Will this dog ever hunt again?
Not that I didn't try. In November, for example, I wrote up the annual shareholder meeting. I titled it "The Annual Transylvanian Convention" because it felt more like I was listening to management dancing the Time Warp at the Rocky Horror Picture Show. There was company leadership delivering their well-rehearsed but increasingly tired old lines, and a cast of shareholders from the lunatic fringe, including head psycho Ken Hutcherson. Had I been in attendance - versus listening to the webcast - I would definitely have sailed a piece of burnt toast in the good Reverend's general direction. Then again, my focus would have been on asking Steve:
A dollar invested the day you took over as CEO in 2000 in any of your main peers/competitors like IBM, ORCL, HPQ, SAP, and AAPL, or simply placed under a mattress, would be worth far more today that the same money invested in MSFT which is down almost 40%. Additionally, despite all the money the company has made during that time, shareholder equity has actually declined, in large part to accomplish even that anemic level of stock performance. Given that track record, why do you think shareholders should continue to support your management team, this BOD, and continue holding the stock moving forward?
I also started putting virtual pen to paper on the various "How best to structure a MSFT/YHOO deal" articles that appeared that month. But then decided that talking about "how best" to structure a MSFT/YHOO merger is really just an oxymoron. Partner? Yes. Merger? Expensive for MSFT shareholders and highly unlikely to succeed.
Anyway, I've continued to follow events and the stock. And it's not like there haven't been a ton of developments on both. WRT the former, I guess I've been struggling to decide whether the recent impressive flood of product releases (updates, SPs, betas, etc.) - gives me hope that MSFT is finally getting its act together, or whether the massively bungled ongoing clusterfuck that is Vista's launch, the continued market share hemorrhaging to Google, the embarrassing success of the iPhone (which appears to have MSFT's mobile group in full damage-control mode and doing public mea culpas about what they need to fix in their UI), etc., convinces me that this company is in a fight for its very survival - and losing. Indeed, that's why the title of this post is a question mark versus a statement one way or the other.
What does it say, for example, when you have a disconnect this big?:
"When Longhorn and the Longhorn wave of products ships, they will be great products. I have absolutely no doubt about that."
"#1. No Wow, No How: Windows Vista
Five years in the making and this is the best Microsoft could do?"
In fairness, Leopard and iPhone also made PC World's list. But numerous other publications have said effectively the same thing about Vista. More importantly, sales results - or lack thereof - prove it. This release has not resulted in the "2X adoption rate of XP" that management claimed it would. Indeed, it's lagging XP on an apples-to-apples compare. Now that's still a huge number in absolute terms, but it's a significant failure vs even company-provided expectations (far less market ones after five years in the making). Meanwhile Leopard, despite many widely-reported bugs, has been a blowout success for AAPL.
Quite frankly, if you compare the progression of OS X over the past decade with that of Windows, the feature set of both current offerings, then factor in that Apple has spent a fraction of what MSFT has on development and marketing, it is impossible to overstate the magnitude of how badly Microsoft has screwed up here. Effectively, MSFT has ceded its position as the clear leader in personal computer operating systems (btw, I'm obviously talking technology not marketshare - at least for now). That's the core of what this company does and is meant to be good at. In fact, if (when?) Microsoft eventually implodes and the definitive book is written to answer the question "What went wrong?", the Vista/Longhorn drama will no doubt make the top 5 list (FWIW, imo, #1 would be the sense of entitlement that permeated the company in the late 90's and caused them to think they were owed a market and could basically sit back and coast. #2 is the anti-trust loss and resulting fallout which continues to this day - itself caused by the arrogance from #1. #3 being the stupid decision to try and hold back the web vs embrace and lead it, which also led to #2. And #4 being a seemingly endless series of ill-conceived, poorly-executed, big bet "investments" that have collectively been a dismal failure).
