Tech Investing Insights

Microsoft Should Now Stay Away From Yahoo!

As most everyone knows by now, Yahoo! rejected Microsoft's increased share price offer of $33 per share. Microsoft promptly stepped away from its proposed Yahoo! acquisition with both Steve Ballmer and Bill Gates stating publicly that the pursuit of Yahoo! was over.  This news has been all over the media including websites with financial pages, so I won't bore you with the details.

Microsoft was wise to back away, because one sick business unit acquiring another sick business unit simply makes a bigger sick business unit.  Rumors abound that Microsoft will make a later play for Yahoo! at a more favorable share price.

Microsoft should stay away from Yahoo! and pay attention to the business conditions they face and the threats to their existing businesses.

The Yahoo! acquisition would have distracted Microsoft from going into new markets, and the process of integrating the Silicon Valley based Yahoo! with its wide, open culture into the laid-back Microsoft culture would have been painful and time consuming.  Many engineers would have left Yahoo! rather than enter Microsoft's somewhat stodgy atmosphere, engineers that Microsoft sorely needs.

The search wars are over and Google is the big winner.   As I stated in a previous post about Google, no one in North America is going to catch the Internet behemoth.  In China, a huge growth area, the Chinese search company Baidu.com is now ahead of even Google in the number of searchers on the web and holds a commanding market share in China of more than 50%.  Microsoft is nowhere in our own country, which represents the world's largest market in Internet search and advertising.

Microsoft must now pursue new markets involving the Internet and the Worldwide Web.  They have to modify their current business model dependence on operating systems and office software to implement new, profitable technologies that work well with the Internet.  They have major threats to their existing business as software and computing moves onto the Web.

Microsoft is under fire from threats like SaaS (software-as-a-service), where software applications like Excel or CRM (customer relationship management) are stored on a website, downloaded by demand, used, and then all results are stored back on the website. Several companies, including Google with its own office suite and Salesforce.com with its CRM package have already entered this market.  The revenues from these efforts are not yet comparable to those from Microsoft's Office, but the volume will grow. Eventually, the trickle of revenues from web-hosted software will turn into a flood, all at the expense of Microsoft profits.

Virtualization software will cut into Microsoft's Windows business.  Vmware and Citrix Systems typify the competition that Microsoft already faces with this technology.  Virtualization means fewer computers needed in back room computing and fewer Windows operating systems sold.  Worse for Microsoft is that a full-blown operating system such as Windows Vista is not needed in the virtual world. A small operating system called a "kernel' is sufficient.  Microsoft must address this threat quickly.

"Cloud computing" is unique to the Internet but still a concept starting to materialize without Microsoft.  IBM was an early implementer of cloud computing when the company sold computing time on its own corporate computers when they were not in use.  Amazon.com is another seller of compute time on their unused or lightly used computer systems to companies that would rather lease computer time than purchase, install, and maintain more computers into their already too-expensive IT departments.  After all, who buys books at two o'clock in the morning?  In the future, a company or even we consumers need only use our browsers to locate an unused or lightly loaded computer to do our computational work.  We won't know the location of the computer or who owns it, but we won't care.  This situation, too, will result in a loss of revenue for Microsoft, as fewer computers are needed along with fewer Windows operating systems and Office software.  Microsoft must address this, as most of their quarterly revenues and profits come from operating systems and office software.

The Internet is still very young with many unknown opportunities waiting to be discovered.  Microsoft should go looking for such opportunities and exploit them before they are a shell of their former self.

Microsoft nor their shareholders need the Yahoo! distraction.

Copyright by Bill Durrenberger  May 12, 2008  All rights reserved.
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.Before purchase of any investment, the buyer should consult a financial adviser.

Microsoft: A Crumbling Giant

Will Microsoft ever again be a dynamite investment?  Don't bet on it.

There are very viable competitors at the gates of the Microsoft's fortress.  Some are already inside the walls.  Microsoft, once invincible, had a stock price that continuously climbed higher and higher.  They had a hammerlock on the personal computer market, which includes desktop units, laptops, and high-end server computers.  Five years ago, the stock value was $24.  Now the price sits slightly above $29.  In mid 2006, the price was at $22.50 and the 52-week high was $37.50, reached in November of 2007 when the overall market reached all-time highs.  With the exception of last November's high, the stock has been nearly flat. 

Microsoft  is losing its status as the largest technology company in terms of market capitalization and is in danger of becoming an "also ran" competitor, even though they dominate the computer market with their Windows operating system and their Office Suite consisting of Excel, Word and Power Point.

Yes, they still report huge quarter profits as well as growing revenues.  And yes, Microsoft's Windows operating system still controls the computer market.  And they still sell a huge majority of the office software in use with their Excel, Word, and Power Point products.  In spite of this market dominance, Microsoft is on the verge of becoming just another large company whose time has come and gone.

Microsoft is on the defense, with several leading companies in new markets and/or new technologies eating away at the aging giant. 

They have been slow to recognize disruptive technologies such as the Internet, virtualization, and the mobile market. Even when the magnitude of their mistakes become clear, they have been exceptionally slow in reacting to the reality of the market forces that are leaving them in the dust.  Microsoft seems to be repeating many of the mistakes that IBM made in the late 1980s.  When mainframe sales growth started to slow, IBM refused to recognize the industry move toward distributed processing.  This attitude was particular short-sighted when you consider that the IBM Personal Computer, a disruptive technology. played a key role in that industry shift.

