Is the Microsoft Empire Cracking? 40 comments
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Interesting news: the share of computers with Microsoft Windows OS surfing the web dropped below 90% (article here).
Of course, Microsoft (MSFT) is still an enormous cash machine. It still has a near monopoly on the corporate desktop and laptop market. Many investors might assume that the company can still produce great returns. But I think the Empire is cracking.
Let's take a look at the last quarterly report (quarter ended September 30), available here.
Operating Income by Divisions
Client division, i.e. Windows for desktop/laptop: $3.2 billion, slightly less than a year ago.
Server and Tools division, i.e. Windows Server, SQL Server, Exchange and other things: $1.15 billion, or 20% more than a year ago.
Business division (Office): $3.311 billion, 20% increase.
Entertainment and devices (Xbox and Windows Mobile): $178 million, slight increase.
Online services: loss of $480 million, compared to $267 million a year ago.
This is operating income. If you look at it from the corporate point of view, entertainment and devices is in red, and online division is a huge sinkhole.
Balance sheet looks healthy. Lots of cash. One small problem is that all that cash and then some is already allocated for a huge buyback. Microsoft, for the first time in its corporate life, is issuing debt. It has enough free cash flow to service it, so debt shouldn't be a problem.
It looks like a picture of a very healthy company, maybe with some small problems. What can possibly go wrong? The answer is simple: real competition. Let's see by divisions.
Client division: Strong competition from Apple (AAPL) on the upper end. And competition from Linux in subnotebooks (AKA netbooks) segment. The last one is so bad for Microsoft, that it had to do the unthinkable: issue licenses for a product it wanted to retire, Windows XP, specifically for subnotebooks. Competition is mostly localized to the home computer segment so far. Microsoft still dominates the client OS market for businesses for now. There are a couple of small problems here though: businesses mostly refuse to upgrade to Vista (no additional revenue), and Apple has started penetrating into enterprise.
Server
Windows Server: Strong competition from Linux. UNIX is still in business too.
SQL Server: Very strong competition from all sides: Oracle (ORCL), IBM (IBM) DB2, open source (MySQL, PostgreSQL, Ingress).
Exchange: No serious competition so far.
Business division: No serious competition to Office. Companies have an option of switching to open source (Openoffice), but reluctant to do so.
Entertainment and devices: Very stiff competition. For Xbox it's Sony (SNE) PlayStation and Nintendo (NTDOY.PK) Wii, for Windows Mobile it's Apple iPhone, running OS X, Google Android and Linux.
Last but not least: Web services. It's not that Microsoft has competition here. It's that Microsoft is not a competition for others. Companies with which MSFT wants to compete are profitable: Yahoo! (YHOO) and Google (GOOG). Attempts to throw huge money on this problem doesn't help.
How fast can Microsoft fall? That's a big, $180 billion question. Thing is, tech companies sometimes can die fast, like CDC or Wang Computers. They can linger for many years (as Jim Cramer says, dead companies walking), like Unisys (UIS). Or they can reinvent themselves, like IBM, which is more like an integrator than a tech company.
I don't think Microsoft can reinvent itself. It never could compete on an even field. All its victories in competition were achieved by "leveraging" its OS monopoly. Now, when this monopoly itself is under question, what can Microsoft do? It's still possible that the company can survive for many more years, just on the sheer inertia of a huge installed base. The best decision would be to split into two or three companies. Just close the Web shop (no one in his sound mind would ever buy it), sell entertainment and mobile, if there is a buyer. Core businesses need to be changed too. OS development has to be completely changed. Every successful OS right now is UNIX or Linux based. The only way to make a good OS is to take BSD UNIX and add some proprietary GUI, like Apple did. You can even call it Windows Berkeley. Office can do just fine. Mobile shop has to be closed too, it can't compete on its own with Apple and Google. I see a separate OS company, Office company and Enterprise Server company (Exchange and SQL Server). Resulting companies can be much smaller, drastically cutting costs.
Can the company do that? I don't think so. But I'm watching Microsoft now. If there is any hint of a split, I am a buyer.
Full disclosure: At the time of publication author had long positions in AAPL and GOOG and no positions in other companies mentioned. Positions can change any time.
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This article has 40 comments:
<i>Sorry, that was an editing mistake on the part of SA.-Ed.</i>
And on what basis can you say "Every successful OS right now is UNIX or Linux based." if Windows has 90% of the market? How do you define successful?
I understand that you like Linux. I like it, too. I am using Linux as OS on boxes running my web servers and will continue to do so. But I prefer Windows desktops, as most users do.
I have an investing rule: Never invest in a company with an inferior or obsolete product. Windows' inherent unreliability and insecurity compared to Linux/Unix fits the bill. Furthermore, every product in recent years, from the meltdown-prone XBox to Windows Vista, indicates that they continue to disappoint customers.
In summary, MSFT 2008 = GM 1998.
Chris, when you are still netting $Billions on the Windows O/S every year, it is a little early to throw it out. When you have the most profitable and popular operating system in the world, you stick with it until it it only as profitable as say, Mac's OSx. Based on current trends, that will be 2017 or 2018 at the earliest.
