MSFT: Where From Here?

  • Posted: 25 July 2009 09:50 PM

    I wrote the following as a comment on PED’s latest column. It’s worth the read.

    After seeing the length of my commentary I chose to post it here instead. What’s challenging MSFT is an era of falling revenue and earnings and where should the company go from here? PED has started a worthwhile discussion and one we may be discussing for months to come.

    Let?s keep in mind Microsoft has been a spectacularly successful company and now has about $60 billion in annual revenue and one of the highest market caps in the land. The company is valued on the Street at over $200 billion.

    This isn?t an issue of Microsoft fading away quickly, but an issue of falling revenue and earnings. The company maintains the financial resources to invest in its core businesses (and as we?ve seen) attempt entry into new markets.

    As an investor, what would concern me about Microsoft is not only resource-intensive ventures into unrelated markets, but lack of adaptation of its product segments to a changing market paradigm.

    While Microsoft dominates the PC OS market for computers costing $1,000 or less, the desktop market is withering away. Portables are the only area of growth at this time for PC makers. However, netbooks are not a lucrative avenue for revenue growth nor for sales of premium versions of Windows 7.

    The market for handheld computing devices is growing by the minute and for the most part Microsoft is a comparative no-show in this emerging and potentially lucrative market.

    Microsoft also dominates in the productivity suite product market but is facing more formidable competition from Google and others.  Microsoft has had almost unfettered domination of the Macintosh productivity products market and remains one of the world?s largest developers of Macintosh software. Apple has left the door wide open for Microsoft to dominate the Macintosh productivity suite market but that door won?t remain wide open forever. Competition is also increasing from the adoption of Linux and Linux-variants by institutions looking for cost savings as well as more open standards for document exchange.

    Consumers by and large ignored Vista and many enterprises resisted the migration as well. The purported innovations in Vista weren?t perceived as a conspicuous value to justify the cost and the trouble.

    In the eight years since the release of XP, Microsoft has dabbled in video game consoles, digital music players and other consumer devices with decidedly mixed results. During that time the company?s work in innovating its core products and improving its primary product competencies is perceived as having atrophied with little enhancement in the end-user experience.

    This is not a Mac v. PC debate nor an Apple. v. Microsoft battle. It?s a question of where Microsoft will find revenue and earnings growth as the market moves away from the desktop computer paradigm and embraces handheld communications and computing devices.

    Windows 7 may be a fine product, but attractive long-term revenue and earnings growth opportunities will not come from the PC desktop and portable markets. It may come from embracing new markets outside the world of the Windows monopoly, developing an OS that need not run on 90% of the world?s PC?s but on computers used in select market segments that provide satisfactory margins and keep pace with the demands for innovation.

    As long as Microsoft tethers its products to maintaining a monopoly in the PC OS market it may be hobbling future growth opportunities and thus opportunities for shareholders to see their MSFT investment provide an attractive long-term return.

    [ Edited: 26 July 2009 12:23 AM by DawnTreader ]      
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    Posted: 26 July 2009 12:50 AM #1

    Here’s Roughly Drafted take on the Microsoft issue.


    The more I learn the higher I go,
        The higher I go the more I see;
    The more I see the less I know,
        The less I know the more I’m free.

  • Posted: 26 July 2009 02:22 PM #2

    calebcar - 26 July 2009 03:50 AM

    Here’s Roughly Drafted take on the Microsoft issue.

    That’s a good article.  I also liked what John Chambers, Cisco CEO, said in this weekend’s Journal about web 2.0:

    “Now Cisco has kicked into high gear as the world enters what Mr. Chambers calls ?Internet 2.0.?

    This Internet 2.0, Mr. Chambers says, will be all about pervasive video and collaboration tools. It will power the social networking Web world to even greater heights. Much more importantly for our economy, it will ?drive productivity by 2% to 3% per year,? he says.”

    All about video and collaboration tools sounds like a great market for Apple to launch a media pad into.  A pad that has video conferencing functions as well as all the fun media stuff thrown in is right down the ‘power the social networking Web world to even greater heights’ alley.

  • Posted: 26 July 2009 02:29 PM #3

    I’ve said it before:

    Windows 7 is a red herring.

    It will obfuscate Microsoft’s lack of attention to emerging product markets, some of which are closely aligned with its core product markets and product competencies.

    Apple is changing the monetization paradigm from software (Windows and Office) to hardware (The Mac and iPhone) making it more challenging for MSFT to compete. There isn’t a hardware product maker desiring for Microsoft to replicate its margin and monetization success in new product markets. There’s little money left in the PC OEM market and I don’t think Windows 7 will be justification for OEMs to raise hardware prices.