For the record, I use Vista as my primary OS and have for some time. I would never go back to XP. As I've said before, it's not that Vista is bad, it's just not nearly good enough - and the $500M marketing campaign has been abysmal. First, you have to seriously question the judgement that said let's message this product as "the wow starts now" knowing full well (as is now clear) that there was very little wow, and that major driver and application compatibility issues existed. Someone high up was either seriously deluded, or (more likely) decided "wtf, let's try and bullshit our way to success". Has this person (or group of people) been fired? I'm guessing "no" (and yes, I know Allchin eventually got the golden parachute and divisional leadership has now changed - I don't think that covers it). Second, day-after-day we are bombarded with AAPL TV ads bashing Vista (many demonstrably misleading or false), endless media pieces containing factual inaccuracies along with calling the OS a downgrade from XP (absolutely not imo), buggy (not in my experience), bloated (okay, that's true), etc. And what do we get from Microsoft?
[Cue sound of crickets].
That's right, mostly silence. For example, I have yet to see even one Vista ad on TV - maybe I'm watching the wrong shows. But compare that to at least one each night for Apple. Is there anyone in Redmond that's actually proud of this release? Willing to stand up and make the case? Smart enough to understand that perception *is* important and that you're losing that battle big time? Anyone with even a glint of the old pit bull that would have come out with teeth bared and ripped into the endless stream of negativity with counter points, explanations, or at least corrected the more glaring inaccuracies? Well, there's at least one, but he's a pretty lonely voice and doing it personally versus officially. Instead, the company seems resigned to hyping Minwin as something "new", and using the promise of a more-streamlined future version of Windows (7) - along with an improved version of XP via a new service pack - to prevent more folks from jumping ship to OS X or Linux. Even Vista's SP1, which I'm sure many people have been working on tirelessly, is being downplayed at every opportunity by the company. It's like the company has thrown in the towel on voluntary upgrades and is content to just wait for hardware refreshes and/or the obsolescence of previous versions to force the change. That'll probably work too, but what's the impact for the next cycle? How many times can the company afford less-than-stellar releases of its flagship products? Or does the company think people should buy Vista as a transitional OS on the way to 64-bit because that's what makes sense for MSFT? If so, good luck with that approach. Netting it out, while the product isn't nearly as good at it should have been, it's much better than current perception. Blame for the latter rests squarely with MSFT who is failing to tell the story effectively.
I'm already running long, so I won't bother going into detail about the mess Microsoft has made of Search/Advertising and the $B's of shareholder cash blown. Management said to look for a turn by year-end and I was optimistic they could get there. That turn never came. Blodget sums it up nicely here. Excerpt:
Per today's numbers, Microsoft has a pathetic 7% share of the US market, down 3 points year over year. Given the hundreds of millions (billions?) Microsoft has spent on search, it is impossible to overstate how awful this is. Based on past trends, it's only going to get worse.
Despite all the advantages one could ever ask for (browser monopoly, unlimited money and R&D resources, global platform, etc) Microsoft is going nowhere but down in this market. Anyone who says differently is hallucinating.
Abstracting from all this, the real question I'm struggling with is how does a company who leads the industry in R&D spending and has this latent technology arsenal, manage to trail most peers on coming to market with anything exciting? I saw a quote recently that struck me as accurate - especially in the increasingly important consumer space:
Any sufficiently advanced technology is indistinguishable from magic.
Sir Arthur C. Clarke
IMO, this is why the iPhone is succeeding. Yes, you can make a case that much of it is derivative, but the way it's put together is innovative and has that "magic" quality for users. That's why customers wait in line. That's why demand is huge (reportedly as high as 25% of smartphone sales in the US this past Q). That's why people stop to gawk when someone pulls one out in a crowd. Where's MSFT's magic? Do they even strive for that, or are they content to simply keep promising "wow" and not delivering it? For example, check out this mixed early feedback on Hyper-V - a critically strategic product in yet another core technical area that MSFT ceded to someone else (along with marketshare leadership in this case). I realize it's beta, but why deliver it "early" (well, if you forget that the whole thing was already delayed previously) if it's this average and buggy? The public reason is to give folks a chance to try it out, blah, blah blah. I'm sure that's part of it. But you'd have to be an idiot if you think MSFT isn't doing this to try and freeze the market and check VMware's growth - a tactic that used to work for the company back in the 90's, but hasn't really worked since (not that that stops them from repeatedly trying it). And why is MSFT doing that? Well, because VMware didn't sit on their ass this past decade, and instead built a great product that solves a real customer need. As a result, they've been rewarded with a fantastic, profitable, fast-growing businesses that MSFT now covets, and which also poses a potential threat to its cash cows.
