Microsoft Squandering Cash on a Meaningless Product

Microsoft (MSFT) has launched its new product “Bing”, which is supposedly a new search engine. From a product positioning standpoint, it appears that it designed to compete with Google’s (GOOG) search engine. I do not know the nuances of Bing’s capability, and I do not intend to make a relative comparison for pros and cons. In this product launch what caught my attention is the amount of money being spent on its branding exercise, its promotions, its marketing, etc. Media reports suggest that Microsoft has allocated $80million to $100million for this exercise.

In my post on opportunities of technology dividends, I had mentioned that I am wary of Microsoft’s habit of squandering cash in meaningless acquisitions (i.e. meaningless projects). I believe this is a perfect example of squandering cash on meaningless projects.

I just do not understand what Microsoft wants to do. Does it want to compete with Google Search and take some business? Does it want to develop it organically, or does it want to acquire Yahoo (YHOO) Search? Or Does it want to compete with Apple (AAPL) (remember Zune!)?

Why Microsoft does not understand that a mere attempt to replace an already established product is not going to work? How many times it has failed? It’s products (whether Bing or Zune) does not bring anything new to the table for consumers? Assuming that it has few extra features, but then how long will it take for Google/Apple to replace it?

In times of recession, what do you think of $100 million spending on marketing exercise for re-branded or re-formatted product? Can this be justified?

We all focus on Microsoft’s ability to generate cash, its towering presence in desktop and laptop operating systems, and office servers. There is no doubt it has wide moat in that domain. But it has failed to leverage that for next phase of growth. It continues to bank on growth of its market segment.

Microsoft with its towering presence has the ability to shape the new technology boom. It should get rid of its fixation with apple pies. It should stop googling around. It should use its operating system capabilities and take that to newer areas like industrial applications and energy.

Microsoft of this decade wants to be “one of others”, instead of “the only one”. Instead of using its resources to create new market segments, it is more interested in competing in existing markets. This not only shows that Microsoft has run off ideas, it also demonstrates management is not able to adapt to new realities. It has failed to leverage its existing might to create something that does not require shouting.

I can see parallels between Microsoft and Detriot’s three musketeers. First, they became bankrupt in ideas, and after sometime they became financially bankrupt. Microsoft is showing all signs of bankruptcy in ideas.

Microsoft has loads of cash, and it continues to generate lots of cash. But it only knows how to waste it. It is for these reasons I am wary of considering it a potential dividend growth company.

Full Disclosure: No position in any companies mentioned in this article.

Comments

[Roger Knights:]

I suspect that influential members of the board of directors have the bean-counter's attitude that throwing money ("allocating capital") at a product sector should "generate returns," the way it does in an economics textbook.

Jun 09 04:33 AM

[Dividend Gr...:]

I am a non-believer of technology dividends. Most technological innovations come and go, which makes it difficult to predict the next Microsoft, Cisco or Intel. The companies that truly benefit from technological breakthroughs are users of technologies, as they get to reinvest in their business by making it more efficient, which translates into higher earnings are hopefully higher dividend growth.

Jun 09 07:59 AM

[inSearchOfV...:]

Yesterday, I saw an ad on TV for ”Bing” and thought to myself that Microsoft is spending a lot of money advertising this product. Also, it must have spent billions of dollars developing the “Bing”. I hope some good comes of it, and does not end up like “Zune”. This article reminded me that companies that venture out of their main line of business are seldom successfully and often end up destroying their current line of business as well. The article rightly points out that Microsoft’s moat lies in operating system; I guess this is where they should concentrate to create wonderful products. But , it has traditionally been Microsoft’s strategy to take a popular product from the market, then redesign them, enhance them and give users something more than exceptional, like the Microsoft Office suite of products.

Jun 09 08:37 AM

[DmytrenkoArtem:]

author criticizes MSFT but he dont have inside look on it!!! do you know marketing target of Bing? Do you know how Bing will be unite with other MSFT products? Do you know anything about long term MSFT strategy?

Jun 09 08:59 AM

[LA Tech:]

Businesses use MSFT because it is the industry standard for commercial business applications.

Businesses don't use GOOG products because nobody knows that Google provides business applications (GoogleApps).

If you asked ten people about products/services Google provides, all ten would say search.

If you ask ten people about products/services MSFT provides, every answer would be Word/Excel (Office).

Google has a much tougher road ahead to prove it has the services and advertising to compete with MSFT.

Today, Google cannot market anything successfully. Very strange for the largest ad agency in the world.

Jun 09 10:32 AM

[spqrusa:]

I agree with LA Tech that GOOG has a much tougher road. As a software developer, I would still rather deal the MSFT or AAPL than GOOG. The App Engine and Android developer experiences are quite amateurish. MSFT and AAPL are way-way-way ahead of GOOG in just about every aspect as a technology provider company.

The other aspect of BING that is missing here is that MSFT needs to dent GOOGs mind share. BING is largely a marketing exercise - the technology side of BING is quite unremarkable. MSFT needs to keep GOOG from turning into a company that can compete into MSFTs core markets.

Jun 09 11:37 AM

[CharlieZA:]

Microsoft should rather reduce the price of it's software, to increase market share, instead of wasting so much of it's profits on fruitless endeavors

Jun 09 12:15 PM

[sbear:]

tech is full of failures, yet some of microsoft's efforts to replace previously available operating systems and other software has been successful enough to counterbalance all the failures

Jun 09 12:51 PM

[RLLH:]

While I must agree that it seems futile to develop a new search engine, I find it hard to criticize a company for attacking an established competitor in a market. Did Apple make a mistake going after Nokia, RIM, and Palm? Should Toyota have assumed GM had a strangle hold on the US auto market in the 70's?

History seems full of companies who were too well established to be vulnerable. Until someone tried.

Jun 09 02:23 PM

[psychicfriend:]

With all due respect, I think this article is full of crap - and I say that as a frequent detractor of MSFT.
First off - and this is a shocker - Bing works. I have been torture testing it, and it genuinely seems to produce better search results than Google. Of course that doesn't justify getting into the search business by itself.
What does justify it? I figured that one out yesterday when I looked over the new release of MS Visual Studio 2010 (their flagship development system). There are deep hooks and APIs that let developers connect Bing to Windows 7 and Office.
I personally think that the first sign of improvement at MS was the release of the re-vamped Office in 2007. The same product lead who delivered that was put in charge of Windows 7, and if she has managed the same kind of turnaround then it could be the beginning of a new public perception of MS in the business and consumer world.
Finally, tie those together with a search engine that works and is deeply connected to Office and W7, and you have a winning combination that is beloved by everyone but the Justice Department.
Could it happen? Maybe.
FYI I hold no positions in MS and invest in nothing but ETFs.

Jun 09 02:51 PM

[weiwentg:]

Remember the peanut butter memo at Yahoo? The same applies to Microsoft. They're wasting a lot of money on non-core products. I'd like Microsoft otherwise but I'm staying away.

Jun 09 03:10 PM