Microsoft: A big ship at crossroads; What else is new?

Microsoft: A big ship at crossroads; What else is new?

Summary: Predicting the demise of Microsoft is almost a national pastime in the tech sector, but the angst is a bit overblown. Here's the Microsoft ledger of positives and negatives.

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Predicting the demise of Microsoft is almost a national pastime in the tech sector and the last 24 hours has sparked a good bit of debate. Simply put, Microsoft is a massive ship that isn't nearly as nimble as it should be. But that doesn't mean it's sinking by any stretch.

The most recent discussion around Microsoft was sparked by a Goldman Sachs research note. In a nutshell, Goldman Sachs noted that Microsoft missed the tablet curve, faces the down slope of a Windows 7 upgrade pop and faces multiple challenges. According to Goldman Sachs 2011 is going to be a rough year for Microsoft.

That note was so convincing that Sam Diaz put on his GApple (Google + Apple) goggles and likened Microsoft to the Titanic. If Microsoft is sinking it's only because the hull can't carry all the cash the software giant rakes in.

In a case of nice timing, the New York Times reports that Microsoft will demo new slate PCs and Windows 8 functionality at CES 2010 next month. Microsoft has been talking about tablet PCs at CES for more than a decade yet Apple ran off with the market courtesy of the iPad. Now Android tablets are in on the act. Will Microsoft finally deliver a credible tablet?

The software giant's well-documented issues with the tablet and smartphone markets are causing a lot of angst. Goldman Sachs isn't the only research firm sounding alarm bells. Some analysts such as Stifel Nicolaus' Doug Reid say that the mobile wars have been decided in favor of Android and Apple's iOS. In May, Barclays Capital analyst Israel Hernandez said Microsoft's mobile miscues remain a big worry for the company.

All of that's true, but Microsoft has plenty of cash for reinvention. In fact, the company has lost billions of dollars on Internet ventures, but is showing some promise with Bing. Other moneypits that worked out for Microsoft include the Xbox. Bottom line: Microsoft's dollars buy it some wiggle room.

That said there are real worries for the company. Here's the Microsoft ledger as I see it.

Negatives:

Tablets. The topic du jour for Microsoft is whether it can create an iPad rival. What's maddening about Microsoft's strategy can be summed up with one product: Microsoft 7. Microsoft insists on Windows 7 slates when it has a better alternative in house with Windows Phone 7. Here's the deal: Windows 7 is just too large to be a tablet OS. Windows Phone 7 looks as if it were built for tablets. So what if Microsoft doesn't conquer the smartphone market with Windows Phone 7? It has plenty of time to make Windows Phone 7 a real tablet player. The unfortunate thing is everyone on the planet sees that Windows Phone 7 could be powerful with a tablet. Microsoft has its blinders on.

Smartphones. The mobile game for now has been decided. It's Android and Apple with a heavy dose of Research in Motion. Where does Microsoft fit into that equation? To its credit, Microsoft cooked up something unique with Windows Phone 7. The big question is whether that innovation comes too little too late.

Microsoft can't make money online. It's staggering how much money Microsoft has lost online. Perhaps Bing and a search partnership with Yahoo changes the equation.

The software business model is shifting. Microsoft's historical cash cows---Windows and Office---are under fire from cloud computing. Microsoft, along with Oracle, SAP and other software supervendors, need to shift their focus from selling products to services. This cloud shift means new capital costs, pricing models and cannibalizing on-premises products. There will be big winners and some spectacular losers here.

Those aforementioned items form the crux of the "Microsoft is doomed" argument. Now for the other side of the ledger.

Positives:

Cloud computing: Microsoft has seen the shift to the cloud and has an ambitious strategy with its Azure effort. Office is moving to the cloud and Microsoft has a massive cloud footprint. The company articulated the cloud strategy in July at its analyst meeting. Here's how Gartner sizes up the cloud players in terms of emphasis (capabilities still being built out).

As you can see, Microsoft is one of the few capable of covering all the cloud bases. Note that Salesforce.com in recent days has moved to cover more bases than represented in that Gartner chart from October. Also: Office 365: Future, present, past and Mary Jo Foley Webcast

Windows is still formidable. Despite all the yapping about cloud operating systems and encroachment from Apple, Windows powers most of our computing devices excluding smartphones. That upgrade cycle will continue for the enterprise for at least another few years. There is a big question about whether Microsoft can do something with Windows 8 to entice upgrades. Personally, I assume I'll be on Windows 7 for another decade---much like I was with XP.

Office will remain the productivity suite for the enterprise. Sure, there are a lot of folks trying to attack Office, but anyone that has had to swap PowerPoint presentations and Excel spreadsheets around knows that there are serious convenience costs to switching.

Microsoft's server and tools unit is strong. Amid all the yapping about the demise of Microsoft, folks forget items like SQL, SharePoint, server software and virtualization tools. Microsoft remains strong in the business market, especially in the coveted small to mid-sized markets.

Kinect. Microsoft has proven with the Xbox and then Kinect that it can play the consumer game well. Xbox Live is a big community and commerce engine. It's unclear why Microsoft can produce hits in one area and fumble in others. But overall, Kinect positions Microsoft well as a player in your living room.

Research. Microsoft Research is one of the few "old school" research organizations. That research portends future innovation ahead. Now Microsoft may not capitalize on its research, but I'd always rather have more intellectual property than none at all.

Cash. Microsoft has $44.1 billion in cash, cash equivalents and short-term investments. If Microsoft didn't pay a dividend it would still be the richest company on the planet. That war chest can buy a lot of reinvention.

Bottom line: Microsoft is at a crossroads to some degree. Then again, it always has been.

Topics: Operating Systems, Hardware, Laptops, Microsoft, Mobility, Software, Tablets, Windows

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  • If it had zero dollars would you still be impressed?

    "Here?s how Gartner sizes up the cloud players in terms of emphasis (capabilities still being built out). ... As you can see, Microsoft is one of the few capable of covering all the cloud bases." Huh?

    "Microsoft?s server and tools unit is strong." Only because of the pile of cash and the Windows monopoly.
    curph
    • Well, let's see....

      @curph

      #1 Desktop OS
      #1 Office Suite

      Azure looks like it's at least 2 years ahead of the competition...

      I don't know... looks like doom and gloom to me. Or maybe a few investors trying to depress a stock so they can buy it cheap, just before it jumps 25% in the next two quarters?!
      rock06r
      • Yeah, that's EXACTLY it.

        @rock06r "jumps 25% in the next two quarters", sure along with Windows Phone 7's total dominance of the smartphone OS market in the same time period. [b]Just. Not. Going. To. Happen.[/b] One of the reasons that MSFT has been so stagnant over the last 5 years is that there's just no excitement or real growth (as a whole).

        Analysts aren't stupid, Microosft makes buttloads of money, and since it's mostly on software it's also extremely high margin. The problem is that it has so few [i]real[/i] winners, and those are old. The "stink" out there is that Microsoft can't execute. Kin was not just a failure, it was a screw-up of epic proportions. Kinect took some of the sting out, but it's just one product. WP7 looks OK, but it's not an iPhone-like success, which is really what the market wants to see from Redmond.

        All of this may not be a terrible thing. MS makes money, and has piles of cash. I think the industry as a whole is better off with a strong Apple, a humbled and hungry Microsoft, Oracle scavenging any weaklings, HP trying to refind it's "Way" and IBM laying low in the services world.

        20 years ago no one would have predicted that [i]these[/i] companies would be in [b]these[/b] positions. Currently we have no idea where these companies will be in 20 more, but rest assured they'll all still be around. Hell, we could be commenting on how "search" is dead and Google is the Titanic trying to avoid the iceberg.
        matthew_maurice
      • "Analysts aren't stupid"...OH?

        @matthew_maurice

        Appearantly you think they are, if [i]you[/i] understand the market as well or better than [i]them[/i].

        Unless, of course, you're an analyst?
        SonofaSailor
      • Kin ... a failure?

        @matthew_maurice

        Perhaps as a device, Kin is a failure. Even as an investment it's a failure. But... the software technologies that went into Kin are now showing up on the Windows phones, and they're about to show up the new windows slates. Let's wait a couple of quarters and see if they are the epic failures that everyone is talking about. Remember: MS is predominantly a software company. It is significantly cheaper to roll up the code from one project into other projects than to start from scratch. Kin had several good features, but was simply superseded by apple and google products by the time they hit the market - just bad timing. Now they can leverage the IPAD/Chromium wave and the Iphone/android craze - how about a windows compatible phone, and an office compatible slate? While apple and android have to tear people from their desktops and their data and hope they "trust" them with their livelihood, MS won't have that problem. You can have your mobility, and keep your data too. And know your software (we all practically grew up on it...duh). Try that with apple apps and linux/'droid. It comes down to user experience, and MS, more than 1 1/2 decades ago, has taught us to look for the "file" menu on the top left and the "help" menu on the top right.

        MS doesn't need to dominate the Phone market. MS is not a phone company. They haven't been relevant in the smart phone market since day 1. But they sure have brought home the bacon - apparently about 40billion times or so. You guys still think that phones are some kind of be-all for these companies to rake in the money. Apple probably loses a few bucks every time they sell an Iphone. They make $$ on the reselling of apps that developers sell on their market space. Google makes money through the app store and their tied-in advertisements. MS will make money....how again? The whole time Verizon, ATT, etc are laughing all the way to the bank by selling us bandwidth to use these phone, one kilobyte at a time.

        I sincerely doubt that MS will make money on the phones... Instead, you'll see businesses staying with MS servers, staying with MS products on their desktops, relating to their customers who also have MS products. Duh.

        Ever hear of a Google Sharepoint server? Or an Apple Exchange Server? Me neither.
        rock06r
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @rock06r

        Point about iPhone sales revenue. They are not losing money on the hardware. The margins remain high on this revenue. No $s lost for Apple. In fact the profit of iTunes (apps et al) sustain the store ecosystem for the point of high margin hardware sales with low margin on software and content. Win-win situation resulting in a product worth far more than the sum of its parts.

        http://www.bnet.com/blog/technology-business/apple-8217s-revenue-per-iphone-revealed-and-it-8217s-650-updated/2406
        ShamooToo
    • RE: Microsoft: A big ship at crossroads; What else is new?

      @curph

      I'm guessing Visual Studio isn't your forte?
      Zedox
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @Zedox
        Actually it is. Visual Studio 10 is the biggest, steamiest load of waste that MS has ever delivered. Talk about your bloatware! Whoever decided to put corporate strategy ahead of usability by basing the UI on WPF should have to use the product 50 hours a week as punishment.
        curph
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @curph

        We must be using different versions of vs 2010. Its fantastic and considering the reception that its been getting for the past year I would have to say you're in the extreme minority. Do you actually use it because nobody refers to it as visual studio 10.
        rengek
      • I tend to agree with curph on this one.

        @Zedox

        VS 2010 is a slow funky UI of a pig.
        Bruizer
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @curph & Bruizer: <b><i>VS 2010 is a slow funky UI of a pig. </i></b>

        Compared to what? Eclipse? Don't make me laugh. Eclipse is HORRIFYINGLY slow - even just to start-up.

        Show me any other dev IDE that has features like Intellitrace.

        Don't get me wrong - VS isn't perfect, but it's a damn good IDE and is way better than most in almost any and every measure.
        bitcrazed
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @Bitcrazed they won't speak much... VS2010 and it's connecting pieces kick major bootang. Add in Application Management and a host of other capability - it is a real killer.
        jessiethe3rd
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @curph Seriously! I cringe at the thought that people think an entire development platform and several languages are just going to shrivel up and die. VS 2010 is by far the best IDE I have ever worked with. I recently had the chance to work with Xcode and it isn?t so bad, but I feel that Objective-C is in need of some serious updating if it is going to attempt to penetrate the enterprise market.
        apetti
    • Will Microsoft finally deliver a credible tablet?

      No, Microsoft is incapable of delivering a credible tablet? Why? Because they are still stubbornly and arrogantly sticking to the same strategy that has failed for the past decade. Windows is not a good OS for tablets. Never has been and never will be. It is too bloated, resource hungry and antiquated. <br><br>Microsoft seriously thinks they can stick Windows into anything and it will sell. Guess what guys you've been doing it for ten year and it hasn't. Maybe, just maybe if they continue to develop the new Windows Mobile OS (btw, ridiculous to name it Windows) they can at some future point deliver a credible tablet. Will people buy it? Are people buying the Windows Mobile phones? Didn't think so... too little, too late Microsoft.
      Masari.Jones
    • But MS Does have piles of Cash.

      @curph

      Piles and piles and piles.
      Bruizer
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @Bruizer

        Yes they do. But when the cash cows (Windows OS & Office suite) become commoditized to the point of near zero profitability, how well will their other products and services sustain them? How much (in comparison) do and will the other revenues add to their grand total. Also how many billions have they invested in each of the other areas and have they seen a worth-while return on those investments? Are those services or products tied to or dependent upon an unsustainable Wintel approach that is no longer a growth solution? That is the destination of this crossroads choice. Let's wish them well, but the time to sound the alarm is well before the crash. Now is that time.
        ShamooToo
      • RE: Microsoft: A big ship at crossroads; What else is new?

        @Bruizer

        On the cash pile, it turns out that little old Apple now has more on hand than Microsoft. Who would have thought? Also, highly explosive growth channels for hardware that will propel them into the stratosphere within two years. Not an Apple vs Microsoft post, but the comparison is inevitable. Where is the puck going and who is doing what? It does not matter where the puck is. Money can be spent. When your two main printing presses are in need of replacement, where are you going. This is exactly why they are potentially in trouble. They could have owned tablets, phones, music, SaaS. Even though they will have a presence, will it supplant their Win/Office money. 2015 will tell for sure. Within four years, this theory will flesh out and demonstrate conclusively. I hope Microsoft does turn it around and doesn't suffer fiscal wasting - but it is appearing this way. Sad.
        ShamooToo
    • RE: Microsoft: A big ship at crossroads; What else is new?

      @curph Yep, that's the issue. What can Microsoft continue to offer in Windows OS that will make everyone want to upgrade every two years? What about Office? There is only so much a word processing suite can do until it just starts to become excessive and bloated. Now they aren't getting a foot hold in cell phones and tablet markets are weak for Microsoft too. They can't compete with software as a service, because eventually they always tie it into the Microsoft machine. A failing proposition if I don't want to have to buy an XBOX, Zune, use only IE, or install Silverlight. Micorsoft soon will run out of new things to market, then they will start limiting old products or nerfing them with updates, then software as service, and then all of a sudden it isn't so great at all.
      Socratesfoot
  • OEMs see their way out from under MS restrictive licensing

    Now that it is evident how well Android is doing on both smartphones and tablets, don't you think that OEMs are keen on getting out from under their restrictive MS OEM agreements?

    Clearly, there is a way to profit from using Linux and OEMs are especially happy with being able to set their own schedules for release of products with Android.

    WP7 is a latecomer and will simply not garner interest and remain a small market player.

    An interesting remark coming from Google Gmail creator Paul Buchheit today is his estimation that Android will (paraphrasing) dominate the markets over Chrome OS:

    h-t-t-p://twitter.com/#!/paultoo/status/14631053989773313
    Dietrich T. Schmitz, ~ Your Linux Advocate
    • RE: Microsoft: A big ship at crossroads; What else is new?

      @Dietrich T. Schmitz, Your Linux Advocate,

      First of all...Android is a fantastic OS. Is Google actually making money off of it though? (I don't know...I'm asking) I think OEMs will deal with whatever terms they need to in order to sell their products. You don't think they would have worked with Apple and iOS if Apple had permitted it to be used on their devices?

      I agree WP7 is too little too late. I'm a Microsoft guy and I agree with that. iOS and Android have the market now.
      bmonsterman