Tuesday, October 31, 2006

See no evil versus do no evil?

That's how one commenter summarizes Google's well known corporate mantra in the wake of alleged details behind the recent Google/YouTube acquisition surfacing on Mark Cuban's excellent blog maverick site:

Cuban quotes an anonymous trusted source, but is clear that none of it has been confirmed. So at this point, it's simply conjecture. Still, if the allegations are subsequently substantiated, it's going to be pretty ugly for all involved. Among the claims:

  • All parties knew YouTube was an infringement nightmare (no surprise there).
  • $500M of the $1.65B purchase price is earmarked for infringement settlements not Youtube shareholders (perhaps one reason the price was so inflated?).
  • GOOG wasn't concerned about small copyright holders, but worried that big ones could tip the balance unfavorably (so evil is okay per se, just don't get caught by those who can make it hurt?).
  • Settlements were therefore concluded with the latter, and specifically structured so those entities could avoid normal sharing %'s with the talent involved (hmmm...potential individual lawsuits and even a class-action?)
  • GOOG negotiated a 6 month "look the other way" clause for themselves in order to give Youtube more time to solidify its position (again, interesting ethics for all involved, if true).
  • GOOG requested that large media players pile lawsuits on other competitors to slow them down and make it more difficult/expensive for them to operate and secure VC funding (Umm, hello. DOJ?)

The anonymous source wonders how much of this will come out formally. He/she points to a concern that GOOG may be able to avoid SEC disclosure requirements by claiming that some of the transactions don't qualify as "material" financial developments given GOOG's overall size. Color me stupid, but if these claims are true, it's ALL coming out regardless of SEC rules. It's simply a matter of time - just ask the former chairwoman of HPQ.

Maybe we should be glad that GOOG outmaneuvered Ballmer et al for YouTube after all...

Monday, October 30, 2006

MSFT Live Barcode

Various coverage out about MSFT's new Live Barcode solution. Some, like Nathan Weinberg, summarizing it as:

Could be a lot of fun. Someone just please find me some decent software, or Windows Live better start shipping soon. I’m excited about the possibilities.

While others, like David Hunter, see it as MSFT "jumps the shark":

Reading through the Web site and taking the tour, it seems mostly to be yet another way for the geeky set to exchange business card information although Microsoft apparently has higher aspirations.

The simplistic/laborious business card example given by MSFT isn't overly compelling and I can see why, based on that, Hunter isn't impressed (or at least not favorably so). However, I think the concept has FAR broader implications. If you abstract from barcode - which, let's face it, is boring as hell - to a hyperlink that can be easily read via software in camera-equipped cell phones and/or modified mice and linked to specific, server-based info, the possibilities become endless. For example, reading about a particular automobile in a magazine and want to know more? Simply scan the provided barcode with your phone or mouse and get linked immediately to additional info, product specs, videos, etc. (also, from the manufacturer's perspective, think how much better that allows him/her to track the efficacy of their advertising spend). Doing business in another city and pass a restaurant, store, whatever, that you want to check out later? Grab their menu, product list, etc., by simply scanning the barcode on their window. See a product in a store and want to find out more about it, maybe even do some comparison shopping? No problem - just scan the barcode and voila! Finally, put the barcodes in known (GPS) locations, and you even have a poor man's spatial system that can link to maps, related local shopping, etc.

These and many other concepts are already being trialed in Asia, where the greater adoption of camera-equipped phones has led to much greater innovation in this area. Indeed, there are several existing ISV's who are seemingly several years ahead of MSFT in both conceptualization and technology. They're not alone. There are even OSS-based solutions, including one in Washington State no less.

Now MSFT is using QR codes for their effort, whereas many others are using their own proprietary implementation. QR codes are from a Japanese company called Denso-Wave, partially owned by Toyota, and are apparently the most popular 2D code in Japan, making their way onto numerous phones and into various related applications. While there may be some reason why QR, as aesthetically displeasing as it is, may eventually prevail as the leader in 2D barcodes, it's unclear to me how MSFT gains a competitive advantage by providing a service that is tied to it? Shouldn't they at least be taking an ownership position in the company or better yet, building a solution that will read multiple codes or even their own (more consumer appealing) one?