I am a programmer that prefers a Mac, but I still bought a Windows XP license for it to run under VMware for all of the Windows software I need to use on occasion. Many people have. Many will continue to do so because of the huge selection of application software still being developed under Windows.
Now, so much work can be accomplished ( Email, documents, spreadsheets, photo manipulation, programing etc) without using your operating system or local software for anything other than it's web browser.
So the Windows vs Linux vs OS x argument on the desktop will soon be moot. It really doesn't matter what O/S you are using if you are just using a browser.
I guess whenever we see Microsoft cut a point out of Google (which will eventually happen) you'll be calling out the end of Google.
Apple is far more adaptable. They sell their laptops very cheaply at universities, hoping to build an inert customer base among people who will be making money. Microsoft is still a better deal, but they are going to need more agility than they're running now.
MSFT dominates the productivity apps business on the MAC. This was not done by "leveraging" an OS monopoly. Lastly, NT was developed in the 90’s and is technically superior and more "modern" than the UNIX variants you speak of (developed in the 80’s) one example of this is B2/C2 security compliance and more robust memory/object management architecture.
Mike
One thing to remember is Microsoft has really smart people and a dynamic culture internally. If one smart person at Apple can turn it around from crutches, I think many smart people can surely think of something.
To sum it up, I don't quite believe the assertions here.
Trends are noted too. I understand that reading numbers is boring, but here are two trends: profits from desktop business are a little bit down from the last year and losses from Web business are more than twice as big as in the last year.
Now can you tell just WTF that has to do with total market share?
I call BS on the whole story.
That would be inconsistent with being in business 20 years.
"All its victories in competition were achieved by "leveraging" its OS monopoly"
The cash from the OS sales came in handy, but it was not the source of all future victories.
Apple spoof of Microsoft leaves audience in stitches:
www.youtube.com/watch?...
All you need is a national situation to occur where virtually all cash-strapped small businesses and schools runs out of money and are forced to consider/try cheaper/equivalent alternatives (linux, google-apps, etc.).
And all those alternatives have to do is perform as well as Vista...
:^)
--ikk
I agree with your premise that M$ is cracking.. but you completely missed the biggest problem they face.. losing market share ex-US.. the rest of the world is and has moved to Linux. The developed world no longer tolerates the M$ license bullying and the emerging market countries cannot afford the licenses for their millions. When the rest of the world all uses Linux, they WILL dictate that US governments, businesses conform, as the world's user numbers will absolutely dominate.
it is just a question of when, not if.
from a stock investor's point of view, msft is a steal, the company could easily buy itself at current prices - now, what multi-billion dollar company in the world can say that about itself?
regarding linux: people getting computer-illiterate at an increasing pace. you need fail-safe, plug-n-play, easy-to-operate stuff. not linux, that needs sophisticated knowledge of hardware and software, that needs someone to configure and set it up. it will remain a niche until it gets as easily to handle like Windows or Mac OS. Very likely, it will never get there because it does not pay off to anyone to bring linux there. talk about a monopoly keeping competition at bay.
and to the office-via-web folks: I would never ever wirte my word documents or excel sheets aned calculations on some web-based software. first, you have a problem when the connection breaks down. second, and more important, you never know who will have access to your data. corporations won't do that. I won't do either. it's a niche product and will remain one.
On Dec 09 05:01 PM perki wrote:
> Ouch. Billions dude!
>
> Chris, when you are still netting
$Billions
> on the Windows O/S every year, it is a little early to throw
it
> out. When you have the most profitable and popular operating system
in
> the world, you stick with it until it it only as profitable as say,
Mac's
> OSx. Based on current trends, that will be 2017 or 2018 at the
earliest.
>
>
> I am a programmer that prefers a Mac, but I still
bought
> a Windows XP license for it to run under VMware for all of the
Windows
> software I need to use on occasion. Many people have. Many will
continue
> to do so because of the huge selection of application software
still
> being developed under Windows.
If you only make stuff that people feel they had to have, but that they don't really WANT, you have a major problem. IT managers still feel they want MS products, but even they can't turn back the tides of change.
Third, Microsoft may have millions if not billions of money but they also have at least fourteen lawsuits against them! Two lawsuits in the European Union were already lost by Microsoft! The first lawsuit lost by Microsoft was 65 million dollars. The second lawsuit in the European Union was also lost by Microsoft and came to 165 billion dollars! There are two more lawsuits to be held in the European Union against the monopolistic business practices of Microsoft! Here, in the United States, there are approximately twelve lawsuits to be held against Microsoft!
