MSFTextrememakeover

Saturday, October 20, 2007

What if Microsoft wasn't a screwup?

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...

19 Comments:

  • Despite my Apple bias, objectively speaking, I don't think the market can go MSFT's way, as they are seen as:

    Boring, non-innovative, and yesterday's news.

    What is their next Office? What is it about Windows that will trump the competition, aside from an existing installed base?

    How can you get a big company like Microsoft to be nimble like other big companies who have defied their size? (Google and Apple...)

    Microsoft needs a cultural and perception change. So long as Ballmer and Gates are the public faces of the company, I don't think you ever get there.

    By Blogger louisgray, at 12:59 PM  

  • FOB

    I admit that I'm no fan of Microsoft generally. I think their monopoly position (legal or otherwise) is not good for the country, and not good for businesses that have developed a dependence on it.

    On the other hand I don't hate the company because they are rich as I've never held similar antipathies for IBM, or more recently Google. I think it has to do with HOW you compete, whether it has to do with the pure merit of a product versus some gimmick (EG: even new web based tools from MS almost never work with Firefox at the outset, if ever).

    Given all of that, I'd have no problems if the company truly reinvented itself (what ever happened about that grand entry into the consulting business?) or voluntarily split itself up into independent companies or divisions that could work honestly with other companies (enough of this "co-optition" nonsense that the company BRAGS about).

    But can any of this happen with Ballmer in charge? In two years I haven't seen an article anywhere (outside of MS) quoting him with anything but derision.

    Is there any way, with any other company that this man would still be in charge were he not a "Friend of Bill"?

    Is the board so much composed of spineless yes-men that they don't have the nerve to say ENOUGH!?

    It would seem so.

    As a investor, beyond evaluating a company's present position, don't you need to evaluate the abilities of the Chairman, CEO, AND the board itself in navigating uncharted waters? Maybe investors are doing just that.

    By Blogger BP/CMB, at 2:40 PM  

  • 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", ....

    Steve (call me "VC") Ballmer recognizes the pace of new investments was lagging:

    Ballmer to Start-ups: Email Me!:
    "The world’s largest software maker expects to vacuum up about 20 companies each year for the next five years, the sometimes bombastic Microsoft leader told attendees at the Web 2.0 conference in San Francisco today. Microsoft will spend between $50 million and $1 billion per company, he said.

    ... “We’ll continue to buy a lot of stuff,” Mr. Ballmer said."

    Just when you thought shareholder equity couldn't be invested more poorly...

    Any idea what the industry average RoS (Return on Stuff) is these days?

    By Anonymous Charles, at 2:47 PM  

  • [btw, yes I understand the surface-level oxymoron of calling a $50B company a screwup. It's a statement relative to potential]

    You are correct to not be disuaded by financial size. Size is a benefit when it is adaptable and manageable. Otherwise that bulk is merely a lethargic hindrance.

    That $50B company also has a burn rate near $35B (and growing), some $20B (?) less cash, Software Assurance rev streams are at risk, brain drain, product architecture and application stack problems, OEM pullbacks, and a track record of increasing product release delays, recalls, litigation, etc. As you've oft noted, the company makes big bets that don't pay off and big promises that aren't kept.

    Ballmer is at the helm of a freighter competing in the Americas Cup.

    A $50B company must anticipate much better - big corrections need several years lead-time. The time to initiate such a correction to avoid the inevitable running aground was 3-4 years ago, IMO.

    By Anonymous Charles, at 3:53 PM  

  • Does this mean you're finally going to dump all your MSFT holdings?? If only you'd just converted all MSFT to GOOG earlier this year. I left Microsoft this year, and promptly dumped all options and shares when the price was around 30. I feel an unbearable lightness of being, I can tell you. But then again if you do the same, I suppose you'll end this blog... and it is a good read...

    By Anonymous Anonymous, at 4:35 PM  

  • As an employee and shareholder I am as frustrated with Ballmers (lack of) performance as you are. Unfortunately it's not enough that the employees are unhappy, the large institutional shareholders need to do something to influence the board so that they can get rid of the fool.

    With such a poor track record since he took over as CEO I would have thought any sensible board would have moved him aside but alas he's still there. My faith in our board is as low as my faith in our CEO.

