A closer look at Microsoft's "lost decade"

A closer look at Microsoft's "lost decade"

Summary: Last week, everyone who normally covers technology became a stock market expert briefly, marvelling over Apple's stock price and tsk-tsking at Steve Ballmer for Microsoft's "lost decade." But take a closer look at the PC industry as a whole and you'll see a different story.


Last week, everyone who normally covers technology became a stock market expert. At least for a day, while they marveled over Apple's market capitalization, which passed that of Microsoft for the first time. That inspired the predictable wave of Apple-versus-Microsoft posts, along with an amazing amount of advice for Microsoft CEO Steve Ballmer on what he needs to do to "turn the company around."

Now, I don't claim to be an expert on the stock market and I don't offer investment advice. But I do know how to read a stock chart and how to compare the performance of publicly traded companies in the same industry. And after looking at the evidence, I'm amazed at the number of people who got this story completely wrong. Yes, the first 10 years of the 21st Century have been a lost decade for Microsoft shareholders (including its employees), but that's been true of the entire PC industry during that time. If your big company makes PCs or PC components, your last 10 years have probably sucked, too.

The most egregiously wrong-headed analysis I've read in the past few days came from Jean-Louis Gassée, who was an executive at Apple during the 1980s and is now a venture capitalist. After the obligatory reference to Apple's market cap, Gassée argues, at length, that Microsoft's stock-market performance is a crushing indictment of Ballmer's management skills:

Over the last decade, Wall Street has declined to reward Microsoft for its superior profit. The explanation is simple: Professional investors don’t believe Ballmer, and they don’t see bigger profits in Microsoft’s future. [...] January 2000 was when Steve Ballmer was made CEO of Microsoft. Yes, we can discount the year 2000, that’s when the Internet Bubble burst causing most high-tech shares to collapse. Still, since the end of 2000, Microsoft stock has stagnated, hovering between $25 and $30.

And indeed, if you look at Microsoft's stock chart for the period in question, you see a nearly flat line, up only about 6%. The analysis is a little more favorable if you use the proper measure, adjusted closing price, which accounts not just for splits but for dividends and distributions. If you invested $1000 in Microsoft stock on January 2, 2001, and reinvested all your dividends, you have roughly $1,468 today, or a 47% return over nearly 10 years. By contrast, $1000 in Apple stock purchased on the same day is now worth $34,526.88, for a return of more than 3300%.

But that simplistic analysis misses the real story, which is the PC industry in general. Here's a chart that explains the story quite crisply. It starts in 2004 and runs through last week. The top line is Apple, the one in the middle is Google, and that cluster of flat lines at the bottom represents Microsoft and its biggest OEM and chip-making partners: Dell and HP, Acer and ASUS, Sony and Toshiba, Intel and AMD.

It's no accident that the two tech companies that have performed best in recent years are several steps removed from the commodity PC business. Right at the midpoint of Apple's spectacular growth curve, in 2007, the company famously dropped the "Computer" from its name and became just Apple, Inc. Meanwhile, all those companies that build and sell PC hardware, components, and operating systems have been butting heads in a business characterized by commodity products and low margins. If you take Apple and Google out of the picture, here's what the stock-price chart (adjusted for splits but not for dividends) looks like up close. The green line at the top is Nvidia; everyone else is clustered neatly around the 0% line:

Still too hard to tell? Maybe a close-up will help. That big blue dot in the middle is Microsoft, with some of the biggest manufacturers of PCs and PC parts just above and below it.

Over the "lost decade" that began in 2001, IBM and HP have outperformed Microsoft modestly in terms of adjusted returns, up 65% and 70%, respectively, compared to Microsoft's 47% return. Nvidia was delivering Google-like returns for a while but has since given much of those gains back. Still, at 163% it's the best performer of any company in the PC industry over the past ten years. Meanwhile, the chipmakers are way, way down. If you bought Intel or AMD in 2001, you've lost 20% and 40%, respectively. Your Dell stock took a 24% haircut, and Sony stock has lost more than half its value (53%) in that time.

It's easy to pick on Ballmer's performance and especially easy to identify the big mistakes and the missed opportunities. But it's hard to argue credibly that he has failed at his number-one job, which has been to keep making a profit on Microsoft's enormous core businesses of Windows and Office. Back at the beginning of the decade, Steve Jobs decided to transform Apple into a high-end consumer electronics company. Moving away from the commodity PC business was one of many smart decisions Jobs made with Apple. Ballmer didn't have the luxury of giving up on the PC business, which meant that Microsoft's attempts to move into other markets were often halfhearted and poorly thought out. But even after that lost decade, Microsoft is more profitable than Apple, whether you measure in raw numbers or by profit margin.

