Microsoft CEO Steve Ballmer appears to be planning a major reorganization. The apparent objective is to help the company move toward becoming a "devices and services company" as presented in the company's annual shareholder letter last October.
But, the question for investors is whether this is a crafty move that will help Microsoft launch renewed profitable growth, or is it leadership further confusing customers and analysts while leaving Microsoft languishing in stalled markets? After all, the shares are up some 31% the last 6 months and it is a good time to decide if an investor should buy, hold or sell.
There are a lot of things not going well for Microsoft right now.
Everyone knows PC sales have started dropping. IDC recently lowered its forecast for 2013 from a decline of 1.3% to negative 7.8%. The mobile market is already larger than PC sales, and IDC now expects tablet sales (excluding smartphones) will surpass PCs in 2015. Because the PC is Microsoft's "core" market – producing almost all the company's profitability – declining sales are not a good thing.
Microsoft hoped Windows 8 would reverse the trend. That has not happened. Unfortunately, ever since being launched Windows 8 has underperformed the horrific sales of Vista. Eight months into the new product it is selling at about half the rate Vista did back in 2007 – which was the worst launch in company history. Win8 still has fewer users than Vista, and at 4% share 1/10th the share of market leaders Windows 7 and XP.
Microsoft is launching an update to Windows 8, called Windows 8.1 or "blue." But rather than offering a slew of new features to please an admiring audience the release looks more like an early "fix" of things users simply don't like, such as bringing back the old "start" button. Reviewers aren't talking about how exciting the update is, but rather wondering if these admissions of poor initial design will slow conversion to tablets.
And tablets are still the market where Microsoft isn't – even if it did pioneer the product years before the iPad. Bloomberg reported that Microsoft has been forced to cut the price of RT. So far historical partners such as HP and HTC have shunned Windows tablets, leaving Acer the lone company putting out Windows a mini-tab, and Dell (itself struggling with its efforts to go private) the only company declaring a commitment to future products.
And whether it's too late for mobile Windows is very much a real question. At the last shareholder meeting Nokia's investors cried loud and hard for management to abandon its commitment to Microsoft in favor of returning to old operating systems or moving forward with Android. This many years into the game, and with the Google and Apple ecosystems so far in the lead, Microsoft needed a game changer if it was to grab substantial share. But Win 8 has not proven to be a game changer.
In an effort to develop its own e-reader market Microsoft dumped some $300million into Barnes & Noble's Nook last year. But the e-reader market is fast disappearing as it is overtaken by more general-purpose tablets such as the Kindle Fire. Yet, Microsoft appears to be pushing good money after bad by upping its investment by another $1B to buy the rest of Nook, apparently hoping to obtain enough content to keep the market alive when Barnes & Noble goes the way of Borders. But chasing content this late, behind Amazon, Apple and Google, is going to be much more costly than $1B – and an even lower probability than winning in hardware or software.
Then there's the new Microsoft Office. In late May Microsoft leadership hoped investors would be charmed to hear that 1M $99 subscriptions had been sold in 3.5 months. However, that was to an installed base of hundreds of millions of PCs – a less than thrilling adoption rate for such a widely used product. Companies that reached 1M subscribers from a standing (no installed base) start include Instagram in 2.5 months, Spotify in 5 months, Dropbox in 7 months and Facebook (which pioneered an entire new marketplace in Social) in only 10 months. One could have easily expected a much better launch for a product already so widely used, and offered at about a third the price of previous licenses.
A new xBox was launched on May 21st. Unfortunately, like all digital markets gaming is moving increasingly mobile, and consoles show all the signs of going the way of desktop computers. Microsoft hopes xBox can become the hub of the family room, but we're now in a market where a quarter of homes lead by people under 50 don't really use "the family room" any longer.
xBox might have had a future as an enterprise networking hub, but so far Kinnect has not even been marketed as a tool for business, and it has not yet incorporated the full network functionality (such as Skype) necessary to succeed at creating this new market against competitors like Cisco.
