This week, Bill Gates, arguably the most successful businessman in the world, ever, announced his decision to step down from his day-to-day activities from Microsoft (what are those, by the way, counting money?). Effective immediately, Ray Ozzie becomes MSFT’s Chief Software Architect, while Steve Ballmer remains CEO. Symbolically, that’s a big deal, realistically, he will remain MSFT’s Chairman of the Board, technical adviser, and of course, largest shareholder. As such, his influence will remain larger than ever.
Frankly, I think it’s great that Mr. Gates will now focus more on the Bill and Melinda Gates Foundation; if he can do 10% of what he has done for - and with - MSFT over the past 25 years in the fields of education and health care in the next 25 years, the world will be a better place.
Of course, this begs the question: who needs Bill more? MSFT or the world’s unhealthy and uneducated?
Truth of the matter is that MSFT desperately needs new blood. Indeed, I probably should not be critical of the world’s richest man and one of the most powerful companies in the world, but, as both shareholder and consumer of Microsoft, I can speak, and you better listen.
The company, I hate to say, has become a me-too company. In the past few years, the company has delayed the release of Longhorn/Vista long enough to affect investor and consumer confidence in the company to meet deadlines and innovate fast enough.
More importantly, in two critical, high-growth areas - search and digital music (let alone the World Wide Web altogether) - the company simply missed the boat and after the fact, decided to get serious about the matter.
Search
I’ll spare you all the details. But this can be summed up in one word: Google. The company with the $120 billion market cap is worth almost half of MSFT’s $225 billion (actually, that is MSFT’s market capitalization which includes the $34 billion in cash it has on its books, MSFT’s enterprise value is $193 billion while Google’s is $110 billion, in other words, the stock market values MSFT 1.75 times more valuable that Google).
Do you want an idea of how badly MSFT missed the boat? Google is using its search to get into email, productivity systems etc., yet MSFT had the productivity suite (Office), email (Hotmail) and browser (Internet Explorer), despite all of this, it slept on its potential in the Web search and today is a laggard that might be irrelevant. Yahoo! is number 2 in search and even it can’t seem to get out of neutral. (I own shares of Yahoo!)
Worst part of it all is that MSN Search is a very good search engine. The company’s search has two extremely important advantages over Google: it indexes new sites much faster and it seems to index sites and pages that lack optimal Search Engine Optimization practices. These are very important for the simple reason that Google must know that one of its achilles heel is that so many marketers are spending millions of dollars and endless time trying to deceive its PageRank technology.
By virtue of its PageRank methodology, Google is essentially a Reference tool: the more sites that link to you, the higher you will rank. But, if the mother of all sites on a topic goes up today, no matter how great it might be, Google’s search algorithm will take months if not years before the website pops up on the top page; with MSN Search, not so.
This is a major benefit to people who search for the same thing frequently. Alas, MSFT does not stress this. Mind you, Google might be able to tweak PageRank over night to adjust for this, but the fact of the matter is that unlike Yahoo! (whose shares I also own) who tries to position search a bit differently, MSFT is hell bent on trying to copy Google and offer, you guessed it, a me-too product.
Digital Music
This week MSFT announced that it was planning - sit down folks, are you ready, this one will shock you - an alternative to Apple’s iPod. I think the word some used was an iPod killer. Ooh… I get goose bumps.
Again, someone might want to tell the folks in Redmond that Apple has gone from has-been to must-have. Take a look at the 5-year and all-time stock performance of Apple.
Can y’all take a guess as to when Apple launched the iPod?
5-year Graph
All-time Graph
If you guessed sometime in 2001, you win an iPod. Ok, so you don’t win anything. And that’s as many victories as MSFT has had of late. For a history of the iPod, click here.
The point I am trying to make is that MSFT has had the software and leverage with hardware partners to have developed an iPod ages ago, it did not. Today, players like Sandisk, Creative are trying to take Apple on, and while they may not be MSFT, they are worthy adversaries who realize the task will be tough. More than anything else, those competitors have a focus.
Microsoft, on the other hand, is a massive company with way too many priorities and objectives, and more importantly, with way too many threats and risks facing it.
If the Office suite wants to really ensure that Google does not eat away at its dominance, well, perhaps that team needs some flexibility and agility. How can it possibly have any agility within the kingdom of Steve, Ozzie and Bill?
The same can be said about search and digital music. Do not get me wrong, MSFT can indeed come up with a great digital media player that can store and play video and MP3’s, I even believe that its video player’s quality can be better than the iPod’s video quality, but the fact remains that MSFT is slow and in a space like music where a company needs to navigate amongst the RIAA, the music labels and artists, a slow company is probably not going to win in the end.
In fact, the companies that stand a chance of dominating in music in 5 years are companies that produce phones and handheld devices. The killer application will be that that can access your entire library of media files, be it work documents, music files, videos, photos from anywhere in the world. This was something that seems obvious but was stressed by Sun’s Chairman Scott McNealy. For more on that, click here. But of course, in this context, your files need to be hosted somewhere… and this might explain Google’s strategy against MSFT. For more on that, click here.
In other words, Redmond: wake up, get your act together.
Here is a friendly advice, use some of your cash hoard and start buying the stock back. In the low 20s, it is a great time to buy it back on the cheap and reduce your shares outstanding. MSFT has $34 billion in cash on its balance sheet. It is rightfully investing billions in everything from XBOX to Live and MSN Search.
To take on Google online, it has also planned to increase capital spending to meet online traffic processing needs for its online migration from $100 million to $500 million by 2007. But, as all of this shows, they have a lot of cash sitting on their books. It should take $1, $5, heck, go crazy and use $10 billion to buy back stock. At $22, and with over $3 in cash per share, something is wrong and Redmond is in denial.
It is way too big to be managed properly, and sadly, the heavy cash on its balance sheet is part of the problem. But don’t take it from me, look at two stats: according to Yahoo! Finance, its return on equity is a decent 30%, but its return on assets is 15%, still not horrible, but clearly being pulled down because they have way too much cash to know what to do about it. Google’s ROE is 24% - less than MSFT’s - and its ROA is 22%… but because they are not sitting on so much cash, they give off the impression of being the better place to invest your money even though according to those stats, they beat Google’s ROE by 6%. Investor confidence is extremely important and even there, MSFT is losing.
Two years ago, they issued a dividend, that was a nice step. But all factors being equal, for a company like Microsoft, they should be buying back shares to reduce their shares outstanding. I am not saying that financial engineering is the remedy MSFT needs, I am just saying that the massive cash hoard is one of many things that have given MSFT a sense of false security…
How so?
Every time a threat pops up, MSFT staff and MSFT supporters quickly dismiss the threat because “with $30 billion in cash, MSFT can invest and catch up / contain the threat.”
Well, guess what folks, money is not the cure. Innovation is, speed is, a sense of urgency is. And sadly, none of those things seem to be present in Redmond.
O Microsoft , Microsoft ! wherefore art thou Microsoft
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