I'm sorry, he lost me at comparing Microsoft stock to Apple and Google over the past 10 years. In retrospect, those are two of the most successful publicly traded tech companies of the period--not a fair comparison.
Not to mention those were small companies in 2000. For Microsoft stock to have increased 1200% (as Google's did) it would have probably had to grow into some very significant portion of the world economy.
Obviously Microsoft hasn't outperformed over the past 10 years, and it looks like the rest of the article gets into actual substantive critique, but it's hard for me to trust substance from someone who starts out with such an unfair introduction.
@asr - I think the OP's point is a bit more subtle than that. He's not suggesting that MS - a large and mature company - should still be growing like companies that only hit their stride recently. Rather, he's noting the degree to which Apple and Google have dramatically outperformed the NASDAQ, citing this as an indicator of how much room to grow the tech sector has had in general.
The real point is that MS has realized none of this potential. Forget lead, it hasn't even followed. Instead of swiftly copying the wildly successful iPhone, they just mocked it, telling everyone that it was a hopelessly niche product. Likewise, the iPad was being written-off by Ballmer as a pointless device with no appreciable market. In reality, it was busy becoming the most successful consumer electronic product of all time.
This goes well beyond a failure of vision. A remark like that indicates total ignorance of present reality. It's a bit like calling Avatar "a flaming fiasco seen by nobody" on the same weekend it breaks a billion dollars at the box office. Coming from the head of a major studio, an assessment that poor would be career-ending.
If your model is imitating others, fine. But you HAVE to be fundamentally aware of what others are doing if you're going to make it work. So if you're demonstrably clueless about what "two of the most successful publicly traded tech companies of the period" are really up to, or why their products are selling so well, you're simply the wrong man for the job.
Note: I do not hold shares in any of the below companies.
Apple and Google were in their heydays during this time period. If anyone is interested in seeing a really interesting comparison then go to finance.google.com and do the following:
1. Look up MSFT
2. Click "All" for your zoom option, this should give you from 1986 to present
3. Add GOOG and AAPL using the compare box
Now look at the chart. MSFT is up 25,019.04% since it was publicly listed. AAPL is up 11102.07% since it was publicly listed. GOOG is up 394% since it was publicly listed.
If we want to truly assess Ballmer's performance as a CEO using stock performance as a metric then I strongly suggest we look at the past ten and five years of performance of Microsoft and compare it to similar tech companies.
Offhand, I think that IBM and Oracle make suitable comparison points. Looking at the past ten years of performance, we can see that MSFT is down about 27%, while IBM is up 49% and ORCL is up 109%. Now we can more clearly see that Ballmer has more than likely missed some opportunities along the way. When you narrow to the last five years, the picture doesn't change.
I agree with the author of the blog piece - Ballmer has proven to be a mediocre CEO of Microsoft. However, we need to make sensible comparisons to get the point across.
Frankly, I don't understand how MSFT could sit on 40 billion dollars in cash and short term investments without increasing its dividend to something more in line with what one should expect from a mature cash-rich business.
Increasing shareholder value should be the goal of all publicly listed companies. Purchasing Skype for $8.5 Billion dollars flies straight into the face of this - it is a crazy move. Any shareholders that are not screaming about this should wake and smell the sinking share price.
Edited: Formatting in the step-by-step portion of this post was messed up initially...
MSFT was the overpriced darling of the Dotcom era. Ballmer inherited an insane valuation. Meanwhile, in the last ten years, net income has gone from under 8 billion to over 18 billion. This is not a failure and will eventually be reflected in the stick price.
"Though <a company>’s intrinsic value cannot be precisely calculated, two of its three key pillars can be measured... The first component of value is our investments: stocks, bonds and cash equivalents... <a company>'s second component of value is earnings that come from sources other than investments... There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.
This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton."
- Warren Buffet, 2010 Letter to Shareholders
Over the last ~10 years Microsoft has been good at #1, good at #2, but #3 has been suspect.
An insane valuation? At the start of January 2000, Microsoft's most recent earnings per share was $0.90. It's share price was about $58 dollars. This would have given it a P/E ratio of about 64x. This was relatively tame by dot com standards.
MSFT's current P/E ratio is about 10x. Just looking at that number right there, most people would conclude that MSFT was a great value play. In my personal opinion it is indeed a great value play - but not so long as Ballmer is still calling the shots.
If market prices were solely set based on income then you would be right; the price would eventually rise regardless of whether Ballmer remained at the helm or not. However, market prices are more complex than this. They also incorporate expectations for the future. It is here where MSFT's current problem is.
If you look at the components of MSFT's cash flow their major income sources are the Windows Operating System and the MS Office Suite. It is unbelievable that either revenue source will suddenly evaporate.
The problem is that both of MSFT's core business functions are under pressure. This pressure is coming from the decreasing dominance of the PC as the digital platform of choice and the increasing prevalence of Internet-based solutions to problems that were previously solved by offline software packages.
While MSFT is currently conducting expansions into a large array of industries, it is unlikely to dominate these industries to the same degree that it currently dominates the desktop sphere. In all of the industries where MSFT is trying to expand its footprint it faces vigorous competition from fairly formidable competitors. Even in its core industries, challenges are appearing on the horizon. Here's just a really quick summary:
1. Video Gaming - Nintendo, Sony, Apple? (Perhaps for "casual" gamers only, but I am not well versed enough to know how serious of a contender Apple is as of yet)
2. Tablets/Mobile - Google, Apple, HP
3. Search/Advertising - Google (Look, this is a big enough fish, I don't even need to name anything else)
4. Operating Systems - Google (ChromOS in the distant? future, Android everywhere, tablets eating market share), Apple (tablet popularity may erode Windows market share)
5. Server & Server Tools - ORCL, Linux, IBM, etc, etc, etc
6. Microsoft Office - Nothing serious yet, but GOOG is salivating at a chance to chip away at this
Market prices incorporate expectations for future growth as well as performance relative to peers. In the near term Microsoft is making buckets and buckets of solid cash. In the medium term, there are threats on the horizon that are looming large. In the long term, there is a great deal of uncertainty and this uncertainty is not made any better by strange moves like acquiring Skype for $8.5 billion.
I have heard some people say that acquiring Skype was a defensive move. Look, defensive moves like that are the last ditch strategy of someone that knows they are losing. There were a billion strategies that could have been taken that would have yielded a better strategic position.
What Microsoft needs is a visionary leader that can turn its buckets of cash into something that can carve out a substantial, permanent, and secure foothold on one of the fronts that they are fighting. That sounds cliche, but it is what they really need right now.
