Monday, April 23, 2007

Nibblin' on sponge cake

Watchin' the sun bake.

Ah, the opening line from Jimmy Buffett's Margaritaville and the reality I've been living for the past two weeks. Okay, so it wasn't Mexico and the concoctions weren't frozen, but it was tropical and chilled drinks went down just fine! I also took a two-week break from watching the markets and anything even remotely related to Microsoft. Alas, all vacations eventually come to an end. So now that I'm back to the cold, rainy reality of home, I figured I might as well add to my misery and review MSFT developments.

The first thing I noticed was that MSFT lost the bidding war for DoubleClick to Google. I didn't think DoubleClick was worth the originally rumored $2B price tag, so the $3.1B actual makes even less financial sense. Still, it seemed pretty silly of MSFT to pursue a purchase without ensuring that it had the deal locked up or was prepared to outbid any potential rival. But then I read John Battelle who states that MSFT actually did offer to outbid GOOG and got turned down anyway. If correct, that's a big ouch! So MSFT once again loses a visible high-stakes acquisition target to GOOG. Then they compound that embarrassment by whining to government regulators - joined by fellow convicted monopoly AT&T no less. And reading [MSFT general counsel] Brad Smith's comments about the impact of this deal, I'm tempted to buy GOOG. Battelle wraps up with this thought:

The more I think about it, the more the fact that DBCLK went to Google strikes me as a seminal moment in the history of this industry. Microsoft could not win it, despite the cash it was willing to spend. Why?!

I'm not sure how seminal it is - although clearly it's another feather in GOOG's cap. But wrt "why?", I assume because DoubleClick wanted to partner with the clear market leader vs an also-ran - duh. Maybe this helped as well?:

MSFT Board of Directors: are you listening? BTW, if regulators don't stop this deal - which seems likely - I've got to believe that the odds of a YHOO/MSFT hook-up just increased substantially. What other choice does either have?

Thanks to a blog commenter - no doubt one of the ABMers who troll my site (a hyperlink to a negative story with no commentary being the signature trademark) - the next item I noticed was that Goldman Sachs dropped MSFT from its "Americas Conviction Buy" list. Now that MSFT perma-bull and permanently wrong analyst Rick Sherlund is moving on, it appears that his replacements aren't as bullish. Another source provides this quote from GS analyst Sarah Friar:

Product upgrade cycles should provide strong revenue and profit growth in the next 12-plus months. Normally, this would make us view the stock as a must-own. At the same time, these launches may also mark the end of an era, as changing technology and business models seek to diminish Microsoft's hold on the desktop, which in turn significantly depletes the cash cow.

Most of Friar's comments are a rehash of concerns that most investors already know. And sadly, despite dropping them from their elite list, GS still maintained a "buy" recommendation on MSFT. Having been wrong for the past 7 years, an outright "sell" might have at least been a decent contrarian buy indicator :-) Oh, and meanwhile Friar is bullish on Oracle, who's strategy of making accretive acquisitions is paying off where it counts - the bottom line. MSFT Board of Directors: are you listening?

Another item that caught my attention was the ongoing speculation over Vista and whether it's succeeding or failing. You know things are bad when MSFT has to counter claims that Vista has sold just 244 copies in all of China. DELL going back to offering XP on some PCs isn't overly bullish either. But the Seattle PI's Todd Bishop has the best quotes, including this gem from Ballmer:

The adoption of Vista in the corporate market has not been slow. At least not relative to history or my expectation. This is important for people to recognize. Unless we do essentially a service pack, corporations, for good reasons, are notoriously 'slow' to adopt.

So, adoption has not been slow, er...well...just notoriously slow like normal? Um, okay. Ballmer continues:

It's about the speed of past releases, and what we would have anticipated.