Many of us remember the famous memo issued by none other than Bill Gates in the mid-'90s that stated that Microsoft was to focus all developing ideas on achieving great gains in the Internet market with new, innovative products.  The effort produced a browser called Internet Explorer and not much else.  So much for innovation.  Microsoft has the Xbox, a big seller competing effectively with Sony's Play Station; but ironically, this product consistently loses money.

Google has become the premier Internet behemoth, with a huge market share in Internet search and advertising, as well as great sales, profit and market-share growth.  The Google march continues with office applications hosted on the Web that compete with the Microsoft Office offering.  Users can access and use Web-hosted software such as Excel and pay only for package use time.  Google has developed a cell phone operating system called Android, which is free to any cell-phone manufacturer.  For the right to use Microsoft's Windows Mobile, cell-phone users pay a fee.

And now there is Saas, or "software as a service" as the technology is defined.  Started by an immensely successful young, nimble company called Salesforce.com, such software resides on the Salesforce Web site and is available 24/7 for customer use.  All updates are performed by Salesforce, unknown to the user, eliminating the need to periodically install a new version of the software application package.  All bugs and viruses are removed immediately by Salesforce, so the user incurs no maintenance costs.  Microsoft is still in the development stage with regard to this technology.

Vista, Microsoft's new operating system, has not been well accepted.  It is slow, and to use all its new features requires hardware not yet available.  Users would rather keep Windows XP.  Vista took five years to develop but still needed a Special Service Pack to remove problems at the time of release.  The file management features that were intended to turn on the corporate Information Technology Departments were eliminated under "time to market" pressures.  Apple took only 18-20 months to develop and release its new operating system, OS/X, which worked very well out of the box.

Now that Apple is using Intel processors in its personnel computer line, the legions of Windows-independent software vendors are more apt to write Windows applications for the Mac.  Mac sales are climbing, taking market share from you-know-who.  Apple is beginning to make moves to enter aggressively into the corporate world with higher-performing machines.  To be successful in this Microsoft stronghold may take Apple several years of building sales infrastructure and forging the corporate relationships necessary to compete successfully.  Do you have any doubt that Apple can make that happen?  I don't.  And all along the way, Apple will be chipping away at the Microsoft market share.

Now consider virtualization, the new software technology that allows corporate IT departments to more efficiently balance computer loading by spreading user tasks across several computers.  The result: fewer computer needed, less cooling and less maintenance required.  All of which translates to less costs for any business that depends on back-room computing, whether a bank, a manufacturer, or any other medium-to-large company.  VMWare has already developed the virtualization technology and has a commanding market share in that growing new market.  And the kicker?   Virtualization needs only a small operating system, called a kernel, to do its job.  It doesn't require a huge, all featured, general operating system like Vista.  Over time, virtualization is sure to further slow Vista sales.  Microsoft's answer to this threat is to debut its own virtualization software later this year.  Other companies are either already in the virtualization market or developing their own virtualization software, including Hewlett-Packard, IBM, RedHat, and Oracle.

As the entire world knows by now, Microsoft has made an offer to buy Yahoo! in an attempt to compete with the new king of the Internet hill, Google.  So far, the effort has resulted in a standoff as Yahoo does not wish to be acquired, at least by Microsoft.  Historically, large technology companies have not easily integrated their acquisitions into one smoothly running operation, and I do not expect this one to be any different.  Yahoo is located in the bustling entrepreneurial energy of Silicon Valley, California, while Microsoft resides in laid-back Redmond, Washington.  These vastly different corporate cultures will be very difficult to merge effectively.  Engineers are already leaving Yahoo, and it's the engineering brain power that Microsoft needs so badly.  Yahoo has the better products, some of which overlap with those from Microsoft.  Which products will go or stay when these two companies combine under a Microsoft executive?  No one knows, but the infighting over eliminations will be intense.  If a merger does occur, many industry observers are estimating that integration may take as long as two years.  Microsoft does not have a stellar record in being able to bring acquisitions into profitability.  Meanwhile Google just keeps rolling along.

None of the above, with the exception of Google, seems to be causing Microsoft any significant heartburn at the moment.  But as long as Microsoft stays in denial mode, the competitive pressures will keep building:  more chunks of market share will be lost and more disruptive technologies will emerge.  The Microsoft cookie that was once so huge, will be nibbled away, and one day the cookie's size will be insignificant.

One axiom in industry the world over is "change before you need to."  This simple advice applies in spades to the rapidly evolving technology industry, but Microsoft has refused to follow it.

In the Marines, we had a saying whenever indecision was the order of the day.  Someone would invariably point out that "the brass is off playing switch," defined as having one thumb in your mouth and the other in your...well, it was the Marines...and then switching indefinitely.

This appears to be Microsoft's order of the day, and the reason for my original statement:  Will Microsoft ever be a dynamite investment again?  Don't bet on it.

Copyright by Bill Durrenberger  April 28, 2008  All rights reserved.
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.Before purchase of any investment, the buyer should consult a financial adviser.