Thursday, November 30, 2006

Buy the rumor, sell the news?

That's what it looked like today, following the formal business availability of Vista/Office/Exchange and Ballmer ringing the opening bell at the NASDAQ market:

Of course, it might have been that lesser-known adage "If Ballmer's talking in public, sell!". That one has a near-perfect track record of success. See his webcast here btw, if interested (I didn't bother).

Getting back to the chart, check out that EOD sell volume. Not exactly the kind of reception you'd like to have on such a day. Yes, there has been quite a run up recently. However, that's also true of competitors GOOG and AAPL, yet both managed to perform better on the day despite any equivalent news. At least volume wasn't that high - that's something to be thankful for. But the long-worried about $30 ceiling is starting to look pretty formidable here, and it's unclear what positive news MSFT has left that isn't already in the market.

As always, the timing of Gates' regular dumping didn't help. Given that the only quarter he didn't sell in recent history was - conveniently - the one right before the tender and increased buyback announcement that sparked the recent run up, it would have been nice if he could have passed on another quarter to give the stock a chance at finally breaking through $30. But alas, no such luck - and maybe it wouldn't have helped anyway.

I also see that short interest has been on a tear recently. The author attributes it to disappointment over ZUNE, but my take is that it's simply traders making a bet that the stock is now effectively out of "good news" gas (some of it five years in the making) and yet, even with that, hasn't managed to take out the 4 year old trading range top convincingly. As such, the odds of it doing so are falling, while the odds of a trip back down are increasing. It's the old "the trend is your friend" phenomenon.

So, is the company out of good news gas? Are there some positive developments still unknown by the street? Have they completed all their buybacks or is there still some significant amount to do? Is this just the pause that refreshes? Are some of the executives going to finally put their wallet behind their "confidence and optimism" and actually buy some shares? Okay, forget that particular pipe dream. Or are the short-interest traders right and this was just another trip to the top on the MSFT yo-yo before heading back down? I guess we'll find out...

Update: Even this fairly significant news during the session didn't help:

Update #2: Looks like we're getting our answer, as the stock has clearly broken the previous uptrend and disconnected from the market - once again.

Wednesday, November 29, 2006

Can someone please justify the Xbox business? Anyone?

When I penned my recent Xbox post, I thought I was done with that particular topic for the time being. For those who missed it, I tried to estimate actual losses to date, realistic payback timeframes as a result, and how that compared to initial expectations expressed by executives, including Robbie Bach.

But then Bach went and opened his mouth again. This time, to Mercury News. During that interview, in addition to further hedging when Xbox would become profitable (FY '08 now looking less likely despite repeated previous guidance to that affect), he responded to a question about the $3.8B spent to date (fyi, it's significantly higher imo - again, see the original post) and whether he has a "blank check", as follows:

A: No. I think the things you have to look at is you have to look at, sure, the dollar investment, and the asset value that's created and then look at the P&L. You have to look at all three of those things. So, yes, the amount of investment, in particular on Xbox, has been a large number. So, compare that to the alternatives and some of the alternatives would have been, "Well, go buy somebody big." So, you could have looked and said, "Go buy Nintendo." And Nintendo at the time would have been a $15 billion acquisition. So, by any stretch of the imagination, a much bigger investment. And if I look at the asset we've built, it's a different asset than Nintendo has, and they certainly have got a great company, but it's an asset that we can be proud of. So, the first thing I'd say is, we went in knowing it was going to be a big investment, but the size of the marketplace and the importance to what we're doing justify that. Second thing I’ll say comes to the asset value point. People like to say we have invested many billions of dollars in that. But what they don’t point out is what is that asset worth? If we spent that money and there was no business there, I would say I should be working out on a farm someplace. The fact is there is a business there.

Now, compare this to Ballmer's justification when he presented at the Sanford Bernstein event in May of this year:

I know somebody will want to know, do you like your Xbox investment. Let's say we go negative $4 billion before we start going positive, I'll tell you that was one of the great creations of shareholder value of all time. If we had bought a company, say, like a Nintendo, and paid $10-12 billion for it, 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 or $8 billion.