Meanwhile, it takes a certain amount of panache (and perhaps some amnesia) on the part of M. Gassée to criticize Ballmer's performance. This is, after all, the guy who left Apple in 1990 to found Be Inc. Six years later he turned down Apple's offer to buy the company, reportedly for an amount between $110 million and $200 million. In 2001, Be Inc. closed its doors, and Palm, Inc. wound up buying the company's assets for $11 million. Now that's a lost decade.

Topics: Banking, Apple, Hardware, Microsoft

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  • Any Microsoft stockholders out there?

    I'm curious why you've hung on to MSFT despite the flat price, and even more curious whether you think MSFT can ever regain its market mojo. Hit the Reply button and tell me what you're thinking!
    Ed Bott
    • RE: A closer look at Microsoft's

      @Ed Bott
      I am holding Microsoft because they have the fire and talent. They also have Windows and Office. Now SharePoint, which part of Office, is a billion $ target itself. They also have XBOX, which was losing money, started to gain profits, not big, but eventually could become one with Natal. The Win Phone 7 may not be #1, but it will have its market probably gaining from first time smartphone buyers, who would be a new phone user or feature phone user. I would say it will get its marketing numbers from feature phone, new phone or existing Windows Mobile user. I am also expecting to hear something from Microsoft on Windows Mobile strategy/roadmap for enterprises. These will definitely pull back the company.
      Ram U
      • profits

        microsoft is successful and highly profitable in the it world. they have been and probably will for a long time. outside of their core windows/office/server business however they failed to generate any meaningful profits over the last decade. on the contrary they lost around 20 (!) bn on the xbox (and other devices) and search over that time. i would argue, it is very unlikely that this will somehow dramatically change. to make matters worse, wm7 has a flawed business model (why would any handset maker pay redmond a license for wm7 when they get android for free?) and even if it were successful it wouldn't generate any meaningful revenues, let alone profits on $10-$15 license fees a pop.

        as you mentioned sharepoint being on the move to become a bilion dollar business; to put things in perspective: apple will probably generate around 2.5 bn in ipad revenue this quarter after the product being solely 3 months on the market. now, that is growth!

        wall street cares about future profit drivers and according to msft's performance over the last decade they obviously don't see any new one on microrosft's horizon.

        p.s. ed's ridiculous assumption that microsoft dragging a whole industry into the basement does make their own awful performance any less bad, the commodity industry finally wakes up and former "partners" jumping ship one by one (hp using webos in tablets, asus meego, acer android and the list goes on and one). if the last decade was a "lost decade" for msft, the next one will be their demise.
        banned from zdnet
      • @banned "would any handset maker pay redmond?" uh, yes.

        @Rama.NET Who's signed on so far? HTC has. They've put out several of the most popular Android handsets to date-- and they're tossing their hat in the WP7 ring. Dell has leaked the Lightning. LG has given us glimpses of the Panther. Samsung and Acer prototypes were unveiled at MIX10. Rumors are also circulating that Nokia has a device in the works.

        So... yes. Yes they will pay Redmond.
      • RE: A closer look at Microsoft's

        @Rama.NET wm7 has a flawed business model (why would any handset maker pay redmond a license for wm7 when they get android for free?) If you think Android is free...so some research. android has licensing fees for key Google software, increased development cost, and have to fight patent lawsuits yourself.
    • I own both AAPL and MSFT stocks.

      @Ed Bott <br><br>And now I'm buying more and more MSFT. It's because, ultimately, the stock price will ALWAYS reflect its abilities to make profit. You just can't tell WHEN and HOW. And I don't think MSFT will lose that ability soon.<br><br>Ironically , I'm worried more about AAPL atm since the price will drop sharply right when Steve Jobs is not a CEO any more.<br><br>While it's fantastic when a company has a great leader, its also very risky to have a leader that is so good that people think he has been the only source of company success all along.
      • RE: A closer look at Microsoft's

        @Dealing "People think" Jobs is the source of the company's success because, for all intents and purposes, Apple Inc. IS Steve Jobs, and Steve Jobs is Apple.

        Recall, they fired him in the 80s, and before too long the company was teetering on bankruptcy (Microsoft chipped in to prop them up).

        Jobs returned, fired a bunch of people (there was the saying that people were afraid to get on an elevator with Jobs for fear they'd be out of a job by the time they got off it) and Apple has rhymed off one home run after another.

        But the true test of how smart Jobs is will be how he plans for the future of Apple post-Jobs.

