Wednesday, April 02, 2008

Is the Sleeping Giant Finally Waking Up, or Just Rolling Over?

In the movie Tora! Tora! Tora!, when Japanese Vice-Admiral Isoroku Yamamoto is presented with the news that Pearl Harbor has successfully been attacked, he doesn't gloat. Instead, he shows great prescience and says:

I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.

For several months now, I've been trying to determine whether the increasing successful attacks of competitors are finally waking MSFT up and relighting the fire, or whether the company is just putting more pillows over its head so that it can keep dreaming about the good ol' days of the late 90's - the corporate equivalent of a child's "can't hear you".

Support for the latter proposition is nearly endless, and I'll return to that in a bit. In fact, it's so abundant that my willingness to consider an alternate reality is itself ipso facto evidence of possible self-delusion. Holding the stock will do that to you. Nevertheless, there is some support for that view, albeit that it's much harder to come by. Case in point, this ZDNet article by Dana Gardner, who interestingly isn't much of a MSFT fan - which gives it all the more credibility:

Excerpt: (bolding mine):

The Google fear on the business model disruption, the Apple fear on the client disruption, and the Amazon fear on the cloud disruption, seems to be making Microsoft do what anti-trust regulators, Java, open source developers, Linux, Firefox, OpenDocument, IBM/Eclipse, Novell, and a chorus of Microsoft bashers like myself have been trying for many years. And that is ultimately to save Microsoft from itself.

Halllalulah on that last one. The piece contains several great links that are also worth a read, including this one by former softie Robert Scoble.

Unfortunately, there's the flip side that I mentioned earlier. Let's skip over the usual stuff like an Excel bug, a Word bug to keep that one company, a long-ignored Jet bug, and embarrassing IE performance scores (btw, can someone also tell me why IE - both 7 and 8 - choke on a large number of favorites when Opera, Firefox, and even Safari do not? Or why Safari can come to market with better standards support and a better mobile experience in less time than IE, and - at the risk of answering my own question - why MSFT hasn't ripped the browser out of the OS where it should never have been put in the first place?). I'm not even specifically focused on news of all the drivers that are still problematic for Vista SP1 along with failed install stories. After all, that was true of XP SP2 initially too, and God forbid that MSFT would improve over time - especially when this version of the OS is struggling so visibly.

No, the things that really concern me are reports of declining reputation and other branding issues:

Microsoft also came out on top when customers were asked to choose which company to rebrand. "It's gone from innovative and bold to stodgy and a follower," said one respondent. "But rebranding is only one step since it really needs a major shift in how it thinks."

Or how much additional share the MAC is picking up - here's a further nice quote to ponder on that score:

Huberty notes that a recent higher education survey shows Apple’s mind share tracks well ahead of the current market share - 40% of college students plan to buy a Mac, while just 15% actually have one so far.

Mary Jo Foley has a timely piece quoting Forrester and saying forget the noise, "Windows still totally and completely rules the enterprise roost". That may be true, but it's a very shortsighted view of things. IMO, if MSFT continues to sit back and let Apple lead technically (or at least from a user experience perspective - the phrase every convert I know uses to describe it is simply "I love it") and clobber the Windows brand from a marketing standpoint, then it's only a matter of time before consumer success for AAPL translates into business success as well.

Then you have the recent trend towards low cost portables, like the Asus Eee, with Linux as the default (and where Vista is a non-starter both price-wise and especially resource-wise). And the very concerning possibility that with the iPhone, Apple may have given birth to an entire new platform - taking a page right out of Microsoft's own Windows play book.

Another concern, though unsurprising, is Ballmer's absence from Barron's list of the world's best CEOs. Was it the failure to "deliver for shareholders", or the inability to be seen as an "excellent manager", that kiboshed his inclusion? Guilty on both charges would be my own input. Is the Board really so out of touch that it doesn't recognize the connection between confidence in the CEO and bullishness in the stock? Maybe they need a more concrete example - like the top holdings of the QQQQ as a percentage of net assets? Hmm...that is meant to be the tracking stock of a marketcap weighted index right? So, er, shouldn't MSFT be weighted higher than AAPL?

And finally we have the whopper, the YHOO bid, now rumored to be going to $34 - or maybe $36 - despite the already ridiculous premium of the current offer, ongoing executive and senior sales departures (the latter apparently coinciding with the annual bonus being paid out in March - go figure), comScore data showing continued search share erosion, the Alibaba folks wanting to trigger a contract clause that allows them to buyout YHOO's stake in the event of a takeover (particularly concerning since the Asian holdings are perhaps YHOO's strongest asset), childish anti-MSFT antics, and fantasy growth projections like this:

Take a look at the data below, and ask yourself whether pursuing the same "me too, just worse" strategy that has failed dismally so far, only in a super-sized and even more shareholder-hostile version via Microhoo, is likely to yield a different result?