Okay, so MSFT's executive are at least capable of reading from the same corporate-approved script (like there was any doubt), but what have we learned? Well, ostensibly, the justification offered is that building was cheaper than buying. That's probably true. The problem, of course, is that it implicitly assumes it was necessary to enter this market in the first place. But it wasn't. It was a discretionary choice made by the management team and selected over other competing opportunities. And, in addition to potential gains foregone via those lost alternatives, it's a decision that has resulted in more than $4B in subsequent losses to date with no firm idea of if/when we'll see profitability, and at times has decreased EPS by ~.10/share - or approximately $2.00/share in foregone stock price (on a typical P/E multiple of 20).

A good investment for shareholders (far less "one of the great" ones) is only good if it can be realized in a way that directly benefits us. As per my original post, I think it's clear that Xbox will never pay back the original investment over any reasonable timeframe. Certainly not over the fantasy "less than 5 years" originally espoused by Bach (which has come and gone), or even a decade, since Bach is now waffling on whether profitability will be reached by FY '08 - seven years after the initial launch (fyi, my original post argued why it will in fact be decades, if at all). So scratch being a good investment by virtue of generating outsized future returns over a reasonable timeframe (the main reason most businesses invest). How about Bach's new argument that a viable business has been created which is an asset that has value? That has some merit. Of course, the problem here is twofold. One, the only way to monetize that value for shareholders is to sell it. Does anyone actually believe that MSFT would do so? Two, what would the business be worth? Left out of Bach and Ballmer's comparison, for example, is that teeny tiny detail that Nintendo is in fact profitable. Would anyone really plunk down the $4-5B invested to date (plus some premium to make it all worthwhile) for an as yet still unprofitable business that isn't forecast to generate a return until at least FY '08, and that requires the wherewithal to absorb multi-billion losses every new console cycle? How many companies can afford to do that even if they were stupid enough to want to? The answer is very few, and therefore MSFT would likely be hard-pressed to find a buyer (and hence lucky to recoup even a fraction of the money invested to date). Plus, the entire discussion is moot since the likelihood of the division going up for sale is slim to none. So scratch being a good investment by virtue of selling it for an outsized return. Okay, so it can't generate a sufficient return on its own, and it's unlikely to be sold or capable of generating one even in that scenario. Hmmm...what does that leave? Well, there's the argument that it was really a defensive move to protect the cash cow of Windows. I know, not exactly what you want to tell the DOJ (we spent $5B to keep SONY out of our Windows monopoly) or shareholders (oops, we lied about our intent), but possible? Was SONY really a threat to that business? Maybe, but it's a stretch and certainly not to tune of $4B+. Indeed, I could easily make the argument that they put Windows at more risk by taking their eye off the ball while focusing on Xbox and other "emerging businesses". So scratch being a good investment by virtue of defending existing cash cows that otherwise were at risk.

So what's left? How about that Xbox somehow adds to the perception of value that investors are willing to pay for MSFT? While that's scary on many dimensions (e.g. managing for perception vs results), the most obvious weakness is that it isn't borne out in the stock price. What about the argument that w/o it, MSFT would have been worth even less? After all, while it's been unprofitable growth, Xbox sales have been the bright spot in MSFT's overall top line results. Without it, you would have been left with the reality of cash cows growing at 5% or less, versus the overall impression of a company growing at double-digits. Leaving aside the counter-argument (that it may have seriously undermined confidence in the management team's business savvy), that's true. But is it really what we're down to when forced to justify the Xbox investment? That w/o it, the stock would have fared even worse? If so, should that warm the hearts of shareholders? BTW, if I've overlooked a viable justification, feel free to bring it to my attention.

Is the Xbox a kick-ass console? Is Xbox Live one of the few clear examples of MSFT innovation? Is becoming #2 in 5 years a huge accomplishment? Does Xbox represent the only coolness MSFT has? Yes to all, but that alone doesn't make it a good investment for shareholders. In my view, they simply lost too much money in round one to accomplish the latter. But heck, maybe Bach himself might deign to wade in and, for the first time in MSFT history, offer shareholders a compelling business justification for this massive and to date unsuccessful investment.

For now, his advice appears to be that if this performance isn't imbuing you with confidence in your management team, you should sell and move on:

If you don’t think the management team is investing wisely, you should put your money elsewhere.

That's certainly one option. I have another. Now that the management team has managed to wipe out ~$300B of shareholder value and badly underperform the major indices for the past 4 years, at least in part due to Xbox and other massive investments that have yet to pay off, how about they stop thinking their past glory in the 90's exempts them from having to justify themselves and their decisions this decade to shareholder owners - or we replace them?

