Saturday, June 30, 2007

What will Microsoft learn from the iPhone?

Before you groan, I too want to hear more on the iPhone about as much as something new regarding Paris Hilton. The media-saturation has been insane. On the other hand, I am interested in what lessons MSFT will take away from this current phenom. Will there by any?

Microsoft has been in the mobile business for over a decade. They've been in the specific phone sub-segment since 2002. In fact, Windows Mobile is now on its 6th generation. MSFT also spends an order of magnitude more on R&D than AAPL. So how come MSFT has never once had a phone product, during that entire time frame, that has come even distantly close to matching the consumer and media interest generated by the iPhone - which only just shipped? Indeed, across all of MSFT, the only product that has come close is Windows 95. Let me add a couple of caveats before proceeding further: First, I don't know if the actual iPhone will live up to the likely overdone promise of the iPhone. Second (and related), I don't know how well it will do in the market, though I think they will easily make their unit guidance for the year. Regardless, the iPhone has already had a massive impact. From media, to consumers, and the market (where AAPL stock has recently tacked on another $30B of marketcap based largely on iPhone anticipation and interest), everyone is talking iPhone.

I have my own thoughts on why/how AAPL managed this engineering and marketing triumph. The more important question is does MSFT? Have they even bothered to put together a senior cross-discipline team to study the situation, including how AAPL managed to come out of left field and accomplish it? This isn't just about a new phone. The iPhone highlights issues in R&D, customer needs understanding, UI design, software development, go-to-market strategies (e.g. partner or direct), marketing, etc. These are areas that aren't peripheral for MSFT, they're core - or should be. And MSFT should be the undisputed world leader. They aren't.

MSFT needs to look across the company and answer the question "why can't we do this?". What is so broken that Windows 95 is the most recent example of similar [MSFT] success? Why did Vista, a product that took 3-5X longer to develop than the iPhone, greater than five times as much R&D, and touches several orders of magnitude more people, fall largely flat? MSFT is even having to simplify the downgrade rights from Vista to XP. That's hardly a bullish indicator for adoption. And here is Ed Bott -one of the most knowledgeable Windows writer out there - defending (?) Vista by saying it's like Win95 not WinME (as others are charging), while acknowledging that it will likely require the Win98 equivalent before fulfilling the original promise. Wow, what a ringing endorsement. And it's not just Vista; Similar could be said for Zune, Windows Mobile 6.0, Internet Explorer 7.0, etc., etc., etc..

My guess is that current leadership hasn't bothered with that review. I bet they have already rationalized (to their own satisfaction) why their approach is still the best one, and why the iPhone phenom is of only marginal importance. As a result, nothing will change. MSFT will continue to ship often mediocre products (at least on revs 1 and 2) to lukewarm reviews. They'll keep ramping up marketing launch budgets in the asinine hope that these same products will do well if only they get pushed hard enough. When that fails, as it consistently does, they'll spend their time crafting ridiculously misleading "momentum" press releases in the vain hope that it will turn the tide. Finally, they will cycle through the litany of handy excuses that have become their trademark this decade, including "market saturation", "not every product is a growth opportunity", the "notorious risk-adversity of enterprises", or the multi-purpose catch all: "it's still early innings". MSFT, under current leadership, should be renamed Excusesoft.

I'm not alone in doing the comparison and asking these questions. If you've been following the stock's major YTD underperformance (NAS up ~8%, MSFT down ~2%), and current meltdown, there's good evidence to suggest that many investors are:

FYI, the green line that I've added to the bottom chart highlights money flowing out, along with the impact on the stock in the top chart. FWIW, that long-term uptrend line that I've drawn (purple) had better hold, otherwise it's BOHICA for shareholders. That's somewhere around $28.69 or so, if you're interested. But look for a range between $28.40-$28.80. If it fails, technical analysis suggests that MSFT could eventually crash back to around $22.40. In other words, the Ballmer-led MSFT elevator is headed either to the Mezzanine level, or all the way to the parkade basement again. Getting tired of this yet? If so, when the proxy rolls around this year, send a message once and for all.

Update: An upgrade by Pacific Crest is worth a read and helped generate some buying interest during a pre-holiday shortened session. That lifted the stock back above $30, eventually hitting a high of $30.22 and closing the previously open upper gap in the daily chart (see red lines below). The stock then immediately reversed course (green circle). For now, it managed to hold $30 (with two cents to spare). However, there are several lower gaps still open (red circles) and unfilled gaps that stay unfilled are exceedingly rare for MSFT.

Update #2: July 6th, 2007. Latest Xbox disaster has provided the catalyst to close the first lower gap. Next up, lower gap number two (~$29.47) ...

Update #3: July 10th, 2007. Stock takes out lower gap number two as expected. Next up, $28's.