Anyway, in trying to answer the subject question of this piece, I went back and reread an earlier post where I laid out what MSFT needed to do imo to turn itself around (lest you thought all I did was complain). It has been just over one year since I wrote that piece and two things struck me after reviewing it: 1) It stands up pretty well despite the passage of time (read: I would change very little, though I'm of course biased) and 2) There has been progress in some areas (implicit as well as explicit). That's a positive. But complicating the analysis - and one of the main problems - is that MSFT (the company) never appears to be on one singular path. Instead, you have to divine the direction of the whole by assembling various often conflicting crumbs of information from the constituent parts. As this article notes:

"Microsoft's left hand and right hand don't ever talk to each other -- but if they did? Whoa, watch out," he said.

How does the leadership of a company this disorganized and literally tripping over itself with respect to its go-to-market messages, branding, advertising, etc. (think Live, for example), convince itself that it can be the leader in helping others hone their image and advertising online? Maybe back in the 90's, companies would have sidled up for some insight from the master. Today, that master would be Apple, or less so GOOG, and the value of getting strategy/marketing advice from MSFT is pretty unclear - except possibly so you can do the exact opposite. For example, consider the following from this article:

"We are working with a broad cross section of our product groups," he said, adding that evangelizing Silverlight across the company is still a challenge, even though CEO Steve Ballmer has highlighted the technology as key to its future. "It's a big ship to start turning around."

Huh? Is the captain in charge and running the "ship", or is this the Exxon Valdez? Or how about a quote from this one:

That's all I'll say, but you can easily imagine how we can take those things -- music, some of the things we do with Zune; games, with what we do with Xbox and Xbox Live; things that we would do with the PC and the Web, with Windows Vista and Windows Live; what people do in business with Exchange, with Office -- and how we'll make those things really come to life on mobile devices, in the right way for a mobile device.

Imagining that requires no effort whatsoever. What's difficult to understand is why it hasn't been done already? Was someone actually content with being a distant #3 (or having say a whopping 1% marketshare in China) before Apple came along and kicked everyone's butt? Predictably, now that the latter has occurred, the company is finally mobilizing (sorry for the pun there) and spending vast sums to acquire Danger, license Flash from Adobe, and doing whatever else comes to mind - including playing for time by making forward looking announcements and even creating fictitious and misleading UI shots - to try and get back in the game. And the PR machine is pumping out "Mobile momentum" pieces almost daily, while Mr. Credibility himself, Robbie Bach, assures us that MSFT will gain more share. Recall what that normally means in Bachspeak - more $$$ going the wrong way.

Anyway, all of this is a rather long way of saying that after looking at the data for and against, I think the giant is awakening. That's something, and potentially constructive. However, my concern is that the breadth of that change is still too limited and the overall pace of change is grossly inadequate. Like Nero fiddling while Rome burned, Ballmer seems to be preoccupied with GOOG while MSFT melts down - or at least while the first embers, which had already been apparent for years, now threaten to turn into something much more serious. Hence the recent ill-advised and fiscally irresponsible YHOO bid.

Barring a leadership change (which sadly isn't in the cards), MSFT's best bet is seemingly that emerging market growth bails the company out long enough to get its act together (a tall order given the competition there from Linux, along with heavily discounted MS pricing). Because at this rate, it's going to take current management at least several more years that they don't have to get there - assuming they ever do. Meanwhile, AAPL, GOOG, and others (Firefox, etc.) are going to continue to grab significant additional share in their respective markets - much of it at MSFT's expense - based on current momentum alone (not to mention their generally better strategy, agility, efficiency and execution). Against that backdrop, don't expect the stock to cease its now five-year plus flatline.


Update: Related developments...

Michael Gartenberg, vice president and research director at Jupiter Research, suggested that rather than acquire or partner another company to gain ground on Google, Microsoft should turn inward and focus on execution of its own online strategy. The company has developed innovative online services behind the scenes but has been slow getting those out to users, he said.

FWIW, while I agree with Gartenberg that MSFT has some innovative online services that need to get out the door faster, focusing internally on the current strategy isn't the answer. That's what the company has been doing for the past several years and it has been an abject failure. MSFT needs to quit the "me too, just worse" strategy. Instead, it needs to go back to basics. Forget the envious dreams about GOOG's $ signs. What customer isn't currently being well served? What are their needs that aren't being met? What unique core competencies does MSFT have that it can bring to the table? What partners exist who, for their own reasons, would want to align with MSFT and could be leveraged? Execute on that, and while MSFT many not ever dislodge GOOG, it could at least start to grow share - which is more than it has been able to do so far, despite years spent and billions lost.


