3

    Umm… Maybe I’m missing something, but did any of you actually read the transcript?!?

    Einhorn is essentially apologizing for a rotten pick (Microsoft) from 5 years ago and going through the reasons that he got duped… Essentially picking out all the right reasons (and obvious to us) such as the way Courier was shut down b/c Ballmer lives in the past and lets Windows legacy bulldoze over new products.

    The quotes are not from Einhorn, they’re from Ballmer. Einhorn is using them to illustrate Ballmer’s lack of vision.

    Then, at the end, he’s publicly calling for Ballmer’s resignation:

    I think it?s fair to say that almost everyone except Steve Ballmer understands it?s time for Microsoft?s board to tell Steve Ballmer after ten years as CEO, alright, we?ve seen what you can do. Let?s give so-and-so a chance. This continued presence is the biggest overhang on Microsoft?s stock.


    Finally, Einhorn is on record as a strong Apple bull as of December 2010.

    Here is an interview with him on Bloomberg where he explains (pretty well in my opinion) to the highly skeptical interviewer the value in Apple.

    In sum, I understand the frustration with hedge funds, but let’s give credit where credit is due. Einhorn is one of the smarter hedge fund managers. After all, hard to not respect the guy who had the balls to short Lehman Brothers.

    Edit: bad link

    [ Edited: 12 July 2011 08:29 PM by Roman ]      
  • Posted: 12 July 2011 09:19 PM #4

    I was looking for a place to post this topic and while it may be a little out of place I’m hoping its appropriate.

    Microsoft denies WP7 for tablets: ‘we view a tablet as a PC’

    Microsoft’s Windows Phone president Andy Lees at the Worldwide Partners Conference once again tried to shoot down hopes for tablets based on Windows Phone 7. The use of the mobile OS would be “in conflict” with Microsoft’s notion of having the full speed of a computer in any design, including truly mobile tablets. He insisted that users would want to do PC-style activities on a tablet and saw Windows 8’s networking and printing support as being important.

    “We view a tablet as a PC,” Lees said.

    Exactly. And that is why your tablet strategy has totally failed for over a decade.

    In 2009, 99% of all tablets ran Microsoft Windows. In 2010, the iPad sold more tablets in 9 months than Microsoft had sold in the previous 9 years.  In 2011, 99% of all tablets run non-Windows. What is it that they know and that Microsoft has yet to learn?

    1) Instant on.
    2) All day battery.
    3) A touch interface.
    4) An operating system designed around touch and built from the ground up specifically for the tablet.

    These are the lessons of the iPad. No one but Apple seemed to grasp them in April 2010, but there is no excuse for anyone in the industry not to have learned them by July of 2011. Yet listen to what Microsoft is saying about their upcoming tablet.

    The use of the mobile OS would be “in conflict” with Microsoft’s notion of having the full speed of a computer in any design, including truly mobile tablets.

    Translation: we refuse to put a mobile operating system in a mobile device.

    Translation: When reality conflicts with our philosophy, we’re going to stick with our philosophy.

    He insisted that users would want to do PC-style activities on a tablet and saw Windows 8’s networking and printing support as being important.

    Translation: We’re going to ignore the success of the iPad and insist that users want to do PC-style activities on a tablet.

    Translations: We’re going to ignore the fact that hardly anyone with a tablet gives a hoot about printing.

    “We view a tablet as a PC,” Lees said.

    Translation: We’re going to pretend that our tablet failures of the past 10 years didn’t happen.

    Translation: We’re going to pretend that the iPad didn’t happen.

    Translation: We’re going to pretend that if we keep banging our head against the same wall that the wall, and not our head, will eventually give in.

    Translation: We’re going to pretend that people want a PC on their tablet despite the fact that there is no evidence to support this and despite the all the abundant evidence to contradict this.

    Here is the reality. If Microsoft can’t extend Windows to tablets, then Windows is stranded on the ever shrinking island of notebooks and desktops. then one day - one day soon - the operating system and the office software that generated 4 billion in profits per quarter, will become irrelevant. As will Microsoft.

         
  • Posted: 12 July 2011 09:47 PM #5

    FalKirk - 13 July 2011 12:19 AM

    I was looking for a place to post this topic and while it may be a little out of place I’m hoping its appropriate.