        The greatest investor of our time, Warren Buffett, has spent a goodly amount of time writing out his philosophy, and discussing "the plan" for a Berkshire Hathaway without him. Unlike how the core philosophy at Bear Stearns was abandoned not long after Ace Greenberg retired and before too long Bear Stearns was no more, we're waiting to see if a Buffett-less Berkshire Hathaway will doggedly retain the culture that got them there or figure "they can do better" and go their own way (to ruin, most likely).

        But, that will be the truest test. Right now, yes, Apple and Steve Jobs are basically one and the same.
        Non-techie Talk
    • Investors demand higher return for higher risk

      @Ed Bott Judging from your figures, return of Microsoft stock was about 4%, which I will guess is above the treasury rate for the past decade since last decade has been the one of historically low interest rates. The reason for low return - I would guess - is that Microsoft is considered and established company and a safe investment. Apple, on the other hand, was coming back from the brink of death. As a very risky investment it had a higher rate of return. High return on apple stock is to be expected since investors demand higher return for higher risk.

      Comparing Apple and Microsoft is like comparing Toyota and Tesla motors ? one is an established company, and the other is an upstart with potentially great but unproven ideas.

      Personally I think that Microsoft had a good but uneventful decade. Their Windows XP OS is good enough for most businesses to stick with it. I think Microsoft should keep trying to make good and reliable software that people depend on and they should leave hype and pizzazz to Apple.
      • RE: A closer look at Microsoft's

        @hamobu : I'm not so sure about "good but uneventful".

        The reason why is that, while Microsoft has trended along with the PC folks stock-wise, Mr. Bott missed the fact that Microsoft also competed in the mobile, gaming (console), and media arenas (e.g. Zune). Now if you look at how, say, HTC has done, and how, say, Nintendo has done, then all the sudden Microsoft falls short - way short. No need to compare Zune vs. iPod, eh? :)

        Long story short - there was a TON of potential there (judging by HTC and Nintendo), and Microsoft missed out on reaping that potential - big time.

        AAPL skyrocketed because they weren't as chained/wedded/whatever to the traditional OSX desktop and laptop arenas, and were willing to strike out in new directions, and have managed to reap some rather huge rewards for their efforts (see also the iPod, iPhone, now the iPad, etc).

        Love it or hate it, Microsoft did make large pushes into other arenas, and have (fiscally) failed miserably to get beyond their Windows+Office profit centers.

        The sad part is, at least in the mobile arena Microsoft _had_ a head-start. They could have taken advantage of that lead to get somewhere. Instead, they dickered around, failed to find the sweet spot for consumers, dismissed the competition (internally, not just externally), and wound up getting its lunch money taken by RIM, then getting its girlfriend stolen by Apple and Google.

        I can't help but think that Bill Gates would've at least had enough forethought to have rectified the situation, but apparently his successor completely has no vision at all.

        IMHO, Ballmer should be retired soon - else Microsoft will continue its gradual slide into irrelevance.
      • RE: A closer look at Microsoft's

        @John Zern

        Microsoft did not do that badly when compared to S&P 500 for example. From 1/1/2000 to 12/31/2009, S&P 500 actually earned negative return. S&P 500 is a suitable portfolio to compare Microsoft to since it features mature companies in well established but non-growing fields.

        Microsoft did have some bad performers but so did Google and Apple (Apple TV anyone?). It is said that nine out of 10 businesses fail in the first year, but that does not even count businesses that never emerge from planning or even concept stage.

        Apple is really only good at marketing and branding. They can generate hype and excitement for products before they even announce the products. That is why Apple is really a device and content seller rather than a software company or a computer maker. Their stake is always in growing or even non-existent markets. Return on Apple would be best compared to some sort of portfolio of high risk emerging companies in new markets. I could not find such a portfolio to make a comparison.
      • RE: A closer look at Microsoft's


        You nailed it: Ballmer has no vision. He's a salesman and he's top-notch in that arena. Give him a vision and he can sell it but don't expect him to come up with the vision or direction for a company like Microsoft. Just look at the "Developers!" video. He's trying to rah-rah a salesforce into having the confidence to go out and sell the product. The problem is he wasn't addressing a salesforce or even at a sales conference. He was talking to developers. Compare to Jobs going on stage and showing off the new features of iPhone OS4 (or any of the WWDC keynotes) and you see someone who understands his audience and inspires vision. Sadly, Ballmer is the epitome of the "Peter Principle". I only hope that Microsoft survives his tenure, if for no other reason than my own Redmond property value.
      • RE: A closer look at Microsoft's

        @hamobu "Apple is really only good at marketing and branding."