Microsoft is a fantastic company with an amazing amount of talent in it. I actually believe that it has some incredible earnings potential, but unlocking this potential will take bold, aggressive moves - not expensive defensive posturing.
It is not my intention to bash Microsoft. I have a lot of respect for the company. However, something obviously needs to change in response to the new challenges that they are facing. The status quo is no longer good enough.
64x being tame by dot com standards still doesn't make it cheap!
As for the earnings argument, look at it this way - Apple and Microsoft both made about 18B after taxes in 2010. Difference is, Microsoft's been printing money for almost a decade. Google doesn't even come close.
It's a fantastically profitable company. You can speculate about the future however you want, the fact remains that this company that until a year or two ago made more than Apple and Google combined is priced far below that combination.
It is a fantastically profitable company. A fantastically profitable company with the P/E ratio and historical growth rates of a public utility.
Why invest in Microsoft when you could invest in Exxon Mobile, Johnson & Johnson, The Coca-Cola Company, Novartis - all companies with better long term growth rates and beefy dividends.
Look, I am not trying to be discouraging, but I find it grating how little progress Microsoft has been able to make despite its huge market advantages.
Maybe the question is one of perspective. I tend to constantly think in terms of long-term investments. If you are investing because you intend to cash in on an upcoming bounce in the price (rather than holding on for the long term) then that is actually a sound strategy - I wish you luck in timing the bounce.
It's the long-term perspective that I am mostly referring to. That is the reason for the speculating about the future.
Disclaimer: I own none of the shares mentioned above - as a matter of fact I currently own no shares of anything.
Microsoft's had better earnings growth than any of the companies you listed. In the past 5 years Novartis grows its revenue from 30B to 45, MSFT does it from 51 to 62. Keep in mind that it gets harder the bigger you are - if you're already sucking 51B from your customers, how the hell do you find another 11?
The flaw with speculating about the future is that anything that's certain will be priced into the stock immediately. Any other "educated guesses" you make might as well go to a blackjack table.
A lot of people think they're being prudent just because they're investing with a "long-term perspective". That doesn't get you anything in and of itself - I can buy a car and hold onto it forever but it'll never appreciate (well, until it becomes an antique). It's true that you shouldn't daytrade, that you should be willing to stomach holding something even if it loses value. But that just makes it more important that you understand why you've chosen to hold onto this stock for so long. And I don't think speculation about the future is a good basis for that decision. If you can point to something in the present (e.g, 18B in net income) there's a lot more assurance that you're actually getting something for your money.
If Novartis has put on 50% or 15B, how is Microsoft doing better by putting on 22% or 11B?
Now, I'm not fully convinced that companies on that scale are really delivering the best market value to either shareholders or wider society compared to their functions being split across a network of smaller organisations that can stand or fall on their own merits, but still... other large companies exist and have done better.
"Keep in mind that it gets harder the bigger you are"
Generally, this is true, but no one is doubting MSFT's profitability right now, the doubts are with regards to MSFT's future profitability.
"The flaw with speculating about the future is that anything that's certain will be priced into the stock immediately."
Only in the very short term and with short-term information that is both publicly available to all investors and verifiably true - most information does not meet these criteria. The longer you move out on your time horizon the more uncertainty will impact the market price.
There is an enormous amount of literature out there with relation to determining the future price movements of volatile assets in markets with asymmetrical information (not everyone gets all news at the same time). You should google the "efficient-market hypothesis" as well as recent efforts to test the assumptions that it relies on. (Thanks to the fall-out that occurred immediately after the 2008 market bust there has been a lot of soul-searching in the investment management industry.)
"A lot of people think they're being prudent just because they're investing with a \"long-term perspective\". That doesn't get you anything in and of itself - I can buy a car and hold onto it forever but it'll never appreciate (well, until it becomes an antique)."
They don't have to think that they are being prudent - there is evidence to demonstrate the prudence of this strategy. There is a large body of research out there that has demonstrated that long-term investment via index funds with low management fee overhead is a solid, profitable investment strategy.
"But that just makes it more important that you understand why you've chosen to hold onto this stock for so long. And I don't think speculation about the future is a good basis for that decision."
MSFT has underperformed over the past 5 and 10 year horizons. Past performance is not a guarantee of future results, but I have found it to be a worthwhile indicator to pay attention to.
I was a portfolio manager for about 3 years (before I decided to jump ship and try a startup). When building a portfolio for someone, one of the most important questions concerns the time horizon of the investment. A portfolio's risk profile should be appropriate for the investor. The only way to determine this is to look at the past performance, past volatility, and future prospects of any potential portfolio asset.
In the long-term everything is uncertain - I agree with you on this. However, where we disagree is that you seem to believe that all future events have an equivalent uncertainty, but this is demonstrably false.
There is a implicit probability associated with all future events, and these probabilities, in the aggregate, will impact today's share price. Some events are more probable than others. For a subtle demonstration of this, you could easily look at the performance of some of the larger pharmaceutical companies. As they get closer and closer to the expiration of some of their key money-making patents the volatility of the companies notably increases.
There is a considerable amount of truth to what you are saying, but I would, personally, hesitate to invest in an individual company without incorporating some type of business risk analysis into my decision.
Edit: Minor grammatical flaws. I apologize for any that remain, this was typed in a hurry.
It's a cash cow. The bulk of its income comes from Windows and Office, with most of the rest coming from servers and enterprise services.
The issue is that it is being managed like it is a change-driving company investing huge sums in new markets that generate slender revenues where they don't generate losses. Paying $8.5 billion, around 4% of its market capitalisation, for Skype is not likely to change the revenue it gets from its core businesses.
If it wasn't so big, I would expect it to be a private equity target. But the pargest PE deals have been around $40 billion, about 20% of Microsoft's cap.
You are correct in that perspective, but Microsoft is supposed to be the smartest kid in the class. They've said so. And taking them on their word, analysts are supposed to compare it against the other brilliant companies in the sector.
Even so, look at the comparison this way. Google and Apple both created and captured new markets; Google with online advertising and Apple with mobile devices. This proves that there was a huge amount of room for innovation and growth in the last ten years. But comparatively, MS has done nothing. It hasn't grown in any direction.
And what makes the comparison even more relevant is that MS has actively attempted, and failed, to copy both of the other leaders--Ad center is a failure, MS online strategy is balkanized and schizophrenic, the zune is dead, and WP7 is not gaining traction. That failure is reflected in the chart.
Over the last decade they broke into the enterprise and built the server & tools business into something with income that exceeds the Windows client business in some quarters. They also appear to have built Xbox/Kinect into a $2 billion/year business. I don't think that's nothing.