All of which makes me wonder what the overall business strategy for Live is? Currently, it seems to be "throw whatever we've got at the wall and see what sticks", versus consciously researching, selecting and then entering a specific segment with a strategy and plan to win. If I'm wrong, and the latter in fact underpins decisions like the one to introduce Live Barcode, then why enter with a seemingly entry-level, poorly-differentiated, offering that at best comes across as a fun toy? Heck, it doesn't even have obvious linkages, like say a connection between Office/Exchange contacts and a Live [server-based] service whereby business card info could be kept current on an automatic publish/subscribe basis (updating info, or - worse - dealing with outdated contact info, being the real productivity sink hole wrt business cards). Wouldn't it have been better to deliver a comprehensive solution that would impress and, either because of breadth and/or technology, couldn't easily be replicated by YHOO, GOOG or anyone else inside a month (assuming they're not there already)? I'm not talking about massive internal groupthink before acting - we've seen enough of that from MSFT. But surely some semblance of an overall strategy for achieving profitable growth, including how individual initiatives like Live Barcode play within it, should be in place internally and hence apparent externally?

Friday, October 27, 2006

Forbes on MSFT


Even though the Redmond, Wash.-based software behemoth is getting closer to finally releasing its new operating system, known as Windows Vista, its growth businesses--like the Xbox video game console and its MSN Internet unit--remain unprofitable. Some investors now view Microsoft (nasdaq: MSFT - news - people )--once seen as the technology-growth play--as little more than a proxy for the entire market.

And you think I'm harsh :-)

American Century’s Telford, for one, is holding off buying shares. "We look for positive improvement and positive change," he says, "and we haven't seen it yet from them."

Although it's hard to disagree with that one. Or this one:

The company’s shares have lagged the S&P 500 over both the last three- and five-year periods. In fact, Microsoft’s stock price has compounded at a measly 1% annually since 2001.

1% annually since 2001? Hmmm, I wonder how that compares with executive compensation over that timeframe? I'll go out on a limb here, and guess "not favorably"...

Allchin on what MSFT learned from Vista

A surprising amount of honesty here and, uncharacteristic for a MSFT executive, minimal spin:

Guess it helps to be leaving soon. Anyway, pretty scary what seemingly fundamental stuff about the OS and its dependencies apparently had to be learned. Yikes! I guess the positive takeaway is that it's now documented. Hopefully that documentation is being kept up and reviewed.

Worth the read...

Thursday, October 26, 2006

Q1 Earnings

Well, here we are in the lead up to the earnings call tonight. You can almost taste the fear and hear the dull hum as thousands of long-term MSFT shareholders look to the sky and repeat the same mantra: "Please don't f#*kup again". Meanwhile, the market is registering its confidence in the management team by taking the stock slightly lower [currently] in an otherwise flat to slightly positive market.

Now for the not-so-well-kept secret: the earnings tonight don't really matter. Sure, a major miss would be negative, buts odds of that happening are slim. A minor miss, unfortunately, is not without precedents over the past 2 years and so again, is unlikely to tank the stock. On the other side, a major upside surprise is also unlikely. That leaves the odds on bet the usual meet or beat by a penny or two - well, at least after you add back the inevitable "one-time" charges that typify all post 00 MSFT earnings calls. One outlier to this analysis is how investors may react to another lukewarm report from MSFT given the very strong results already reported by GOOG, AAPL and even IBM (on the earnings side). If investors do that compare, we're done. So, what is important? GUIDANCE. In particular, the outlook for the year but also for Q2. Unfortunately, we now know the latter is going to be severely impacted by the coupon program - so they've already dug themselves a nice big hole to try and get out of there. Focus will also be on the emerging businesses, especially Xbox 360 which appears to be struggling of late. MSN's progress in search-related advertising is going to be important - and likely underwhelming (although I will say their search engine is much improved and worth giving another try). Luckily, BusSol has been nicely hidden under Office, so I suspect there won't be too many details on that underperforming train wreck. Finally, analysts might just be looking for a final, unqualified date on MSFT's two biggest cash cows - Windows and Office. Are these guys sticklers for details or what? More after the call - unless I'm too busy crying in my beer...

