MSFTextrememakeover

Wednesday, January 09, 2008

Gates kills it at CES - literally

So Bill Gates had his final CES keynote as a full-time MSFT employee (and likely his last ever). Anyone who has attended a Gates presentation knows that they're long on repetition and short on excitement. In fact, they're normally real groaners. But apparently some were hoping for a miracle despite that well-established track record. And given that the consumer market is red-hot right now, and MSFT - being perpetually slow to respond - has finally even acknowledged that it needs to do a better job there (earmarking $300M more for advertising), it would have been nice to see Gates and MSFT do more. But alas, it wasn't to be. In fact, the best part imo was the video - which shows a self-deprecating side of MSFT that I think few external watchers appreciate exists.

Still, the media reviews are surprisingly scathing. Which suggests to me that others besides myself are tiring of MSFT constantly promising innovation but delivering precious little of it, and are no longer afraid to say so. Some examples:

Excerpt:

In an era when the vanguard of technology is creating smart devices for entertainment and communications, Bill Gates, the outgoing chairman of Microsoft, had little that was interesting or innovative to show off in his last annual keynote at CES in Las Vegas on Sunday.

Excerpt(s):

But the biggest problem for CES isn't the competition, it's internal. And you only need to look as far as Microsoft to see what's wrong. Despite headlining the event, Microsoft didn't make a single major announcement last night, let alone acknowledge that some of its biggest announcements from last year--Windows Vista, new Media Center Extenders, or an IPTV-based Xbox 360--have yet to materialize or have any real positive impact on the market if they have. 

And for crying out loud, start talking to Steve Jobs. That the most influential consumer electronics company in the world isn't at CES is a crime.

 

And finally, the Pièce de résistance:  

Excerpt:

The big question is how, in 2008, have we come to a point that Microsoft is so bereft of new ideas and innovation that what was once the most important keynote speech of the year turned out to be a complete dog? It’s not for a lack of good people, there are many in Microsoft doing a great job, and there’s even some good technology and products being created (Silverlight and Windows Live Maps being two examples) and to those people I say don’t take this personally, it’s not personal, it’s just that if people don’t have anything interesting to say, they’re better off not getting on stage and making us yawn. I’ll be in San Francisco for the Steve Jobs keynote at Macworld next week and I doubt that I’ll be writing a similar post.

"How" indeed. Current leadership should really reflect on that -  especially in light of the massive R&D spend relative to virtually everyone else (especially AAPL) - and make substantive changes. Will they? Of course not. They'll simply deny it's true - call it the "Vista defense".

Reviewing the rest of the MSFT-related CES coverage, I found this article the most interesting:

Primarily because of this excerpt from Gates, which encapsulates most of the reasons I continued holding MSFT:

Gates: Remember, it's all about software. So why are we talking about those companies? There are very few companies that understand software. The phone is becoming about software, the TV experience is becoming about software. Our bet goes back to the founding of the company--that software is going to be at the center (of things). It really is coming true.

 

I think the core of who we are and what we do (is) believing in a platform. We're better positioned than anyone. Do we have to continue to work on our advertising scale and our search and some usability things in our music products? You bet. But that all comes off the core of being a company with the best research group, by far, of any software company, and a breadth of talent that everyone is envious of.

What a shame that they've done such a poor job of executing to be the leader in realizing that vision. Instead, they lost focus, decided to be lazy, played defense, tried to solve every problem from a PC-centric perspective rather than a platform-agnostic software one, and vainly tried to hold back the internet. So now others - in particular AAPL, GOOG, and even Adobe - are realizing this original vision for them. Can this situation be turned around? With a lot of hard work and tough choices, I think so. But I don't see how you get there with a leadership team that begins from a position of near-total denial. Just ask an iPhone user who they think "understands software" better - AAPL, on their first attempt, or MSFT after nearly a decade of mobile involvement? Or maybe the problem isn't "understanding software", but more importantly understanding what people need to accomplish from it, and then maximizing the resulting "experience" for those paying the freight? Oh, and delivering on your commitments doesn't hurt either. Just a thought.