Is adcenter a failure? I have no idea what their data looks like, but I do know that bids have gotten quite competitive (much more Google like) since the Yahoo partnership.
As the revenue generating end of Microsoft's online services division, the popular bar chart showing quarterly losses exceeding 600M says that it is a failure. This may turn around if Bing hits its magic number in terms of market share. But one would think that the division will have to have start stemming its tide of losses if it is to be given a chance.
I remember reading somewhere that Microsoft is targeting 2014 as the year that Bing is supposed to stop losing money. I can't seem to find it again though.
It might be unfair to compare the stock price to Google and Apple, but if you compare Gates to Ballmer, you can see that the stock has completely flattened since he took over. The rest of the article does point out some moves by him that sound really embarrassing. Having seen some videos of him doing interviews and presentations, I've had a very negative view of him and these points just reinforce that. Microsoft definitely seems on its way to irrelevance.
He started with the Nasdaq comparison, which is fair, and they don't look great in that comparison either. I don't agree with everything in the article but tuning out at the Apple/Google comparison isn't "fair"
> I'm sorry, he lost me at comparing Microsoft stock to Apple and Google over the past 10 years. In retrospect, those are two of the most successful publicly traded tech companies of the period--not a fair comparison.
Apple and Google are Microsoft's biggest competitors. Is he not supposed to compare Microsoft to its direct rivals?
The graph starts around the height of the internet bubble. It's a dishonest comparison. You can't blame Ballmer for not driving the stock back up to unrealistic levels.
Meanwhile, Google is basically starting from zero - of course it's going to show faster growth than the lumbering behemoth that is MS. Keep in mind that few people outside of the bank underwriting the IPO and Google employees actually got the awesome starting price.
So yes, he should compare them, but no, he's doing it wrong.
There's a big difference between "driving the stock back up to unrealistic levels" and totally flatlining - which is what MS has actually done. Yes, the former is ridiculous. But so is the latter.
If you factor in dividends the return would be something around 20% over the past 7 years. Crappy, but definitely not "flatlining".
Microsoft makes twice as much as Oracle, pays a dividend, and yet has half the P/E multiplier. It's just not a sexy stock right now, but you can't deny the underlying profitability. Personally I think it's just that they've made some really embarrassing mistakes (Bing?). None of the failures have really dented the bottom line...they still had 8.5B lying around to buy Skype.
Good point about the dividends. I didn't consider that.
And you're right about spare cash and the bottom line. From what I understand, the twin cash cows provided by Windows and Office hide a LOT of sins. In that sense, Microsoft is like some hopelessly corrupt petrostate. Sure, the place is a shambles in every way imaginable, but as long as the oil keeps flowing, nothing matters enough to dislodge the ruling class.
Judging by source of revenue, Microsoft's an enterprise software vendor, Apple is a consumer electronics company, and Google is an advertising company. They're Microsoft's biggest rivals in terms of media hype, and they all make mutually competing products, but they're not a fair basis of comparison in terms of stock value. How have Oracle and SAP done?
You'll note that MSFT sticks out like a sore thumb.
In their defense, MSFT also has been paying dividends, which some of the comparison companies have not. When a company pays a dividend, the stock price theoretically should fall by almost exactly the dividend paid. As http://ycharts.com/companies/MSFT/dividend_yield shows, they had a particularly big payment in 2005. When I put those dividends back in to MSFT, their stock has been utterly flat over a decade. This makes them a lot better than they otherwise appear, but their poor performance still sticks out like a sore thumb compared to the rest of the tech industry.
You're right. I made the list out of MSFT, ORCL, and SAP, then every company that it suggested as being related to those which I remembered being fairly large a decade ago.
I don't think it was his list didn't include Sun. Or AOL. Or Compaq. Or Dell. Or Sony. But the comparison list was not generated with an eye towards being unfair, and I think that the point made is still valid. Microsoft could have done better than it did.
Thank you. It never ceases to amaze me how many people fail to realize that you need to correct for dividends (One time, and otherwise) when calculating market cap.
Can you (or someone else) please explain this in a little more detail? I understand the concept that a stock that pays dividends won't rise the same way as one that doesn't, but how does one "correct" for this effect to calculate market caps?
Are you implying that all those stories about Apple surpassing MSFT's market-cap were misleading due to this fact?
As the article mentions the job of a CEO is to increase shareholder value, dividends are part of that value. MSFT has issued quarterly and sometimes annual dividends which are currently at 16 cents a share. In total, MS has issued $6.35 in dividends since 2005, this is fully 25% of the current stock price.
In fact the company issued a special $30 billion dividend early in Ballmer's tenure. The Federal Reserve had to correct for this in their quarterly report, because it was an economic event felt across the entire country.
Even so, it wasn't enough. Shareholders of MS stock realized a 25% return due to dividends over the last 6 years, nearly half of it due to that one $3 per share dividend. In contrast, Google shareholders realized a 177% investment gain, Amazon shareholders a 370% gain, and Apple shareholders a 900% gain. This would be fine if Microsoft were in a different industry than these guys, but they're not. If anything Microsoft's business is most similar to Apple's (or at least had been). Microsoft's failure to capitalize on markets other than their core OS/platform and Office is very, very much reflected in their current stock price.
Past performance is no indication of future performance. Looking back, buying Microsoft in 2000 with a P/E of 60 was a stupid thing to do. But, that says nothing about buying it today with a P/E of 10. IMO, Microsoft is a great value play and but nothing to write home about, however Apple (16x) is slightly over priced and Google (20x) is stupidly overpriced.
On the one hand this is sound analysis, Apple and Google do look stupidly overpriced, and MSFT does look stupidly underpriced. However, I think there is an underlying rationality to these phenomena. I am not convinced that MS will even be a major player in the industry in the next 20 years, due to failing to miss opportunity after opportunity in capturing new markets and reacting well to defend or migrate their existing high revenue products from disruptive innovation. Meanwhile, Google and Apple continue to expand their businesses at an impressive pace, in some cases creating new multi-billion dollar markets as they do so.
Given the expected substantial growth of per-capita wealth throughout parts of the developing world (e.g. much of Asia especially China, parts of India, much of South America, parts of Eastern Europe, etc.) and the consequent expansion of the population of the affluent, developed world the potential future market in the computer software/hardware/services industries is likely to be enormous. The companies that manage to cement themselves firmly into the future mainstream mechanisms for people to buy physical and digital goods online as well as the mechanisms for obtaining access to the online world will be well seated to collect substantial revenues from that expanded market. And Apple, Google, and Amazon are much better situated and seemingly much more capable of capitalizing on new forms of markets than Microsoft is. I believe all of that is, to varying extents, reflected in their respective stock prices, and I think it's a very valid view of the state of those companies.