Update #4: August 10th, 2007. It took longer than expected, but today we are trading in the $28.40-$28.80 range that I called for in the post. In fact, we took out the low end by trading down to $28.31. The stock is currently at $28.54. As I said then, a failure to hold here risks another trip to the basement. The fact that we so easily undercut that range doesn't bode well.

Wednesday, June 20, 2007

Who us - leadership? Nah, we just vest here.

Regular readers know that I'm a staunch critic of Microsoft's current leadership team. In fact, I'd argue they don't even deserve to be called that and instead resemble the Keystone Cops. Now, you might assume that this is primarily because of the stock's non-performance - and I'll admit that's a big factor. But it's also the endless strategy/execution issues and constant inability to get even minor details right. IMO, that shows a company that is badly led and poorly managed.

Here are just a few current examples:

It's always wise to take your premium-priced offering, justified in part on the promise of future "extras", and then stop delivering those amid rumors the team responsible has actually been disbanded. Meanwhile, MSFT cans the Digital Image Suite which arguably would have made a great extra (though MSFT says most of the functionality is in Vista already - it isn't).

Couldn't agree more. Is there anyone driving MSFT's overall branding and marketing? It sure doesn't seem like it. Add to the list of confusion three different products that all contain the name Messenger. WTF? This is really too bad because many of the "Live" products are superior to competitive offerings - but most users aren't going to wade through the confused naming/marketing message to try them. Oh well, at least "Microsoft TV: IPTV Edition" got renamed Mediaroom. Not exactly creative, but at least it's an improvement.

Did we upgrade the heatsinks in light of widely reported overheating problems? Well, we're not going to say specifically, even though pictures documenting the change exist, because er, ...why be honest?

Related. Can anyone read Holmdahl's responses and NOT conclude that Xbox failure rates exceed the industry average? So let me see if I understand the strategy here. Having lost $5B+ on the Xbox fiasco so far, with the ONLY hope for payback - no matter how unlikely - being via subsequent games sales and related, leadership thinks being less than forthright about overheating and reliability problems (not to mention blaming users for scratched disks despite evidence that it's a hardware problem) is going to get buyers to invest more in the platform? Brilliant.

This person obviously didn't get the memo from Raikes explaining that there's no demand for this type of solution and why it's therefore not in MSFT's future.

Oh, did we just brief the press on changes we were making? Sorry, consider it a belated April Fool's Day joke.

Ballmer: the allegations are "baseless". Days later, MSFT agrees to make changes. Apparently several state AGs, already pissed off at MSFT for past infractions, thought it had enough basis to threaten legal action if MSFT didn't comply. [BTW, this helped tank the stock as the revelations included timing of Vista SP1 which now looks like next year (beta late this year), thereby potentially pushing out Vista migrations even further.]

Excerpt: "Yahoo's search total grew 18.6 percent from the year-ago period, according to Nielsen/NetRatings. Microsoft Corp.'s MSN/ Windows Live took third place with 605.4 million searches, or 8.4 percent of searches in May. The service experienced 0.8 percent search growth year over year."

Remind me again, didn't YHOO's CEO just get ousted for his performance? 18.6 vs .8? Will there be ANY equivalent accountability doled out at MSFT? That's rhetorical btw as the answer is an emphatic "No".

Okay, so it's likely over-hyped. But can someone remember the last time a MSFT product caused anyone to drool or caused a traffic jam? MSFT is spending an order of magnitude more on R&D than AAPL and taking at least twice as long to get products to market, right?

Unsurprisingly, after a brief run, the stock returns to regular programming. For example, versus the NASDAQ (dividends excluded), MSFT has now underperformed over:

  • 1 day
  • 5 days
  • 10 days
  • 1 mth
  • 3 mths (just)
  • YTD
  • 3 years
  • 5 years

(Over one year, it's still ahead).

Meanwhile, where's MSFT's Board of Directors? MIA, as usual. Bottom line, if shareholders expect change then we're going to have to demand it.

Friday, June 15, 2007

Some days you really have to wonder...

Why any of us continue to hold this stock. For example, here's the list of equities I track on a daily basis:

Notice anything unusual there? That's right, of every stock I track, only MSFT was down today. Off .1% while the NAS is up a full 1.05% - and that's despite already under performing the NAS by ~6%+ year to date. WTF?

Reviewing the news, nothing particularly stands out as a likely cause for today's under performance. Nevertheless, the price action speaks for itself and volume is significantly above-average - so you can't write it off as meaningless. Now, in fairness, it was a triple witching day and that often causes some aberrant behavior. While that might explain the higher volume, why was MSFT the only issue from that fairly long list who was unable to close in positive territory? Sure, any stock can have a bad day, but we see this kind of action in MSFT repeatedly.