Friday, November 24, 2006

Is this really the best you can do?

I mentioned in a recent post that ZUNE was a topic unto itself. Since that time, I've been keeping tabs on customer reviews and media reports including this one, which caught my attention today. In particular, this comment:

I think this is a decent first effort by Microsoft and am sure that software updates will improve the functionality of the device and Zune software, but there are a few things they could have done at launch to greatly improve the buzz around the device.

A "decent first effort" - and this from an article that's trying to restore balance given the overwhelmingly negative press to date.

Now, consider the backdrop. According to Ballmer, MSFT wanted to do a ZUNE-like product years ago but couldn't because the only executives capable of leading the charge were too busy losing money on Xbox. Let's leave aside why the "the strongest management team in MSFT's history" (as Ballmer recently referred to them), with over 900 senior managers, has to wait on 2-3 to come free in order to move forward in this area. Instead, let's cut him some slack and say it's because the competitive challenge is so formidable, the stakes so high, and the perceived solution so analogous to MSFT's gaming "success". After all, the Ipod isn't just a product, it's a cultural icon that has bested all comers to date (including MSFT and all its partners) to grab some 80-90% market share. It also comes from a company with a reputation for zealous customer loyalty, leading design/ergonomic prowess, and who has arguably forgotten more about marketing than MSFT knows. Most importantly, Apple's dominance in this area is a direct threat to MSFT's aspirations for the overall home and entertainment market, which is already large and expected to only get more so.

What approach does the creme de la creme of MSFT's "strongest ever" management team select? Why a derivative product based on the Toshiba Gigabeat (which maybe makes sense from a cost/time-to-market perspective but doesn't exactly scream "innovative"), that in some ways is better (larger screen, wireless, native FM radio), but in many ways is worse (bigger, same resolution as the smaller screen Ipod, less battery life especially with wifi active, less titles available for download, etc.), and then rush it to market before the software has apparently been fully baked, resulting in widespread reports of disappointment in the initial feature set and numerous reports of bugs/difficulty installing even that. People are actually having to write hacks just to run the device as a hard drive or on Vista - not to mention trying to get around its restrictive DRM.

So Ballmer et al have been thinking about this for several years, had their very best executives working on it heads down for presumably the past 6-12 mths at least, and this is the best they can do? And what's the result? Like the Origami before it (remember that one?), tons of advance buzz has largely given way to generally negative reviews and seemingly underwhelming sales. For example, having debuted at #5 on Amazon's list of top-selling MP3 players, the ZUNE fell to #9 by day two, and now stands at #21. What's going to happen as a result? Well, expect whatever losses had orginally been forecast, and resulting payback timeframes estimated, to get doubled as they fix the current shortcomings and then work to overcome the negative perception that's been left by this less-than-stellar debut. As the saying goes, "you only get one chance to make a first impression". That's especially true in this day and age of the web and blogs where, within hours, your initial success or failure gets communicated to literally millions. Why does MSFT consistently ignore this?

To me, the answer is found in MSFT's long-standing approach of getting something "okay" out to market, gathering feedback and then eventually incorporating that into a better subsequent product. It's a model that has worked well for them in the past, albeit that it has also resulted in a widely-held perception that first releases, and even subsequent ones, are a work-in-progress and therefore imminently skipable (the old "wait for the service pack" or "they'll get it right by version 3" problem). To be clear, I'm not arguing that gathering customer feedback and then incorporating that into subsequent products is a bad idea - it's obviously critical. The question is whether you do enough work up front to ensure that you begin with an already strong product. In other words, aiming for what Apple's Steve Jobs calls "insanely great" out of the box, versus being content to ship "okay", figuring you can always fix and/or improve it over time. In my opinion, that latter approach too often characterizes MSFT's efforts and it needs to change. Today, markets are moving much faster, competitors (armed with different business models) are much more aggressive, consumers have far more options for their scarce $, and the willingness to pay at all, far less pay to effectively be a beta tester, is fading fast. So in my view, the minimum success bar moving forward is likely going to be "insanely great" not merely "decent". With insanely great, people want to buy your product and tell others about it - versus you having to pour $B's into marketing budgets to try and sell them on it (or god forbid force them to buy contractually). When your products are insanely great, you don't have to hide behind excuses like "our biggest problem in the installed base is the good enough factor". To me, when a customer says that what they have is "good enough", what they're really telling you is that your new product isn't sufficiently compelling and/or you've failed to adequately explain why it is.

