Microsoft’s Pig in a Poke Problem

I’ve been a Microsoft stock booster this year, arguing that the company was heading into the strongest product cycle in recent memory, driven by Windows, Office, and SQL Server upgrades, plus, plus.

But this latest news kills the story. By, in effect, diverting all the windfall profits from these new product releases into much more questionable businesses — Xbox, Windows Live, etc. — Microsoft is asking shareholders to buy a pig in a poke. It wants people to ignore how poorly it has done in retooling itself in recent years, and then let it burn an entire product cycle’s profits in pursuit of Google, as well as the gaming market.

No mas. Some may buy this, but most thinking shareholders are going to say no way. There are many things you can say about Microsoft, but one thing is relatively certain: The further it gets from its Windows hegemony the worse it does. And by chasing after Google in search and ad serving, and after Sony et al., in games, Microsoft could hardly be further from home turf.

Related posts:

  1. Microsoft? Meet Microsoft
  2. The Three Big Microsoft Myths
  3. Brad Silverberg: Microsoft’s Price Problem
  4. Hasta la Windows Vista, Baby
  5. Microsoft’s Annuity Problem

Comments

  1. GIven one view might be MSFT has let the lunatics run the farm so why does Scoble need to defend not letting the financial boys get the blog habit so maybe some of us get a shot at understanding the reality of what’s going on here. But no – regulation – compliance. Great.
    Having said all that, your analysis is potentially dynamite. If I combine that with what I already know from Mini-Microsoft you know what? Your view makes perfect sense. And I can probably do a reasonable job of figuring out how the numbers stack up from the filings anyway.
    So do investors really need MSFTs finance guys for this? Damned right because when numbers we’ve NOT previously seen start getting attached to things, companies get twitchy. And in a world striving for transparency yet apparently yoked to 404….??

  2. What’s even more remarkable is the press release is misformatted when viewed through Firefox. A minor but very bad indicator.

  3. mb says:

    It’s an arms race that only Google and Microsoft can afford to participate in. The rest of the pack – eBay, Yahoo, Amazon – will need to partner up in order to keep up.
    While Microsoft has enough cash to win the arms race, it’ll take more than a big checkbook to win this one. Google’s got a big head start in building out a massive, global, distributed infrastructure. Microsoft has a lot to learn, and a lot of mistakes to make, before they can scale like Google scales.
    Since Microsoft can’t innovate as fast as Google, what makes them think that a $2 billion cluster of servers is gonna do the trick? By the time they get it running, and a Live Drive offering to run on it, it’ll look dated.
    MSFT investors may be buying a pig in a poke, but some interesting transactions are going to happen before this story is over. I’d be looking at Amazon and Akamai as possible acquisition targets in the next two quarters as the industry consolidates, since the smaller guys can’t keep up with the arms race.

  4. Franklin Stubbs says:

    Ballmer throwing chairs and threatening to “f*ng kill Google” comes to mind… smells like software jihad.

  5. Well put, Franklin. Ramping up spending so much and so unexpectedly feels like an emotional decision from someone who spent the prior fifteen minutes throwing chairs.

  6. Paul, I blog from an enterprise buyer, not an investor perspective and I love what appears to be MSFT’s bold move …too many s/w vendors are content spending roughly 10% on R&D and 35 to 50% on SG&A and the rest on dividends or M&A.
    http://dealarchitect.typepad.com/deal_architect/2006/04/microsofts_rd_i.html

  7. Vinnie – I take your point, and while I was taking an investors’-eye-view of this, that doesn’t mean I wasn’t thinking about what’s good for business customers. After all, >90% of Microsoft’s profits come from Office and Windows, and better than 80% of the paying customers for the former product are in the workplace. Put differently, there is no non-enterprise story when it comes to talking about Microsoft, at least not from a profits perspective.
    The preceding said, I’m dubious that this is anything for enterprise customers to get excited about. First, a significant chunk of the spending is for Xbox, which has no enterprise relevance. Second, while Microsoft is building up its hosting capabilities, it demonstrably has Google squarely in its sights, which is another way of saying it is more focused on consumers than on business customers. Finally, until Microsoft demonstrates some skill at building hosted applications the idea that the company will back into that skill via being infrastructure vendor first strikes me as optimistic and dubuous at best.

  8. if all you say pans out it would be huge waste. My hope is they use it to build a massive grid and take SaaS way beyond just a Google type focus…and may be even Hardware as a service for SMEs – many would buy processing cycles and storage on a metered basis. Google is an apps vendor but has shown promising infrastructure and telecomms capability – no reason Microsoft cannot either.

  9. Nitin Gandhi says:

    Microsoft’s online strategy is flawed, but they have a bunch of capital projects coming online shortly. SQL Server 2005, WinFX, Office System and Vista. That is pretty much all of the real Microsoft being recycled in two years.
    Most organizations and homes are holding out for Office System and Vista. Each of these projects has 5 years of R&D behind them and 5 years of revenue ahead.
    Further, now that the real brains are getting free, they want to chase Google. How is this bad for Microsoft, cosidering they are great at chasing?

  10. Michael Robinson says:

    Paul: “Finally, until Microsoft demonstrates some skill at building hosted applications the idea that the company will back into that skill via being infrastructure vendor first strikes me as optimistic and dubuous at best.”
    The epic migration of Hotmail from FreeBSD to Windows is legendary in tech circles, up there with the story of Moses leading the Israelites around the desert for 40 years trying to find the Promised Land.
    Which brings us to point two: even if they do figure out how to build and run Google-scale hosted applications, they’re going to insist on doing it on top of a technology stack which, to put it charitably, is ill-suited to the task.

  11. cs says:

    @9: WinFX? you gotta be kidding me. the original winfx would have been something to write home about, but the current incarnation (the one probably going into vista) has NOTHING to do with the first vision any more.

  12. Rob Relyea says:

    @11: Don’t agree with your characterization of WinFX here.
    Original announcement of WinFX at the Professional Developers Conference in Fall of 2003 included WPF (“Avalon”) for Presentation, WCF (“Indigo”) for Communication, and “WinFS” for Data/Storage/etc…
    Since then, “WinFS” has fallen out of the v1 (actually called v3) plan for WinFX.
    But we have added support for Windows XP and added 2 nice technologies Windows Workflow Foundation (WF) and Infocard, which are both getting traction with users and analysts.
    Yes, WinFX as we will ship has changed…but your comment is not quite accurate here…it has more than NOTHING to do…
    Thanks, Rob Relyea
    Microsoft Program Manager, Windows Presentation Foundation Team (WPF/”Avalon”)
    http://spaces.msn.com/rrelyea