Microsoft's Lost Decade

[M Paquette]

Microsoft is completing the long transition from a growth company to a value company. This isn't a transition you want to hold a stock through, but coming out the other side, you get a company suitable fro the widows and orphans investments, a reliable, plodding dividend payer, if they can only stay relevant.

[Meadbh]

This week I decided my 9 year old Toshiba laptop is too big and bulky and needs to be supplemented with a lighter, more responsive device that will do what my iPad does not. I ordered a Mac Air. I will put MS Office Pro on it, but will probably browse with Safari.

Last weekend at a dinner party someone said: "What has Microsoft done in the past 10 years?" We really couldn't think of anything innovative.

Microsoft has evolved from being an innovative growth company to being a high revenue stable company that generates dividends It's a normal part of the lifecycle of a successfully company.

[Running_Man]

I am more of a numbers guy and not so much of a story guy, although I like to read the stories to see if they jibe with the numbers. That Microsoft is huge is undeniable, despite this they have increased net income from 10 billion in 2002 to 23 billion in 2011. At the same time operating margins have remained stable exceeding 40% and return on shareholder equity has increased from 20 percent to 40 percent. Their effective tax rate has declined from 32 percent to 18 percent. What has happened is the PE ratio has declined from 33 (it was 53 in Y2K) to 11 today. I really like Microsoft, they exceeded expectations in March and until the numbers show a decline in financials I will go along with Value Line which expects an annual average increase in the dividend of 17 percent.

With 60 billion in cash there are very few companies with the financial strength of Microsoft. The lost decade does apply to the stock price itself but as a corporation I think it has been one of the very best run ones. This stock along with "O" realty and IBM are the 3 leading candidates for the next stock add to my portfolio. And I type this as read these threads on my Macbook Pro, an obviously superior product to any other windows PC I have ever had.

[clifp]

Quote:

Originally Posted by Midpack No one is counting them out, simply pointing out they've gone nowhere in the last decade, where they were once a dominant colossus. They were aware of Amazon, Google & Facebook and dismissed them all. Ballmer actively ridiculed the iPod, iPhone & iPad when they were introduced. The days where they can wait for someone else to develop products and markets and then take them over with "me-too" products appear to be over (see Zune, MSN Messenger, Bing?, etc.). They've had several OS updates, their bread and butter, that were considered flops (Vista, Me). Whether they will become more relevant again as they say, time will tell...

But a tripling of revenue and almost a tripling of profits in decade is hardly going no where. I think it is almost impossible to be the "It" company for an extended period of time. Microsoft had 15 years as the top dog not a bad run. Comparing them to Apple is a bit unfair since they are clearly the most successful company in our lifetimes.

[nun]

Microsoft isn't an innovation company; they bought DOS and the Windows interface wasn't original. I think they'll end up like IBM (which is ironic and a pretty good place to be) doing consulting and large servers.

I also think that Facebook is a "paper tiger" and when the next new thing comes along it will become irrelevant almost over night.

[nun]

Quote:

Originally Posted by Meadbh I ordered a Mac Air. I will put MS Office Pro on it, but will probably browse with Safari.

Have you thought about OpenOffice? It works great on my Mac.

[ItDontMeanAThing]

Devil's advocate here?

MS and Apple weren't competitors until non-trivial numbers of people decided to buy iPads instead of another Wintel notebook. Apple was a niche player, occupying areas that were outside of MS's strategy. Then two of those niches GOT HUGE.

One way to look at MS's attempts with consumer electronics is they learned about areas outside of their core business. Things like Zune were R&D. MS wasn't late to the game, they were in a different game. A hugely profitable one.

Apple has grown enormously by seamlessly integrating their hand held devices with their home computing environment. I got nothing but respect for how they implemented their vision, making devices which fit people's needs exquisitely. Those devices just happen to be computers and so are eating into the Wintel market. Has Apple awoken a sleeping giant? MS wasn't sleeping, just arrogant. They thought that if Apple ever took non-trivial sales from their home desktop/laptop market they could respond, enter the market late and take a large portion of it. I don't think so.