Is the ZUNE insanely great? Was MSFT even shooting for that? Was anything less even remotely likely to make a dent in the Ipod? Should the hugely compensated creme de la creme of MSFT's strongest management team ever, have been able to figure that out and if they didn't, are they really the best? More importantly, is insanely great the focus for MSFT and their products generally? Is IE7, for example, great or just a "decent" attempt to catch up? What about Vista? Was it one of the exceptions that actually began as an attempt to be insanely great and then proved too difficult and time consuming (always a concern when you swing for the fence)? Based on what I've read, it will likely be good but fall far short of insanely great. Now to be fair, I think there's increasing evidence that several groups are starting to get it and at least trying to make each release a stellar event. But overall, I think the answer is still no, that is not the defining hallmark of MSFT. Too often, they seem to be content with simply shipping their best yet, versus the best yet. Again, in my view that needs to change and ASAP. Unfortunately, I think the concept is orthogonal to much of what Gates/Ballmer and other senior leaders hold dear based on past success. As a result, it's going to be that much more difficult to instill it as part of the company's DNA. But do so they must.

Update: Interesting article on MSFT and particularly executive J. Allard, which touches on the development and thinking process that went into ZUNE:

Update #2: Another interesting article, this time with suggestions on what MSFT really needs to do in order to win:

Tuesday, November 21, 2006

Portrait of the emerging business as an older dog

Xbox, one of MSFT's most expensive "emerging businesses" to date, is now some 5 years old and no longer a young dog. In 2001, when the original unit was launched, there was already concern that MSFT was being far too optimistic about its prospects:

When Microsoft expects to break even is moot. Henry Blodget, Merrill Lynch's celebrated internet analyst estimates it could take as long as five years for the company to recoup its investment - essentially the life-cycle of the product.

In the same article, Robbie Bach, Xbox division head, took issue with Blodget's assessment, saying (among other things):

Microsoft does not go into businesses that make losses for five years. I have my own profit-and-loss account.

"Five years" have now passed, and the Xbox division has made annual losses over that entire period (albeit that it did have one profitable quarter on the back of the Halo launch). So, while props to Blodget are due, even his assessment ended up being recklessly optimistic.

Before determining how long it will actually take MSFT to "recoup the investment", let's try and determine what that investment has been. That's more difficult than it might appear, since MSFT didn't break out segment P/L in the earlier years. However, according to this article in '05, Forbes estimates losses for the first 4 years at approximately $4B. Add to that what we know from MSFT's subsequent earnings reports (which do break out segment P/L), and that total rises to at least $5.3B and possibly higher (depending on what Forbes included in their calculation). So, minimum $5.3B investment to date and counting, since the division still isn't profitable.

Now to the return part. How much profit could MSFT potentially generate from Xbox? Well, we can't look to MSFT for input because they've never bothered to even roughly estimate it publicly. However, we can look to SONY, the segment leader, for some idea of what's possible. From what I can see (and admittedly I couldn't locate the source I recalled), in their best year ever, SONY appears to have generated some $1B in profit from their PlayStation-led gaming franchise. Let's be hugely generous to MSFT by assuming they can supplant SONY tomorrow, and get to that former level of record profitability (SONY currently being expected to lose as much as $1.7B on the back of the PS3 launch). At that rate of return, it would take another 5+ years to breakeven, for a net total of 10+ years just to recoup the investment - twice what Blodget predicted, and more than twice Bach's estimate. But wait, it gets worse. In reality, while MSFT might ultimately be able to generate more creative options for monetization than SONY (TBD), assuming $1B in profits, or even half that, any time soon, has a likely probability of zero when rounded to the nearest decimal place. So, actual time to recoup the investment, assuming it ever occurs, will likely be measured in decades. Keep in mind that Ballmer's characterization of this business, as recently as May 31, 2006, was:

I'll tell you that was one of the great creations of shareholder value of all time.

My question would be: Based on what evidence?

