Tag Archives: Microsoft

Third Time’s a Charm?

So now Microsoft joins the rumored array of aspiring watchmakers.

TechCrunch mockup of Microsoft Watch

Every story includes an obligatory reference to the Microsoft SPOT watch and its FM sideband broadcast technology:

SPOT watch

Yet there was an even earlier Microsoft watch. Industry history, it turns out, predates the archives of any tech blog, even those that stretch all the way back to the early 21st century. The first Microsoft watch was a mid-1990s collaboration with Timex called the Datalink (check out this retro unboxing video, featuring a 3.5” disk and a CompuServe offer). The watch had an optical sensor on the face. You synced your Outlook calendar data to it by awkwardly holding your arm up in front of your monitor while the screen blinked madly. The technique only worked with CRT monitors, not LCDs, which certainly put a damper on its future prospects. I found mine, which is a little worse for the wear:

Timex DataLink watch

And if you go back to the 1970s, there is another famous industry watch which doesn’t even merit a Wikipedia entry, despite an industry titan’s efforts to keep it and the lessons it conveyed alive:

The Microma watch

We’ll see if the next wave of smart watches do better than the previous attempts.

A Very Targeted Tax Cut

Unexplored Territory 

We are in new territory with PC sales in freefall after a new release of Windows and, as some analysts contend, because of Windows 8. Even the Windows Vista “Vistaster” didn’t see PC sales to implode.

Discussions of Microsoft are moving beyond product recriminations to the more fundamental. The time-honored strategy of tying new businesses to the Windows mast is not working, and now the SS Windows is taking on water (if you need some frustration in your life, try Windows 8 on a old-school PC – the tablet-first approach dramatically undermines the traditional keyboard and mouse experience).

Both Goldman Sachs and Nomura’s Rick Sherlund have downgraded the stock today (Goldman to an outright Sell, Nomura to Neutral) and get into more existential questions about the company.

I have argued that Microsoft would be well served to voluntarily break itself up. It would unlock value, deliver a material strategy tax cut to individual businesses and solve the succession question.

Goldman views a breakup as ultimately unlikely but still makes it the first of four “Plan B” strategic options they present (the others are leverage offshore cash/increase debt, massive subsidies for mobile hardware to get into the game or significantly cut costs):

Are the parts worth more than the whole? Our sum of the parts analysis suggests a valuation at the midpoint of about $37.

Their sum of the parts analysis is interesting:

image

Note that Server & Tools will basically catch up to Windows in revenue this year and gets the highest multiple of any Microsoft business. Windows is the median business.

Sherlund, the once and future axe on Microsoft, weighs in on taking the company private (maybe Dell actually is an innovator and trailblazer…):

“I’d like to think you could make something happen, but the enterprise value is $200 billion. That’s a pretty big company.”

But another Sherlund comment really makes the case for breakup:

It’s all about Office. There’s so much they could do to sell Office, but Microsoft is focused on trying to sell the Windows. Office is Microsoft’s anchor. How do you compete with Google‘s (GOOG) Android? The hardware guys can produce commodity tablets in China. The lever for Microsoft is Office. But they should deliver office on alternative platforms as well. You would hurt Windows 8 traction, but where is your better revenue opportunity? There is going to be a point in time where Windows has to stand on its own because we are missing an opportunity for a big annuity revenue stream. People are learning Evernote and Dropbox. Microsoft should be pulling Skype and Yammer sales through Office.

I have always believed the Office business was Microsoft’s to lose, as opposed to some competitor being able to take it from them. But if the rumors of Office for iOS not coming until 2014 are to be believed, they seem determined to lose it. I find it difficult to believe the development hasn’t been done for a while, so it is hard to know whether it is an issue of sitting on it to try to help Windows get a tablet foothold and/or not wanting to share 30% of revenues with Apple (the Office 365 subscription model with free clients being the obvious path out of this, but it hasn’t achieved the necessary volumes to make this work well). Office is the bigger business, but Windows comes first at Microsoft and will continue to as long as they reside under the same roof.

