Microsoft’s Identity Crisis Rages On - Take a Page from Nintendo, Guys
So, I’ve been mentally out to lunch for a few days but I’m back. And during my mental hiatus Microsoft reported earnings, some more stuff came out on Nintendo, and, in general, my views on these two companies and their strategies have been validated. Nothing like a little validation to help get you up and running again.
So, first, my friends at Microsoft. Earnings were good. Congratulations! But these nice earnings were in spite of the continued poor performance of its Home & Entertainment (H&E) Division. My thesis, spread out over many, many posts, can be summarized as follows:
Microsoft’s enterprise software business is like a portfolio of oil wells. It kicks off a highly profitable yet declining annuity that it seeks to bolster through the drilling of new wells (i.e., Vista, exactly how much of a gusher this will be remains to be seen). This can be a risky and costly proposition. However, it knows how to drill for oil and has done so successfully in the past. But Microsoft has sought to tap into other, less proven forms of energy (i.e., fuel cells), that it is seeking to bolster through investments in non-core activities (like, say, those in its Home & Entertainment division?). As a result, it is using the oil wells to subsidize its foray into fuel cells which, if successful, could put the Company back on a real growth ramp. But, alas, it is not that good at leveraging fuel cell technology, causing its core oil business to subsidize continued operating losses and adding volatility to its business. Both of which should, over time, damage its business and hurt its stock price.
Ok, ok, you say. Microsoft is in H&E for the long run. After all, they’re in it for 20 yards ($20 billion in FX-speak), and there is the whole “window to the living room” strategy thing that will take years to play out. But they can afford it. My response: so what? So they can absorb $5 billion in operating losses and they just took another $1.1 billion hit. Is this better then, say, paying a big dividend back to shareholders? Or making a strategic acquisition that can augment a business they actually understand and that leverages their core competencies? Theirs appears to be a strategy of conglomeration which, by the way, generally is not rewarded in the stock market (see Electric, General). This isn’t the 1960s, Microsoft is not ITT and Steve Ballmer is not Harold Geneen. So, I’ve never bought this diversification argument and I never will. And their numbers continue to bear out my thesis: success in their core, failure in their non-core. They can stop the bleeding if they want. But they won’t.
But wait, there’s more. A 7/20/2007 article in PC World indicates that Microsoft sees 2008 XP sales doing better than anticipated and representing a higher proportion of the XP/Vista operating system mix.
During a conference call with analysts following the earnings results
release Thursday afternoon, Chief Financial Officer Chris Liddell said
the company has changed its fiscal year 2008 forecast from an 85/15
split in sales between Vista and XP to a 78/22 split. Windows XP sales
will, in other words, be nearly 50 percent higher in the next 12 months
than Microsoft had estimated earlier.********************
His remarks caught the attention of Michael Cherry, analyst at
Directions on Microsoft, a Kirkland, Wash.-based research company.
“What that seems to say is that XP has stronger legs than you would
expect after the release of a new operating system.”********************
“Most
of the machines I see pitched in catalogs are in the $700 range,
certainly under $1,000,” said Cherry. “Computers with that amount of
hardware are a better fit for XP. With Vista’s requirements, people may
be thinking about sticking with XP, and putting less money into the
hardware.”
Now this can’t be good. Vista costs more. Vista is much more complex. Vista often requires hardware upgrades. And the market says - we don’t want as much of it as you thought, Microsoft. I had hypothesized about these kinds of problems back in December. And now they’re here. Here is an extract from my post dated 12/12/2006 titled Microsoft vs. Apple: Is Vista the Answer in the Era of Consumer Computing:
I guess the question is whether or not those 73 million households are
a gimme. A lot has happened in the consumer market since the release of
XP: the rise of the Mac Book, the popularity of iTunes, the ubiquity
of the Apple consumer experience. Analysts frequently love to base
projections on previous product adoption cycles. Is Mr. Schadler
correct in assuming that Vista will enjoy the same uptake as XP did
when it went live? Today’s world is clearly different, my friend, and
woe be those who are bounded by yesterday’s thinking in projecting
tomorrow’s reality. Even a small dent in Microsoft’s OS market share
would have a huge impact on its P&L (with the benefit going
straight to Apple). I’m just saying it’s a possibility, but apparently
not to Mr. Schadler.
