Why Hasn't Microsoft Captured Its Share of the SME Market?

On April 10, 2005 I wrote a piece called Microsoft’s Two Should-Be Acquisition Candidates, which addressed the growth trends in the SME markets. The two candidates were: Autodesk (ADSK) and PayChex (PAYX).

I have to pay close attention to Microsoft (MSFT), since my financial advisor, Diane at Merrill Lynch, keeps urging me to sell the stock. So far I have chosen to hold on to it, but as time goes by and I watch them falter at every step, continuously losing important battles (if not the war itself) I become increasingly concerned.

In this piece I want to go back and explore the status of the SME market and those two companies - Autodesk and Paychex - once more.

The SME market is clearly a growth market worldwide, not only in America. A number of companies have been established, each of whom are leveraging the SME growth trends effectively, and might I say, a lot better than Microsoft. Salesforce.com (CRM), Webex (WEBX), Qualys - to name a few. All three (and many others) offer the value proposition of hosted, On-Demand Software-as-a-Service to small and mid-sized companies around killer apps like CRM, Web Conferencing, and Security respectively. Others, like Rightnow (RNOW), Concur (CNQR), Taleo (TLEO), cover other applications like Customer Service, Expense Report Management, and HR, respectively, in a similar mode.

It is disheartening that Microsoft has not yet executed a compelling strategy to capture its share of the SME growth engine. It tried with the Great Plains and Placeware acquisitions, but neither product has succeeded in becoming a market leader. Meanwhile, both Salesforce.com and Webex are going gangbusters.

Also going gangbusters is my earlier recommendation, Autodesk, which has moved up from $7.5 Billion to a $9 Billion market cap. Paychex too, has grown steadily, and appreciated from $12.3 Billion to $15.23 Billion.

I see Microsoft chasing Google’s (GOOG) tail, doing blocking and tackling, in the same way that I have observed Yahoo (YHOO) chasing Google’s tail. Neither has so far played to their OWN strengths.

This SME - SaaS area is much more aligned to Microsoft’s strength,; the Internet Search area is a lot less so. If they really want to play the Online Advertising market, they need to be a great deal more creative. Read: What is this sea change?

XBox may be a sexy product for Microsoft to experiment with, but the real shareholder value is locked up in other areas, and I submit, SME-SaaS is a critical dimension that the company has put very little emphasis on. And now, with Google’s attack on its Office franchise, they’re playing yet another block and tackle game, which really needs to stop.

Comments

[Malkiel:]

Microsoft is going through a phase of "not getting it" on every front of their business; Vista is not a catalyst and I don't see any catalysts for them until they come to grips with their shortcomings (that's code talk for dumping Ballmer). Your value locked in those shares could be put to better use elsewhere for now...

2007 Mar 09 04:43 PM