Post close:

Revenue $10.81B vs $10.75B consensus. EPS given as $.35 versus $.31 consensus, much stronger than expected - unclear yet whether that's apples to apples. Taking a quick look at the financials, operating expenses continue to outpace sales (Hint Steve: that isn't going to lead to earnings acceleration). Client posted weak revenue growth of 4% vs comparable '05 Q (as was somewhat expected) and even weaker income (+3%). Server continued to prove why they're the only group currently earning their pay, posting a 17% growth rate on revenue and 36% gain in income. Great job! Online Services continued to show what a mess it is, posting weaker revenue (-4%) and managing to lose even more money doing it (-$136M vs last year's $68M profit). The Business Division managed a 4% revenue growth rate as well, but was effectively flat on income (more signs that BusSol still isn't executing?). Entertainment came in at up 70% on revenue and decreased its YOY loss from -$173M to -$96M. Unearned revenue up $185M. Buybacks on the Q of $7.683B. Stock initially off more than $.67 in AH, but recovering currently to -$.11. More after the conference call...

Post Conference Call:

Phew! No huge surprises. The stronger EPS result mentioned above, seems to have been due to shifting some planned marketing expenses to Q2 and beyond. That makes more sense, since revenue growth was in-line and expenses were hotter than that. Advertising growth of 5% and lower search revenues (I kid you not), were the brutal results that I had anticipated and posted about. With GOOG seeing 70-90% growth in this segment, let's not even bother belaboring how bad that result is. Luckily (?), MSFT's comically bad performance to date in this regard has set expectations at a very low level, so that one can probably slide. Dynamics notched a 19% YOY increase in billings. That's better than the advertising result, but still shows no acceleration in growth and is insufficient to take major share -especially when segment competitors like are growing at 2-3X that. Xbox 360 unit sales now stand at 6M life to date. Unclear whether that puts them in position to make their target of 10M units by year-end. The general tone seemed to more reserved than one might expect heading into the biggest season of the year for that particular product - but I might be reading something that isn't there. The post CC Q&A, as expected, was dominated with questions about the coupon program and the Q2 downward revisions. The answers generally seemed to be forthcoming, and I don't think analysts walked away with any new concerns following their "advance" warning a whole two days ago. Net net, it could have been a lot worse. The market, at least in AH, seems to agree, with the stock now marginally green at $28.41 (+$.06). We'll have to see what the full session tomorrow brings...

Tuesday, October 24, 2006

And the first shoe drops...

A previous post shared some concerns I was seeing for the upcoming earnings report and FY guidance. One of these, was the the issue of potential free/reduced-cost Vista upgrade coupons. These coupons has been rumored for months, but the story got renewed life this past week along with a new concern: an adverse financial impact on MSFT. Then, as if on cue, up popped Goldman Sachs analyst Rick Sherlund - always your first clue that bad news is imminent - to raise the alert while trying to mitigate the negative impact. He was joined by fellow top-ranked s/w analyst Heather Bellini of UBS. See story here:

Bellini's take:

UBS AG's Heather Bellini, Institutional Investor magazine's top-ranked software analyst, reduced her estimate for sales to $12.6 billion from $13.4 billion and sliced her profit estimate to 32 cents a share from 38 cents.

[While it's not 100% clear from the article, that's apparently for Q2 not Q1].

Sherlund's take:

Sherlund, the second-ranked analyst, estimates $500 million to $1 billion in revenue may need to be pushed into the next two quarters. He also said Microsoft may need to defer $200 million in sales of Office software if it offers coupons for upgrades to Office 2007, which is being released at the same time as Vista.

As above, the coupons had been rumored for months. So why did both analysts wait until the week before earnings to raise this concern? After all, had the coupons come earlier (as most expected) then both would have been caught flat-footed. Of course, despite this new bump in the road, both maintained their "buy" recommendation (Sherlund's being effectively useless anyway since he's been wrong for 4+ consecutive years - but that's another story).

Now today, we finally get confirmation of the coupons and that they will be valid for purchases starting Oct. 26th:

We also get a hastily called webcast by MSFT to review the financial impact:

At that, we find out that [drum roll] Office will be included and the actual expected impact will be $45M of revenue in Q1 and a whopping $1.5B in Q2 shifted to Q3 (far beyond either Bellini's or Sherlund's guesstimate) - with unstated but related impact on Q1-Q3 earnings and Q1-3 unearned revenue. The good news? Supposedly, full year results are not expected to be impacted. The bad news? Well, you already heard it - the program is going to adversely impact Q1 and especially Q2. Which of course is likely why we got this transparently choreographed song and dance in the first place, all timed to try and take some of the sting out of the expected fallout when earnings are released Thursday and [now] dramatically lower Q2 guidance given.