        I find it funny that "marketing" is the only thing that Apple haters can point to for Apple's success. It can't be the products! It's as if they think other companies don't know how to advertize or it hadn't occurred to them...

        Ironically, Apple is good a marketing by its true definition: understanding a market and creating products that appeals to it.
      • RE: A closer look at Microsoft's

        "Coming back from the brink of death"? For the last 10 years? That may have been true at the beginning, but you don't come back from the brink of death for 10 years running, my friend.
      • RE: A closer look at Microsoft's

        @rynning<br><br>If I were to ask you what is so good about Apple product, you will probably say something like usability or polish or something else that is totally subjective and not measurable in any way.<br><br>Apple spends tons of money on adds that in all cases feature no specification, and a lot of times they dont even feature products. Look at this for example:<br><br><a href="http://prblog.typepad.com/photos/uncategorized/ipod_ads_2.jpg">http://prblog.typepad.com/photos/uncategorized/ipod_ads_2.jpg</a><br><br>The reason why Apple does this is because thats what sells their products and not value and specs.<br><br>And where are the adds for iTunes store? Well iTunes store is not sold, but tied in with iPod.<br><br>Other tech companies do not do same type of marketing that Apple does. Apple marketing and branding is closer in nature to Coca Cola, Abercrombie and Fitch and Target. The idea is to associate warm and fuzzy feelings with the product and sell an image rather than sell the product on its own merits.<br><br>Microsoft advertising is abysmal. Part of the reason is that Microsoft does not really sell PCs and Microsoft does not sell to end consumers. Another part is that Microsoft tends to use advertising power houses which have no clue about tech market as is evident by the fact that many of those people use Macs.<br><br>I did like the ads where little kids do amazing things with pictures. I also liked ads where people shop for a computers with specific requirements and ended up choosing PCs because Macs could not meet all the requirements at reasonable price. Other adds like <i>windows 7 is my idea</i> are just terrible.<br><br>Microsoft is Wall Mart of software and it needs to act like it. They dont need ambiguous commercials just go with the facts. World runs on Microsoft while computing fads run on Apple. Target is not Wall Mart, so target needs to use bright colors, cure dolls and people dancing in their ads. With Wall Mart its all about falling prices. Microsoft should do the same: Point out interoperability, wide acceptance, familiarity, proven value etc. Leave hipsters and turtlenecks to Apple.
      • RE: A closer look at Microsoft's


        Since we are trying to gauge how two investors investing in 2000 - one investing in apple and the other in Microsoft - would end up now in 2010, it makes since to look at how each stock was viewed at the time. But of course different time periods would give you different returns for two stocks.
      • Really? LOL

        "Comparing Apple and Microsoft is like comparing Toyota and Tesla motors ? one is an established company, and the other is an upstart with potentially great but unproven ideas."
        Yeah ... like comparing a 3000 year old established democracy like Greece to an 200 year old upstart like the US.
    • I'm hanging onto it

      I think we're finally at that point that there is enough competition out there to get [i]everyone[/i] to start doing their best work, MS included.

      Everything they've put out in the last 12 months is top notch, and it looks as though they are [i]finally[/i] going after the consumer market, something they should have placed a little more focus on earlier. Plus I bought it early on, and it will allways remain up over that price, as I have with Apple stock, (and others), so yes, they are poised to make some big strides, so it would be stupid to sell it off now, as it would be with any tech stock I hold.
      John Zern
    • Apple became more valueble not for the first time: since 1989

      @Ed Bott: the subject.
    • Microsoft does ***NOT*** pay dividends, so your comparison is WRONG

      @Ed Bott:
    • Microsofts lost mojo.

      @Ed Bott
      A commenter said, "The sad part is, at least in the mobile arena Microsoft _had_ a head-start". I think this says it all. Microsoft had a huge lead in many areas and rather than try and make things better for the consumer, they (and they have said this many times) went to monetize their products. Microsoft wants you money. PERIOD. Selling crap is fine if you are the only one in town. But.. things are changing and now many can see that Microsoft "has no clothes"..

      Writers are no longer afraid of being banned from the business when they write things about Microsoft.

      Just a thought..... How valuable will Microsoft be when:
      IE is less than a 50% brower share, world wide.
      Apple is selling 20% computers world wide and making big money on all of them. (ps linux selling 20%).
      Win Mo 7 is carried on 5% of the world phones (or less).
      Office will still be the world leader in use, but only just barely.

      Just how much do you think Microsoft stock will be worth then? And for how long?

      When Microsoft is no longer the 800 lb gorilla but just another company,,,, then what?

      Just a thought,