I'd imagine you could just subtract the value of the dividend from the stock price. Someone correct me if I'm wrong.
If you buy a stock as a dividend stock, you might not really want it to rise much, or at all, since you want those dividends giving out the increased value rather than seeing it reflected in the market cap; ie. you want the company paying out the results of expansion.
People invest in stocks in order to get a return. They pay the price of the stock because they believe the current and future value of the company is such that they will receive a higher amount of money when they sell the stock. Stocks that issue dividends modify that arrangement because one doesn't need to sell the stock at a higher price to receive a return, since the dividend is providing a return all the time.
The traditional view of efficient market stock valuation was that the stock price = the net present value of the future dividend stream. Of course, especially in technology, that doesn't really represent how things actually work. But theoretically stock price represents money you'll be paid out over time rather than some greater fool theory.
As for the basic point here though. Yes, an investor cares about total returns so dividends can't just be ignored.
When comparing a dividend-paying stock to non-dividend paying stocks, the dividend-paying stock's price per share should be adjusted to incorporate the dividends paid (for comparative purposes only). As someone else pointed out, even if Microsoft's stock didn't gain a cent you would have made over $6 since 2005 from the dividends paid.
Since the comparative price of the stock would get adjusted to reflect this and market cap is a simple product of the price and shares outstanding, it does tangentially impact market cap (again, only for comparative purposes). Though a more direct way of stating this is that the value of the stock should be adjusted to reflect the returns from dividends.
I agree with you then, particularly when you say for comparative purposes only. My contention was that somebody evaluating the stock for purchase today should not include past dividends in the current market capitalization.
Simple example. A company had a market cap of $25. They have $5 in cash and decide to pay out a $5 dividend. The company now has $0 in cash and is now worth $20.
Can you expand on that comment? I have no idea what this is supposed to mean. Should this change how we interpret the stock price growth comparison between Microsoft, Apple, and Google?
Just thinking about it, I only see two ways in which that would change the stocks valuation. On the one hand, it must reduce the capital that Microsoft has on hand, which might reduce the price of the stock. On the other hand, I would imagine that the fact that owning Microsoft gives you real value in the form of an (quarterly?) payout might increase the stock's price. One can still buy and sell the stock just like a stock that doesn't pay a dividend, betting on the future success of the company, plus you get money on a regular basis. Is there some other way it relates? I really don't know much about this.
You can make money by buying a stock, having the business get more valuable so the stock goes up, and selling the stock at a higher value.
Or you can make money by buying a stock, having the business make money and pay it out to you in dividends.
At the end of the day, what matters here is how much money you make and how long it took you to get it, which is a function of sell price - buy price + dividends received - transaction costs and taxes paid. This chart ignores the dividends received part, and thus misrepresents the value of the stock. I don't know how big the dividend is so I don't know by how much. I doubt it would really make -50whatever% a whole lot better, but it would certainly be something better.
Traditionally dividends are generally paid out by businesses that can't reasonably expect to use their cash to grow - reinvesting all your cash to grow may not make sense if your growth is limited by geography or by completely owning an entire market. The textbook example is a utility company.
You're wrong. The long term capital gains tax rate in the U.S. is 15% for most people. The tax rate for "qualified" dividends (essentially, dividends on stock that you've held for awhile) is 15%. Starting in 2013, dividends will be taxed at your ordinary income tax rate (which is the way they used to be taxed), while long term capital gains will be taxed at 20%, which means that for most people, dividends will be more highly taxed than long term capital gains.
Ah. Thanks for the correction. The information I had must have been dated, looking here[1] it does appear that my information was old (probably from the 2003-2007 timeframe). I could have also been misremembering, and in fact the original data was probably comparing income tax to dividends tax. Good thing I am not an accountant!
It does seem that recent changes have again adjusted the tax rate. In fact, based on more information[2], it seems long term capital gains tax is in fact lower (while short term is the same as dividend tax).
Even a company that's growing ought to pay dividends in most cases. After all, if your shareholders have faith in continued good business they have the option of reinvesting their dividends. Companies that don't pay out are essentially telling you that your money's better off in the company, which strikes me as a rather arrogant way to treat your owners.
> "Even a company that's growing ought to pay dividends in most cases."
That's not true. Companies have opportunities to invest money into things that a normal investor cannot. If a company can invest the money at an above average rate it should.
For US investors, it's even more clear cut as dividends would be taxed if payed out. If the company instead retains and prudently invests that money, the company in essence is able to generate a return on money that would have been payed as taxes. Over the long haul, that "float" is extremely valuable.
Dividends are basically saying "we're returning earnings because you can probably invest them better than we can". It's up to the investor balance their portfolio and decide how much money they have invested in the company, dividends are supposed to be that mechanism.
Sure, and as a shareholder I can say that I always know better. In reality I probably don't, but it's a matter of principle. We own this company, and they're telling us that they'd rather use all the profits they generated (out of the money we provided) for themselves.
It's not that I think every company should always pay out a dividend. It doesn't make sense if you're growing fast, or losing money. Berkshire doesn't have to because we generally agree that Buffett's a better investor than the rest of us. For the vast majority of companies not in these categories though, it seems like the shareholders would be better off if they just got the cash.
It shouldn't change how you interpret the stock price growth, but it should change how you interpret the total return of the company.
The graph that was shown is misleading because it only represents the share price growth over the last ten years, which was down (or flat). For much of that time Microsoft was paying quarterly dividends, which means shareholders were yielding some return from their Microsoft stock even if the share price wasn't appreciating.
One way to look at this is to track the market value of a company less its cash horde. It is a safe bet to assume that none of these companies is earning much beyond money market rates, except when it is adding (or subtracting!) value by investing in its own projects. Of course in this world of financial opacity, you can't easily estimate cash more often than quarterly. The cash-less value chart would be pretty interesting.
Interesting choice of words on his part. The stock goes down for every company. Anytime a dividend is declared the stock price is adjusted down by that same amount.
Though he also said this (it was paraphrased by a reporter, so it's not a direct quote):
Shareholders benefit more from leaving their money with him and reaping a handsome return than by getting a regular payout and depleting the Berkshire war chest.
Interesting. If a company pays dividends, does that mean it doesn't have confidence that it can make as much money as its investors could make by investing their money elsewhere?
Microsoft has also repurchased a lot of stock over this period which should inflate the stock price.
In any case, it doesn't matter that much especially given a relatively small number of years and a stagnant price per share. The general premise of Microsoft stagnating is true regardless of how you tweak the numbers.