Apple's ecosystem-like integration combined with no concern for backwards compatibility are two things MS can compete with only by abandoning their core philsophies. Until MS announces they've funded a startup who's mission statement is to use MS's money to put MS out of the home computing and consumer electronics business they will remain a minor player in those markets. Kodak was once the leader in digital imaging. They should have funded a startup, transferred their digital technology to it and said 'now put the film division out of business'. But as somebody once said "Radical ideas that are rejected by institutions become institutions that reject radical ideas."

[ItDontMeanAThing]

Quote:

Originally Posted by nun Microsoft isn't an innovation company; they bought DOS and the Windows interface wasn't original.

MS bought DOS because it was the only way to seize upon an IBM blunder that gave MS the keys to the kingdom. They had the talent to build an operating system, but they needed one Right Now!

Like Jobs, Gates visited Zerox PARC to see the future, which included a working graphical user interface. Jobs got it and built very expensive, very slow computers that almost killed the company. Gates got it and knew the CPUs available in the next few years wouldn't have the power for a graphical interface.

[nun]

Quote:

Originally Posted by ItDontMeanAThing MS bought DOS because it was the only way to seize upon an IBM blunder that gave MS the keys to the kingdom. They had the talent to build an operating system, but they needed one Right Now! Like Jobs, Gates visited Zerox PARC to see the future, which included a working graphical user interface. Jobs got it and built very expensive, very slow computers that almost killed the company. Gates got it and knew the CPUs available in the next few years wouldn't have the power for a graphical interface.

Agreed. I see MS as looking to take existing stuff, repackage it, and sell it on. That's produced some great successes, but they've also missed the boat of a lot of stuff. Apple and Google create new stuff and take risks.......I can't remember the last time I was excited by an MS product......oooooo Windows 8, another version of Office and a keyboard that attaches with a magnet. MS just isn't sexy anymore. They should realize that they have become IBM.

[GrayHare]

Quote:

Originally Posted by Meadbh Last weekend at a dinner party someone said: "What has Microsoft done in the past 10 years?" We really couldn't think of anything innovative.

Kinect is recent and quite impressive. From Wikipedia: "After selling a total of 8 million units in its first 60 days, the Kinect holds the Guinness World Record of being the 'fastest selling consumer electronics device'."

[explanade]

Quote:

Originally Posted by clifp But a tripling of revenue and almost a tripling of profits in decade is hardly going no where. I think it is almost impossible to be the "It" company for an extended period of time. Microsoft had 15 years as the top dog not a bad run. Comparing them to Apple is a bit unfair since they are clearly the most successful company in our lifetimes.

Most of that comes from Windows and Office, which were established by different set of management.

They haven't been able to find a hit outside of those two businesses. Instead they've been trying to replicate hit products from other companies such as search advertising or iPhone (Windows Phone is using the same strategy).

[Hamlet]

People need to realize that Microsoft is not a consumer company (outside of Xbox). Their earnings are driven by the corporate market.

Large companies give almost all of their corporate employees a laptop with Windows and Office on it. Increasingly, they run their e-mail on an Exchange Platform. Their servers are running Microsoft Server as an OS and SQL as a database platform. The same companies are rolling out Lync and Sharepoint installations as well.

Unless Corporate America decides to move away from Microsoft, Microsoft will continue to make massive amounts of money. I see no indication that the typical company is considering reducing their dependence on Microsoft products. If anything it is increasing.

The home PC market can wither away and I don't think it makes Microsoft a bad investment at this price.

[nun]

Quote:

Originally Posted by Hamlet People need to realize that Microsoft is not a consumer company (outside of Xbox). Their earnings are driven by the corporate market. Large companies give almost all of their corporate employees a laptop with Windows and Office on it. Increasingly, they run their e-mail on an Exchange Platform. Their servers are running Microsoft Server as an OS and SQL as a database platform. The same companies are rolling out Lync and Sharepoint installations as well. Unless Corporate America decides to move away from Microsoft, Microsoft will continue to make massive amounts of money. I see no indication that the typical company is considering reducing their dependence on Microsoft products. If anything it is increasing. The home PC market can wither away and I don't think it makes Microsoft a bad investment at this price.

exactly, they have become IBM, nothing wrong with that as long as they know it and don't waste resources trying to compete with Google, Amazon and Apple. They are so far behind on the publishing and music side of things they might as well give up on regular consumers and concentrate on the corporate world. Of course they have stiff competition there too with the growth of Linux and all the Unix flavors.