All of which raises the question of what MSFT's broader strategy wrt emerging businesses is, and how success is measured. Are they worthwhile standalone efforts, meant to be profitable in typical industry 3-5 year timeframes (or less), but MSFT just can't execute properly? Or are they always, at least in part, defensive plays aimed at protecting the existing crown jewels and only justifiable (financially at least) on that basis? I think the answer is a combination of both, which explains why MSFT's "investments" continue to be viewed by many externally as hopelessly unsuccessful, especially when they weren't sold to the street or shareholders on that basis. Net net, MSFT needs to start rationalizing its efforts and ensuring that if new ventures are being touted as making standalone financial sense, that they in fact do so, and over timeframes that most would consider reasonable. Otherwise, the street and investors will continue to focus on the order-of-magnitude better risk/reward investment choices of competitors (e.g. AAPL's in Ipod, GOOG/YHOO's in search/advertising), and conclude that Ballmer and team are either inept, bullshitting about the true purpose of these investments, or working on timeframes that even the longest of "long-term" investors would balk at.

Update: note that in the linked webcast, Ballmer infers that Xbox losses hadn't yet reached $4B (as of May '06). Specifically, he says:

Let's say we go negative $4 billion before we start going positive

That's at odds with Forbes' estimate and seemingly MSFT's own reported financials, but possibly true if there's some discrepancy in what H&E losses were directly attributable to Xbox (let's ignore the possibility that losses may well have been understated by charitable interpretations of what costs to bill to G&A and R&D versus the unit). Suffice to say, that $4B vs $5B (or somewhere in between), while substantial, doesn't change the underlying analysis that materially (i.e. minimum payback period becomes 9+ years vs 10+, and likely still decades under any more-realistic scenario).

Update #2: And the expectations for Xbox profitability get pushed out even further:

When asked how long it will be before Microsoft starts making money on Xbox, Bach replied, "To be clear, we have said that in fiscal 08, entertainment and devices makes money. That’s not exactly Xbox. We don’t break profit down by business. And there are parts of entertainment and devices that make money. Xbox doesn’t. Xbox has to make significant progress to enable E&D to get there."

Thursday, November 16, 2006

Mighty Casey gets a base hit?

While trolling through the generally negative media reports on Zune (an entire topic for a future post), I was happy to see this development on the search/advertising front:

This strikes me as a fairly positive development, especially for a group that has been perpetually striking out for most of the past 2 years. I'd like to think it's a major coup in itself, but more importantly foreshadows some positive momentum now that Steve Berkowitz (former CEO of has likely had sufficient time to assess where the team is at, and what they need to do to get back in the game going forward. Let's hope so. has been AMAZINGLY successful (growth second only to GOOG, albeit on a very low share) both technically, and wrt selling advertising. So I was personally happy when MSFT acknowledged the obvious - they've been failing miserably - and uncharacteristically went outside to secure someone with demonstrated industry success. Key will be whether Ballmer et al give him the support he needs to make the changes necessary. The track-record with previous outsiders isn't encouraging, but then the stakes have never been higher, nor MSFT's failure to date more apparent. So again, let's hope for a positive outcome.

And since I'm spreading sunshine and goodness for a change, here's someone who thinks MSFT is going to ultimately prevail with Xbox:

Before you get too excited, that's by 2011 and there are numerous others who predict the exact opposite. Personally, after $4-5B of losses to date, I'll settle for just profitable...

Tuesday, November 14, 2006

The future's so bright, I gotta wear shades!

I'm paraphrasing, but that's essentially the message from Ballmer at today's annual shareholder meeting. Of course, that's been his message at every other shareholder meeting since he took over as CEO 6 years ago - a period, it should be pointed out, during which MSFT's market cap has been cut in half.