Thankfully, after more than a decade losing money, xBox reached break-even recently. However, margins are only 15%, compared to historical Microsoft margins of 60% in "core" products. It would take a major growth in gaming, plus a big market share gain, for Microsoft to hope to replace lost PC profits with xBox sales. Microsoft has alluded to xBox being the next iTunes, but lacking mobility, or any other game changer, it is very hard to see how that claim holds water.
The Microsoft re-org has highlighted 3 new divisions focused on servers and tools, Skype/Lync and xBox. What is to happen with the business which has driven three decades of Microsoft growth – operating systems and office software – is, well, unclear. How upping the focus on these three businesses, so late in the market cycle, and with such low profitability will re-invigorate Microsoft's value is, well, unclear.
In fact, given how Microsoft has historically made money it is wholly unclear what being a "devices and services" company means. And this re-organization does nothing to make it clear.
My past columns on Microsoft have led some commenters to call me a "Microsoft hater." That is not true. More apt would be to say I am a Microsoft bear. Its historical core market is shrinking, and Microsoft's leadership invested far too much developing new products for that market in hopes the decline would be delayed – which did not work. By trying to defend and extend the PC world Microsoft's leaders chose to ignore the growing mobile market (smartphones and tablets) until far too late – and with products which were not game changers.
Although Microsoft's leaders invested heavily in acquisitions and other markets (Skype, Nook, xBox recently) those very large investments came far too late, and did little to change markets in Microsoft's favor. None of these have created much excitement, and recently Rick Sherland at Nomura securities came out with a prediction that Microsoft might well sell the xBox division (a call I made in this column back in January.)
As consumers, suppliers and investors we like the idea of a near-monopoly. It gives us comfort to believe we can trust in a market leader to bring out new products upon which we can rely – and which will continue to make long-term profits. But, good as this feels, it has rarely been successful. Markets shift, and historical leaders fall as new competitors emerge; largely because the old leadership continues investing in what they know rather than shifting investments early into new markets.
This Microsoft reorganization appears to be rearranging the chairs on the Titanic. The mobile iceberg has slashed a huge gash in Microsoft's PC hull. Leadership keeps playing familiar songs, but the boat cannot float without those historical PC profits. Investors would be smart to flee in the lifeboat of recent share price gains.
Microsoft needed a great Christmas season. After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products – including the new Surface tablet.
Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC. Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration – the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share. Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.
These trends mean nothing short of the ruin of Microsoft. Microsoft makes more than 75% of its profits from Windows and Office. Less than 25% comes from its vaunted servers and tools. And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter). No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.
So what can we expect at Microsoft:
Ballmer has committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
Expect enormous layoffs over the next 3 years. Something like 50-60%, or more, of employees will go away.
Expect closure of the long-suffering on-line division in order to conserve resources.
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows – and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
Missing the market shift to mobile has already forever tarnished the Microsoft brand. No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership. The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM. Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company."
But failure is already inevitable. At this stage, not even a new CEO can save Microsoft. Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success. Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game – and Microsoft's ante is now long gone – without holding a hand even remotely able to turn around the product situation.
Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.
This is an exciting time of year for tech users – which is now all of us. The biggest show is the battle between smartphone and tablet leader Apple – which has announced new products with the iPhone 5 and iPad Mini – and the now flailing, old industry leader Microsoft which is trying to re-ignite its sales with a new tablet, operating system and office productivity suite.
I’m reminded of an old joke. Steve the trucker drives with his pal Alex. Someone at the diner says “Steve, imagine you’re going 60 miles an hour when you start down a hill. You keep gaining speed, nearing 90. Then you realize your brakes are out. Now, you see one quarter mile ahead a turn in the road, because there’s a barricade and beyond that a monster cliff. What do you do?”
Steve smiles and says “Well, I wake up Alex.”
“What? Why?” asks the questioner.
“Because Alex has never seen a wreck like the one we’re about to have.”
