Ballmer presents his case in Manhattan - and bombs

The big news this week was Ballmer's unprecedented trip to Manhattan to try and reassure analysts in the face of the recent guidance fiasco and associated $40B stock haircut.

• Read the transcript - in case you simply saw the stock down the next day and wondered "wtf?"

Media coverage was extensive, but the most insightful article imo was this one by Mitch Ratcliffe:

• Penetrating Ballmervision

He brings up several interesting points. One that I've wondered about for a long time is what exactly MSFT's massive $7B/annual R&D spend represents? According to Ballmer, only about $250M is actual "R" leaving $6.5B of "D". Is that simply operational product development costs masquerading as R&D for tax purposes? If so, it's pretty concerning wrt to what the true [non-variable] costs of MSFT's product development might be. It also calls into question whether Ballmer should be touting it as the massive differentiator that he does. Anyway, if someone has some insight into how that $6.5B is seperate from general product development, I'd be interested.

A second comment he makes is critical imo:

The really cogent argument Ballmer did offer for the reliance on internally developed technologies and products was XBox. He pointed out that, if Microsoft had acquired Nintendo (whose U.S. headquarters is just down the street and now surrounded by Microsoft's campus), it would have spent three to four times as much as it will lose in the early years of XBox and "we would have had a business we didn't understand as well, wasn't as good, wasn't as well-positioned and essentially would have cost our shareholders an additional $6 billion, $8 billion." All true, yet it doesn't seem to inform Ballmer's strategic approach to extending Microsoft's business.

If the build-it-don't-buy-it case is proven by XBox, Ballmer should be much stronger in his defense of Microsoft's $35 billion cash reserve, more of which should be going into basic research now to put the company at an advantage later.

Exactly! If Ballmer believes that the massive investments he's made over the past 5 years have been wise for shareholders, then he needs to articulate that and in some detail - in particular because these emerging businesses as a group are still collectively unprofitable and detracting from earnings and hence the current stock price. His unwillingness to do so suggests that he can't because he doesn't know the answer, or that he won't because he knows the answer might not be sufficiently compelling to convince investors that it was a good risk/reward. IMO, it's more likely the latter, although I'm still willing to give Ballmer the benefit of the doubt. However, until he comes across with some detail, investors will view all the new "investments" through the prism of this past track record and conclude that it simply means more big dollars being spent upfront for unclear future returns.