Pushing through the strategy tax cut at Microsoft would solve a lot of problems for SteveB.

(Interesting that though the stock is down over 4% today, it is only back to Monday’s price and is still at a six month high. Makes you wonder if the insider trading game that is Wall Street knows something about next week’s earnings).

WARMer or Colder?

Here we are, over a year since we last checked in on Windows 8, and the latest aspirant to the Microsoft operating system dynasty continues its slow meander to market. Since our last installment:

  • Apple has shipped over 55 million iPads. I wonder how many versions of the iPad will ship before we see Windows 8 tablets. iPad 2 shipped since our last installment and iPad3 looks to be announced next week. A modest slip and we could be asking about iPad 4.
  • PC sales continue to shrink in absolute terms, while the Mac grows and takes share.
  • The next version of Windows Phone is confirmed to run “big Windows” (as predicted), but the messy euthanasia of Silverlight continues to cloud the future of Windows Phone 7 applications. Microsoft pledges support for Windows Phone 7 applications going forward on “big Windows” but the successive departures of not just one but two execs responsible for Windows Phone developer evangelism might give cause for skepticism. No one in that role likes to renege on promises to developers.
  • Microsoft has embarked on a quixotic crusade to get us all to describe ARM-powered Windows tablets as WOA (Windows on ARM) as opposed to WARM.  I admit I have forgotten what the politically correct and corporately decreed alternative to Wintel was back in the day.

The “consumer preview” was delivered yesterday, which is basically the first beta. There is little noteworthy new functionality in this release. The most interesting thing was the vague disclosure that “Although the ARM-based version of Windows does not include the same manageability features that are in 32-bit and 64-bit versions, businesses can use these power-saving devices in unmanaged environments.”

Evidently WARM tablets can’t join a Windows domain, which has major implications for a Microsoft proposition that its tablets are better suited for the enterprise than the iPad. This is probably just a schedule casualty in the enormous effort required to port to a new processor architecture (ARM support is almost certainly the long pole for Windows 8), but it could also be a convoluted attempt to advantage notebook PCs or, even more implausibly, represent a bold endorsement of Intel’s power consumption roadmap.

It means Windows 8 ARM tablets are going to be consumer devices that don’t integrate with the Microsoft enterprise infrastructure any better than the iPad, so Microsoft loses what should have been a major selling point. You will have to sacrifice battery life and go with x86 to get enterprise features and manageability. This is a big blow to Microsoft’s tablet proposition for the enterprise and WOA may be DOA as a result.  It will be fascinating to understand the decision-making behind this result.

A Tale of Two Stocks

 

IBM

MSFT

Revenue (TTM) $101.62 billion $68.62 billion
Profit (TTM) $15.1 billion $21.79 billion
Net Margin 14.9% 31.8%
Price/Earnings 14.28 9.72
Forward P/E 11.67 8.84
Price/Sales 2.03 3.01
PE/Growth 1.33 0.9
Price/FCF 19.19 10.74
Dividend Yield 1.76% 2.61%
Debt/Equity 1.33 0.22
EPS 5 yr growth 18.59% 13.34%
Revenue 5 yr growth 1.85% 9.45%

Source: www.finviz.com

A WARM-Up Act

As WARM (Windows-ARM) reportedly takes the stage in Las Vegas tomorrow, some thoughts:

  • This is “big” Windows, not yet another repackaging of Windows CE.  Remember Windows NT got its start supporting multiple CPU architectures.
  • This has huge implications for Windows Phone’s future.  It makes no sense to have two separate operating systems and application ecosystems for increasingly overlapping touch devices (phones and tablets).  It sucks for customers, developers, OEMs and is terrible for Microsoft economically to have to build and support parallel operating systems.  And Windows Phone’s road is profitability is hard to imagine.  Even if you assumed a wild leap to 20% market share, at <=$10/unit, it isn’t going to pay for the 3,000+ people working on it, never mind the marketing spend and OEM “incentives”, any time soon.  Windows Phone 8 probably is a configuration of big Windows on ARM which lets that team focus on the phone experience and not have to build an operating system top to bottom.
  • This also explains the demise of Courier – a third operating system in the mix would be exponentially worse.  Presumably the Courier application experience is being implemented on big Windows as the shell for Windows tablets.
  • While iOS is Apple’s branded operating system for touch devices, it shares the same underlying kernel, tool chains, etc. with Mac OSX.  Microsoft aspires to have a single, modular operating system that can be factored appropriately for the increasing variety of form factors.  Better modularization will also help power efficiency from a software perspective.  Expect new configurations of big Windows for TVs, settop boxes, etc.
  • In theory Windows apps can be recompiled for ARM, but in reality they all need new user interfaces for the touch world.  So much for the vaunted “applications barrier to entry”.
  • Meanwhile, the modest traction Microsoft is making with application developers for Windows Phone 7 is at risk as it is not clear whether the Windows Phone application model will be supported in the future or whether something new will be introduced.  History suggests the big Windows team will have opinions on the application model.
  • The ARM support won’t show up until Windows 8 (presumed to be 2012), which is an awfully long time to wait.  The incredibly late to materialize Windows 7-based tablets look like sacrificial offerings.  Meanwhile, analysts variously estimate Apple ships between 30 and 50 million iPads this year.  And we’ll see how whether Android 3.0 is as successful with tablets as it was with smartphones, with devices hitting the shelves shortly.  There is a huge difference between being number two and number three in  market (and I guess I should mention RIMM and WebOS for completeness and the possibility Microsoft could be number five in this market).  Microsoft might consider stopping spotting multiple competitors multi-year leads in some of these markets.  But maybe the company just likes a good challenge.
  • Needless to say, Microsoft is in a tough position.  Getting to a single operating system and single application model is desirable for the long term, but the degree of difficulty to get there is incredibly high being a year or more from shipping product, having a full slate (yuck, yuck) of competitors in the market and potentially Osborning the current Windows Phone along the way.
  • But it could be worse – you could be Intel.  Microsoft porting to ARM is a serious indictment of Intel’s power efficiency roadmap.  Historically, Intel-Microsoft executive meetings have had colorful moments and I’d pay to see video of some of the recent ones.  I do expect Microsoft to take the high road and throw Intel a conciliatory bone or two, deeming the next generation of Atom chips to be “pretty good (for you guys…)”.  And while client-focused, this move also improves Microsoft’s options for supporting ARM-based servers in the future, making this a double-barreled nightmare for Intel.  But at least they control their own destiny with that MeToo, er, MeeGo operating system.

Will be fun watching to see how Redmond plays this one.

The Baby Bills Are Back

First it was Forbes, and now Goldman Sachs is raising the idea of splitting up Microsoft.  When the Department of Justice proposed splitting Microsoft asunder, the company resisted it tooth-and-nail.  Ten years later, it isn’t a crazy idea and could be done on Microsoft’s terms.  It might just be the best way to unlock value in the company (Goldman points out the company has a –8% annual return on a dividends-reinvested basis since 2002).  So why not divide it (and the accompanying mountain of cash) up into multiple companies and distribute equity in each to the shareholders (of whom I am still one).  Faster growth businesses will merit higher multiples, cash cows can focus on distributing cash and comps with other companies will be easier.

Microsoft today is a sprawling software conglomerate spanning everything from ephemeral celebrity gossip to plumbing resident deep in the bowels of the enterprise.  There are cost efficiencies to having all that under a single roof, but there is less and less evidence of product synergies as the company struggles in multiple markets.  The company may simply be too big to coordinate and synchronize effectively across individual businesses (and has been for a long time).  The strategy tax burden grows with overall size.  For years teams have been trying to minimize any dependencies across the company.