Microsoft has played “bet the company” on its Windows 8 launch, updated office suite and accompanied Surface tablet. (More on why it didn’t have to do this later.) Now Microsoft has to do something almost never done in business. The company has to overcome a 3 year lateness to market and upend a multi-billion dollar revenue and brand leader. It must overcome two very successful market pioneers, both of which have massive sales, high growth, very good margins, great cash flow and enormous war chests (Apple has over $100B cash.)
Just on the face of it, the daunting task sounds unlikely to succeed.
But there is far more reason to be skeptical. Apple created these markets with new products about which people had few, if any conceptions. But today customers have strong viewpoints on both what a smartphone and tablet should be like to use – and what they expect from Microsoft. And these two viewpoints are almost diametrically opposed.
Since the initial product viewing, almost all professional reviewers have said the Surface is neat, but not fantastically so. It is different from iOS and Google’s Android products, but not superior. It has generated very little enthusiasm.
Tests by average users have shown the products to be non-intuitive. Especially when told they are Microsoft products. So the Apple-based interface intuition doesn’t come through for easy use, nor does historical Microsoft experience. Average users have been confused, and realize they now must learn a 3rd interface – the iOS or Android they have, the old Microsoft they have, and now this new thing. It might as well be Linux for all its similarity to Microsoft.
For those who were excited about having native office products on a tablet, the products aren’t the same as before – in feel or function. And the question becomes, if you really want the office suite do you really want a tablet or should you be using a laptop? The very issue of trying to use Office on the Surface easily makes people rethink the question, and start to realize that they may have said they wanted this, but it really isn’t the big deal they thought it would be. The tablet and laptop have different uses, and between Surface and Win8 they are seeing learning curve cost maybe isn’t worth it.
The new Win8 – especially on the tablet – does not support a lot of the “professional” applications written on older Windows versions. Those developers now have to redevelop their code for a new platform – and many won’t work on the new tablet processors.
Many have been banking on Microsoft winning the “enterprise” market. Selling to CIOs who want to preserve legacy code by offering a Microsoft solution. But they run into two problems. (1) Users now have to learn this 3rd, new interface. If they have a Galaxy tab or iPad they will have to carry another device, and learn how to use it. Do not expect happy employees, or executives, who expressly desire avoiding both these ideas. (2) Not all those old applications (drivers, code, etc) will port to the new platform so easily. This is not a “drop in” solution. It will take IT time and money – while CEOs keep asking “why aren’t you doing this for my iPad?”
All of this adds up to a new product set that is very late to market, yet doesn’t offer anything really new. By trying to defend and extend its Windows and Office history, Microsoft missed the market shift. It has spent several billion dollars trying to come up with something that will excite people. But instead of offering something new to change the market, it has given people something old in a new package. Microsoft they pretty much missed the market altogether.
Everyone knows that PC sales are going to decline. Unfortunately, this launch may well accelerate that decline. Remember how slowly people were willing to switch to Vista? How slowly they adopted Microsoft 7 and Office 2010? There are still millions of users running XP – and even Office XP (Office Professional 2003.) These new products may convince customers that the time and effort to “upgrade” simply means its time to switch.
Microsoft has fallen into a classic problem the Dean of innovation Clayton Christensen discusses. Microsoft long ago overshot the user need for PCs and office automation tools. But instead of focusing on developing new solutions – like Apple did by introducing greater mobility with its i products – Microsoft has diligently, for a decade, continued to dump money into overshooting the user needs for its basic products. They can’t admit to themselves that very, very, very few people are looking for a new spreadsheet or word processing application update. Or a new operating system for their laptop.
These new Microsoft products will NOT cause people to quit the trend to mobile devices. They will not change the trend of corporate users supplying their own devices for work (there’s now even an IT acronym for this movement [BYOD,] and a Wikipedia page.) It will not find a ready, excited market of people wanting to learn yet another interface, especially to use old applications they thought they already new!
Long-term, there is yet another great battle to be fought. What will be the role of monitors, scattered in homes and bars, and in train stations, lobbies and everywhere else? Who will control the access to monitors which will be used for everything from entertainment (video/music,) to research and gaming. The tablet and smartphones may well die, or mutate dramatically, as the ability to connect via monitors located nearly everywhere using —- xBox?