Don't get me wrong, the coupons are a good idea for both consumers and MSFT's PC eco-system partners. But given that Vista's latest ETA had been maintained by MSFT since long before the fiscal began, why weren't the coupons and their impact on quarterly flows already part of guidance? Did they not believe their own ship dates, or did they somehow conclude that coupons could be avoided w/o Xmas sales being dramatically impacted? [I could use another more plausible option here]. Now, once again, the upcoming earnings report/guidance will likely be mired in confusion. Which, color-me-jaded, but perhaps is the intent: Now you see the pea, now you don't; Pea not coming in as planned? Move all the shells around. Someone still manages to note the pea discrepancy? Don't worry, it'll be under the Q3 shell - trust me. Unfortunately, disappointed investors have had enough of MSFT's shell games and are likely to sell first and ask questions later. If this transpires, review my post about the proxy and factor your response accordingly.

Monday, October 23, 2006

The proxy and you

The saying goes that a picture is worth a thousand words. So let me submit this particular one, from MSFT's current proxy statement:

The net message? MSFT has underperformed the S&P 500 index for 5 years now, and the NASDAQ for the past 3. Note that this is despite MSFT assuming dividend reinvestment for the calculation - including, principally, the record-setting but financially-irresponsible $3 one time - and some $40-50B of shareholder-owned cash having been poured into buybacks during that period. Worse, this brutal record of underperformance is getting more pronounced. That might be less obvious from the simplistic and advantageously drawn chart supplied by MSFT. Let's take a look at how the chart would look drawn to scale and w/o including the dividend reinvestment component:

Hmmm, now that looks even more concerning doesn't it?

The proxy is the one chance each year for you as a shareholder to have your ownership voice heard. Don't do like most folks and simply check it off w/o reading it, or round file it, assuming your voice doesn't matter and/or that someone else will provide the appropriate feedback. Sit down, review the track record, and ask yourself whether this is the kind of performance that should be expected, is deserving of the $1B in bonuses that the management team recently treated themselves to, and is worthy of your continued support. If so, then by all means go ahead and give management the rubber stamp. If not, send a strong message that this is unacceptable by withholding support for some/all of the proposed officers and directors. And btw, that means employee shareholder owners as well. You have a vote too - use it.

The management team, though they seem to have forgotten it, have a fiduciary responsibility to look out for our best interests and increase our wealth - not theirs at our expense. If they haven't done that, and imo that's clear from the evidence, then it's time for a change. Indeed, change is long overdue. But don't expect change if you're too lazy to do your part and make your voice heard. After all, the caption above the chart says:

Note: Microsoft management cautions that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.

Somehow, I don't think they're cautioning you that it might get better...

Thursday, October 19, 2006

Concerns growing for the upcoming Q?

The recent wave of mostly-positive MSFT news appears to have crested and is being replaced by an increasingly cautious tone. For me, the first signs of this were concerns over comments that Ballmer apparently made wrt R&D spending for 2007. See story here:

If true (and I've seen neither a denial or a confirmation), management apparently didn't learn the lesson from last time they negatively surprised the market with higher R&D costs. FYI, this would represent a further $1.3B above and beyond the amount that put MSFT into a $40B tailspin in April. They say the definition of insanity is doing the same thing over and over but expecting a different result. If once again MSFT is forced to admit that it has seriously understated its '07 R&D spend, then I think management will lose whatever credibility they have left - which isn't much. Additionally, it will almost surely impact earnings in a negative fashion, but back to that in a second.

[Apparently the further R&D increase is false. See update below - courtesy of a reader.]