Off-topic - but related timing-wise (and therefore worth covering in this post) - is MSFT's decision to acquire Fast Search for a whopping $1.23B. I'm still scratching my head on this one. The market hated it - there's nothing like announcing a new $1.23B acquisition and immediately losing $5B in marketcap on the news. Apparently, the market initially saw it as [more] good money going after bad in the so far hopelessly losing battle against GOOG for consumer search/advertising share. That seems to be wrong, with the deal being more of a SharePoint/enterprise play. Thank god! Market reaction today suggests that maybe folks are now getting that. Still, when you the read history of Fast - suspended trading, accounting restatements, executive resignations, charges that a Director sold the company an external organization at an inflated price (pocketing the windfall), the heretofore dominant shareholder demanding removal of board members, Directors being sought for tax evasion by the Norwegian equivalent of the IRS, etc. - you really have to wonder "wtf was MSFT thinking?". Oh, and did I mention it's unprofitable? Doesn't MSFT already have too many of those?

Now, maybe Fast has some killer technology and/or people that would be worth this otherwise ridiculous premium for such a troubled company. Even then, you have to question how come MSFT R&D, which has some of the industry acknowledged superstars in Search (and has been focused on it for several years now), wasn't light years ahead of some struggling player from Norway. Quite frankly, the whole thing smacks of a defensive move by MSFT to either play catch up (which, as above, shouldn't require going external), or to ensure that a failing company with some good technology didn't fall into the hands of ORCL, IBM or perhaps GOOG. Neither option seems like an especially great use of $1.2B of our cash, unless we see R&D come down by say an equivalent amount? Yeah, didn't think so.

Some people do like the deal:

Excerpt:

Forrester Research analyst Ken Poore called the buyout "a big deal." In an interview, Poore said Microsoft's search strategy has been weak, leaving the software maker trailing behind not only big players like Fast, but also Oracle and IBM, who have been investing in the technology in recent years.

"By going out and acquiring Fast, in my opinion, they've kind of leapfrogged" IBM and Oracle, Poore said.

Excerpt:

The acquisition will give Microsoft an immediate strong presence in the market for corporate search software thanks to Fast's high-end roster of clients, including Merrill Lynch (ML), Disney (DIS), Best Buy, Pfizer (PFE), and Dell (DELL). The Norwegian company's chief rivals in the estimated $4.8 billion business include Google (GOOG), IBM (IBM), Britain's Autonomy, Oracle (ORCL), and SAP (SAP). Fast was on track to book $200 million in 2008 sales—about 20% higher than in 2007—and Microsoft's direct-sales and reseller network can expand that, UBS (UBS) analyst Heather Bellini wrote in a note to clients.

The latter includes MSFT perma-bull Brendan Barnicle, a vice-president and senior research analyst at Pacific Crest Securities:

"Buying Fast will cost Microsoft less than three weeks' worth of free cash flow, and could provide better returns on the company's $21.6 billion cash pile than stock buybacks and dividends...Microsoft has tried everything in the world with its cash," Barnicle says, "and nothing has really worked for the stock."

Um, Brendan, is that meant to encourage shareholders given that the company isn't profitable? Sorta like "buying the shares of a losing company is a better investment that buying shares of MSFT"? Er, okay. Also, isn't that because the one thing they haven't done with our cash is use it to make smart, accretive acquisitions in areas that they actually know something about and can execute best-in-class in?

Also pumping the deal was top-rated Goldman Analyst Sara Friar:

The acquisition of FAST bolsters Microsoft's positioning in the enterprise search market. We view this acquisition as a necessary next step to help Microsoft shore up its defenses against Google in the enterprise. Microsoft's strength is that it owns the entire back-end infrastructure and hence data in the enterprise, which may be more difficult for Google to access. We also believe that this acquisition highlights an increased focus on inorganic growth.

Hmm.."shore up its defenses" in the enterprise? Isn't that what MSFT's massive annual R&D spend is meant to do - at a minimum? And an "increased focus on inorganic growth"? So basically Ballmer is throwing in the towel on his largely failed "big bets" strategy and adopting ORCL's approach instead? The same one he initially denigrated, but which has subsequently shown far better returns than his own? Well, if true, that might actually be a good thing - though Fast seems an unlikely candidate for achieving success on that tact. Finally, Sara forgot to mention that Goldman acted as advisor to MSFT in the deal. But I'm sure that didn't influence her coverage <wink>