Mega million dollar lawsuits have a tendency to lopside the cashflow/assets equation! For once, Microsoft will have to do four things in order to stay in business. One, they will have to re-invent an Operating System based on REAL security, based on the Unix Server, and NOT on third-party software whose security is a real laugh! Second, they have to sever their connections to Third-party software companies. Third, they have to have a REAL research and development department whose aim is to bring out an operating system based on quality control and not "how fast you can get it out to the market" without working out the "bugs" and flaws BEFORE it is released to the public. They need "think tanks" that think outside-the-box and not be penalized because they are "yes men." And they need consumer advocates, not advocates for the Microsoft that like Toyota came to the PUBLIC and asked what the public wanted and what they are looking for not only for a computer operating system but also what businesses are looking for and what/how they can help them realize that! UNLESS Microsoft does that.....their company and its hold on the Desktop/Laptop/Busines... will steadily be going down every year. And YES, the bottom line of business has always been economics/security and even business out of the need for security/savings will turn to Mac computers or Linux! Unless, Microsoft gains the trust of the public that they arrogantly mishandled.....their company will flounder and slowly die!
yes, the desktop as it is will be a thing of the past one day. but when that day come, Apple will be the innovative company that delivers the replacement.
Sorry, but there are sooo many links into excel and word from other programs, i.e. ERP systems, detailed macro's, etc. The lack of such plug ins and the cost / effort to rewrite the macro's will hold back enterprise adoption of a competing product.
Also, why not upgrade Office verisons, you are foreced to pay a yearly tax (licensing fee), so you may as well use the latest product.
On Dec 09 11:54 PM pgvinter wrote:
> I agree completely with the author. MS is finally beginning to lose
> some market share to other operating systems, but more importantly
> as Alex points out the value proposition for upgrading the OS is
> no longer there. I am still amazed that corporate clients upgrade
> the office suite. Can anyone here honestly tell me that they have
> seen any functional upgrades that regularly get used between office
> 2003 and any later edition of the software? Open office is not really
> getting adapted yet but I feel that once cloud computing becomes
> more reliable and acceptable it can steal away a good bit of microsoft's
> small business customers who do not have the resources for a dedicated
> IT department. The gaming division is essentially a very large low
> yielding investment as it has failed to produce any meaningful revenue
> after having tons of money thrown into starting it. The online is
> even less successful than that. Office sales will begin to slow down
> some time soon as the upgrade cycle lengthens just as it has already
> lengthened for the OS. MSFT had better think up some new revenue
> streams quick if it does not want to begin shrinking soon.
No reasonable investor would use net apps metrics, and then
extrapolate to MSFT crumbling. Well not unless your just a fanboy, using an investment site as a cover for your silly anti-MSFT rants.
The fanboys have spent millions of man hours online crying about MSFT and telling us how it will all end soon because of XYZ.
On Dec 10 12:48 PM User 316869 wrote:
>
> Sorry, but there are sooo many links into excel and word from other
> programs, i.e. ERP systems, detailed macro's, etc. The lack of such
> plug ins and the cost / effort to rewrite the macro's will hold back
> enterprise adoption of a competing product.
>
> Also, why not upgrade Office verisons, you are foreced to pay a yearly
> tax (licensing fee), so you may as well use the latest product.<br/>
>
All the world knows that Microsoft's niche's are ONLY business.
Watch Apple tick up up up and up against Microsoft home usage, media outlets, online commerce, etc. New iphone apps will be another kick in the teeth.
I'm not sure about Google yet. They are advertising and I've never been a fan of ads.
Truth of the matter is that Microsoft is out of gas, no one "needs" a new desktop, and competition has stiffed their ability to "create a new scratch".
If you want to make money, short Microsoft.
That is all.
Most of MSFT's cash cows (MS-DOS, Windows, IE, Office, and Vista) were hijacked, blackmailed, or copied from other companies...it's safe to say that they have done nothing but profit from the ideas of others. Now that this portion of tech is maturing, their competition is wise to the game and are taking it to the late innings for MSFT.
Windows costs somewhere between these two alternatives, yet is far worse on security, stability, system requirements, and efficiency. Its main advantage is the ease with which software can be installed. This is also the disadvantage that allows hackers, viruses, worms, etc. to install themselves. Conclusion: Fail.
Billions on the balance sheet mean nothing if a company's products are inferior or will become obsolete. A lot of people bought into GM or Ford in the 80's & 90's based on their billions in cash. They also thought the product didn't matter (concerns dismissed as fanboy rants) and pointed to billions in sales over the course of decades as proof. Who could have known market share would soon plummet? People who studied product quality, that's who.
The millions of complaining Apple/Linux fanboys are themselves an early indicator something is wrong. World class products don't inspire such opposition.
On Dec 10 01:28 PM jackdee wrote:
>
>
> No reasonable investor would use net apps metrics, and then
> extrapolate to MSFT crumbling. Well not unless your just a fanboy,
> using an investment site as a cover for your silly anti-MSFT rants.
>
>
> The fanboys have spent millions of man hours online crying about
> MSFT and telling us how it will all end soon because of XYZ.
>
>
>
>
>
>
>
Sorry, missed this. Just comparing a set of numbers to what they were last year is not trend, it is a comparison. If the same thing continues to happen, that is a trend :). The fact that losses in web business are twice could signal twice as much investment. Anyways, not to rat hole but I am giving another point of view here.
On Dec 09 07:28 PM Alex Filonov wrote:
> To Vishal Sood:
>
> Trends are noted too. I understand that reading numbers is boring,
> but here are two trends: profits from desktop business are a little
> bit down from the last year and losses from Web business are more
> than twice as big as in the last year.