I had coffee with a friend last week who is ex-MSFT. He follows my blog and asked why I hadn't posted recently. I told him that I'd actually penned three different posts but decided not to publish any of them.
The first touched on Vista's challenges and the growing threat from AAPL (short version: Vista has stumbled badly. Forget the original 2X the rate of Windows XP goal, it's barely tracking it - a damning indictment after 5 years of development and some $5B spent. Also, AAPL is gaining serious momentum - verifiably as well as anecdotally. If MSFT continues to do next to nothing about it, they risk losing not just more marketshare, but possibly OEM loyalty). The second reviewed Ballmer's latest plan to "transform" MSFT (the future isn't in plastic, Benjamin Braddock, it's in advertising. Hmm.. I wonder how he twigged to that one? BTW, is that the 9th or 10th transformation since Ballmer took over? I'm losing track.). Finally, I did one on the eternal bad news story: the stock. In particular, some recent Ballmerbabble - when he wasn't busy making more idle patent threats against Linux:
Mr Ballmer says that the sluggishness is in part the result of overly optimistic Wall Street targets - misguided calculations by “all these expensive, well-meaning financial types” - and in part a function of Microsoft being a technology company subject to more risk than a “bricks and mortar business, like Tesco”.
("Overly optimistic Wall Street targets"? "Being a technology company"? Sure, Steve. Um, how come that hasn't affected say, AAPL? Or HPQ?, or SAP?, or INTC?, or ORCL?, or IBM?, or... well, you get the picture.)
BTW, in the second one Ballmer said about advertising:
“It gives us the chance to surprise shareholders,”
A simpler way to "surprise shareholders" would be to concentrate on doing what he/MSFT already chose to do, only doing it well. Let's start with the basics. Like, say, understanding customer's needs well enough to ensure you have designed a compelling product, then actually shipping any [major] one on time, doing a great job of marketing it, and - this is key - make a profit. Combine that with some sanity wrt headcount increases (especially in the US), and maybe consensus EPS estimates might look more like this, rather than like this. Investors might even award a PE premium to market, versus the current discount.
Anyhoo... despite spending several hours writing those three posts, I didn't bother hitting the "Publish" button in Windows Live Writer (an excellent product btw). Why? Because frankly there was nothing much new there. Sure, the specific examples were current. But the basic underlying themes have been discussed here and elsewhere ad nauseam. And while it would be nice to ponder what could happen if MSFT stopped being such a screwup, as John Dvorak does here, including this amusing "glass is half full" statement:
Because there is so much room for improvement at all levels, there's great upside potential for Microsoft.
the fact is that current leadership show few signs of even acknowledging their screwup status, far less attempting to address it. [btw, yes I understand the surface-level oxymoron of calling a $50B company a screwup. It's a statement relative to potential]
Case in point, here's Forbes succinctly describing some of the challenges in an article entitled "Microsoft: Time To Plot A Comeback"?:
The Redmond, Wash.-based software giant faces growing competition in its core software business, which dominated the industry for two decades, and it hasn’t had a bottom line-galvanizing success in any other area recently. It was late to online advertising, letting Google (nasdaq: GOOG - news - people ) all but run away with that sector. It hasn’t had a big Web 2.0 hit yet. Thank god for Halo 3!
Ballmer's response? He's "not worried", according to Forbes. Indeed:
Just give Microsoft a little more time, Ballmer said.
Apparently the better part of a decade hasn't been enough. He goes on to add:
"I’m happy with everything but everything needs some improvement –sort of like your kids," said Ballmer, who strode onto the conference stage toting a vente-sized Starbucks iced tea.
Steve must be the only MSFT shareholder who is "happy with everything". He must also be one of the few company followers who thinks MSFT is in good shape overall and just needs some tweaking around the edges. Frankly, I'm starting to wonder if the CEO's of MSFT competitors don't wake up every morning, check the web, and say "He's still CEO. Thank God!". I have visions of Schmidt, Jobs, Benioff, Szulik, virtually every Web 2.0 CEO, and even Ellison and Palmisano, uttering a collective sigh of relief each a.m., happy in the knowledge that with Ballmer at the helm the MSFT pit bull of old - which Joe Wilcox says "mauled IBM, Lotus, Netscape, Novell, WordPerfect and so many other high-tech companies in the 1990s" - will remain a fat and slow moving Saint Bernard, inspiring about as much fear and respect as a yapping Chihauhau.