His obligatory "we're extremely excited and optimistic" about the future, was augmented with lots of talk about "multiple cores". Seemingly, this is his latest favorite company analogy, replacing the previous "fast and slow twitch" muscles. [Aside: Is it just me, or does it seem odd that the "people-ready" company would move from something at least suggestive of humans (muscles) to the antithesis - a silicon chip?] According to Ballmer, MSFT now has four cores: Desktop, Server, Entertainment and Devices, and Online. Of these, the Online one was referenced as the most critical to get right. Duh! He reiterated that MSFT would be "a leader" in this area, which sounded pretty hollow following 2-3 years of anemic search/advertising performance. However, numerous stats surrounding current offerings (live mail, search, space, messenger, and 20 other services) were offered up as evidence of progress. Left out, of course, was that niggling detail that collectively, all are currently unprofitable. But hey, why screw up an otherwise compelling story by dealing with reality? He went on to note that the company returned $23B in cash to shareholders via buybacks and dividends during the fiscal, but continued the trend of not commenting on the stock itself. Gee, I wonder why? There was also lots of talk about the need for more "big bold bets", without bothering to explain why shareholders should continue to underwrite these given the failure of existing ones to generate profits. Finally, according to Ballmer, the major reason for optimism is that MSFT has managed to assemble the "strongest leadership team in the company's history". While that may explain the recent decision to treat these folks to $1B in bonuses, it's less clear what metrics he would point to as evidence to support that assertion (certainly not returns on current big bold bets, for example). More importantly, the key question is whether they're strong enough for the task at hand (i.e. how do they stack up to competitors?) - not simply whether they're the strongest MSFT has fielded to date. Bottom line, it's clear they're being paid as if they're world-class. It's just not obvious from actual results that they're delivering value for money.

Gates also spoke, but was so boring that I barely made any notes at all. If you have trouble sleeping at night, I highly recommend listening to this segment. There was more talk about how "fantastic" this past year was. Translation: low double digit-growth is now apparently considered exceptional performance. He went on to discuss highlights on Xbox 360 (expect 13M units sold by June, 2007), Xbox Live as an example of the potential of Live services, "foundations for success" like Windows Mobile 5.0, and even managed to squeeze in a comment or two about Office and Vista RTM'g, before getting back to more money-losers break-even businesses - like Zune, etc. All in all, a big ZZZZZZZZZZZZ here.

At this point, 55 minutes into the webcast, the official content concluded w/o the stock and its sorry multi-year track record having been mentioned once! It boggles the mind that a public company who's stock has underperformed the S&P for 5 consecutive years, would host a shareholder meeting and not even mention the stock. Is there any doubt that if MSFT ever managed to actually beat the S&P again, suddenly that performance would be the kick-off to the shareholder meeting and management would take a collective bow for securing it?

Lastly, we had the Q&A - normally the only useful part of these events. Unfortunately, there was little there either. One shareholder did ask about the dividend, but Ballmer quickly fobbed that off with "the Board regularly reviews it". I guess that means they regularly look at it and say "Yup, that's below market alright". Incredulously, not one shareholder in attendance bothered to call the management team on the obvious. Namely:

All optimism, excitement, leadership prowess, etc., aside, you've managed to underperform the S&P for 5 consecutive years. What are you doing to address it?

Meanwhile, at present, the S&P is up 9 points, the NAS up 22, GOOG up $8.17, AAPL up $0.50 and MSFT down $0.02.

Update: Corrected some mistakes and here's Todd Bishop's take on the shareholder meeting (we did listen to the same meeting, right?):

Thursday, November 09, 2006

What exactly is MSFT's dividend strategy?

Dividends are a significant part of the historical return attributed to stocks and the market generally. Indeed, of the oft-quoted 10% average market return, some 4.5% of that represents dividends. Which is why a company's dividend and its strategy wrt to said, are important to investors.

MSFT declared its intention to pay a dividend in January of 2003. This was coincident with the last ill-advised split, and amounted to $0.08 ($0.16 pre-split). Neither announcement was well received by investors, with many "growth" players seeing the dividend as an admission that MSFT's best growth was behind it and abandoning the stock (which, unfortunately, proved to be correct - at least to date). For those who remained, the initial dividend was far below market and therefore near-meaningless. This was addressed, to some extent, over the following 12-18 months, as MSFT followed up with some fairly aggressive and consistent increases - which provided a basis for future optimism. Then came the brain-dead and fiscally-irresponsible $3 one-time, which proceeded to tank the stock some $5 or more before the dust settled. Since then, it's been difficult to discern what MSFT's strategy is for the dividend. The early (directionally positive) momentum, has been replaced with long periods of no increases or, more recently, modest $.01/Q per year (or so) ones. Currently, MSFT pays just 1.38%, while the S&P average for dividend-payers is 2% (1.52% for all 500 issues combined). Now, bear in mind that MSFT hasn't been able to even keep pace with that index for the past 5 years (although it has a shot at doing so this year). Also, unlike almost all those companies, MSFT is still sitting on ~$32B of cash and short-term investments, as well as another $8.7B of "Equity and other investments" (all figures as at last Q) - the necessity for the latter being a subject unto itself.

