Microsoft's $6M+ (Per Year) Man

Okay, you may be too young to remember the TV show The Six Million Dollar Man, starring Lee Majors (former husband of formerly gorgeous Farrah Fawcett - first pin-up for every guy my age). But this post isn't really about old TV series trivia anyway. Instead, the focus is once again on MSFT's Entertainment & Devices Division and its president Robbie Bach.

Readers of this blog already know that I'm not a fan of the Xbox business; Great console, world-class stupid business investment. There was a time when I actually had to justify that opinion. Today, it's the mainstream perception based on results (or, more accurately, lack thereof) and you can find others making the case routinely:

• When Will Microsoft Own Up to the XBox 360 Bomb?
• Japanese Failure Dooms Xbox 360 (same guy, less detail)
• A modern-day Gerstner is needed to cure all of Microsoft’s ills

However, what bothers me more than the massive losses to date, likely inability to ever return an overall profit as a result, and missed alternative opportunities, is that Xbox is constantly cited by MSFT management as a "success" and its leadership rewarded with even more responsibility. For example, Ray Ozzie is quoted in a recent Wharton interview (an otherwise thoughtful and highly recommended read btw) calling it "fairly successful", and goes on to say that:

When all was said and done, [these threats] ended up making the company more resilient.[For example,] in the PS2 competitive realm with Sony, our whole entertainment division came out of that one battle.

Er, so shareholders should be happy that Xbox hasn't just lost a ton of money but has also spawned an entire money-losing Entertainment and Devices Division? Um, okay. Even normally level-headed journalist and full-time Microsoft-watcher Mary Jo Foley seems to have bought into this fantasy. Here she is with "Ten lessons the Xbox Team can teach the rest of Microsoft". Hey, I'm sure there's good stuff in there that other teams at MSFT have/could/or should benefit from. But how about the one lesson MSFT's legacy divisions could teach E&D - namely, how to make money?

Meanwhile, Bach keeps right on making promises he has been totally unable to deliver. For example, here's another comically-titled must-read article (right after you read my Repeat After Me, "We're on the cusp of" post):

• Microsoft Poised to Rule Entertainment, Devices World

In it, while Bach waxes poetic about the future, the interviewer manages to slide in "When do you think Xbox will be able to contribute a billion dollars to Microsoft's bottom line, and how?". Hey, good question. After all, at that impressive rate of return it would take just five more years for Xbox to...well, to almost break even since inception. Eight paragraphs later (you gotta read it - it's funny stuff) we get Bach's [effective] answer:

So, it's a business that will be profitable next year—we'll make money next year and that will be the first time, which is pretty exciting. And then the next two or three years are the place where you need to make tracks, and the next two or three years are where you have to make money.

In other words, beyond the vague "2008 will be profitable" assurance (now that the previous 2007 - itself a revision - came and went), he gave no answer at all. But hey, they've only lost $5B+ since 2001. So why would anyone expect or - gasp - demand some greater visibility and accountability at this point?

Bach is on a roll though. Here he is again, this time providing his thoughts on Wii (and PS3):

"It’s a very nice product, but it actually has a relatively specific audience and a fairly specific appeal, frankly, based on one feature, which is the controller itself," he said, as quoted by GoNintendo. "And the rest of the product is actually not a great product—no disrespect, but … the video graphics on it aren’t very strong; the box itself is kind of underpowered; it doesn’t play DVDs; there are a lot of down-line components [that] aren’t actually that interesting."

Don't know about you, but I'm actually starting to feel sorry for Nintendo after reading all that. Hmm...maybe we should review how this sad little product with minimal appeal is doing outside of Bach's mouth - like say, in the marketplace:

Tokyo (Japan) - In one of the most amazing turnarounds in gaming history, Nintendo has seen its net profits grow 77.2% to 174.3bn yen ($1.4bn), beating financial analysts expectations, and its sales grow 90% in the year to March on the back of the runaway success of its DS and Wii gaming systems.

Oh, so they have already achieved what has eluded Bach et al for 6 years? But wait, what about unit sales? I mean, the first person to 10M units (MSFT's Xbox 360) "won" right?:

The Wii has sold 5.84 million units in the year to March, and Nintendo expects to sell around 14 million in the 2007/08 financial year.

Hmm..looks like no one told Nintendo they were meant to give up. Game over. So now they're currently on a much steeper adoption path than Xbox 360, outselling it every month, and are poised to surpass it in total unit sales sometime next year (assuming no change of trend) - all while doing what the Xbox hasn't: be profitable. Perhaps MSFT should have come out with a limited product with limited appeal too? BTW, see the lesson which Nintendo understood and executed brilliantly but which seemingly still eludes Bach (and most of MSFT's current management)? When competing against an entrenched competitor it's not good enough to offer a product that plays just to their weaknesses. The latter can be easily addressed (assuming the competitor isn't destracted or clueless). You need to have a product which plays to the weaknesses inherent in your competitor's strengths. That way, even if they could copy you they likely won't, as it would adversely impact their real or perceived strengths too dramatically.

Bach isn't done though. This time, he's pumping Windows Mobile. Coincidentally, this is occurring just as the iPhone nears market availability and MS "leadership" right up to Ballmer seemingly can't shut up about how it won't take major share - but "may make a lot of money" (isn't that like the goal?). And we know from actual market share data that Mobile is a distant third to Symbian and [much less so] Linux, respectively. But Bach sees an inflection point and it's...well, it's just ahead of course:

After years of struggling to gain momentum, the business is finally at a tipping point, Bach said in an interview."Three years ago, I could walk through Microsoft halls and see Windows Mobile phones. Now, I can walk through any airport in the world and see Windows Mobile phones," said Bach, in Las Vegas to speak at two Microsoft developers' conferences.

Hey, who needs market share data from recognized industry sources when you've got anecdotal evidence like that? He continues:

Bach, who is one of Microsoft's three business presidents, said he expected that figure to more than double to between 10 million and 11 million this year before doubling again to around 20 million handsets in the 2008 business year.

Of course, Bach also famously said (about Xbox) that MSFT doesn't go into new areas "to lose money for years", that Xbox would sell 13-15M units by the end of this year (before revising it down to the current 12M - even that is going to be a challenge based on last Q's sales), and that Zune would be great.

So how much does Bach make for this track record of accomplishment? There's no data available to check back to 2001 - which is unfortunate as it would have made a nice overlay with Xbox's $20B+ invested and $5B+ lost during that period. But in just the past two years since he's been President of the division, Bach has made ~$4M+/year in grant/option sales and what I would estimate to be another $750K/year or so in salary and bonuses. Not up to $6M+/year you say? Well, you need to add in the 328,250 shares he got in August of '06 for doing such a bang-up job. Approximately value at that time: $8M - but it was part of the 3-year SPSA pork barrel and "only" $2.8M of it vested immediately. So there you have it: $6M+/year for an executive who oversees a division that had cost shareholders nearly $2B in losses during the past two years alone. In passing, I see that Bach has a degree in Economics and an MBA. Surely in one of those two he was exposed to the concepts of "opportunity cost" and "net present value"?

Thinking about this and MSFT generally, I'm reminded of the tag line from the Six Million Dollar Man: "Gentlemen, we can rebuild him. We have the technology. We can make him better than he was. Better...stronger...faster." Sounds great - let's start with a new bionic E&D arm...