Yes, and increasing earnings per share generally increases stock price.
In theory you only buy shares back when you believe that they are worth more than they are trading for. If this is true, it will increase the intrinsic value of the company and should increase its price per share. If it is not true, then management is incapable of evaluating their own business and shareholders should demand that all non-essential capital be returned to shareholders in the form of dividends.
In either case, my point still stands. These things don't matter enough to be bickering about them. From January 2000 to present the Nasdaq is down about 29%, for Microsoft to only be down that amount your adjusted price would need to be about $40. You need to be very generous to say that those dividends we're worth ~$15 and that's just to match the Nasdaq.
If you really want to argue with the data you should be arguing about the start/end dates. Comparing to the Nasdaq eliminates some of the problem as most tech stocks were equally inflated in 2000. I still think you're looking at near parity at best. Microsoft should have been better than average and the data shows that it probably wasn't.
Buying back shares doesn't raise the stock price because it doesn't change the underlying fundamentals. If the stock goes up after a buyback, it only stays up if there was a reason other than a share buyback.
If you don't overpay for the shares, your enterprise value should be the same or slightly higher. So market cap should be flat to slightly higher but there are fewer shares outstanding so price per share would go up. When buybacks don't increase share price, by definition market cap must be decreasing.
Actually, when buying back stock you're essentially reducing the number of shares outstanding, which, all else equal, would translate into a higher stock price.
That confuses me. When the company buys back shares they don't just disappear, do they? With 1 million outstanding shares owning 50% of a company and the company buys back 500k, then there are 500k shares owning 25%. Why would those shares' value increase?
Yes, the shares disappear. A company cannot own itself, at least not directly. If a company had 3 million shares outstanding, then buys back 1 million shares, there would then be 2 million shares.
Yes. When a company buys back shares, those who do not sell end up owning a larger percentage. It would be the same if you were paid a dividend and then used that dividend payment to buy additional shares of stock.
Doesn't that support the OPs point ? The reason MSFT issues dividends, like any steward of shareholder capital, is because they realize that their shareholders can generate higher returns on that cash than they can.
Given that MSFT is a tech company, and we have seen many major tech companies started and grown to almost MSFT's size in the last decade, it does support the OPs point that clearly Ballmer missed a few things.
MSFT missed search. Great. They missed the music play, great. They missed the phone play. Great. Now they missed social media. How many things do they have to miss before someone says Ballmer has to go.
It is precisely because they are a 'high-tech' company AND paying dividends that validates the OPs original point...in my humble opinion.
Edit: That being said, them paying dividends will affect the stock price for sure. But, he was just using the stock price as a proxy for Ballmer's performance.
I think Microsoft should break itself up and leave Ballmer in charge of the business focussed parts and put a new CEO in charge of WP7, xbox and the other consumer parts. Everyone heaps platitudes on Jobs but the reality is he has no understanding of or interest in business needs. On the other hand, you can make an argument that Ballmer has performed quite well on this front.
The simple fact is that it may be impossible to reconcile the different business styles needed to succeed in both the consumer space and the business space. Let them separate and have genuinely different corporate personas and both might succeed more.
>Everyone heaps platitudes on Jobs but the reality is he has no understanding of or interest in business needs. On the other hand, you can make an argument that Ballmer has performed quite well on this front.
Yeah Apple definitely doesn't need all that cash they're raking in.
Move along please, point to something substantive and back it up with evidence before you arrogantly dismiss Steve Jobs. He has valid criticisms such as how will he be replaced? But what you said, absolutely is not backed up by all the available evidence. You then go on to praise Ballmer? Bizarre.
I think the OP is right, but you are misunderstanding. Jobs understands his business, but what products does Apple put out there for businesses? Microsoft has Exchange, Active Directory, .NET/C#/MVC, MSSql, plus many more products aimed at the enterprise. Apple makes consumer products and does it will. The iPhone/pad/pod, AppleTV, laptops, and desktops. They tried the server market with XServer, but that was discontinued this year.
I want to mention again .NET and C#. C# has become a cornerstone of the enterprise world, much like Java. You could say that Apple has XCode and Obj-c, but that doesn't really compete against .NET, except for desktop apps. But the focus of XCode lately has been iOS and .NET has been web apps. Of course this is a broad generalization.
Back to business needs. Microsoft is great at products for the businesses, and great at selling them to the businesses. They are also great at other things too, like XBox. I have had a feeling for a couple years now that there are departments with great product managers that put the product above the politics of a large corporation and upper management that shield the workers from the politics. Those departments end up with great products, like the XBox, Office (though I have heard Office just has the clout of being a big money maker to get whatever they want), Visual Studio/.NET/etc, Windows, and possibly IE (or at least the the current IE team). But reading about what happened with purchasing Danger to take on the iPhone stinks of to many people trying to tell Danger team what to do.
About the only place where Microsoft and Apple true stand toe to toe is the OS. Windows 7 looks great (I have only used it sparingly being a Mac/Linux guy) and OSX is great. I guess you could say the browser is another place. Both IE9 and Safari are good, but really, I think Firefox and Chrome have them beat.
How Microsoft can use this to their advantage is for someone else to figure out. Maybe splitting up would be good, or maybe they just need to say to hell with completing against Apple when in comes to consumer gadgets.
what products does Apple put out there for businesses
That's the beauty of it - they don't have to target businesses, because businesses buy their shit anyway.
doesn't really compete against .NET
Apple doesn't have to compete against .NET - Microsoft shot itself in the foot years ago by not building a Unix and by not taking advantage of the open-source ecosystem.
You may say what you want about .NET, but go to any software or web-related conference, and you'll see more than half the room filled with Apple computers.
Apple doesn't compete with .NET because it doesn't have to.
A huge percentage of crud business apps are .NET. That might not seem important (the 'boring' part of software development), but that just hooks a huge amount of business to the whole Windows platform.
I don't care for MS, but I do grudgingly respect .NET from everything I have seen. And while it is hip to use Apple and run RoR, Django, Erlang, or any other next big language and stack, .NET is huge in the corporate world where the stack is decided based upon politics and who plays golf with who instead of by the developers.
And yes, Apple doesn't compete with .NET, that was sort of my point. They different products to address different needs—iOS/desktop apps vs web based CRUD apps for insurance companies (example corporate industry).
Why does Apple need to worry about B2B? They sell consumer products--iPads, iPhones, iPods, Macbooks--that's where they make the bulk of their revenue/profits.
The idea that it's valid to criticize Apple for not having enough B2B is like complaining that Fender doesn't make flutes. It just isn't their business.