The bottom line? If, despite recently paying the management team $1B in bonuses and pouring $B's more of shareholder cash into buybacks (which, thankfully, aren't being diluted even faster for a change), Ballmer is still having trouble figuring out ways to spend MSFT's enormous cash horde - which appears to be the case (see here, here, and here) - how about this suggestion: increase the dividend? Quite frankly, how any leadership team sporting that abysmal track record of performance versus the S&P can still be in power, is difficult enough to understand. But how they can do so while simultaneously sitting on a mountain of cash, and nevertheless paying a grossly under-market dividend, is unfathomable. You can't have weak growth, poor relative performance to the market, AND a far below market dividend, and still expect anyone to find your stock particularly attractive. So if you're truly "shareholder-focused", start demonstrating that fact by raising the dividend to at least the S&P dividend-payer average of 2%. You know... like say, INTC (2.32%)?

OT but related: watching CSCO's surge today following very strong numbers last night, I see that they've now joined the growing list of companies, including SAP, ORCL, AAPL and others, who's stocks have outperformed MSFT over the past 10 years. Ballmer says that shareholders need to take a "long-term" focus. Isn't a decade a reasonable timeframe in which to assess management's performance in their primary mandate of increasing shareholder value? If MSFT can no longer outgrow many of its competitors for investing $, stubbornly refuses to ditch money-losing new ventures or make deep cuts in existing core businesses to better drive earnings, and continues to lag many peers and all major indexes wrt the stock, then hadn't it better start providing at least a market dividend in exchange for anyone bothering to hold it as anything other than a trade?

Wednesday, November 08, 2006

Vista RTMs - Finally!

Okay, its development isn't quite as old as the folks pictured above, but close enough. FIVE years - a lifetime in the computer industry. And please spare me talk of all the other OS releases that occured during that time (MCE, Server 2003, XP SP2, Tablet, etc.). While that helps clarify that MSFT wasn't sitting around doing nothing, it doesn't negate the fact that Longhorn/Vista was a total fuckup that has had a massive adverse impact on MSFT, its partners, its shareholders, and external perceptions of the company and the ability/effectiveness of its leadership. It also provided a huge opportunity for direct competitors like Linux and OSX to catch up and, in many cases, surpass Windows in functionality, while opening the door of industry/customer/investor interest to other companies and business models who were delivering - many of those being web-services based. All that aside, let's be grateful that this abysmal and unacceptable chapter in MSFT's history is finally over, and thank the team for what must have been a hugely stressful past 2 years trying to get this thing back on track. Let's hope the final result is something that all can be proud of, that it gives MSFT a leg up on dealing with its myriad of other competitive/execution problems, and that future projects are never allowed to go so far off the rails.

Curiouser and curiouser!

Courtesy of NOVL's SEC filing, we get some of the financial details behind the recent MSFT/NOVL deal that were missing at the press event (see my previous post here). Media coverage includes:

Major points:

  • MSFT will pay NOVL $240M up front in subscription fees.
  • MSFT will make an additional $108M in upfront payments for use of NOVL patents.
  • MSFT will spend $12M/yr marketing Windows/SUSE, SUSE/Windows virtualization scenarios.
  • MSFT will spend $34M over the life of the agreement (2012) to beef up the sales force behind this joint effort.
  • MSFT grants NOVL and exclusive in this area versus other Linux distro providers for 3 years.

I still don't understand why MSFT is buying coupons for SUSE support and for a staggering $240M no less. This apparently gives MSFT the ability to "use, resell or otherwise distribute over the term of the agreement, allowing the certificate holder to redeem single or multi-year subscriptions for SLES support from Novell (entitling the certificate holder to upgrades, updates and technical support)". I'm pretty sure MSFT isn't going to be taking advantage of the "use" clause (unless hell just froze over w/o me knowing), so that leaves "resell" or "distribute". Let's hope it's the former, to recoup some of that $240M, versus say, standing outside RHAT events and giving them out as party favors. The $108M for patent use is equally unclear to me. What patents does NOVL have that would be worth $108M to MSFT just to use? Or, worse, are these patents MSFT thinks it might have already infringed? The remaining ~$94M in assorted upfront and ongoing sales and marketing costs are vague, likely easily incorporated into MSFT's normal marketing efforts behind virtualization, and therefore less concerning.