Meanwhile, Goldman Sachs is beating the drum for MSFT (again), adding them back to their America's Conviction Buy List after taking them off six months earlier. Putting aside the fact that Goldman has been wrong about MSFT virtually every year since 2000, let's look at the specifics of what analyst Sara Friar said earlier when she reiterated her "Buy" and $37 target:
"Microsoft stands at a major juncture in its life cycle, with near term product cycles balanced out by longer term uncertainties as new areas as software-as-a-service, virtualization and open source [software] seek to diminish Microsoft's grip on the desktop."
Hmm... is it just me or did Sara not get the Ballmer memo saying everything is in good shape? Seriously, this is one of the top-ranked software analysts, trying to make the bullish case for MSFT, and this is the best she can come up with? Does that sound like someone who believes MSFT just needs some tweaking? And I'm not talking about the list of "uncertainties" - we already knew those, and could make an equivalent list for AAPL, GOOG and every other company. It's her implicit lack of confidence.
And that, in a nutshell, really sums up the problem with MSFT. In the case of GOOG, AAPL, and virtually every other large peer/competitor, the market has strong confidence that those companies can adapt, overcome, and continue to grow and prosper. That's borne out by analyst's opinions, premium to market P/E's, stock performance, growth expectations, etc. In Microsoft's case, on the other hand, they're not nearly as convinced. Why? Is it just the "law of large numbers"? That's part of it. But primarily it's the post 2000 track record of poor "bets", even poorer execution, and chronic overspending, all of which come together in the lack of visibility wrt future earnings leverage. Hence the reason why even after five years of this stock going absolutely nowhere, $50B+ spent on buybacks, $30B+ down the hole in R&D, and $10B's of new "investments", most analysts still can't make a case for more than 20% upside from current levels, and the stock continues to badly underperform. Meanwhile, they have no trouble doing so for AAPL, GOOG and many others - despite their already spectacular runs - and those issues continue setting new all-time highs (AAPL and GOOG increasing more in the past month alone than MSFT has in the past 5 years).
All of which brings me to the opportunity cost of continuing to hold Microsoft. In my view, there's little doubt that GOOG will surpass MSFT in total marketcap sometime in the next two years (it's already above $200B). And while it's harder to see AAPL doing that even over a slightly longer timeframe, it's not impossible given current trajectories. But even putting these super-performers aside, MSFT is down ~11% YTD relative to the NASDAQ market generally. And this was meant to be the "big year". Do you think MSFT is going to increase 11% more than the market over the next twelve months to catch up for the past twelve? Possible, but unlikely. Outperform it by ~33% over the next year or two to catch up for the past three? Straining belief. 90% any time soon to make up for the past five? Fahgetaboutit!
The market, it seems, doesn't much care about what might happen if MSFT weren't a screwup. They only care that MSFT is one, and is in total denial about it. As critical as I have been, I have always been optimistic that this company could eventually get back on track. That optimism is fading. Turns out the market was right five years ago when they ignored Ballmer's rosy outlook and disconnected MSFT from the broader averages. Flash forward to today, and again the market is sending a negative message while Ballmer waxes poetic. Only now, the market is the sole one with any credibility.
Update: And the comedy of errors continues...
Somebody help me out. Is that Dynamics NAV, Longhorn Server, Viridian, Windows XP SP3, Office for the MAC, Silverlight 1.1, and CRM 4.0 (aka Titan), all delayed just this year alone? Or am I missing some other major ones (let's not even bother with the minor ones)?
Update #2 (10/24/07): Further to AAPL challenge and OSX vs Vista:
Nice. Sure, it's MAC fan Walt Mossberg. Still, it's difficult to argue that several of the features in Leopard aren't superior to Vista and/or better implemented. Also, that relative performance on similar hardware favors OSX. Meanwhile, MSFT pumps out some Vista performance updates (which in my experience provide only marginal improvement) and hosts holiday "preview events". And we wonder why AAPL is gaining market share at MSFT's expense...