Microsoft (NASDAQ:MSFT) is one of the biggest and most well known technology and software companies on the face of the earth. It has been around since 1975, is one of the most valuable companies in the world, and is generally regarded as the world's largest software maker. The company had its heyday in the 80's and 90's, sucking up the majority of market share for operating systems and Office suite products worldwide. For the first time recently, Microsoft ventured into the realm of becoming a hardware vendor, when they announced the Surface tablet.
As a recent investment, Microsoft has returned 15% over the last twelve months and 30.3% since the beginning of 2013. The stock opened up 7.4% today on news that Steve Ballmer would be stepping down from his position at the company.
Microsoft was no stranger to blunders under the helm of Ballmer, most recently massively screwing up on Windows 8 to the point where they needed to change "key aspects". They went to the press and (once again) admitted they had botched the software, and that they were in the process of creating patches and changes. As usual, Microsoft aficionados never even seemed to notice. I noted this in my article "Microsoft Takes a Mulligan, no One Notices or Cares":
Microsoft is a company that has a mentality of screw-ups dating back as far as this investor can remember. Rather than hurl insults and bash the stock, people that are long MSFT almost find it morbidly endearing at this point. The Windows 8 problem will work itself out, nary a person the world over will notice it, and Microsoft will go on to creating the next "do-or-die" operating system that will take them 5 years and will need to be patched to death after its release.
Aside from PCs, how does Microsoft continue to innovate and grow its company and (more importantly) its stock price? Well, you have the Windows Phone and then my personal favorite, the Xbox.
It was once my contention that the main reason that I liked Microsoft as a company was due to the success that it had with Xbox, among other things. They lost me after they announced the Xbox One - I watched the speech and presentation in its entirety, convinced that after 10 years of gaming loyalty that this next generation of gaming systems was going to be my first realm into the world of Sony's (NYSE:SNE) PlayStation.
Want to judge how well Microsoft's Xbox launch went? Sony stock finished the day up about 8% after the Xbox One reveal. The initial reaction seemed to be Sony bulls betting on Playstation 4 blowing Xbox out of the water. Microsoft's stock was down 2.5% immediately after the Xbox One reveal. So, it's safe to say that the Xbox One wasn't exactly what Mr. Market was expecting, either.
So, as someone that really wanted to give Microsoft a chance, I found it impossible to convince myself that things were really heading in the right direction. I argued that what Microsoft needed was groundbreaking evolutions into not only gaming, but mobile and tablets - not to mention retail.
It was announced Friday morning that Microsoft's CEO and long-time right hand man to Bill Gates, Steve Ballmer is going to be stepping down from his position. Like myself, the market instantly liked this news. CNBC.com reported:
Microsoft's CEO Steve Ballmer shocked markets on Friday by announcing he would step down within 12 months, ending a tenure marked by the software giant's declining dominance and struggles to keep pace with its competitors.
In a statement, Microsoft said Ballmer would retire "upon the completion of a process to choose his successor. In the meantime, Ballmer will continue as CEO and will lead Microsoft through the next steps of its transformation to a devices and services company that empowers people for the activities they value most."
Investors applauded the news by sending Microsoft's shares surging in premarket trading by 7 percent -- adding a whopping $24 billion to the software company's market capitalization from Thursday's close.
Ballmer missed the boat a couple of times as CEO, letting Microsoft fall to the back of the pack in both mobile and tablets - as competitors like Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF), and even BlackBerry (NASDAQ:BBRY) pulled out in front of the struggling company.
Aside from these misses, the company stock has performed pretty well of late; but not nearly as well as it could should it take a paradigm shifting approach to both mobile and tablet. Ballmer, while sometimes eccentric, wasn't exactly an "outside the box" big thinker. Ron Johnson, however, happens to be.
Also, Johnson, former Apple Retail Executive turned J.C. Penney (NYSE:JCP) "disaster of the 21st century" candidate, happens to recently be out of a job.
Hedge fund manager and J.C. Penney board member Bill Ackman was the original suggestor to put former Apple executive Ron Johnson at the helm of J.C. Penney, citing that Johnson had a vision to transform the stores to an upscale look and feel. When he started, it was argued by Ackman that Johnson's "record of retailing success makes him the ideal leader to fix JCP."
While Ackman may have been ideologically correct, J.C. Penney was in too vulnerable of a position to start in on its cash pile and make the semi-groundbreaking changes that Johnson wanted to put in place. So, while Johnson's vision may have technically been good and worthwhile, the company was in absolutely no place to implement or execute it without doing JCP and its investors more harm than good.