I wasn't criticizing Apple. I think it is the opposite. Apple is great at consumer products, while MS fumbled recently with consumer products, but MS has had success with B2B.
It's a pretty ignorant criticism to complain that Apple doesn't do enough B2B, that's like complaining General Electric doesn't do enough pharmaceuticals--it's not even in Apple's business scope to worry about B2B, they make consumer and prosumer products. I treat idiots with the respect they deserve.
You get my point thought regardless of the example, Oracle doesn't make phones, and Samsung doesn't make game consoles.
Here is a quote from Jobs: People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.
And can you give an example and cite how Apple tried and failed to enter B2B?
I am not saying Apple isn't doing well, just that they are great at consumer products but "meh" at business products. That is not a problem though. They are great a consumer products and I admire their ability to release a product without what would be essential features to others because they are not satisfied with it. For example, cut and paste was missing from the iPhone until v3.0.
Apple is great a certain things and at deciding to focus on those areas, such as dropping XServe and WebObjects.
So this is just shareholder activism at its finest. A lot of M$ share holders are upset at the Skype deal and with the returns on the stock since Ballmer took over. Nothing new here, just that Microsoft lead by Ballmer has underperformed the market.
I keep waiting for these folks to say who they think should be running Microsoft but that doesn't come up a lot.
Yeah, Sinofsky runs windows (cash cow #1) and used to run Office (cash cow #2) which still (allegedly) has a lot of loyalty to him. With these two divisions supporting him he is probably the strongest internal candidate.
That was my initial thought too, but I think everyone will benefit if he'll stick to his own guns and keep turning products around (think Office 2007, Windows 7 and Internet Explorer 9).
Sinofsky is really good at running Windows & Office, but is he the right guy to successfully expand beyond that? MS is getting its butt kicked in mobile, social, and consumer electronics, all of which Sinofsky doesn't have direct experience.
Gates didn't have direct experience in any of the areas Microsoft ended up dominating. In the end, the CEO's role is more visionary than mentor. His job is to guide, not to teach. A good CEO can make smart choices about technologies with which he's unfamiliar, if he has a vision in mind. Compare Sculley and Jobs in their approach to Apple: neither was technologically gifted, but Sculley relied on the engineers to dictate direction, whereas Jobs (mk II) dictated direction to the engineers. The point is that a CEO need not be Gates: he need not have an intimate knowledge of the technology, so long as he has a clear and accurate vision of its future.
While it may be good for Microsoft, Gates isn't coming back. He's pretty much committed to his foundation at this point and I think what he's doing there is far more important than what he could do at Microsoft.
Howard Schultz and Michael Dell come to mind first. Larry Page is the most recent.
Yahoo is a good counterpoint, though I'd suggest externalities like a lack of visionary leadership or a lack of intellectual capital, compared to their rivals, are more to blame.
Edit: Schultz wasn't a founder, but I believe he was their first visionary leader.
The world will be a little better off with a decline of Microsoft. 90% desktop market share is too much. More diversity will be healthier. Chromebooks should take some market share. Microsoft can own 50-70% market share and still be very profitable. They might even be more innovative in other areas.
Enterprise IT is being slowly but surely replaced by online services. The desktop OS ecosystem lock-in that Microsoft enjoyed for so long is definitely on its way out. It will take a long time, since every big company painted itself into a corner with vendor lock-in solutions like Windows, Blackberry, SAP, Oracle, etc, and there are a LOT of people whose job is entirely devoted to maintaining that lock-in. I think we're looking forward to a bloodbath in Enterprise IT in the coming years. I see it every day in my job: big companies are serious about getting off the desktop right now.
If you're in enterprise IT and you disagree with me, remember this: unless you're the CIO, you'll be the last to know.
Who exactly are you speaking for when you say they are not attractive? A large part of Microsoft's share is in school/org licenses. Another large one is for the unskilled users of computers. I would very much consider Google as a real competitor for them.
I look at it this way. Chrome notebooks are priced beyond that of PC laptops, they offer no benefit over a PC laptop running Chrome, so why buy one? Further ChromeOs will have limited local storage, and absolutely no native apps. This means no Skype, no local movie player, etc. A buyer would actually be getting less for their money by buying a ChromeOS machine instead of a $350 laptop at BestBuy with Chrome installed.
The form factor for consumption of media, video and news, does not require a keyboard. In fact it does not seem to require much of the laptop form factor at all. The tablet may already be the best solution, time will tell. But ChromeOS is avoiding stepping on Android's toes, and is not expanding in that direction. And that is limiting.
Leasing will only be available for schools, businesses, and governments--entities already in long term contracts with Apple or PC manufacturers. There won't be much penetration in the short term. And when it comes to price comparisons, ChromeOS will not have the support base and personelle which is already built up around PCs.
Lastly Chrome notebooks necessitate a wireless data plan, but as of now no carrier gives unlimited access for a low, flat fee. That means no unlimited Netflix or Hulu. And judging from my experience with a mobile data card, the connection is not stable enough for video streaming anyway, nor voice calls, nor multiplayer gaming.
Chromebooks actually compete with Windows. Apple basically doesn't - it serves a small segment of premium users. Microsoft is still for the masses and will continue to be unless a competitor undercuts it.
If these numbers are indicative of the US as a whole, 45% of new laptop purchases are OSX. IPhone, IPod touch, and IPad are selling well outside of the premium market. From these data points I still feel Apple is the main competitor to MS.
Being indicative means having predictive power, not being representative. It is often the case that student trends are indicative of larger trends; for instance the number of college graduates looking for employment.
As for laptops, looking at data is better than pointless statements:
Laptop sales correlate with google search trends. The later has a bimodal distribution, with one peak in August and one in December. The former represents back to school sales, and due to its size, it is clear that student purchases of laptops are a significant factor in the market.
I'm more concerned about a company that stores all of my private data and tells me what to look at when I am searching for answers having a dominant market shore.
>> In fact, the acquisition by most accounts sounded more like a move by Ballmer to buy something that others may have wanted to own — just for the sake of others not owning it.
This struck me because I'm presently reading Stephen Levy's In the Plex, in which he reports at great lengths about why Google decided not to purchase Skype when eBay had it up for sale: mainly owing to Skype's peer-to-peer technology not being compatible with Google's existing centralized infrastructure. What reason would Microsoft have to think that this reasoning had changed?
If you look at Microsoft's words and actions in regards to their competitors, they are clearly completely clueless.
In fact, "Microsoft people" are often completely blind to everything not made by Microsoft. Reading HN you may never know, but if you've met actual .NET stack developers, or MSCE's or anyone else similar, and you'll find people who make websites and don't know what apache is. Or they'll dismiss open source technologies with ridiculous reasoning.