Bottom line, this was likely Gates' last keynote at CES - and that's a good thing. Listening to Bill reminds me of some old-school news anchors or politicians. They're smart, capable, etc. but just seem out-of-step and staid. Sorta like recent interviews I watched with former NBC anchor Tom Brokaw and current CNN anchor Anderson Cooper. Cooper came across as hip, fresh, and real; Brokaw did not. The company needs a new chief spokesperson. This time, one that's capable of getting people fired up about the company's new and exciting offerings (assuming they can fix what's wrong there and deliver those).  And please don't tell me that's Robbie Bach, whose CES presentation sounded more like he was doing his performance review and trying to justify his job. It also isn't Ozzie, sadly. So who? And wrt the Fast acquisition, let's just say that for shareholders at least, that's yet another questionable "show me" investment versus any kind of obvious home run.

 

Update: Under the heading "be careful what you wish for". Okay, so maybe there's a limit to how "real" you want your main spokesperson to be after all:

The discussion here provides some more background on his thoughts wrt Vista, mistakes made, and what I hope he meant.

15 Comments:

  • all i can say is that you are a fool who is evaluating an acquisition by market reaction. market reaction was not related to the acquisition. fast is a damn good acquisition for msft. that seems to be a consensus. fast is less than half percentage of msft market cap so you won't see it in the stock.

    By Anonymous Anonymous, at 9:24 AM  

  • Curious on your thoughts on the logitech rumours?

    By Anonymous Anonymous, at 10:54 AM  

  • "all i can say is that you are a fool who is evaluating an acquisition by market reaction."

    No, I merely pointed out the market's major negative reaction. That said, discounting entirely the collective vote of large MSFT holders (the folks who move the stock) is foolish. Regardless, my main concern is the business case.

    "fast is a damn good acquisition for msft."

    That may be, but it remains to be seen.

    "that seems to be a consensus."

    There's no consensus. The market clearly didn't like it and other pundits are split quite evenly for and against. Moreover, I have yet to see one that even attempts to back that with an actual financial analysis. Care to attempt one?

    "fast is less than half percentage of msft market cap so you won't see it in the stock."

    Um, we saw it in the stock - immediately. In any event, my concern is the business justification that shows how $1.23B of shareholder money is being well spent and not wasted like so many other MSFT acquisitions.

    I'm even more concerned that MSFT needed to go outside just to "shore up" its enterprise Search capability given its massive annual R&D spend, now several year old priority focus on Search, and cadre of world-class experts.

    By Blogger MSFTextrememakeover, at 11:33 AM  

  • I agree with the other anonymous guy. I like the heart in your post but I didn't really care for it at the same time. I have more I could say but I'll leave it at that.

    By Anonymous Anonymous, at 11:34 AM  

  • "Curious on your thoughts on the logitech rumours?"

    I believe I did a post that included a recommendation to either buy LOGI or get out of the peripheral business. At the time, it was going for a lot less. Now, it would be pretty pricey and would negatively impact overall margins. But at least it would be accretive and make MSFT the clear #1 in that particular business. So it makes some sense but wouldn't be on my short list.

    By Blogger MSFTextrememakeover, at 1:00 PM  

  • "I agree with the other anonymous guy. I like the heart in your post but I didn't really care for it at the same time. I have more I could say but I'll leave it at that."

    It happens. Although I'd be interested in where you disagree and why.

    By Blogger MSFTextrememakeover, at 1:13 PM  

  • "market reaction was not related to the acquisition."

    What color is the sky on your planet?

    By Anonymous Anonymous, at 4:20 PM  

  • it was a consensus because msft fell less than the peers on a day with negative sentiments.

    you are a fool. people in finance have a competetive index. it went up significantly with fast acquisition.

    By Anonymous Anonymous, at 11:14 AM  

  • I don't think that it's valid to read the drop in the stock price as soley attributable to this purchase. Perhaps you noticed that the Dow and Nasdaq had one of the larger drops in recent history? Each are down roughly 8% since start of year while MSFT is down less than 5%. The FAST announcement happened in that downfall, yet the company has outperformed the market.

    Planet skies come in a plethora of colors, but it seems that the one that the shareholders see is a lot more rosie than what you project.

    By Anonymous Zymurge, at 12:24 PM  

  • "it was a consensus because msft fell less than the peers on a day with negative sentiments."