Um, no. Not the same uptake. And now consider some new skinny on the Zune. From Apple Tech News 7/19/2007:
A
new survey conducted by the eagle research group says Zune owners may
not be all that satisfied with their purchase.The survey shows that 70%
of those questioned did not have a firm loyalty to Zune and intended to
switch to an iPod or iPhone when their current phone contract expires.The
survey went on to say that the most compelling features of the iPhone
was the ability to swipe through music play lists easily and of course
making phone calls.Of
the 30% of people unwilling to switch brands to iPhone the most common
reason given was a lack of music storage, 43% and the dislike of all
things Apple, 22%.Apparently
Zune buyers are no different than any other consumers when it comes to
buyers remorse with 36% saying they would not have purchased Zune if
they knew Apple would produce such a ground breaking product as the
iPhone.
Now, I knew the Zune wasn’t doing so hot, but this is abysmal. More than 2/3 of those who went out and purchased a device want to pitch it when their contract expires? This is worse than the mobile industry! This can’t be what Steve et al had in mind when they poured the hundreds of millions into developing an answer to the iPod. I think the conclusion I wrote to my 12/12/2006 post is as valid today as it was back then, and maybe even more so given the hard data coming out of Microsoft in terms of financials, unit sales and market perception:
Microsoft has to decide what it wants to be. “Bet the ranch” projects
like Vista are not the future. While the Company can say it beta tested
Vista to death, if it takes 5 years, billions of dollars and millions
of man-hours to kick out a commercial product you’ve got a problem.
What top young pro wants to be part of that? The problem is deeper than
business model and who your customer really is (though these are,
without question, two of the most critical issues to Microsoft’s
future), but how you attract, retain, excite, challenge and incentivize
the best people. Without this, the battle is lost. And right now,
Microsoft needs to focus on those dimensions if it wants to maintain
its role in shaping the technology of tomorrow. Because we have firmly
entered the Era of Consumer Computing, an era with which Microsoft has
little experience and even less success. And based upon what I am
hearing from the corners of the Internet, they’ve got a seriously
uphill battle.
So as far as I’m concerned the Microsoft identity crisis rages on. And, unfortunately, with little relief in sight for Microsoft’s shareholders.
Nintendo, conversely, is simply continuing its laser-focused, highly successful march toward console game ubiquity. Whether it is in actual numbers or symbolism, Nintendo is making it happen. Most recently, a powerful cultural indicator of the rising power of the Wii/DS franchise was highlighted in Kotaku 7/20/2007:
For something like ten years, the first floor of Akihabara
retailer Sofmap was PlayStation territory. Not anymore. PS goods, games
and hardware have moved to the third floor. What’s in its place? You
guessed it, Nintendo. Shoppers looking for Wii/DS
consoles and games can easily find them on the ground floor. Retailers
are a good source of info from the trenches, and this is very telling.
That, or the move’s to make things more convenient for elderly Nintendo
customers. How thoughtful!
Little wins. Better store positioning. A changing of the guard. This I plucked from a post I had written in February titled Microsoft Revisited: Vista, Apple and the Sony/Nintendo Phenomenon:
We may be witnessing an historic changing of the guard, which takes
place in every generation. Remember IBM? They were invincible. How
could they be beat? By a couple of geeks in a dorm room, that’s how.
Microsoft rises. And then another snot-nosed kid with a great idea and
a dorm room made it happen in the box business, enter Dell. Then others
got wise and squeezed their efficiency-based margins to nothing. Apple
rose like a phoenix, crashed and rose once again, by virtue of
innovation and a customer-centric ethos. Sony was like IBM. Now they’ve
been bloodied by the customer-centric and community-oriented Nintendo.
And now there’s Google, the poster-child for the democratization of the
Internet and the ever-flattening, increasingly frictionless world. When
put in this context Microsoft just seems so big and slow and old,
hidebound by 30 years of culture and organizational silos that seem
impregnable. And it appears that Vista - the product, the PR, the
marketing approach - is the result of such an organization. At times
brilliant, very heavy, complicated and expensive. This is not a product
for today. This is a product for an era when the desktop ruled. And
that era is long gone.
This changing of the guard is happening all over the technology landscape. And its effects are just beginning to be felt. Keep an eye on shifting corporate strategies designed to create more flexible, more entrepreneurial teams designed to leverage core competencies. The issues for companies like Microsoft and Sony is exactly where their core competencies lie. Because their self-perception and the perception of those who really matter - their customers - seem painfully out of sync.
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COMMENT:
AUTHOR: Jack
EMAIL: jloftus@techtarget.com
DATE: 07/24/2007 09:11:36 AM
For an analyst or someone in the market this is a real headache to figure out, I’m sure, but for a progressive like me, who’s constantly wondering what’s coming over that next hill, it’s pretty fascinating indeed. Welcome back, Roger, you didn’t miss a beat.
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3 years ago
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