But, this week all discussion of the new xBox Live and music applications were overshadowed by the CEO’s determination to promote the dying product line around Windows8.
This was simply stupid. Ballmer should be fired.
The PC products should be managed for a cash hoarding transition into a smaller market. Investments should be maximized into the new products that support the next market transition. xBox and Kinect should be held up as game changers, and Microsoft should be repositioned as a leader in the family and conference room; an indespensible product line in an ever-more-connected world.
But that didn’t happen this week. And the CEO keeps heading straight for the cliff. Maybe when he takes the truck over the guard rail he’ll finally be replaced. Investors can only wake up and watch – and hope it happens sooner, rather than later.
UPDATE 16 April, 2019 – Android TV is a new emerging tech that could have a big impact on the overall marketplace. Read more about Android TV here.
"Is the Party Over for Microsoft?" is the headline at Marketwatch.com. In case you missed it, last week Microsoft reported sales and earnings, and "Microsoft declines on disappointing results" was the most appropriate headline. Sales dropped 17%. Let's see, the last time we heard about a mega-corporation with double-digit revenue declines that would have been – oh yes – GM – and Chrysler.
This blog has been brutally negative on Microsoft for over 3 years. A quick look at the long-term chart and you'll note that the stock has not come near its 2000 high this decade. It's been mired in a go-nowhere range, and has recently broken down to prices last seen in the late 1990s. For investors, Microsoft has been only a disappointment.
But that's because the company has been equally disappointing for customers. Microsoft has been very consistent about trying to "milk" it's near-monopoly in desktop operating systems and office software. Even though the market has moved, Microsoft has done little to move with it. It's applications are "more of the same." It's operating systems have become bloated, and new versions have offered practically no advantages to switch. Meanwhile, customers are learning to enjoy Linux – and Macs again – as well as Unix for servers. There's literally been nothing for customers, investors — or suppliers to get excited about. Ask Dell, itself stuck in the doldrums as a Microsoft devotee.
It's not due to a lack of opportunities in the dynamic IT world. Since 2000 we've seen the emergence of Google, which simply cleaned Microsoft's clock in search and ad placement. The world of digital music became dominant, but that was claimed by Apple. Hot websites for information became valuable – but Marketwatch and HuffingtonPost (examples) are laying claim to attracting lots of readers. Microsoft simply missed these markets. Always late, and never really in step with shifting market requirements. The company tried, failed, and just kept "clipping coupons" from its near- monopoly.
It hasn't been hard to see the market shifting. Customers were put off by Microsoft's disregard for their needs in the 1990s. They searched for better solutions, and found them. Microsoft kept being Microsoft, but the world moved. Now, Microsoft is stuck. And what are they going to do to get out of their rut?
When a company is large, has a lot of cash, and has strong market share analysts are reluctant to predict it will do poorly. But Microsoft has been so Locked-in, for so long, it has been quietly letting all new markets go to new competitors. There have been NO Disruptions to the Success Formula. Windows and Office have dominated the investments. "Taking care of the franchise" has been the mantra. That meant doing more of the same. Which got us Vista – an operating system that was over a year late to market, and very easy to ignore. There hasn't been any White Space to develop new solutions. And as a result whenever Microsoft has tried to do anything new it has been late, with inferior product, a significant lack of knowledge about what the market really wanted, and out of step with new requirements for performance and price.
Microsoft won't declare bankruptcy in 2009 – or 2010. But it's acting just like GM. It's spending all its time trying to Defend & Extend its past. But in fast changing markets, that's not enough to remain viable. In markets moving as fast as IT, it's deadly. Remember DEC? Wang? Lanier? Burroughs? Univac? IBM mainframes? Cray supercomputers? Microsoft is more like GM than it's like Google. Thus, it's future isn't hard to predict. If you're an employee, time to brush up the resume. If you're an investor, time to look for the exit. Do'nt miss the new ebook "The Fall of GM: What Went Wrong and How To Avoid It's Mistakes"