Office would be all over the leading smartphones and the iPad if not joined at the hip to Windows.  Products like OneNote are a waste of time in this day and age without broad and ecumenical device support.  Windows and Windows Live are hampered from encroaching upon Office and Exchange, even as their competitors do so.  Azure’s operating system and programming model choices largely mirror Server and Tools’ offerings.  And Server and Tools would be both more multi-platform and get more credit for existing multi-platform support outside of the Windows orbit.  It has taken mobile over a decade, and it has required an existential crisis, to shake off the Windows desktop baggage.  The complexity of the business results in too much energy going into internal positioning and coordination as opposed to customer value.

You could get as many as six companies out of Microsoft, three of which would be over $10 billion in revenue, a fourth (Xbox) is about half that and the other two around a billion apiece.  So these aren’t tiny businesses that lack scale to stand on their own.  Forbes proposed just three companies (Windows, Office and Web) and Goldman is timidly raising the idea of a consumer business spin-out.  If I were doing it, I’d create six companies:

  • Windows Corporation (Nasdaq: PCOS) – this is the first of the ten billion dollar plus behemoths and a cash-generating machine.  They need to focus on the tablet threat and decouple from the power-hungry Intel.  I’d put Windows Phone here to encourage efficiencies at the base operating system level and a coherent scalable Windows strategy.  Windows Live is the cloud services play.
  • Office Corporation (Nasdaq: CLPY) – behemoth number two is also a cash spewing machine that gets the productivity suite plus Exchange and SharePoint.  BPOS and Office Live are the cloud services play.  They go device crazy.
  • Server and Tools Corporation (Nasdaq: BOBS) – the third behemoth and one with increasingly healthy profits could be part of Windows Corp. but better to have a standalone enterprise company that can focus on competing with Oracle.  One key decision would be whether to put Dynamics here to help compete with Oracle or could be better off being application agnostic (this assumes you can find some enterprise application vendors Oracle hasn’t bought).  You also could buy or merge this company with SAP.  STB gets Azure for its online play.
  • Xbox Corporation (Nasdaq: XBOX) – this is over a $5 billion business (there is some noise in the numbers from Zune and Windows Mobile/Embedded) but minimal to no profits.  Time to show it can stand on its own.  There is little technology synergy with the rest of the company.  Give this company a good chunk of cash to fund the next generation console (and Zune as a fabulous consolation prize).  The awesome Xbox Live is the service play and they can also go nuts across a broad variety of devices.
  • Bing Corporation (Nasdaq: BING) – give Bing a few billion dollars as a buffer and lets see if sinks or swims.  This group is actually doing a great job executing.  Microsoft is now the clear number two and most markets like at least two players.  Plus Google doesn’t look like they will close this market out with the 80-90% share once expected.  With Yahoo’s distribution in hand, lets see if the losses start moving soon in the right direction.  The defensive rationale for Microsoft being in the search business is to keep Google’s profit pools from being used to drain Microsoft’s own profit pools like Windows and Office.  Google might worry less if there is no overarching Microsoft threat. 
  • MSN Corporation (Nasdaq: ADHOC) – you could combine this with Bing to have a single online company, but I think it is better to have a standalone entity that is portable in the coming portal consolidation game with AOL and Yahoo.  Give up MSN for the search distribution.

The Baby Bills (Svelte Steves?) are welcome to do deals with each other reflecting both legacy and new relationships.  You don’t give each company a copy of all the source code as the DoJ had proposed, but both Windows Corp and STB Corp would get a snapshot of the Windows code (and maybe also the development tools).  The sales forces are largely segregated already except for the broad enterprise-facing field which serves multiple businesses today so will require some careful partition.  The company has multiple campuses already and hosters have proven it is easy to operate datacenters with multiple tenants (you could even spin the datacenters as their own company and get all that capital off the new balance sheets).  It would be a distraction for a year but I think the benefits of greater management focus, a strategy tax cut and a more motivated workforce would more than make up for it.