Microsoft, on the other hand, has its feet dug into the ground significantly more than JCP did. Let's take a look at a "back of the napkin" SWOT analysis of Microsoft's business, and then we'll look at where we can plug Ron Johnson's "big thinking" in:
- Large cash position and plenty of free equity to make necessary moves
- Continued reign of dominance for market share in operating systems and Office suite
- Brand recognition planet-wide
- Taking a stab "out of the box" with Windows 8 for PC/Tablet/Phone
- Retail stores are embarrassing knockoffs of Apple Retail
- Software continues to be laden with issues
- Xbox One seemingly not well received from the get-go
- Internet Explorer is embarrassing
- No large position in mobile/tablets
- Need to continue to push Windows 8 to mobile, which according to trusted contributor Michael Blair, is impressive:
Microsoft Windows 8 for phones is a lot better than I imagined. I bought a Huawei Windows 8 phone from Wind Mobile to test it out. Without any plan and unlocked the phone cost $249. It is a delightful phone with a light but comfortable feel and a clear screen.
- Continue to provide lower cost alternatives to the iPad, and continue to use cheeky advertising, like they have of recent, comparing the two and making MSFT's advantages crystal clear.
- Venture into the "ecosystem" play that Google and Apple are already moving into. MSFT is getting there with their in-car SYNC system
- Mac picking up significant PC market share
- Google's (NASDAQ:GOOG) Chrome becoming world's default browser quickly
- Ubuntu is available for free and runs on both Mac and PC native systems
- Continued regression from the Windows 95 era
So, there's a few things on this quick list that stick out to me immediately. The first, obviously being the Microsoft retail stores. Johnson was out of his element with retail clothing, hence screwing things up at JCP while trying to make them "classier". This is the kind of suave and polish that Microsoft has been looking for in recent years, eclipsed by the "beauty" of competitor Apple's products. MSFT is getting the urgency in needing this, as you can see from their logo change, store designs, and product designs. However, they need something all their own that's going to separate them from Apple in the retail space. If they continue to just try and carbon copy Apple's every move (arguably how they achieved success in the first place), the company doesn't stand a chance. The company needs a "big thinker", and Ron Johnson should be the guy for the job.
SA contributor Benedict Evans does a really good job of putting on paper Microsoft's regression from its "magnum opus" which was the Windows 95 release and ensuing hoards of cash that followed:
Just as overnight success can take a lifetime, overnight collapse can also take a long time. There are founders creating companies today who weren't born when people were still actually scared of big bad "Micro$oft." It stopped setting the agenda 18 years ago. Windows 95 was a moment of victory, but it was also the peak: It came just at the moment when the Internet started taking off, and Microsoft was never a relevant force on the Internet despite investing tens of billions of dollars.
But you needed a PC to use the Internet, and for almost everyone that PC ran Windows, so Microsoft's failure to create successful online services didn't seem to matter. Microsoft survived and thrived in the PC Internet era, despite appearing to be irrelevant, by milking its victory in the previous phase of the technology industry. PC sales were 59 million units in 1995 and rose to over 350 million in 2012. Of course, that's now coming to an end.
There's no doubt that Benedict "gets it" and has a firm grasp on how Microsoft got to where they are today - the 18 year hangover after the party - but I disagree with him that it's going to lead to Microsoft's eventual demise.
Johnson would also be the type of guy who would be perfect for leading MSFT into the "ecosystem" play. To take a company focused only on computers and move it into the realm of the other products you use and interact with on a daily basis again requires "big thinking" - Johnson fills this niche.
Another area that needs big thinking is going to be mobile, one of MSFT's biggest areas of opportunities. The company needs to do something drastic, like announce a wicked partnership with someone that already has a big niche in the mobile market. They need to get Windows 8 on more phones, on more networks, quicker.
Finally, they need someone that's not going to be scared to come in and change the status quo at the company. Johnson showed us with JCP that he's the type of guy that has vision and is going to implement it - even though I was mostly critical of his work with JCP. Even if Johnson isn't brought in, as long as the Board can fill Ballmer's void with someone who can think big and has some appeal, Microsoft is poised to make significant progress as a company. After numerous blunders and at a crucial point in Microsoft's history as a company, I welcome Ballmer's exit, and remain bullish on Microsoft going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.