The Tech Press Turns on Microsoft's Ballmer
newsweek.com
newsweek.com
The share price might not have rocketed, but MSFT's net income is up from $5.355bn in 2002, hit $17.68bn in 2008, and even in 2009 was still $14.569bn. For 2000, pre-crash, it was ~$9bn when he took the reins. A 62% increase in net profits from a peak to today's trough is nothing to poo-poo.
Call Ballmer whatever you like, but the company, under his direction, is producing giant piles of cash even in these rough times.
At this point it is only a question of time until free alternatives to core Microsoft products become good enough that people are willing to stop paying the Microsoft tax. The growing popularity of mobile and semi-mobile devices without Microsoft software suggests that this day is coming sooner rather than later. And Microsoft's attempts to increase its profit margins aren't helping any.
In short the relative stock prices of Apple and Microsoft is a vote of belief that Apple understands and is inventing the future, while Microsoft has no realistic plan for how to adapt.
As for the critics, they missed what was obvious to me at the time. The main purpose of the Xbox was not initially to make money. Few remember now, but a decade ago Microsoft and Sony were butting heads in many different areas. (Particularly ones involving DRM, storage formats, and other things of interest for media providers.) In typical Microsoft fashion, they went after Sony's air supply. Competition from the Xbox forced Sony to slash prices on the playstation, which cut Sony's profits in half. This distracted Sony, which made them a less dangerous competitor in areas where Microsoft was going head to head with them.
(Of course in the end Apple did an end run about both by demonstrating with iTunes that you can deliver content without DRM and make everyone happy. Microsoft never sold the world on DRM everywhere, all the time. And Sony learned the hard way that people really don't like having a rootkit slipped on your computer without your permission...)
Also consider S&T (server & Tools) in the last decade, MS has been able to grow huge profits from that division, Very few people in 2000 would use Windows as a server platform.
The xbox story strikes me as relatively similar to Bing (OSD) story... They are pouring a lot of resources there. Hopefully, the end result will be similar or better.
Now I grant you that Microsoft put a lot of energy into .Net, and it has achieved some success. But I look at that as more of a sustaining effort. Microsoft has always had programming tools aimed at certain sections of the business market. They have changed the tools, so what used to be done with VB and Access is now done with C# and SQL Server. But fundamentally it doesn't seem to me to be a radically new market, nor do I see much evidence that their market share has changed significantly.
As for Xbox and Bing, I absolutely agree with you that they are very similar stories. Just as Microsoft used the Xbox to try to neuter Sony, they are using Bing to try and undercut Google. It will be interesting to see how that goes. I think that Google's recent stock price is evidence that the market thinks there is a real threat.
However the bigger threat to Microsoft is coming from Apple. And Microsoft is nowhere to be seen in that space. Furthermore despite the threat to Google from Microsoft, there is more of a brain drain from Microsoft to Google than vice versa. And I see more entrepreneurs worrying about competing against Google's offerings than Microsoft.
Last time I looked into this there was much confusion about posting a small yearly profit (which they've done for the last few years) and actually having a positive return on the umpteen billion dollar investment they've made.
Various figures I looked at then (maybe 6 months ago) suggested they were still 1-10 Billion in the hole overall with some hope that they'd break even after this generation, though obviously the model they've followed means another giant investment at the beginning of the next round of the console war.
Can you find anything to suggest that the XBox project as a whole is in the red or black for Microsoft?
With so many xbox 360 users out there who will keep paying for Xbox live and buying new games and further innovation (Natal) and more features (Hulu integration) I suspect Xbox division will be profitable for some time.
Also, the numbers include money "invested" in kin and windows phone 7 so Xbox alone is probably making more money than the numbers suggest
No. To name a few: Xbox, BPOS (Exchange/SharePoint Online), SharePoint, Office Communications Server, Dynamics CRM.
See http://news.ycombinator.com/item?id=1392036 if you want to hear me lament the awful MS commentary on HN for a few more sentences.
On the other hand Microsoft has created product lines (and they're not giving them away for free), but if you're looking at them through ms-hate glasses you might miss them.
The truth is that Google has many different profitable product lines, and all are ad supported. Exactly how many, and how profitable, can't be told from the way they report earnings.
In any case, you don't really need to convince me. I'm just trying to interpret what the market is saying. And the market is saying that they think Microsoft is walking off of a cliff. That's why they are worth a P/E of about 13, while Google is worth one of 22 and Apple is worth one of 21.
The market projection only gets more stark when you subtract current book value to find how much the market values future revenue. Microsoft's market cap is 221 B, their book value is 46 B, and therefore 175 B of their market cap is projected future earnings. Their current profit is 46.28 B/year, and that works out to the market valuing them at their current earnings stream projected over a bit under 4 years.
For Google the equivalent exercise says a market cap of 154 B, and book value of 38 B so 116 B of market cap is projected future earnings. Their current profit is 14.81 B/year, which translates into the market valuing them at their current earnings stream projected over a bit over a decade. (10.4 years.)
For Apple the equivalent exercise says a market cap of 225 B, a book value of 39.4 B for 185.6 B of market cap due to projected future earnings. Their current profit is 17.22 B/year, which translates into their current earnings stream projected over a decade. (10.8 years.)