The R&D concerns were quickly followed by more public whining from several [former] security partners about lack of equal access to Vista's kernel/security console, and threats of possible action by the European Commission. Hot on the heels of that, came news that Vista, which seemed to be firming up nicely, will no longer RTM on the 25th as expected:

Don't know about you, but Allchin's new "pretty good shape" tone sounds a lot less optimistic that just a few short weeks ago and makes me wonder if they've hit some new unexpected bug/issue(s). Adding to these Vista-related ship date concerns, are worries that earnings could take an additional hit due to the anticipated Vista coupon program:

Sprinkle in AAPL's strong results last night, which apparently included a large jump in computer sales, including new-to-AAPL buyers (read: likely Windows converts):

And GOOG's blowout results today (it's up $32.72 currently in AH):

and we seem to have all the makings for this recent upward stock momentum to have ended - or at least stalled temporarily. Worse, take the rumored higher R&D number (and likely negative fallout), the hit from the anticipated Vista rebate program, the likely increased costs associated with making the recent product changes to please the European Commission, rumors of heavy Xbox discounting in Japan as a last-ditch effort to try and salvage that situation, and the fact that buybacks - though aggressive - are unlikely to have secured the shares that would have been retired via the tender (and were needed to make the revised earnings guidance for the year), and there seems to be a growing risk for a relatively weak Q and more importantly, downward earnings guidance for the rest of the fiscal. Now, I don't want to be Chicken Little, but if that happens, especially against the backdrop of AAPL and GOOG continuing to knock it out of the park, MSFT is going to reestablish itself as a laggard - both as a company and as a stock. And if that ends the current upward momentum right around here, focus is quickly going to turn to technicals and talk that MSFT has once again topped out on its now 3-4 year old trading range. The latter would be a green light for shorts.

Let's hope this scenario doesn't play out and that management somehow either manages to dispel these concerns and/or results are strong enough to overcome them. I'm dubious, but also have a hard time believing that management is prepared to risk another post-earning's call implosion just weeks before the annual shareholders meeting. Then again, they've done it before - which is why those November $27.50's puts are looking increasingly attractive as some cheap insurance should another blowup vs blowout be headed our way...

Update: the R&D spending increase rumor appears to be false:

Update 2: Argggggghhhhh! Okay, I'm completely confused wrt what the original R&D guidance for '07 was. Before making my initial post, I checked the Analysts meeting .ppts (where guidance for everything else was given) and found nothing - hence my stated inability to confirm or deny the rumor. Subsequent to that, a reader alerted me that the article I posted had been revised with the seeming impact being to deny the rumor of a further increase. Accordingly, I updated my post and put a strike through comments that no longer seemed applicable. It was still bugging me, so I did some more digging. Specific guidance from MS continued to elude me, but this and numerous other 3rd party sources say it was meant to be $6.2B (which while consistent with the original story's claim of a $1.3B increase to $7.5B, in hindsight makes no sense since the actual for '06 was $6.684B - and we knew it was increasing). Additionally, numerous legitimate media sources ran similar "$7.5B is a further $1.3B unexpected increase" stories w/o posting a retraction (and they says blogs lack credibility). To make a long story short, what I did find was the May '06 Sanford Bernstein event, where Ballmer said "And really I also pointed out that with an R&D budget that's going to come on $7 billion, we could probably afford to do 60 or 70 different things" and later "Now, we spend $6.2 billion in R&D" - which I would take to be his approximation of the '06 spend (I didn't have time to listen to the webcast for context). If that turns out to be the closest thing to actual company guidance, then recent purported Ballmer comments of $7.5B would represent another unexpected increase (albeit $500M vs $1.3B) and once again w/o advance warning to the street. Oh well, my head hurts now, so I'm giving up and going to bed!

Update 3: a potential explanation for Allchin's recent, more reserved Vista comments referenced in this post?

Friday, October 13, 2006

Is that what I think it is?

Don't look now, but on news that MSFT is basically caving in to the EUC's latest demands and that Vista will be shipping on schedule, MSFT notched a new 52-week closing high and on big volume. Did you ever think it would feel this good just to get back to where you were a year ago? Such is the value, I guess, of low expectations. So where do we go from here? 100M+ volume days have often signaled at least a short-term change of direction historically. Someone else apparently thought so too and used this opportunity to unload a boat load of shares around 1:15pm (insiders? hedge fund?):

That didn't help, and if you wanted to be critical you could point to the limp into the close while the general market rallied. Still, looking at the stochastics, we're not at the overbought levels that normally signal a reversal. Also, we still have that shareholder meeting ahead, and as I posted previously, you gotta know the management team isn't keen to have the stock lose ground into that. So while I'm sure that when the quarterlies come around we'll see that a ton of the funds earmarked for the failed tender have been spent securing this recent runup, don't be surprised if they kept a few billion around just in case they needed to goose the stock heading into that event. Bottom line, I'd say it's too close to call. Today may have been the classic "exhaustion top" at least for now, or perhaps the beginning of something more interesting - like maybe another attempt to break out of the 3 year-long trading range? A lot will depend on whether real buyers emerge - as opposed to the company - and that will likely be driven by news on the earnings front. Guess we'll just have to wait and see.

