Where Next For Microsoft?

Over at TechFlash this morning, Todd Bishop published a guest post by a disgruntled Microsoft stockholder about to attend his first stockholder meeting. The author, Michael McDonald, has reason to be disgruntled:

November 2000, I purchased 100,000 shares of MSFT at a split-adjusted, average price of $36 per share for a total cost of $3.6 million.

As one commenter noted, this is a “well-chosen” (and well written, I might add) guest post. However, from there, the commenter – Ted Howard – and I part ways. Specifically, I disagree with his xBox optimism and his thoughts on advertising as a business model savior.

Xbox: Microsoft with the NetFlix deal and the Zune marketplace may soon be a dominant player in the living room. If they succeed in becoming the main conduit of media consumption in the living room, the rewards will be vast. The Xbox 360 is poised to leave Sony, and possibly Bluray, as a minority player in the living room.

xBox Critique
First, when I polled Twitter (early adopter tech crowd) for recommendations on a gaming system to be part of my new HDTV system, the recommendation was overwhelmingly Sony’s Playstation because of Blue-Ray. See ArsTechnica from May – Why Microsoft’s Xbox 360 sales milestone isn’t so impressive – for a realistic look at the xBox relative to other gaming systems.

Second, Microsoft has been seeking the holy grail of home TV system for, what, 10 years? There will be more convergence as homes upgrade to HDTV systems, maybe. But maybe not. Even with incredibly easy to use DVRs like Tivo (annoying “plop plop plop” sound effects aside), it sees most Americans don’t want to timeshift. (Side note: will they want to order pizza from their TV?) And as much as geeks and timeshifters love NetFlix, it too has only a marginal penetration in mainstream U.S. (less than 10 million members).

Third, Ted positions xBox as though it has a monopoly on beaming NetFlix into the home. Not even close. TivoSeries 3 and two new Blu-Ray players also stream (as well as the NetFlix player). Heck, even Mac users will be able to stream NetFlix movies by year’s end (or so they promise). And he ignores powerhouse Amazon, which also streams to Macs, PCs and TiVo.

Finally, Ted … Sony developed Blu-Ray! Sony Entertainment makes movies! Blu-Ray provides an integrated distribution channel. And for 2000-2005, Sony was the number one studio in box-office receipts in the US (slide 17). There will probably come a day when hard media becomes the minority distribution channel. But that’s a long way in the future, at least in America where we are broadband second class citizens.

Advertising Critique
The post author, on the other hand, is spot-on with his observations about advertising. Here I disagree with Ted again.

Advertising: Despite recent trendy VC statements like ‘ads are dead, go do virtual good sales’, advertising is how a massive amount of consumers “pay” for what they receive – magazines, TV, and most website content (like this one)

First, I don’t think anyone will argue that Microsoft has demonstrated ineptness with its own advertising.

Second, talk to the newspaper business — and even TV — as they search for new revenue models and declining readership/viewership. Advertising as it developed hand-in-hand with mass media in the 20th century _will_ be replaced by something else. I’m not sure what that “something else” is — if I were, I’d be writing a book or on a consulting tour! — but I’m convinced that it will change.

Apple v Microsoft
Miscrosoft Stock ChartEvery now and then I lament the fact that I did not buy more Apple stock 10 years ago or so when it was less than $10 a share. Apple turned itself around, which is why I have the lament. (Well, Steve Jobs turned Apple around.) Microsoft, as Michael points out, has continued to stumble along for the better part of a decade, since its dot-com-bubble peak. MSFT closed at $19.62 yesterday; there has been one stock split since early 1999 compared to eight splits from 1987 to early 1999.

This comparison of how founders respond to sagging stockholder confidence — or changing markets — suggests that Microsoft’s initial success may have been due in large part to Bill Gates and Paul Allen simply being in the right place at the right time in the early 1980s. They had IBM over a barrel; Microsoft subsequently engaged in predatory practices to secure its monopoly dominance with Windows. In fact, in looking at the breadth of Paul Allen’s subsequent business accomplishments (and community contributions), I have to wonder just how much of Microsoft’s financial success  (based on the stock returns) was due to Allen, not Gates. Allen, remember, left the company board of directors in 2000.

Nice food for thought, Todd!

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One thought on “Where Next For Microsoft?

  1. It was very surprising to read the assertion in Ted Howard’s response that MS “may soon be a dominant player in the living room.” My own view is much more in line with Michael McDonald’s statement that “It should not be in the hardware business selling low-margin, low-volume games and devices such as Xbox.”

    You’ve got Apple, which was founded on a vision of personal computers as consumer appliances, and you’ve got Microsoft, which early on found its niche in high-volume business sales. Microsoft’s place in the home really only came about because people got familiar with them at work, not because MS was paying much attention to the consumer market.

    As they’ve consciously introduced consumer products, they’ve failed to dominate the markets for these products in the same way they dominated the business market, because it’s a whole different model. Microsoft got into corporate purchasing departments with volume discounts and economies of scale. But in the consumer market, these are less important considerations. In home purchases, people will pay extra for something that they enjoy, while in business enjoyment is usually not considered sufficient ROI to justify expense.

    The enormous success of Microsoft was built on a single, foundational, business deal with IBM. There is no such deal to be had anywhere anymore, and there never has been anything like it in the consumer product market. But because of the legacy of this deal MS never had the pressure to develop its products and marketing in a highly-competitive environment. The impact on products has been particularly significant — far too often it was enough to purchase or mimic another company’s product or features and make it appealing to purchasing managers by bundling it.

    Of course in recent years Apple’s hardly been at the very forefront of invention either. They are mining the work of others in a similar way, but the big difference is that when they release a new product or feature, they do it earlier than MS, so they can take advantage of enormous opportunities for improvement. The iPod blew Rio out of the water because Apple took the basic idea and offered a vastly improved feature set. Having a deep understanding of aspirational marketing helps too, of course.

    Zune has struggled because iPod defined the feature set people want, so the only room for improvement is in now just incremental bells and whistles. Where “we integrated it with Windows” may be feature improvement enough for purchasing managers, it doesn’t mean that much to consumers who only have to justify their purchasing choices to themselves.

    Similarly, XBox may be a fine piece of hardware, but the video game industry was very mature when Microsoft entered, and all they really introduced was a few bells and whistles. Then they got in a struggle with Sony to see who could lose more on each console sale. The upshot? Third place Nintendo introduced a gamechanger (ahem) in the Wii’s user interface. When XBox first came out, I wondered if MS was seeing it evolve into an Apple-like integrated hardware/software appliance that could run a unique, full-featured consumer OS. Instead, it’s just turned out to be a platform for “Halo.” That’s great if you’re a consumer hardware company, but distracting if you’re a business software company, and hardly represents a decisive embrace of the broader consumer market.

    So now the economy’s in the toilet in a way that Microsoft and Apple have never seen. Consumers have no money. Consumer spending has tanked. But businesses are sitting on historically large cash reserves. As the recession plays out, the downward pressure on consumer discretionary stocks will be inversely reflected in business goods and services stocks, including companies in the IT sector. Like Microsoft. MSFT is poised to move upward just because its core business will be back in vogue, if only because markets will go towards whatever looks like any glimmer of light. But it’s never going to go near its peak again. The conditions of markets and technologies that made Microsoft huge are long since passed, and it shows no interest in the sort of honest self-examination that profitable reinvention of the company would take.

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