    I did my bit with my proxy votes - Ballmer hasnt gotten my vote for 3 years - but being a very small fish in a big pond.....

    What's really frustrating to me is that so many employees are so unhappy and yet so powerless to do anything - we're being lead by a bunch of incompetent so called "leaders" who are only interested in lining their own pockets and playing the political game so they are not found out.

    My energy to continue lessens every day. I used to love this company and would have done anything to help make it the best company with the best products but my motivation just isnt there anymore. I wish there was a silver bullet to fix this but as employees it seems we're powerless.

    By Anonymous Anonymous, at 7:32 AM  

  • Interesting opinion on "what's in the next version of Office"...

    http://theonejosh.spaces.live.com/blog/cns!5D766E244279293C!430.entry

    And more on Microsoft...

    http://theonejosh.spaces.live.com/blog/cns!5D766E244279293C!431.entry

    By Anonymous Anonymous, at 12:27 PM  

  • Hey, show us the post about Vista. That would be interesting.

    By Blogger Charles, at 2:53 PM  

  • Everyone (i.e. critics of MSFT) talks about the dysfunctional management culture at MSFT. What is this culture? I have my own opinion about dysfunctional management cultures, but I don't know the MSFT one.

    By Anonymous Anonymous, at 1:31 AM  

  • I'm an employee, but I'm as little a shareholder as I can be.

    The problem with Microsoft is contained directly in your post, where you write:

    "...I didn't bother hitting the "Publish" button in Windows Live Writer (an excellent product btw). "

    Windows Live Writer was written by a small team focused on a specific customer without product guidance from above.

    The bigger the group, the more likely they will be shipping crap. It's not the teams underneath (though shipping big stuff is always harder than shipping small stuff), it's the oversight (or what passes for oversight).

    Or, to put it another way, the reason why groups aren't focused on creating great products for their customers is because they aren't focused on the customers, they're focused on "managing up" to the huge middle-management bureaucracy, the "brain trust" that applies decades-out-of date experience and a lack of relevant data to "help" the product teams go in the right direction.

    Unless you can radically reduce that middle management layer (and I mean roughly anybody between 2nd level managers and VPs), you aren't going to make progress, no matter what else happens at the top or the bottom.

    And the bad news is that those middle managers are in a big club. They're either partners or are sniffing at partner, and they all know how to play the game.

    BTW, that excellent product you referred to earlier is now under just such a management chain, so don't count on it staying good...

    By Anonymous Anonymous, at 9:25 AM  

  • I highly doubt MS will break up their company any more than Sony would. Why? Hiding! How do you think the world would like to see the Xbox with a big huge 2 billion dollar black eye over 4+ years? That mini-company would be dead. Right now, MS can move the money around so... yes you can find the information..but it's not out there staring everyone in the face.
    Let's play pretend: Xbox broke off from the start. MS gave them $2 billion dollars to make it or break it. Well...we all know how long that mini-company would have been around.
    And to help all the analysts out there that have no clue about the video game market... don't count your hens before they are hatched. The Halo3 thing was a one time surge. It will not produce 500,000+ sales for the Xbox360 anymore. I doubt if it will sustain boosted sales of the Xbox360 even until Thanksgiving. The majority of the people that enjoy Halo 3 already had the system...or were waiting for it to ship. Halo 3 is not going to be the deciding factor for people to buy a Xbox 360 through the holidays.
    Sony is feeling the same sting with their company. Movies/music/entertainment is lagging big time. So... how do they bolster it? Ship the marquee, big profit product (PlayStation) with a tie-in to help booster the movie industry (Blu-Ray). Well, people aren't buying them...and now both Blu-Ray and the PS3 are paying for it.
    The only thing for MS is to get new leadership that draws a more business relation with the company. IBM went through this a few years back and made a major overhaul of the company. PC line, sold off (not making profits). Software gone. Hopefully MS will get this leadership to make the hard calls sooner than later...or they'll obsolete themselves.

    By Anonymous Anonymous, at 9:34 AM  

  • You have nailed it. This is exactly why I left Microsoft 6 weeks ago. The company is going nowhere and are in complete denial.