Meanwhile, if you're MSFT senior management and feeling cocky about the recent stock performance, don't be. While you've been busy using $40B more of our money to help the stock recover what you managed to lose via your incompetence during the past year, others like ORCL has been busy making new 4-yr highs. Indeed, ORCL just joined AAPL (and others) in having outperformed MSFT over the past 10 years:

Much of that enthusiasm - like AAPL - reflects good old earnings acceleration not to mention the excellent job Oracle is doing wrt cost control. Whether that demonstrates the long-term superiority of Ellison's "buy versus build" strategy over MSFT and if so, whether that's sustainable, remains to be seen. Still, outperformance over 10 years - who'd have thunk it? Quoting Ballmer, we just must not be taking a long enough viewpoint. Right.

Tuesday, October 10, 2006

The value of persistence?

Ballmer was out talking in public again today, so we shouldn't be surprised that the stock closed in negative territory. Actually, is it just me or did the buyback spigot appear to get turned off a few days ago with a noticeable weakening in the stock? Oh well, don't expect them to let it slide too far - at least until after the annual shareholder meeting. Anyway, back on topic. Today's event was a Gartner Symposium in Lake Buena Vista Florida (not a bad gig if you can get it):

There's some stuff there on the endless web vs PC debate (yawn), but the part I want to focus on is persistence. Apparently, "where Microsoft has faltered or, has not been the first mover" - which would seem to characterize the majority of cases - MSFT's "stick to it-ivness" is the secret sauce that allows eventual success. According to Ballmer:

The bone doesn't fall out of our mouth easily. We may not be first but we'll keep working and working and working and working and working….. and it's the same with search. We'll keeping coming and coming and coming and coming and coming. We are irrepressible on this.

Putting aside that a lot of stuff doesn't fall out of their mouth easily - like "we're sorry we screwed up and negatively surprised the street in April", or "yes, our stock performance has been atrocious for going on 4 years now" or "in hindsight our SPSA criteria were totally f!&ked up" - I find this statement interesting.

Certainly MSFT has quite a track record of coming from behind, and in all those cases, persistence along with [importantly] a longer-term outlook, was a key factor in the eventual success. So clearly there's value there. I guess what concerns me is that this persistence is now worn as a badge of honor, when in almost all historical cases it was required because the company seriously misjudged an emerging trend and/or competitor. Even eventual success sometimes came at a massive cost (e.g. Netscape and the resulting anti-trust judgement and tens of billions in penalties plus oversight). More recently, this persistence argument is often employed to support "XYZ" emerging business that has cost more and gone far longer w/o generating a profit than originally anticipated (can you say Xbox?), or to try and take the sting out of being outmaneuvered yet again. It's also frequently cited when explaining the initial rather obvious shortcomings of some latest offering (e.g. Zune, Search, etc.).

At what point when you find yourself continuously slow to respond, do you stop congratulating yourself on your persistence and ability to catch up (eventually), and start addressing why it is that you constantly miss opportunities or get beaten to market in the first place? Surely in almost all cases, an ounce of prevention would be far more cost-effective than a pound of remedial cure? That's unequivocally true wrt search and likely true about gaming, portable music, and most other ventures. Additionally, it should be concerning to the CEO that many of these missed opportunities didn't come from out of left field where one might reasonably expect the company to miss out (after all, high tech comprises a very large area), but in segments where MSFT was already directly involved and should have been positioned to either lead (ideally) or be a very fast follower. And if business imperative alone isn't enough of a reason to focus on rectifying this weakness, it's pretty obvious from the downward P/E trajectory that being a perpetual laggard isn't helping the stock - not that he's focused on that according to him (another problem). And let's not even talk about the negative stock impact associated with pursuing money losing ventures that may be ill-advised/ill-conceived to begin with (i.e. when does persisitence become reckless stupidity?).