    Not sure what "peers" you're referring to, nor why you would use the full day - which was complicated by a major market reversal and subsequent collapse - to determine reaction to news that broke in the early a.m.? The fact is that the NAS was up ~25 points that morning (the 8th), along with most of MSFT's generally regarded "peers", while MSFT was down. By the time the market reversed to flat, MSFT had already lost ~$5B in marketcap - the only notable news being the Fast bid. That's the figure I used in the post since it's the most logically attributable. For the record, by day's end MSFT has lost twice as much and underperformed the NAS as well. However, I left that out of the equation since it more logically resulted from the general market decline.

    "you are a fool. people in finance have a competetive index. it went up significantly with fast acquisition."

    For someone who keeps making statements you're unable to support with facts, you should maybe rethink your liberal use of the word "fool" when describing others. I provided some of the analysts who liked the deal and the specifics of what they had to say. There's no such thing as a generic "competitive index", and whether the competitive assessment of MSFT held by individual analysts changed at all (on balance) given this news - far less went "up significantly" as you assert - is unknown and unknowable. Suggesting otherwise simply makes you look foolish. What is known, is that some analysts came out in support of the deal and some against. The problem I have with the former (ignoring the one talking up the deal w/o acknowledging their firm's role advising MSFT on it), is that they didn't quantify their opinion with any hard numbers. And I see that you haven't stepped up to my challenge in that regard either. Now why is that?

    By Blogger MSFTextrememakeover, at 1:31 PM  

  • "I don't think that it's valid..."

    See response to another commenter for more detail on what I did and why. Such analysis is obviously subjective by nature, but imo the approach I took is the most valid under the circumstances (and certainly more so than using the YTD performance). WRT performance YTD more generally, I'm loathe to join you in reading so much about shareholder perceptions into results from a week or so of trading, especially amid concerns of recession and a general market decline (BTW, I show MSFT and the DOW roughly tied YTD at ~-5%.). I would look instead at something like PEs. The current ones show MSFT behind its industry and approximately tied with the S&P (MSFT 22.2, Industry 24, S&P 21.8. Source: MSN Money). So basically a market multiple. Whether that's rosy, or at least rosier than I project, I'll leave to reader's individual perceptions. But fwiw, I think a better run, better executing, more innovative and more customer-focused MSFT should and would command a healthy premium to "average".

    By Blogger MSFTextrememakeover, at 4:24 PM  

  • Since MS has done this song and dance in the past...

    Is the 17.7 million Xbox figures talked about in the keynote "sold thru" numbers or just "shipped" numbers?

    By Anonymous Anonymous, at 9:09 AM  

  • "Is the 17.7 million Xbox figures talked about in the keynote "sold thru" numbers or just "shipped" numbers?"

    "Shipped", just like every other major console vendor. NPD data on the 14th will attempt to show "sold thru".

    By Blogger MSFTextrememakeover, at 12:42 PM  

  • on the day peers like apple, google, intel, ibm fell twice more than msft.

    the whole of nasdaq is not peer. microsoft has about 25 close peers.

    market cap fell by $5b by spending of $1.2b means that some other factors were in play.

    you are not a fool if you could explain why getting fast is more than four times worse than simply burning $1.2 b?

    if you are accounting for a knee jerk reaction then you have not played any stock market. it is quite often than a stock falls or rises immediately after an earning announcement but do the opposite few hours later when investors analyze the whole thing.

    i know you can't answer my question. i still call you a fool to evaluate a strategy by a short term knee jerk reaction, which may not even be related to the action you are evaluating, instead of using the stuff in the top floor of your body.

    By Anonymous Anonymous, at 9:48 PM  

  • "on the day"

    I've already discussed why the full day (or worse, YTD) is a less appropriate metric imo to measure the impact of specific news that broke in the morning. Others can review my logic vs yours and then judge for themselves. WRT the rest, the NASDAQ is a marketcap weighted index. So your "25" peers are represented prominently. Marketcap falling by $5B on a $1.23B spend doesn't require any other explanation than the one I gave - the market appears to have initially seen it as more good money going after bad in consumer Search. Finally, I see you're still unable to even attempt a financial justification of the deal. Why is that again?

    By Blogger MSFTextrememakeover, at 9:16 AM  

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