  • I taught university courses in MIS the past few years. Several years ago, that I once worked at Microsoft meant a lot to these students. They were very impressed by Bill Gates and Microsoft. In the past two years, students now overwhelmingly view Microsoft as big, bureaucratic and boring - pretty much the way my own generation had viewed IBM as the PC was taking off.

    Today, they view Google and Apple as the stars - the students get excited talking about products and services from these two, but find MSFT to be a fading has-been making boring corporate products.

    This turn about was abrupt - it was not as if there was a gradual shift - it just happened. My take away is that the up and coming generations' attitude is a good barometer of what befalls Microsoft.

    Another measure: 100% of student have iPods (about 40 students per class). 25% now come to class with MacBooks or Powerbooks - where just 4 years ago, I typically had one student with an Apple notebook per class. Times change. Microsoft hasn't. Ss a shareholder, I do not think they will change under Steve Ballmer. I can respect him for his work of the more distant past but he has done very poorly for the past five years. It is time for him to give way to new leadership.

    By Anonymous Anonymous, at 4:39 PM  

  • Nothing can grow faster than the economy. Not even a stock. Every stock must reach its long term stable value. MSFT has. Face it.

    If Ballmer can keep the stock at the current levels then he is doing something right, beyond your IQ.

    By Anonymous Anonymous, at 9:48 PM  

  • "Nothing can grow faster than the economy. Not even a stock. Every stock must reach its long term stable value. MSFT has. Face it."

    Demonstrably ridiculous.

    "If Ballmer can keep the stock at the current levels then he is doing something right, beyond your IQ."

    Simply maintaining a terminal valuation is not an acceptable - or viable - strategy for the CEO of a public company.

    By Blogger MSFTextrememakeover, at 7:46 AM  

  • I really hope that anonymous at 9:48 isn't a Microsoft employee. If he or she is, it is no wonder MS is as bad off as they are right now.

    By Anonymous Anonymous, at 9:04 AM  

  • Hey, Will Poole has just decided that it’s time for his 13-year career at Microsoft to come to a close.

    Besides the now infamous decision for "Vista Capable", he was also the bright mind behind embedding Windows Media Player with XP, which brought us so much pain, misery and EU scrutiny.


    With him and mr. HD-DVD Amir Majidimehr out, who knows if maybe some sort of accountability is beginning to show up?

    Imagine that!

    By Anonymous Anonymous, at 9:59 AM  

  • Nice article. Microsoft has definitely spent the last few years getting fat on its Robber-Baron status, unable to get out if its own way. They certainly have the resources to turn things around, but the question is: will they see the light soon enough?

    If your flight leaves in 2 hours and you're a 3-hour drive from the's too late. The disaster may still be far off, but there's nothing you can do but watch it happen.

    By Anonymous Anonymous, at 7:23 PM  

  • Any talk about earnings this time around...especially in light of Yahoo earnings which drop earlier in the week?

    By Anonymous Anonymous, at 1:57 PM  

  • "Any talk about earnings this time around...especially in light of Yahoo earnings which drop earlier in the week?"

    I've been on vacation for the past two weeks, but everything I've read subsequently suggests that both are expected to beat earnings - unless YHOO is playing the dumbest game of bluff yet. So Bumbling Ballmer rhetoric aside, that should cause MSFT to ultimately raise the bid, which in turn should keep a lid on MSFT stock regardless of how good its results are.

    By Blogger MSFTextrememakeover, at 9:44 AM  

  • I personally feel MSFT needs to understand they are no longer a high growth company, and begin ... paying a decent 2-2.5% dividend. Wasting money on Yahoo won't turn anything around.
    Fact is Vista is improving in fact it's a great OS. The drivers are fine, in fact with ATI cards they always have been. Info World is about as credible as the World Weekly News and anyone who thinks Apple is headed into the enterprise is kidding himself.
    Aside from great marketing Apple hardware is crap, I've been there done that. As for Leopard I was listening to Macbreak Weekly and one of the panel said he'd never used a more unstable operating system, this from a Mac fanboy. No Vista is coming around and in a year about 400 million copies will be in use. Wether or not this make MSFT grow is beyond me I can't figure out the stock market and why some companies go up when companies making 5 times as much stay stagnant, it's why I usually buy index funds.

    By Anonymous Anonymous, at 4:51 PM  

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