Can Microsoft Be All Things To All People? (MSFT)

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 |  About: Microsoft Corporation (MSFT)
by: Douglas McIntyre

Microsoft Corporation's (MSFT) stock has traded in a fairly narrow range since early 2003, and that is not news to anyone. The reason why is the subject of endless debate.

Microsoft's problem is that too many businesses have become "strategic" to them, and too few are merely "tactical". Business school professors would argue that strategic is core to the company's overall mission and tactical activities merely play a supporting role for the main engine of a company's growth.

Microsoft has divided its corporate structure into seven units. This is changing and some are combined or reorganized, but it is illustrative to look at them as they have been set up and ask how much each contributes to the overall Microsoft pot.

Microsoft's 10-Q defines the seven units as Client (Windows XP Professional and Home), Server and Tools (Windows server and Microsoft SQL server), Information Worker (Microsoft Office, Visio, Live Meeting and OneNote), Business Solutions (enterprise resource planning, customer relationship management software and Microsoft Partnership Program), MSN (e-mail, instant messaging, MapPoint, portal and search), Mobile and Embedded Devices (Windows Mobile and Windows Embedded OS), and Home and Entertainment (XBox and platforms for interactive TV). Within each unit, a segment of the business may dominate its revenue contribution. Microsoft Office generates 85% of the Information Unit top line.

The Client, Server and Information units are really, when put together, Microsoft's core old line business of licensing software for PCs, servers and related devices. Client has a 77% operating margin in the quarter that ended December 31. Server was at 34% and Information at 73%. These business do not grow fast, about 10% year-over-previous-year. But, they are what Microsoft has been for years, the dominate provider of PC and server operating systems and related products.

Jack Welch once told me something that he said to almost everyone. If GE (GE) has a unit that was not No.1 or No. 2 in global share for its industry, he wanted no part of it. Welch violated his own rule from time-to-time, but his commitment to it is what lead to the tremendous growth of GE while he was CEO.

One has to ask what Microsoft is doing in the portal business, the IPTV (internet TV)
business, the game console business, and the cell phone business. The company has an explanation for each. MSN and search are strategic because they drive contact information and behavior information on tens of millions of people. This in turn is useful in building functions into the company software and identifying customers. Does the company really need to compete with Google (GOOG) and Yahoo Inc. (YHOO) in the portal and search space? Is it essential? MSN revenue grew 17% in the most recent quarter, but margin dropped 33%. Its competitors clearly did much better.

Microsoft wants to get more deeply into the online music business and customized business management solutions for productivity. Microsoft wants its software to be the standard for high-definition DVDs.

In the meantime, the new version of the OS flagship, called Vista, will be released late. Investors weren't happy. Maybe the company is stretched, even with its size and resources.

Microsoft has a multitude of problems. The flat stock price makes it harder to get and keep employees. Antitrust bodies around the world are looking for ways to milk a few hundred million in penalties for real or perceived monopoly practices out of Redmond. The search engine companies are pushing to stay ahead in their core "strategic" business, which really are strategic. Companies like Sony Corp. (SNE) are desperate to rule the video game market.

Microsoft may have to do a bit of retrenching. The most radical form of this is breaking the company up, an oft-mentioned remedy which seems very unlikely. But, the idea of trying to dominate ten or fifteen industries that have solid, capable competitors is almost certainly impractical.

The sooner the management at Microsoft comes around to this, the better.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited site on the web, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.