That's what I see when MS speaks.
(To be fair, IBM can be the same way, if you are in certain industries, and I would imagine Cisco has the same effect in networking, but that's outside my knowledge)
There are certainly company men in the, ahem, company, but one of the problems is that MS makes so many tools that are good enough that using open source tools is really hard to do.
Internally, we're told to use MS technology whenever possible. Using open source tools is also a nightmare from a legal perspective, and there are some non-trivial process because of that. It's not hard, but it requires due diligence on our part to ensure we don't expose the company to liability.
For the above reasons, it's frowned upon in company culture. I'm facing an internal side-project and am tempted to take a swing at it with nginx, apache and RoR for learning purposes, but the last thing I want is my manager to demo it and get a non-IIS error message along the way.
You could of course make the errors that RoR shits out look like IIS. In the interest of familiarity, of course, not because you're trying to conceal anything :)
Thank you. I'm a .NET developer by trade. (ASP.NET MVC).
Yes, I know Haskell. Yes I know python. Yes, I've used django. Yes I've programmed in PROLOG and EIFFEL. Yes I can use a shell and succesfully configured a linux server countless of times. Fuck me, totally unrelated, but I even know MATLAB. Yes, I had my hands on SOLARIS servers. Yes, I programmed a SPH solver with CUDA. Yes I know javascript, not just jQuery. ETC.
So here I am, an actual ".NET stack developer". Ask me anything.
I wish an outsider would write a blog about these bizarre worlds (the IBM mainframe and the all .Net stack guys). As a guy that rarely ever touches any MS products, it would be really freakish and odd.
>If you look at Microsoft's words and actions in regards to their competitors, they are clearly completely clueless.
Clearly they have a clue. They realize that it's perfectly feasible to deploy large-scale applications using only the Microsoft stack. There's even a lot of evidence it might be the most efficient way to do it.
Personally, I try to avoid using Microsoft technologies - but I wouldn't be surprised if, making the switch, life suddenly became a lot simpler.
Well Skype is built on Linux and Postgres, so they might have to look at that stuff. Will be interesting if they try to do a Hotmail and rebuild it in Windows...
Windows Mobile 6.5 was a powerhouse of a product. Pre-2007 most U.S. buyers of smart phones chose between BlackBerry and Windows Mobile 6.5. Both were small screened devices with a hardware keyboard — with exception to the few HTC devices with stylus based touch screens. Palm was struggling at the time and Windows Mobile was the dominate player in consumer minds, BlackBerry was the beast in boardrooms.
This seems off to me. Am I the only one who doesn't remember "Windows Mobile was the dominate player in consumer minds" in 2006?
You had to be one of the rare consumers who were purchasing a "smart phone". I remember writing software for the platform because it seemed like it was really going to take off, especially when things like the Dell Axim were starting to sell.
I remember how badly I wanted a Motorola Q or a Samsung Blackjack when they came out but I had just started a contract... Luckily for me my contract was up just in time to get an iPhone.
I spent almost a year at that time watching my girlfriend trying to decide which Windows Mobile phone she wanted. Might have been 2006 or 2007 but Windows Mobile for smart phone purchasers were very popular.
I don't know about 2006 exactly, but I remember tons of people (pre-iPhone) with Windows Mobile phones who bought them for personal use. People who had their phones issued for business always ended up with a Blackberry.
Of course I also knew quite a few people with Palm Pilots, so...
Whereas I agree that Microsoft's performance and innovation over the past decade has been abysmal, I'm not sure it's just Ballmer to blame.
It all started with the Google brain drain - and that happened while Bill Gates was very much involved at Microsoft. Once the brain drain begins, you lose talent at a rapid clip and no matter how great an idea you may have, it's very hard to execute.
So then if you can't build it, you buy it. The product and the talent. Hence the Skype purchase. Here MSFT is buying a business and the people who run it, granted at a hefty price, but Skype is well established around the world and I see it as a better integration with Microsoft than eBay, which never made any sense to me. No it didn't cost Apple 1 billion dollars to build Facetime - but it also didn't cause Skype 1 billion dollars to build Skype. I can't say what it's worth now but I do know that I use it a lot since it's been available on the iPhone - great when traveling abroad.
Bing is slowly making strides as a search engine, Windows 7 is selling rather well and Kinect is a huge it. And they have partnerships with Yahoo! and Facebook.
Ballmer may need to go, but I really don't think Microsoft is entering the early stages of it's finale.
Buying Skype might have been the first smart thing Microsoft has done in a while. Skype is a relevant brand to consumers globally, Microsoft just is not anymore. The real question is will Microsoft destroy Skype.
Bing search is another good move Microsoft has made. Adcenter, on the other hand is an embarrassing disaster on its own two feet and an ugly nightmare in comparison to Adwords. Adcenter is like a buggy crashing version of Adwords in 2005. Given that Microsoft provides the only real alternative search engine to Google that is pretty damn pathetic.
I think you hit the nail on the head with the brain drain. The fact is even with a brain drain companies have assets. Apple was effectively a dead company in the late 90s. Microsoft needs this same type of brutally intense focused leadership right now -- not attention deficit disorder look at me showmanship.
Trick is, I don't think Microsoft bought Skype for the consumer service. I think it's solely to make Exchange/Lync a better enterprise offering.
MS has apparently realized that there's still a huge opportunity following the analog PBX shakeout of the last decade. They've been pushing Lync pretty heavily lately and I think the Skype purchase was made so they can directly address the things people ask for when they're evaluating Lync.
It just bothers all the Silicon Valley tech press that Microsoft continues to thrash its competitors.
Google makes money via search.
Apple started off with fucking mp3 players and now makes 'post-PC' devices.
It just bothers SiValley that no one can touch the Windows domination.
Microsoft made $5 billion+ in profit last quarter. The CEO who's been in charge for the last 10 years should be given a prize for surviving and growing the company's profits.
A new emerging company will always have more room to grow. If you consider each company at its core competency they are all dominating.
Google has 64% or so search share. Bing+yahoo get 30% or so.
Microsoft has 90%+ desktop OS share. After 16 or 20 continuous quarters of growth Mac is still less than 10%.
Apple is dominating smartphones (though Android might slow it down, notably without making any profit itself - unless you want to count it as a defence for mobile search). It's also dominating Tablets and trying to change things - because it doesn't want to fight Microsoft head-on in PCs - Just too difficult given Microsoft's advantages.
So each company is dominating its niche and trying to find ways to make its niche dominate the entire tech landscape.