    Microsoft denies WP7 for tablets: ‘we view a tablet as a PC’

    “We view a tablet as a PC,” Lees said.

    Translation: We’re going to pretend that people want a PC on their tablet despite the fact that there is no evidence to support this and despite the abundant evidence to contradict this.

    Here is the reality. If Microsoft can’t extend Windows to tablets, then Windows is stranded on the ever shrinking island of notebooks and desktops. then one day - one day soon - the operating system and the office software that generated 4 billion in profits per quarter, will become irrelevant. As will Microsoft.

    From a post I made on another thread:

    70% of computers are sold to consumers (vs enterprise).

    28% say the iPad is their primary computer, while 43% say they use it more than their desktop/laptop.

    hmmm, 70% of 70% is 49%.

    Not counting sales into the enterprise, now that iPads have been untethered from computer syncing, iPads have the potential to account for 50%, or more, of total computer sales.

    2015?

    Referring to your observations, think of the importance of Windows and, by extension, MSFT when their share drops to less than 40% (Apple 50%; webOS 5%; Android 5%; Linux 3%).

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  • Posted: 12 July 2011 10:12 PM #6

    Gregg Thurman - 13 July 2011 12:47 AM

    From a post I made on another thread:

    70% of computers are sold to consumers (vs enterprise).

    28% say the iPad is their primary computer, while 43% say they use it more than their desktop/laptop.

    hmmm, 70% of 70% is 49%.

    Not counting sales into the enterprise, now that iPads have been untethered from computer syncing, iPads have the potential to account for 50%, or more, of total computer sales.

    2015?

    Referring to your observations, think of the importance of Windows and, by extension, MSFT when their share drops to less than 40% (Apple 50%; webOS 5%; Android 5%; Linux 3%).

    People - even knowledgable people in the industry - have no idea of the sea change that is occurring right before their eyes.

    1) Microsoft will continue its dominance of the desktop Operating System. But the desktop is diminishing. And there’s even a danger that Microsoft’s dominance of the desktop may end too. More on that later.

    2) People are fooling themselves by pretending that tablets aren’t computers. Not only are they computers, but soon they will be the norm rather than the exception. And Microsoft doesn’t have one single modern tablet bearing their name. And I predict that the Microsoft’s Windows 8 tablet will be the second coming of the Kin - only more drawn out and more painful and with greater repercussions.

    3) People don’t consider phones to be computers. Hell, I don’t consider phones (and iPod Touch’s) to be computers. But they are. And they run iOS and many other OS’s too. The day when iOS alone is running on more devices that Windows may occur as early as 2013. That’s how long Microsoft has before their OS is overtaken by Apple’s OS.

    4) When people realize that Microsoft Windows no longer has a monopoly on their computing devices - when they realize that Windows only runs on a limited number of desktop and notebook machines - when they realize that Windows is not compatible with anything but Windows - when they realize that competitors have 10 and 20 times as many software options as Windows - the veil will be lifted, the chains will fall away and Windows will suddenly go from the one and only to just one of many and then to just one of the worst.

    And nobody seems to see it coming. Least of all, Microsoft.

         
  • Posted: 13 July 2011 12:19 AM #7

    FalKirk - 13 July 2011 01:12 AM
    Gregg Thurman - 13 July 2011 12:47 AM

    From a post I made on another thread:

    70% of computers are sold to consumers (vs enterprise).

    28% say the iPad is their primary computer, while 43% say they use it more than their desktop/laptop.

    hmmm, 70% of 70% is 49%.

    Not counting sales into the enterprise, now that iPads have been untethered from computer syncing, iPads have the potential to account for 50%, or more, of total computer sales.

    2015?

    Referring to your observations, think of the importance of Windows and, by extension, MSFT when their share drops to less than 40% (Apple 50%; webOS 5%; Android 5%; Linux 3%).

    People - even knowledgable people in the industry - have no idea of the sea change that is occurring right before their eyes.

    1) Microsoft will continue its dominance of the desktop Operating System. But the desktop is diminishing. And there’s even a danger that Microsoft’s dominance of the desktop may end too. More on that later.