So, what are NOVL's obligations? After all, recall that they initiated the dialogue with MSFT. Well, they're going to pay MSFT at least $40M over 5 years for the use of MSFT's patents. WTF? They approach MSFT, and walk away with over $440M+ in upfront and ongoing payments in return for a commitment to [just] pay MSFT at least $40M over 5 years? To put that $440M+ in perspective, that's more than an entire quarter's revenue for NOVL and more than they made in net income last year. And keep in mind that NOVL is still a bit player in enterprise Linux vs RHAT, for example, who enjoys some 70% share (so if the goal was better Windows/Linux interop for customers, a MSFT/RHAT deal would seemingly have had more impact). Clearly, either this deal was put together by the same financial geniuses who brought us the Xbox business plan, or MSFT thinks their whopping $440M+ investment has secured them a hell of a lot more than simply $40M over 5 years from NOVL. I'm going with the latter, although whether it's a potential lawsuit with Novell avoided (i.e. damage mitigation), or future mileage to be gained versus OSS (i.e. strategic), is still unclear.

Update: Other takes:

Update #2: More grist for the mill. Incredulously, Ballmer is open to cutting other similar deals. Umm....Steve, you were a math major, right? If you strike similar deals with others, and those also require MSFT to pay an order of magnitude more than it gets in return, the payback for MSFT investors is what exactly?

Thursday, November 02, 2006


I know...when you heard word about a 2pm "Industry" announcement by Ballmer, you secretly hoped Steve was stepping down, MSFT was going to finally buy YHOO or SAP, they were splitting into three separate companies with individual tracking stocks, or maybe just going to formally announce Vista ship dates - right? Nope, on all counts.

In case you missed it, MSFT announced a joint relationship with Novell. Honest! Here's some coverage:

Listening to the webcast, I'm not 100% sure that I understand this deal. Apparently, Novell initiated the discussions based on issues they were seeing within their customer base. Meanwhile, MSFT was seeing similar issues, so the timing was fortuitous. Six months later, we get today's announcement. Now, I understand the customer need for better interop between Linux and Windows. And, as a stretch, can understand the need for cross-company patent litigation protection agreements in support of that. But why is MSFT supposedly buying 70,000 coupons from NOVL for a one-year SUSE subscription, which they will then distribute to customers? And was that total, or did I hear the NOVL guy say it was annually? Does that explain why the flow of money is apparently heavily skewed from MSFT to NOVL, or is there something else?

One attendee, clearly also having a hard time following the announcement and sensing a conspiracy instead, asked whether the current WordPerfect litigation issues between NOVL and MSFT just happened <wink> to get resolved as part of this? Answer: no. In the meantime, Infoworld figures they know the reasons:

I love those "neutral" perspectives that give three choices, all of them unpleasant. I'm not sure we could call Linux's current miniscule desktop marketshare a "bleeding of Windows to Linux", and therefore write this off as MSFT's effort to staunch it. But of the three, that's the most plausible. Their "Desktop OEMs pushed it" argument, strikes me as strained, and their "Apple fear" one is just laughable.

Still, why this deal, why now, why Ballmer in person to announce it, and why is MSFT distributing SUSE coupons as part of it and paying NOVL cash? Certainly, it seems to have a lot to do with server consolidation and virtualization, and the impact that's expected to have on the technology landscape (hence MSFT's major efforts over the past year or more to try and catch up to EMC's leading VMware). But whether this is a sign of weakness on MSFT's part vis a vis Linux, strength (that on a level playing field customers will choose to host SUSE under Windows vs the reverse), some Machiavellian response to ORCL's recent decision to offer a relabeled Rhat Linux, or simply the customer-focused necessity that NOVL/MSFT suggest it is, is TBD.

Between the recent ORCL/Rhat news, and now this MSFT/NOVL SUSE news, the technology landscape just got a lot more confused. Meanwhile, Linux supporters are currently having a field day in the media with this development, painting it as capitulation on MSFT's part to the inevitability of an Open Source world. For its part, the market (both in the session and AH) gave this a collective yawn for MSFT, although NOVL was up big time as word somehow leaked out ahead of the announcement...

Update: Microsoft Monitor's Joe Wilcox shares his thoughts on the deal:

Update #2: Forbes wades in with their particularly harsh take: