The guest list for Microsoft's alleged funeral is long.
Over the weekend, blogger Paul Graham stirred up a Techmeme hornet nest when he declared Microsoft dead. Today, Goldman Sachs removed Microsoft from its "conviction list," the equivalent of a super-duper buy list.
The Goldman report was spurred as analyst coverage was handed from Chris Sailer to Sarah Friar. Long-time Microsoft analyst Rick Sherlund recently left Goldman.
In the report, Friar talks about the end of Microsoft's dominance. Friar didn't change estimates and kept a "buy" rating so the hubbub may be a bit overblown. Nevertheless, it's worth examining her key points since they seem to be so prevalent these days.
"Product upgrade cycles should provide strong revenue and profit growth in the next 12-plus months. Normally, this would make us view the stock as a must-own. At the same time, these launches may also mark the end of an era, as changing technology and business models seek to diminish Microsoft’s hold on the desktop, which in turn significantly depletes the cash cow."
Friar is partly making the all-too-familiar case that Microsoft's best days are behind it. She hedges her bets in the report outlining both the bull (shares are cheap and there's a big product cycle) and bear cases, but notes the risks facing Microsoft. The big question: Why are so many folks worried about Microsoft?
It all seems a bit premature. Sure Google may be sexier--just ask the Microsoft employees that are defecting and burning bridges on the way out--but can you really say a company with $28.8 billion in cash is on the downswing? I can't.
Among the key worries raised in Friar's note (and brought up elsewhere too):
It's over after Vista. Friar wrote that "Vista may be the last big operating system developed by the company."
Reality: Possibly, but highly doubtful. Microsoft is already pondering the next Windows. And my hunch is people will probably buy it.
Microsoft needs markets that can move the revenue needle. Friar noted that "size matters for Microsoft. With FY2007 revenues estimated at over $50 billion, Microsoft needs to focus on markets and opportunities that are needle-moving."
Reality: Dead-on. The issue: It's nearly impossible to move the revenue needle with new markets. The solution: Microsoft needs to pull an Oracle and acquire companies to build out its online advertising business. Microsoft needs to buy DoubleClick, Yahoo or both.
Microsoft will be hurt by Linux, Apple and software as a service. Friar notes that desktop Linux could become "increasingly attractive;" Apple "continues to perform well in our IT spending survey;" and SaaS requires Microsoft to "shift gears to embrace new business models."
Reality: All of those risks are very real. But the time frame is key. Realistically, it may take another decade for those aforementioned risks to dent Microsoft. Also keep in mind that Microsoft has already moved to spin open source into mixed source by teaming with Novell. By then, the landscape could change or Microsoft may figure out how to counter those threats.
Microsoft can't be nimble enough to compete with Google. Friar said that "Google is a competitor unlike any Microsoft has seen before. Google’s dominance in search, deep pockets, and “cool” factor make it a serious competitor to Microsoft as it strives to obsolete the desktop operating system."
Reality: Being nimble is a big concern for Microsoft, but the company still seems as competitive as ever. In addition, Google remains a one-trick pony with nearly all of its revenue and profit tied to keyword advertising. Google can nibble at Microsoft's Office juggernaut, but if Microsoft does the same in online advertising it's going to hurt Google more. Nimble is nice, but being massive isn't so bad either.
Microsoft's messaging stinks. Friar notes the frustration on Wall Street with Microsoft's messaging.
Reality: Microsoft's messaging problems go beyond Wall Street. Does anyone really know what the Live brand is about?
Overall, Microsoft does have its challenges, but it's way to early to write the company off. To me, these Microsoft worries would be much more credible if the company was resting on its laurels. That doesn't seem to be the case.