And for those whose reaction to this missive is to viscerally defend the status quo, do you think the whole of Microsoft is greater than the sum of the parts today and what is an alternative to restore confidence in the company’s future and move the needle on the stock price?  I’d love to see Microsoft recapture the energy, ambition and success of yore, but scale and complexity seem like some of the biggest impediments.  And maybe Mini-Microsoft can change to Multi-Microsoft.

So Who is Giddy About Windows Phone 7?

Windows Mobile is a dinky business for Microsoft but it has assumed a much greater symbolic role as a lens to judge the company’s future prospects and its ability to compete outside of the traditional PC business (the inexplicable lack of a Windows tablet is more significant as the iPad is cannibalizing laptops but doesn’t seem to have the same level of external fixation). 

This means great scrutiny for the upcoming Windows Phone 7 launch.  Microsoft is ramping the marketing machine (including a parade) and promising nine or ten figures of marketing spend.  There is never a good time to be flat on your back in the market, but Microsoft picked a particularly bad time as the Windows Phone 7 delivery woes have coincided with the phenomenal growth of both Android and iPhone, but they’re ready to reengage.

Perception-wise, just maintaining share will count as a loss for Microsoft, so it is going to take more than just a solid product launch.  Windows Phone 7 is going to have to light some people up with excitement to be successful.  There are four constituencies I’m watching for signs for giddiness.

Smartphone OEMs

There are a decent number of OEMs committed to shipping phones running Windows Phone 7.  HTC, LG, Samsung and Sony-Ericsson amongst the traditional mobile phone manufacturers as well as more aspiring vendors like Dell, Garmin-ASUS, HP, Toshiba and Qualcomm (whose product plans are a lot fuzzier than the traditional guys).  Key questions to gauge excitement amongst OEMs:

    • Where is the Windows Phone 7 device in the OEM’s portfolio?  Hardware-centric mobile guys are pretty pantheistic, especially the Koreans who do one of everything.  Will Windows Phone be anyone’s lead device?  All the major mobile OEMs also do Android devices. 
    • How much hardware flexibility does Windows Phone give OEMs?  What hardware support got cut to get it out the door?  How many chassis (evidently that is the plural too) does it support? Can OEMs leverage their investment across a family of devices and differentiate themselves?  Obviously things like CDMA support have been pushed from the initial release.
    • Are the OEMs content to lose the ability to differentiate themselves with their own shells? (e.g. the HTC Sense UI).  Are there enough other opportunities for OEMs to believe they are differentiating themselves with Windows Phone 7?
    • Do OEMs see Windows Phone giving them more leverage with Google on the Android side or does it put their access at risk?
    • Will we see any surprise new OEM announcements?  e.g. Motorola, Nokia or RIMM?
    • Will OEMs get excited about paying for an OS again after a taste of Android?  Or is the license now just for patents rather than code?  There is a scenario where Microsoft makes more per Android phone than Google (who have own revenue challenges) via patent licenses.  The whole smartphone market is becoming a patent free-fire zone.

Mobile Operators

The operators are less important and have less control than ever before thanks to Apple’s trailblazing work but they can still mess up a launch with pricing, promotion (or lack thereof – think Kin or Palm) and the inevitable but self-defeating initiatives that get dreamed up in the name of not being a “dumb pipe”.  The operators are worse than PC OEMs when it comes to self-destructive and misguided “differentiation”.  Discerning operator giddiness is similar to the OEMs in terms of seeing where it fits in their overall portfolios, but they also have some unique attributes:

  • How many Windows Phones are in their portfolios and what kind of pricing and promotion do they get?
  • What’s up with the big operators and will any of them get behind Windows Phone the way AT&T rode iPhone or Verizon pushed Android?  Verizon has already announced they won’t do Windows Phone at launch.  Partly this is due to the lack of a CDMA-capable phone but you can also imagine if they get iPhone as rumored in the coming months, it is hard to see how Windows Phone doesn’t take a serious backseat while Verizon busily scoops up millions of AT&T customers.  But the flip side of this is AT&T is probably more interested in Windows Phone if they need to fill the hole the loss of the iPhone exclusive will create, though they bring a sullied network reputation to the Windows Phone camp.
  • Beyond the phone itself, there is also a battle being waged for who will control mobile services on the smartphone.  Will the operators accept Microsoft’s various services that are integrated with Windows Phone?  Microsoft is following right through the doors Apple and Google have opened but operators historically have thought of these services as their birthright.  Maybe Microsoft has placated the operators or perhaps they are ready to accept their “dumb pipe” fate (or maybe not).  Google can offer operators more search revenue share than Microsoft, at least based on the underlying economics.

Mobile Application Developers

Windows Mobile historically had a huge developer community and tens of thousands of applications.  But breaking backwards compatibility and the long delays in shipping make developer support for Windows Phone 7 much more tenuous at a time when there are alternatives with huge installed bases to target: 

  • When will the most popular existing mobile apps show up on Windows Phone 7?  Android still hasn’t gotten all my favorite iPhone apps.
  • Will we see breakthrough applications unique to the platform from Microsoft or anyone else?  How compelling are the mobile Office apps?
  • Will we see organic investments by developers or is Microsoft having to pay for apps?  Historically, Microsoft viewed any platform that had to pay developers to write code for it as doomed.
  • Can Microsoft thread the needle and avoid both the totalitarianism of the Apple App Store and the fragmentation and low value add of the Google Market?
  • Will confusion about Microsoft’s commitment to Silverlight after the IE9 HTML5 festivities affect developer investment?  Does Silverlight go forward or has the company quietly dumped it for HTML5?  Or will Microsoft have one programming model for mobile and another for PCs and tablets?
  • Can they get custom enterprise applications, historically a real strength of Windows Mobile and something that plays to Microsoft’s strengths?  This should be a slam dunk although the dynamics of your employer choosing your phone have deteriorated.

End Users

Last but not least are actual customers as the other three will follow if Mikey likes it.  Some key questions:

  • Who is Windows Phone 7 for?  The positioning to date seems all over the place.  The alternating emphasis on Xbox Live, Zune and Office doesn’t exactly scream focus.  All things to all people is a tough sell.  Competing across the board with Android and Apple seems like a mistake for this release.  Far better to be laser focused in this release on Blackberry who just happen to be in freefall anyway plus the enterprise positioning plays to Microsoft’s strengths.  The iPhone hearses in the release parade don’t suggest that kind of focus.
  • Why will a new smartphone buyer want a Windows Phone as opposed to the cool iPhone or a geek-chic Android device?
  • Will new user interface find fans?  Microsoft can’t be accused of just copying the competition as the Windows Phone 7 UI is unlike anything else out there.  I think the live “glanceable” home screen is better than the competition, but the “pan-and-scan” navigation model underneath it feels clunky and disjoint (admittedly I have only played with it briefly).

The smartphone market is a huge and rapidly growing market and there is room for multiple players as the majority of cellphones turn into smartphones.  But to be successful, some of the constituencies above are going to have to get really stoked about Windows Phone 7 for Microsoft to move up from the number five position behind Symbian (ok, that share is up for grabs), Android, iPhone and Blackberry.

And even if Microsoft moves serious volumes, there still are business model questions about a mobile operating system business in a highly fragmented market.  You have to sell a boatload of units at or below $10 a pop to make the billions in development and marketing expenditures pay.  And related services revenue, beyond search, is still more dream than reality at this point.

It will be fun to watch over the next couple months.