Moving on, I see that Mary Jo Foley's predictions for 2008 include a Zune phone. Is there anyone who thinks that the management team who failed on the original Zune, is failing on the current Zune (at least the flash models; Zune 80 is still TBD since MSFT can't seem to ship it in quantity), and hasn't made even a decent deposit on the $20B of shareholder cash pumped in and $6B lost on Xbox (despite being at it for most of this decade), is capable of delivering a "magical" phone? Let me spare you the suspense. If MSFT delivers a phone, it will introduce one or two nice ideas that it fails to even moderately exploit. The UI will be too confusing. It will be too big, too slow, too buggy, suffer from insufficient battery life, and will be poorly marketed. Version 2 - at least a year later - will be better, but still buggy and largely me-too or worse. Version 3 - at least three years after first launch - will finally start to be competitive. Sadly, by that point, MSFT will have burned through minimum $500M and still be losing money, whereas the market leader(s) will be profitable (probably from day one), and will have built a dominant position, leaving MSFT to struggle for 10-20% marketshare table scraps. We see this play out again and again and again and again. Indeed, the only "genius" H&E management in particular have shown, is in maintaining their aura of being MSFT's future - and retaining their jobs - in the face of what can only be described as abject failure on behalf of shareholders.
Sadly, I really don't see any of this changing until there is a change at the top that brings with it an entirely different emphasis on innovation, the minimum bar to ship, and places a far greater value on preserving/enhancing the MSFT brand name rather than continuously squandering/diminishing it by repeatedly shipping things that are half-baked and/or sub-par.
Moving on to the stock, again it's a mixed bag. After finally breaking out of the multi-year trading range, we promptly gave back much of it. This caused at least one publication to ask "What's wrong with MSFT". Luckily, I bought puts because I'd seen this movie before. We've now rebounded somewhat, and should end the year 5-10% better than the NAS. That's a nice recovery from the situation that prevailed for most of the year, and it's easy to get caught up in the euphoria of seeing mid $30's again. However, the fact is that MSFT has still badly underperformed most of its own self-selected peers over the past 5 years (only DELL has done worse):
And don't even bother adding real competitors and current momentum favorites like AAPL or GOOG, who again left MSFT in the dust on the year despite massively outperforming it already over the past five.
Equally concerning, is the fact that MSFT is one of the few companies on this list who have actually shed shareholder equity over that time versus grown it. Yes, the massively stupid one-time dividend (and all subsequent dividends) is part of that. Ditto the ongoing buybacks. But a big part is the unbelievably expensive "emerging bets" that have collectively failed to pay off. Add it up, and you have the current situation where shareholder equity continues to decline and a stock that has badly underperformed over the past five years. Meanwhile, outside of Ballmer and Gates, you have one of the highest paid leadership teams in the industry. Now, does that make any sense whatsoever? I'm talking from a shareholder's perspective, btw - clearly management is making out nicely despite their demonstrated failure to create shareholder value.
Bottom line on the stock, while it may be less overvalued than some on say a DCF basis, unless the company can generate some surprises on earnings and/or execution, it's likely to continue being an industry laggard and struggling to keep up with the market (although it's done better on the latter these past two years). Which is why you have comical stuff like CFO Liddell quoted recently saying (about the share price) that:
I never make a judgment about whether it's too high or too low.