    By Anonymous Anonymous, at 2:09 PM  

  • Everyone (i.e. critics of MSFT) talks about the dysfunctional management culture at MSFT. What is this culture? I have my own opinion about dysfunctional management cultures, but I don't know the MSFT one.

    1) Management through building consensus. Anyone beyond 1st level manager is taught to never, ever, make a decision for their group. Always "buid consensus" among the team. Do not explicitly direct your reports.

    2) A focus on the individual contributions of managers (e.g. whitepapers, presentations, one-on-one interactions with people up their management chain) rather than on the leadership contributions (e.g. project planning, project execution, team building, developing people).

    3) Very little accountability for results. Microsoft has had so much cash pouring in for so many years essentially on autopilot, external feedback (e.g. financial results) could be ignored.

    4) A growing perference for PMs rather than Engineers in leadership positions. Early on, MSFT was led by engineers (usually Devs, occasionally Testers). But over the last decade, PMs have slowly edged all others out of leadership positions. Additionally, PMs are primarily rewarded for "cross-group" skills, leaving the more technical PMs behind in the ladder climb.

    5) A Glengarry Glen Ross reward system that gives the top 20% (as determined by their managers) huge rewards and everyone else very modest 2nd or 3rd tier pay that doesn't even keep up with inflation.

    Any one of these elements by itself could be survivable, perhaps even beneficial, but they combine in deadly ways.

    Combine 2 and 5, and you have a culture that breeds out any leadership from its leadership ranks. Placed in a group of smart, ambitious peers where making a power point presentation is rewarded more than driving execution, managers who focus on execution are left in the dust by glad-handers who spend all their time "managing up" instead of just "managing."

    Combine 1 and 3 and you have a culture of indecision, dithering, and being more concerned with avoiding blame than with solving problems.

    By Anonymous Anonymous, at 10:09 PM  

  • CRM 4.0 is not delayed.

    By Anonymous Anonymous, at 11:01 AM  

  • "CRM 4.0 is not delayed."

    CRM 4.0 was originally scheduled to ship in "summer". It didn't and still hasn't.

    By Blogger MSFTextrememakeover, at 11:08 AM  

  • "CRM 4.0 is not delayed."

    CRM 4.0 was originally scheduled to ship in "summer". It didn't and still hasn't.


    But it's not delayed. It just hasn't shipped.

    And you can bet there are several GMs and GPMs putting all their energy into selling that message to their bosses.

    Instead of, you know, doing something to help it ship a little late instead of a lot late.

    One of the most frustrating things about working on Vista (and there were many) was the abject failure of anyone in a real leadership position to take a stand on schedules and realistic plans. Nobody wanted to admit they couldn't make the schedule. Every GM waited for someone else to officially slip first, then they would dutifully "line up" behind the new scheudle, even if they one didnt' have a snowball's chance in San Diego of making the new schedule either.

    By Anonymous Anonymous, at 5:14 PM  

  • "But it's not delayed. It just hasn't shipped."

    Gotcha. Apparently the other trick is to break it into pieces and/or ship to early adopters only. Mary Jo Foley did a piece here and here. And on the CRM side I see they're dropping the price to partners by 40%. As usual, margins are sacrificed to make up for other shortfalls of product and execution. Meanwhile, Salesforce.com charges a premium and keeps right on growing...

    By Blogger MSFTextrememakeover, at 6:19 PM  

  • MSFT has been suffering a crippling brain drain for at least a decade now. Once the "work her for five years and be a millionaire" story was over, it was inevitable that the best and the brightest were going to head for new companies where they still had a shot at hitting the jackpot.

    By Anonymous Some Guy, at 10:10 AM  

  • "The bigger the group, the more likely they will be shipping crap. "

    That's pretty much axiomatic throughout the industry. The optimal size for a software development team is five people. Apple's iPhoto was written by a team of three. The Interface Builder tool has three developers. The Core Data framework had five. The speech technology team has four.

    The biggest team at Apple are the guys who write Xcode, and that's segmented into similarly small teams who cover the compiler, the GUI, code editor, and so on.

    I'm ex-Apple, and I'm in charge of development for a start-up right now. If our business takes off and we do a couple hundred million in revenues in 08, each one of my development groups will still be five people or less.

    By Anonymous Anonymous, at 10:17 AM  

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