    2) People are fooling themselves by pretending that tablets aren’t computers. Not only are they computers, but soon they will be the norm rather than the exception. And Microsoft doesn’t have one single modern tablet bearing their name. And I predict that the Microsoft’s Windows 8 tablet will be the second coming of the Kin - only more drawn out and more painful and with greater repercussions.

    3) People don’t consider phones to be computers. Hell, I don’t consider phones (and iPod Touch’s) to be computers. But they are. And they run iOS and many other OS’s too. The day when iOS alone is running on more devices that Windows may occur as early as 2013. That’s how long Microsoft has before their OS is overtaken by Apple’s OS.

    4) When people realize that Microsoft Windows no longer has a monopoly on their computing devices - when they realize that Windows only runs on a limited number of desktop and notebook machines - when they realize that Windows is not compatible with anything but Windows - when they realize that competitors have 10 and 20 times as many software options as Windows - the veil will be lifted, the chains will fall away and Windows will suddenly go from the one and only to just one of many and then to just one of the worst.

    And nobody seems to see it coming. Least of all, Microsoft.

    A most excellent post.  I’m in full agreement.

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  • Posted: 13 July 2011 12:21 AM #8

    Roman - 12 July 2011 11:24 PM

    Umm… Maybe I’m missing something, but did any of you actually read the transcript?!?

    Einhorn is essentially apologizing for a rotten pick (Microsoft) from 5 years ago and going through the reasons that he got duped… Essentially picking out all the right reasons (and obvious to us) such as the way Courier was shut down b/c Ballmer lives in the past and lets Windows legacy bulldoze over new products.

    The quotes are not from Einhorn, they’re from Ballmer. Einhorn is using them to illustrate Ballmer’s lack of vision.

    Then, at the end, he’s publicly calling for Ballmer’s resignation:

    I think it?s fair to say that almost everyone except Steve Ballmer understands it?s time for Microsoft?s board to tell Steve Ballmer after ten years as CEO, alright, we?ve seen what you can do. Let?s give so-and-so a chance. This continued presence is the biggest overhang on Microsoft?s stock.


    Finally, Einhorn is on record as a strong Apple bull as of December 2010.

    Here is an interview with him on Bloomberg where he explains (pretty well in my opinion) to the highly skeptical interviewer the value in Apple.

    In sum, I understand the frustration with hedge funds, but let’s give credit where credit is due. Einhorn is one of the smarter hedge fund managers. After all, hard to not respect the guy who had the balls to short Lehman Brothers.

    Edit: bad link

    I did read the whole article and he is saying that Microsoft is currently undervalued and therefor could be a good buy except for its current management.

         
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    Posted: 13 July 2011 02:23 AM #9

    Zeke - 13 July 2011 03:21 AM

    I did read the whole article and he is saying that Microsoft is currently undervalued and therefor could be a good buy except for its current management.

    Is that not true? If by some magic whim Apple’s management today (including Steve Jobs) were to run Microsoft tomorrow, while Ballmer & Co would be in charge of Apple tomorrow, I would sell 95% of Apple stock and buy Microsoft.

    Yes, Apple has an upper hand on the mobile and tablet market today (while Microsoft still has an upper hand on office/productivity apps & enterprise) but as the 1980’s and 90’s have shown, these things change fast. It’s the management team of each company that makes me an Apple bull and Microsoft bear. It seems to me that Einhorn is of the same opinion.

    Do watch the Bloomberg video I linked to; the guy’s a good reference to point to when speaking to Apple non-believers that think the stock is undervalued. He handles 2 annoying interviewers well and even handles the usual “Steve Jobs what-if” question decently.

         
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    Posted: 13 July 2011 11:56 AM #10

    Hmm, apparently hedge funds are buying both AAPL and MSFT heavily. (This may have contributed to the uptick in AAPL’s volume lately). Einhorn does own both. AAPL currently in top 10 of 63 funds, MSFT in 54.

    I’d be the first to agree that fund managers don’t seem to notice the seismic shifts that FalKirk outlined above (thank for a great summary, by the way). We on AFB use collective powers of observation and analysis to derive some insights that seem to be hidden from a traditional top-down analyses of companies.

    When the day comes and it is finally clear that mobile systems are usurping desktop, watch out the hedge funds (and everyone else) make a run from MSFT to AAPL. Judging by equal interest in Microsoft and Apple, that day isn’t today.