WTF? The guy principally tasked with doing $B's every quarter in buybacks - using our cash - isn't making a judgement about whether the stock price it too high or too low? So are you admitting to being incompetent, Chris, or are you "just" lying? It's the latter, of course. What Liddell really means is that management want to continue abdicating responsibility for the stock - unless of course it happens to go up (in which case they'll be the first to take credit - as they comically did when the stock finally "outperformed" last fiscal, following the crash to 3-year lows the year previous caused by their bungled "spending surprise"). He's also telling you that they plan on buying it back regardless of inherent value because...well, because they're too clueless to redeploy the cash more effectively and need to keep mitigating the dilution caused by their outsized pay packages. And since we shareholders keep letting them, why not?
All of which reminds me of a statement made by a shareholder at the November meeting. Excerpt:
But Tuesday's shareholders meeting didn't have the spark longtime investors remember from the good old days.
"When I used to go to Microsoft meetings, it was like, 'Thank you, you made me a millionaire,' " said James Arnstein of Vancouver, Wash., who was attending his first shareholders meeting since 2000. "The room was just so powerful because you created so much wealth for the shareholders."
That's because back then this dog could hunt. Now, it mostly likes to eat, lie on the porch, and sleep a lot, while shareholders make corporate officers millionaires and underwrite the cost via stock declines and underperformance due in large part to the failure of said management's investment choices, execution, and ability to instill confidence on Wall Street.
So what does the future hold? Can this dog learn to hunt again? That's likely the minimum requirement for this stock to ever provide outsized returns. It may even be required for the company just to survive. Or will MSFT continue its march into irrelevance, struggling to even be an "IBM" ten years from now?
IMO, unsurprisingly, that's going to come down to leadership. Can Ballmer pull it off? I'm doubtful - he's had eight years so far and we've seen the results. Who does that leave? Raikes? He'd seemingly get the nod if Ballmer and Gates have a say, and it's likely the main reason he's stuck around. Is he up to the task? Again, I doubt it. He's simply too invested in what used to work but no longer does. Who does that leave? One of the hip earring-adorned geniuses from H&E that can't figure out basic ROI? Pass, thanks. One of the former CEO's from companies MSFT has acquired like AQNT? That strikes me as the best choice - or of course an outsider. The problem? I don't seen any signs that Ballmer is planning on giving up his chair.
The bottom line is that I really don't know how it will turn out. Even though this post (on re-reading it) comes off clearly in the negative camp, in reality I think the odds are about equal for it to go either way. What do you think? See any reasons to be more optimistic? Pessimistic? I do know one thing: If management plans to go another five years enriching themselves and letting the cost of their failed strategies and execution be underwritten by shareholders, then this holder won't be along for another ride.
Update: Further to the discussion of putting out stuff that's half-baked:
Some of the products causing problems?:
Windows Vista Photo Gallery
Windows Live Photo Gallery
Microsoft Office OneNote 2007
Microsoft Office OneNote 2003
Microsoft Office Outlook 2007
Microsoft Money 2007
SyncToy 2.0 Beta
But hey, why would MSFT have thoroughly tested at least those, right?
Update #2: And to give the "pro" side equal billing (although it contains some comments that make even my criticisms look tame):
Update #3: More related articles:
- Defending Windows Vista
- Windows Vista gets pounded in year-end recaps
- Microsoft’s $300 million ‘consumer product blitz’ inches closer (Go figure. Excerpt: "Microsoft has nowhere to go but up with any kind of consumer advertising campaign". Well that's true).
- Tech train wrecks in 2007
- Christmas Present For Apple Bulls: Mac Cleared for Takeoff
- Apples For The Army
- Apple trades at $200 for first time
- Microsoft (MSFT): Skip the Vista Upgrade, Buy the Stock? (btw, it's a tease - the answer is only if you want market performance or slightly better over the next 2 years).
- 2008: Definitive, Unsolicited Advice for Microsoft