Persistence and a long-term approach are generally good things, and I don't want to minimize their competitive value especially in an era of companies too often focused quarter to quarter. But care should be taken to ensure that they're not being used as a crutch, or to mask deep-seated organizational/leadership/execution failures. Additionally, especially in the context of a longer-term approach, it is crucial that day-to-day milestones be correct (vs the brutally expensive SPSA "oops") and accountability clear (existent at all?). Over the past four years, that doesn't appear to be the case at MSFT. To give credit where credit is due, Ray Ozzie's Services Disruption memo, albeit candy-coated for politically correct internal and external consumption, is the closest thing I've seen to acknowledgement of the problem as a problem:

We should’ve been leaders with all our web properties in harnessing the potential of AJAX, following our pioneering work in OWA. We knew search would be important, but through Google’s focus they’ve gained a tremendously strong position. RSS is the internet’s answer to the notification scenarios we’ve discussed and worked on for some time, and is filling a role as ‘the UNIX pipe of the internet’ as people use it to connect data and systems in unanticipated ways. For all its tremendous innovation and its embracing of HTML and XML, Office is not yet the source of key web data formats – surely not to the level of PDF. While we’ve led with great capabilities in Messenger & Communicator, it was Skype, not us, who made VoIP broadly popular and created a new category. We have long understood the importance of mobile messaging scenarios and have made significant investment in device software, yet only now are we surpassing the Blackberry.

Let's hope he's also capable of implementing steps to start addressing it, and that Ballmer et al give him the organizational support required to do so.


Thursday, October 05, 2006

Microsoft's Stock Recovery

Interesting post today by Nathan Weinberg on his excellent InsideMicrosoft blog:

In it, he points out that MSFT has now completed a recovery from where it was before April 28th and the now infamous earnings warning. That's correct, and I'm glad he noted it specifically.

His concludes with this:

The fact is, Microsoft’s stock fell because its investors didn’t believe in the company, and bolted at the idea of anything bold and competitive. The stock has recovered for one of two reasons: Either they believe that Microsoft is not going to compete as planned with Google, or those investors are gone, and Microsoft has a stronger investor base

On the former, I think he's half-right - investors didn't believe in the company. I disagree, however, that this was an aversion on the part of investors to seeing the company doing anything bold or competitive; Most of us would like to see the company do more (any?) of that. Instead, I think investors were sick and tired of negative surprises/excuses and based on the demonstrated five-year track record, correctly concluded that additional investments were unlikely to pay off via accelerated earnings anytime soon. WRT his second point - reasons the stock has recovered - I think he missed the most important point which seems to have eluded others as well. The recent run up in the stock, impressive though it has been, wasn't a fluke or free. It came at the cost of an additional $40B of shareholder money being committed to propping up the stock via the tender and additional buyback announcement. Indeed, when we get the quarterly financials, don't be surprised to find out that the company has been aggressively buying stock during the Q - which likely explains a good part of the upside pressure. Of course, the residual funds earmarked for the tender will eventually be depleted and then the stock will rise or fall on merit - not gimmicks. The former, is going to require execution excellence and earnings acceleration - something we haven't seen much of over the past 3-5 years. I do think Nathan is correct that MSFT may have a stronger investor base now, although I would attribute that 100% to the tender taking out some weaker hands directly and - by failing - drawing a line in the sand at $24.75 (which must have given pause to anyone considering shorting more or buying puts).

Personally, I'm happy to see the stock higher, but I don't give any kudos to the management team at all. Effectively, they've simply used another $40B of our money to [possibly temporarily] repair the damage caused by their own incompetence. Meanwhile, a lot of shareholders got hurt - some permanently (e.g. those forced out at the lows). Moving forward, buyback and tender gimmicks will only take you so far. At some point, this management team is going to have to do what it hasn't been able to for more than three years - execute effectively and accelerate earnings. And no amount of transparent shell games like this, are going to distract investors from the many failures in those areas while simultaneously signing off on $1B bonus packages to the management team generally. In my view, if they're unable to accomplish that task, which is a fundamental job requirement, then forget about reducing your bonus for optic's sake - just tender your resignation.