In the absence of material earnings acceleration and/or other investor-generating interest, there just doesn't appear to be any sustained incremental demand for MSFT whatsoever. Even a rare "bullish" PC analyst that I saw recently, recommended just about everyone but MSFT to play the trend - his specific worry being the long-term adverse impact from GOOG. Recall that with Vista, the new Office, etc. this was meant to finally be MSFT's big year. So far, for investors, it's been a bust. MSFT continues to be a piñata that exists purely to entertain large funds and institutions, who proceed to whack it up and down all day, every day - disgorging 10's or even 100's of millions of dollars for themselves in the process off fractional per share moves, while the overall direction remains flat and long-term holders continue to make nothing.

Current management appears to be mostly resigned to this state of affairs, even helpfully refilling the piñata every once in a while with some fresh shareholder buyback money and taping up the seams when it looks like maybe it's going down for the count. Then the Wall St. game starts all over again. As long as leadership continues to receive massive share and option grants for free, institutions continue to redeem those shares for cash in exchange for unfettered access to the daily piñata spoils, and shareholders continue to underwrite the cost via continued under performance without calling for heads to roll either at MSFT or at those institutions holding it, then life is good. MSFT's leadership can continue to run the company - as they have for this entire decade so far - as their private fiefdom and for their personal enrichment versus as a public company charged with rewarding its shareholder owners. And given the totally lackluster reception of Vista so far - at least in the consumer market - despite repeated Ballmer promises that it "would be great - bet on it", combined with continued reckless spending, it doesn't seem likely that we'll see earnings improvements that might drive [new] investor interest any time soon. Additionally, we're heading into MSFT's fiscal year end when, among other things, grants and options get set - and you know MSFT loves to game those to be as low as possible. So don't expect any major announcements from them aimed at driving the stock - like say a market dividend, or better yet Ballmer's retirement. Also expect buybacks to get curtailed significantly unless earnings are coming in weak and need to be juiced again by reducing shares outstanding.

Looking at the long-term chart, about the only potentially bullish takeaway is that you could make a technical analysis case for a run to $40 if this seemingly endless consolidation trend ever gets resolved to the upside. Whether it will before MSFT sees the major financial challenges that are almost surely on the horizon given the current strategy, leadership, and execution shortfalls, is any one's guess. Until then, MSFT likely remains what it's been since Ballmer took the helm as CEO in 2000: worse than dead money.

Time for a change. After nearly a decade, this is getting old...

Wednesday, June 13, 2007

Where is the MSFT/Ballmer outrage?

Like a lot of folks, I've been watching the evolving shareholder unrest at YHOO. In case you missed it, shareholders there are unhappy with the company and its CEO Terry Semel. In fact, they've been making that increasingly clear of late, including at a shareholder meeting today. See sample coverage below:

So what are the specific complaints? Well, the list includes poor stock performance, unclear company direction, poor CEO leadership, lavish executive compensation, etc. Hmm...sound familiar?

Reviewing the record of stock performance, certainly YHOO has not had a good time of things over the past year:

Or even over the past 3 years:

However, Semel took over as CEO in May of 2001. So let's see how he's done since then:

I don't know about you, but a greater than 160% gain for YHOO vs an almost 20% loss for MSFT looks pretty decent to me.

In the area of company direction, it is legitimate to question how badly YHOO has done versus GOOG. While YHOO still holds a position that MSFT can only dream of (despite spending more than twice as much on a relative basis in order to achieve), they've clearly failed to check the progress and otherwise keep up with GOOG - and they were in that business already. But of course, MSFT's failures in this and other businesses during the same time are legend. In fact, read this latest piece on the continuing screw-up known as Xbox, which includes this astounding admission from Peter Moore, head of Microsoft's interactive entertainment business division:

If we don't make that move, make it early and expand our demographic, we will wind up in the same place as with Xbox 1, a solid business with 25 million people. What I need is a solid business with 90 million people.


Now, in the area of compensation, Semel got paid a ton - $107.5M is one estimate for last year. Ballmer, by contrast, gets paid a rather nominal amount. But again, looking at the company overall (including the Xbox dream-team above), MSFT's executive compensation doesn't take a back seat to many people - YHOO included.

So what gives? Why are YHOO shareholders rebelling vocally and calling for a new CEO, while MSFT shareholders, who have experienced far worse returns over the tenure of the current CEO, continue to just meekly grin and bear it? Is it that MSFT shareholders somehow feel the worst is over and the company is now on the right track, whereas YHOO shareholders don't? Or have YHOO shareholders just not completely given up and settled for abysmal stock performance and sloppy leadership/execution yet?

Update: Blodget on the YHOO situation:

Update #2: Latest console sales stats:

Update #3: Semel is out as CEO:

YHOO, which was already up 3% on the regular session today, is up another 4.3% in AH on this announcement.