Microsoft Hides Poor Services Performance from Investors' Eyes

As described in my recent post, "Microsoft (MSFT) Puts 'IT Investment Research' Out of Business", Microsoft’s Windows Live and related services businesses are a train wreck. Back at the end of its 2009 fiscal year in July, Microsoft announced some reorganization changes for this group. On Tuesday September 22, Microsoft provided more details. The answer is not substantive change but simply to bury the Windows Live losing operation in the cash-cow Client Division where its fiscal-year-2009 $520 million in revenue and $560 million in losses become invisible in the cash-cow’s 15 billion spots. Microsoft will also bury Mobile Services over in the Entertainment and Device division ($50 million in losses on $70 million in revenue), with its $7 billion worth of X-boxes and mice. Office Live and the CRM Software as a Service (SaaS) business have been in the Office-brand-dominated Microsoft Business Division (MBD) for some time.

Microsoft will probably give investors some color on how the services businesses are doing for a few quarters but clearly the intention is to bury these dogs the way Microsoft buried its five flailing Dynamics ERP/CRM businesses into MBD--where 90% of the revenue is Office--back in 2006, once it realized it could not integrate the applications products as originally planned when it acquired Great Plains and Navision.

Spreading the losses around means Microsoft executives can continue the "software plus services" mantra out of sight of investors’ prying eyes. According to Microsoft, you should invest in Microsoft because it is going to make money in the future distributing software-enabled services as opposed to the way it has made money for the last 30 years, channeling its software to market via original equipment manufacturers (OEMs) and highly skilled solutions providers. Based on results to date, this is looking less and less likely.

As I explained on September 16, my concern is related to personal experience. But that does not make it less real. I was actually willing to pay Microsoft to get my problem fixed but that was not possible dealing directly with Microsoft. Since my last post, it turns out that Microsoft was unable to back up my website even after escalation of the issue to the “Product Group,” whatever that means. However, as I also said on September 16, some of:

“the other good things about using Microsoft products and services in my experience is that there is always a work around that costs me no money and that the whole combination of blogging engine, email support, website design tools, domain name charge, word processor, spreadsheet processor, presentation application, contact database and search engine costs less than $100 a year. But that’s another good reason not to invest in Microsoft. How can they make any money when the stuff is so cheap, rarely needs support, the support is so poor, and you can’t buy it even if you want to.”

Comments

[User 344793:]

What can you expect from all those large companies where the bosses are doing the most stupid mistakes, are mostly crooks and stay, when the hard working little people is thrown out ????
Being from Europe, do not think it is differentFernand Van Damme

Sep 24 10:32 AM

[Josh B Thom...:]

If SaAS was not going to take billions in loses to figure out, than it would be simple to duplicate. Windows Azure is an attempt to create hundreds of Salesforce.com ideas running on Azure [cloudless sky or sky blue]
That is what "developers, developers, developers!!" was all about, and now we've tweaked it to something unforeseen but same train of thought aka Azure.

Sep 26 11:44 PM

[An Onymous:]

I see a lot of synergy between the organizations and the products that you say are "buried" in them. Personally, I'd say that Microsoft is looking to better monetize these products/properties, rather than mask the losses from the shareholders.

Oct 07 04:04 AM

[Kris Tuttle:]

Ultimately all we care about is return on invested capital versus their funding costs. It will probably never be as good as it once was given the margins of the new businesses versus the old.

However if Microsoft can add SaaS features to their core software products to make them work better consumers and businesses will continue to buy them. Because the business has a very large scale it can generate extremely strong returns.

Microsoft management has been very very poor in the last few years and many of their acquisitions, development efforts, product plans and marketing tactics have been pathetic. However they may be flirting with a move up to mediocrity.

Our analysis of the company suggests the shares are worth $30. This makes the stock a bit interesting but won't be exciting unless they can figure out more ways to grow. Getting more products right will help but they have a long way to go.

Oct 20 03:01 AM