Here's a quick translation for those new to MSFT: when Ballmer says "it's about the speed of past releases", that really means "it's trailing past releases by a significant factor but not by so much that they think the SEC could charge them for lying about it". And before some of you take me to task for impugning Ballmer's honesty, let me remind you that it was only about a month ago that MSFT was sending out demonstrably false press releases claiming that Vista was off to a much faster start than XP. Or, you can review his claims of Citigroup deploying 500K copies of Vista when the actual number appears to be 325K. In any event, this entire disinformation campaign which has gone on for months will come to a merciful end on Thursday. At that time, financials and updated guidance are due and there will be no place left for truthiness. In my view, Vista is off to a very slow start. As Lee Pender of the Redmond Channel Partner Online says:

For now, though, Vista has to be a disappointment. Given how long it took to release and how much of a financial boost Microsoft needs from it right now, Vista just isn't building the momentum or gaining the kind of market traction that Redmond would like to see.

Therefore, the only issue that remains is whether - marketing and Ballmer bs aside - MSFT anticipated that in their guidance, or whether they'll be forced to revise downward as a result. MSFT Board of Directors: are you listening?

Another commenter-supplied item from a likely ABMer was this piece claiming that MSFT is "Dead". The author goes on to state that no one is even afraid of MSFT anymore. There are elements of truth to many of the author's points, but the conclusions are overdone. For example, I'm pretty sure GOOG (his MSFT-killer and "most dangerous" company) didn't just overpay for DoubleClick to the tune of some $1B+ because they thought MSFT was dead or not worth being afraid of.

News of Microsoft offering an entire bundle of software for $3 to students and Governments in developing countries also caught my attention. On the one hand, $3 is better than the current nothing. But it's seemingly impossible to ignore the fact that MSFT wouldn't be doing this if not for the growing threat of Open Source alternatives. After all, MSFT has been mostly resigned to the status quo of massive piracy in these countries for some time. So what changed? Why is ongoing anti-piracy education no longer enough? Please don't say it's the incremental revenue at $3 a pop - that's a rounding error for MSFT's financials. So, more likely, it's the concern that w/o that low price tag users in these countries will get their first experience via Linux instead. Is this a wise move then if that's the case? I guess. But at what point are US purchasers going to tire of underwriting the majority of MSFT's revenues while others around the globe pay pennies on the dollar?

From the "I told you so" department - or perhaps the "get the early news late" one - Forbes weighs in on the overall Xbox and H&E business model. Excerpt:

Well, after five years and over $21 billion invested, all they've got to show for it is $5.4 billion of cumulative operating losses, and Xbox 360 doesn't appear to be the silver bullet to turn things around.

Apparently Forbes isn't privy to the Machiavellian underlying strategy of burying Sony (which others have offered up here to rebut my repeated criticisms of the Xbox business model). Go figure. The author goes on:

Why might it be that Microsoft has strayed from the classic "revenues minus expenses equals profits (losses)" disclosure? Perhaps because it doesn't want investors to focus on the fact that more than $21 billion has been invested in a business that has performed so poorly, with unclear prospects for improvement.

Current management being less than forthright about failure? Perhaps even hiding facts via abbreviated financials despite a supposed commitment to "transparency"? Say it ain't so. MSFT Board of Directors: are you listening?

Another item of interest is Mini-MSFT asking why MSFT shareholders continue to be shareholders. Heck of a good question. Going back to the Margaritaville song, that must be the "I don't know the reason, I stayed here all season" line. Maybe we're masochists. Or maybe we think that no management team can go this long without eventually having at least one winning year - though Ballmer et al appear to be focused on being the exception. More likely, it's because we hope that at some point an institutional investor will press for major changes and we'll get a new management team capable of turning MSFT's many market advantages and resources into growth and earnings - versus squandering them. Mini goes on to state that he's unloading his ESPP stock and award grants due to declining confidence in the company's ability to turn things around. That's sad but understandable. And, of course, he's in good company.