[dizzy]

Quote:

Originally Posted by Hamlet People need to realize that Microsoft is not a consumer company (outside of Xbox). Their earnings are driven by the corporate market.

Apropos nun's comment as well above, perhaps the "people" that need to realize this are Microsoft's management, so they can stop wasting money on retail stores, and consumer features & products!

Seriously, though, I think Microsoft is clearly worried about the sustainability of the Windows and Office businesses in a "post-PC" world. They are already seeing it happen in the consumer space. I think you can arguably say that the consumer computing business has definitely moved beyond the PC, where handheld devices take an increasingly significant, if not central role in the consumer's computing lives. It's less clear what the "post-PC" world means to businesses. I'm sure Apple hopes that businesses will increasingly turn to iPhones and iPads with mission critical business apps, rather than just a PC on every desk. Microsofts work on a rumored Office for iPad is probably a hedge against this. All in all, I don't think its crazy at all for Microsoft to make consumer facing investments as the world moves away from mouse & keyboard based computing, its just that their track record for anything other than Windows, Office, and Servers is quite poor, and in fact, has lost money. Not a good sign.

[farmerEd]

Quote:

Originally Posted by dizzy All in all, I don't think its crazy at all for Microsoft to make consumer facing investments as the world moves away from mouse & keyboard based computing, its just that their track record for anything other than Windows, Office, and Servers is quite poor, and in fact, has lost money. Not a good sign.

I mostly agree with that statement, but don't forget the success of the Xbox, which generally has been considered a very successful product for Microsoft, and is clearly a retail consumer product.

[Midpack]

Some perspective?

[nun]

Quote:

Originally Posted by farmerEd I mostly agree with that statement, but don't forget the success of the Xbox, which generally has been considered a very successful product for Microsoft, and is clearly a retail consumer product.

...but Xbox is a tiny fraction of MS profitability.

[Hamlet]

I've been amazed at the money they've wasted on the online division.

It seems like it should be obvious by now that Bing will never be successful, but they keep dumping money into it.

I was just glad that the Yahoo purchase fell through. That was a really bad idea.

Quote:

Originally Posted by nun exactly, they have become IBM, nothing wrong with that as long as they know it and don't waste resources trying to compete with Google, Amazon and Apple. They are so far behind on the publishing and music side of things they might as well give up on regular consumers and concentrate on the corporate world. Of course they have stiff competition there too with the growth of Linux and all the Unix flavors.

[Hamlet]

I don't think most business applications are well suited to handheld devices. I've seen very little movement or interest in corporate America in changing their fundamental structure. They are adding support to get e-mail to phones and IPads, but they don't seem interested in messing with their core application on them.

Large businesses are very slow to change. I'd be more worried about businesses moving away from PC's if they'd ever actually stopped using mainframes

Quote:

Originally Posted by dizzy Seriously, though, I think Microsoft is clearly worried about the sustainability of the Windows and Office businesses in a "post-PC" world. They are already seeing it happen in the consumer space. I think you can arguably say that the consumer computing business has definitely moved beyond the PC, where handheld devices take an increasingly significant, if not central role in the consumer's computing lives. It's less clear what the "post-PC" world means to businesses. I'm sure Apple hopes that businesses will increasingly turn to iPhones and iPads with mission critical business apps, rather than just a PC on every desk.

[studbucket]

MSFT employee here. Lots of thoughts here, some which I see as true, some which I disagree with, but I have my biases, so there's really no point expressing them, as I'm just a homer

However, just wanted to reply to Hamlet:

Quote:

Originally Posted by Hamlet I've been amazed at the money they've wasted on the online division. It seems like it should be obvious by now that Bing will never be successful, but they keep dumping money into it. I was just glad that the Yahoo purchase fell through. That was a really bad idea.

As far as I can tell (I don't work in the online services division), Bing doesn't exist to make money. Sure, it's a goal of the business, and they are creeping toward the black. However, what they really are about is improving the products within the company. Some recent examples include the voice and search integration into Windows Phone and XBox and some of the Bing apps for Windows 8.

I'm sure there's more coming in the future, given that there's tons of smart people and more going on in Bing than I know about.

Also, here's an article that made its rounds amongst MSFT employees, we enjoyed it: Microsoft Is the Most Exciting Company in Tech, Hands Down