So the projection that Microsoft is walking over a cliff in a few years while both Google and Apple have a decent future isn't just claimed by some random haters on the Internet. This is the consensus of the stock market, which is based on people putting their money where their mouths are.
(I took all figures for this from http://finance.yahoo.com/q/ks?s=msft, http://finance.yahoo.com/q/ks?s=goog and http://finance.yahoo.com/q/ks?s=aapl. I got book value by multiplying book value / share times shares outstanding.)
For the market in general the median "life" expectation is lower between 8 and 10 years (and negative for banks). Thus maybe we should conclude that in 10 years time the average U.S. company is going to be death...
Isn't low P/E a good thing? I don't see how this supports your point, unless I'm misunderstanding something.
I want to know what the customers are saying, because they make or break a company, not some suits playing with stocks.
Regarding Google, they're a company with one income source, no matter how many products use that income source. If they lose the search engine they lose everything.
How could a CEO inherit a company with as big of moat as Microsoft and not have piles of cashflow - no matter what he did? They spend $9 billion on R&D and what have they shipped? Windows 7, finally? Let me hit the start button - Windows DVD Maker, Windows Media Center, Windows Media Player, MS Paint --- I have an OS (that I just want out of the way) and a bunch of crap that comes with it.
Office, their cash cow and current defacto for businesses, is $400 for the Pro version! - this pricing model will be obsolete in a decade.
Xbox has been a huge loss leader, now starting to turn a profit. But this barely makes a dent and likely never will.
Zune? Kin one and two? Day late and a buck short. These flops would be very embarrassing for me, but Ballmer has no shame.
That their profits are up 60% over the last decade, even despite the crash, is not entirely dependent on what he "inherited." Windows 7, Windows 2003/2008 Server, the recent versions of Office, and more.
Ballmer is not a "tech" guy, he's a numbers and business guy, always has and always will be. Keeping the profits trending upwards is his job and he seems to have pulled it off despite a lack of true technological innovation.
That statement is truly worrying. There is no such thing as a healthy tech business if all you're doing is 'keeping profits trending upwards despite a lack of true technological innovation.' It's too risky, and it's dangerous precisely because it's so comfortable.
If experience is anything to go by, Microsoft may well turn out to be the next IBM: large, profitable, and irrelevant.
I would agree with that. My point, though, is that that doesn't make Ballmer a bad CEO. Not an amazing one, sure, but not anyone can keep such a giant ship cruising along.
Examples: DirectX -- nVidia and ATI implement Direct3D in hardware, not the other way around .NET -- C# and F# are leading language development in many ways (not all) XNA -- games for Zune, PC's, Windows Mobile, XBox from one suite of development tools and a consistent toolkit across all three WPF/Silverlight -- it's what Flash 10 and HTML 5 are pretending to be
MS pioneered tablet computing
MS has technological innovation coming out of its ears. What's amazing about it is how poorly MS takes advantage of it
MS is in fact turning into the IBM of the software world -- large, profitable, and not sexy, but critical.
For that matter, IBM is far from irrelevant -- the technology that IBM develops and isn't bright enough to utilize for itself enables the rest of the semiconductor industry to compete with Intel -- including AMD.
Just like IBM, Microsoft is developing all sorts of stuff, some of it cool and some of it mundane, but both lack the vision to actually DO anything with it. That's what Apple is good at -- Apple doesn't develop much technology, but is good at coming up with cool things to do with it.
Now, I happen to agree that Ballmer is a disaster. I hate the fact he is 100% about screwing money out of businesses and zero about love for technology. There is nothing in him that is beautiful, nothing that inspires a vision of the future. Jobs, as much as I detest him, has at least a love and vision for technology. Gates had these latter as well, but unfortunately, not the force of personality nor the aesthetic sense to drive his vision to the core of the company the way Jobs has.
Their profit model at this point appears to just be extracting more money from business clients who can't quickly switch away from them.
I've personally long maintained that a major source of Microsoft's problems are a classic case of being on the wrong side of disruptive innovation. See The Innovator's Dilemma and the (IMO better) follow-up The Innovator's Solution for more.
Another has been the legal problems that have caused them to shy away from their past ultra-aggressive tactics.
If I'm right that outside problems are a major cause of their downfall, then part of Bill Gates' genius was recognizing the writing on the wall and leaving at the right time to maintain the myth.
I disagree with the article that seems to want Ballmer's head on a platter for bungling Vista - that was a bad move for sure, but tossing out everyone responsible for that mess seems like tossing out all opportunities to learn from it.
Hubris has a lot to do with it, I think. There have been a remarkably large number of instances where Ballmer has said something that betrays the fact that he has no respect for his competition. Everyone's a lame duck competitor compared to the wonderful products of Microsoft... until they completely trounce MS in the marketplace. Then you might hear a half-hearted mea culpa from Ballmer, but after that it's swept under the rug.
Maybe it's the job of a corporate CEO to talk big about his own products - but I've seen few other CEOs so openly negative and dismissive of competitors' products, and IMHO this has probably a significant hand in MS's failures at tackling new product lines. His reaction to more-successful competitors seems to be unproductive: note his claims that Google and iPods are not allowed in his house. How can you compete when you are willfully ignorant of your competitors' products?! When someone is leading a market I'm trying to compete for, you bet your ass I'll have my hands all over their product.