Desperate, as usual, for some good MSFT news, I finally managed to find this - just 6 or so pages of GOOG results later:

Take it for what it's worth. Personally, I wouldn't recommend buying MSFT to anyone and haven't for many years. But if you're already in the stock - as I am - then perhaps their perspective is of some value. IMO, Ballmer and the rest of the current leadership team have failed rather miserably and it has been reflected in the stock. That situation won't likely change until they're replaced - and by then it may be too late. If you don't believe me, review this which quotes a recent Barron's study on "CEOs who have top-notch reputations in the financial community and who likely would be missed by investors if they unexpectedly left their jobs." Ballmer doesn't even make the Top 30. MSFT Board of Directors: are you listening? But since we all have a choice in continuing to hold it, I guess I'll leave the last line to Jimmy Buffett:

But I know, it's my own damn fault.


  • I'm certainly no MS fan (from experience programming MFC and such), but Paul Graham ("MS is Dead") is living in a Web 2.0 bubble. (And yes, I agree with you that he does have some good points).

    While Web 2.0 might be leading in "hype share" right now, it's not relevant to most people.


    By Anonymous Anonymous, at 3:25 PM  

  • Great post as normal. Nothing much to add except that here we are entering summer season, vacations and all that and the doldrums could not be more palpable around campus. I feel almost in a drug induced haze sometimes in these mind numbing meetings and product planning cycles. Big change is definitely needed.

    By Anonymous Anonymous, at 3:46 PM  

  • Based on earnings estimates, a case could be made that MSFT is currently undervalued:

    Earnings Estimate FY (6/07) 1.47
    PE 25

    Price Target (PE * Earnings): 36.75

    Comparable Software PE Ratios:
    SYMC: 39
    ORCL: 25
    SAP: 24
    ADSK: 32
    ERTS: 203
    THQI: 50
    BEAS: 34
    ADBE: 47

    No question a leadership change is needed at the top. How the BOD and large shareholders continue to allow the Mr. Ballmer to continue is beyond me. As a MS DEV, if I had made the kind of mistakes steveb has made over the last 7 years, I would long ago have been booted and rightfully so.

    In the end, you have to lay this at the feet of BillG. His remarks about Steve's performance
    ... He’s done a fantastic job by every measure... still leave me wondering what world Bill lives in.

    Of course, this is the same guy that is cashing out at the rate of $2M every week, yet another reason the stock is depressed.

    By Anonymous Anonymous, at 12:04 AM  

  • I think John Batelle is full of it. Who are his very good sources? An exec at DoubleClick? Or another journalist who heard something third-hand from a Wall Street guy who worked at the bank handling the transaction?

    I think Microsoft probably balked way back down around $1.something billion, and never seriously considered paying $2B. DoubleClick has some interesting technology, but their main business is matching up display ads between buyers and sellers. The one business MSN/Live has been doing OK in is display advertising...their weakness is search, which DoubleClick wouldn't have helped at all.

    But I love how journalists repeat a completely unattributed source that appeared on a blog as if it were gospel. Funny.

    By Anonymous Anonymous, at 2:44 PM  

  • "Price Target (PE * Earnings): 36.75"

    Sure, possible. But ongoing PE compression has been a big part of MSFT's post '00 slide, and it has often traded below a PE of 20. I think there's risk as well to the earnings target - and apparently so does the market. We'll know more after earnings. Don't get me wrong though - I like your number :-)

    "I think Microsoft probably balked way back down around $1.something billion, and never seriously considered paying $2B."

    Normally, I would agree since MSFT doesn't like to overpay. But someone got the bidding high enough for GOOG to offer $3.1B and, imo, MSFT is the most likely suspect (they're increasingly desperate in this space, have the cash, and have demonstrating a renewed willingness to spend in this area).

    By Blogger MSFTextrememakeover, at 7:58 AM  

  • I ask because I'm truly ignorant about this. Is Forbes' 5.4 billion figure really valid for xbox, given that the product has been re-orged in and out of various divisions over the years ?
    The numbers quoted seem to be for the current components of E&D, which is a group of divisions that have been bleeding profusely on their own anyway.

    I'm curious as to what the actual Xbox-only figures are.

    By Blogger 64, at 12:20 AM  

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