Microsoft still being so dominant and the success of Windows 7 point to Sinofsky and Ballmer being God level. Growing profits from a couple of billion a quarter to $5 billion to $6 billion a quarter is extremely impressive.
Apple's growth is more impressive - However, that doesn't mean Microsoft's profits are unimpressive and it'd be foolish to take your personal dislike of Microsoft as a reason to discount some really solid work by CEO Ballmer.
Finally, Ballmer's first duty is to Microsoft and himself and Gate and Microsoft people.
Who fucking cares what the vultures of Wall Street and shareholders who don't do squat think.
Sure, Microsoft could have built a skype clone in-house for far less than $8bn. But would people actually sign up and use it - to the tune of 124 million people per month? My guess is no, at least not for several quarters.
Pre-antitrust days, that would be exactly what MS would have done. But it has been battered and bruised by the investigations and must have sworn to themselves "never again" will they ever devote managerial time to do what could have been solved by an outright purchase.
I think this is a key point. Ballmer has been hogtied with the fallout of the anti-trust stuff. Microsoft can't use it's "installed base" advantage in the same way it once could. We'll see how great Google does once it inevitably faces the same issue.
Actually, I think it is that whether bad memories can get institutionalised. If Balmer leaves, that body of bad memories will be gone, and people more willing to take risks again. We need to remember the software landscape has changed considerably. What might not be permissible of Microsoft in the 90s may now be fair game.
Windows Live Messenger has 330 million active users according to wikipedia, Microsoft could have improved it instead of the current bloated crap it currently is. If it was as lightweight as gtalk, provided voip capability and a good iphone app capability I would start using it and so would all those 330 million active users.
It does. The problem with WLM is that its US user base is somewhat smaller. And the US user base is pretty influential, especially in the mobile space.
$8.5B influential? Honestly, I don't see what $8.5B gets you that investing $500M in a Skype partnership wouldn't have.
I'd like to think they have some grand plan, but honestly I don't think so.
I think they're just sitting on a stack of cash and getting pressure from investors to spend the cash and grow.
Microsoft is entering what Jim Collins would call the 4th stage of decline: Grasping for salvation. Unless something changes dramatically very soon, I wouldn't be placing my bets on Redmond.
That's an overstatement to say the least. Microsoft still mints money at an incredible rate. They may be doing terrible in the mobile and web space, but Windows and Office will continue to live for a long time, particularly in corporate environments.
But unless Microsoft finds a new vision and direction, they're in serious trouble when those cash cows start to go dry.
What makes Microsoft's floundering under Ballmer particularly galling is the fact that Microsoft has been acutely aware of this for a very long time; the Sun and Netscape antitrust suits were born of Microsoft's fear of a platform-neutral world.
It's not here today, and we're only starting to see the first seeds of it with the rise of rich web applications and platforms like ChromeOS, but it's on its way. Microsoft still has a timeline in the scale of years to work with, but they need to start focusing aggressively on the future sooner rather than later, and, frankly, I don't see Ballmer as being the person capable of guiding the company through a transition they're going to have to make if they're going to survive in the long-term.
Microsoft has an execution problem. Plain and simple. Their competitive advantage for Windows and Office are huge, I'm not arguing that. However, if you look at the numbers you'll see that they are in decline.
Having an execution problem, long term, kills companies. No matter how great their advantage may be.
>> Beyond that is the fact that Microsoft has 89,000 employees — are you telling me that the company that put a computer in every home couldn’t create a Skype clone? <<
Yes, that's right. They couldn't create a Skype clone, no chance. Of course, they could create a similar product in terms of functionality, but how many would switch to it from Skype?
Actually it's a lot worse than that. MS already has a very successful Skype competitor, that does better than Skype in most metrics
Windows Live Messenger boasts in excess of 330 million monthly active users with 40 million concurrent, compared to Skype's 170 million and 20 million-30 million concurrent
People often forget the Microsoft right before Balmer was slapped with one of the largest anti trust lawsuits in decades. People wonder why MSFT hasn't been competing aggressively for the following decade... It's because they've been afraid of anti trust litigation yet again.
I've had a couple of conversations with people in semi-upper levels of MSFT management. Long term Microsoft employees are still scarred from that litigation. So much that it still comes up in conversation 12 years after the fact.
I would guess they are mainly purchasing entrenched users of an already-implemented service. This same outcry (largely inspired by the sheer magnitude of the numbers involved) accompanied the MySpace acquisition and then YouTube. One failed miserably, the other is still playing out and might actually have made sense. The prognosticating is, at the very least, as desperate a flailing as the purchase itself. It's a serious business gamble. If you think you know with certainty at this point in time whether or not it will pay off, I submit that you are really into yourself or just really nervous. Skype has millions of users who couldn't care less who owns Skype. We just cannot say at this point that this is a disastrous business decision.
P.S. I have been following Skype for a long time and worked for a company that sought to partner with them in their early days (fudge - just dated myself). Beyond the old school "acquire eyeballs" angle, in my humble opinion, their technology is very legit. The algorithms/techniques/architecture/infrastructure they use for audio compression and transmission (and now video) are very finely tuned and if you think it is easy to recreate that just because you have thousands of developers at your disposal, you should reconsider your position.
Microsoft's strategy is much more in the 'stability' mode now (similar to Boeing). Most often, exponential growth (as seen in GOOG's chart) occurs in the first ten years of existence. From what I see, once a company is established and the rate of change for acquiring additional market share slows, their stock price tends not to climb up the charts with the same (dare I say 'speculative') uni-directional velocity.
Also, MS has had a nice streak of anti-competition battles during Ballmer's tenure. Just one data point that may be relevant to the lack of growth in MSFT share price.
Last thing, a chart showing the 100-day Simple Moving Average (post tech burst) may more accurately depict/model the normal MSFT price range under Ballmer's leadership.
This article is too business-centric. MS is sinking slowly because the world is moving to better things than Windows. It's sort of like selling bicycles, when motorbikes are becoming increasingly available.
Perhaps this is why it's worth $8.5 billion to MSFT and not to others. It's pretty silly to say someone got a bad deal a week after they bought it. If Ballmer has some awesome plan for it that will require a year or two to implement it would behoove him to disclose this so that others could move competitively to destroy the value from such a purpose.
Why's it silly? He's buying a commodity business (thats what VOIP is) for 32x earnings.
There's a reason M&A is often referred to as a winner's curse -- because winning the bidding typically means overpaying. The synergies execs often talk about almost -always- fail to be realized.
Shareholders of Microsoft would have been much better off if the company just bought back $8.5bn in stock. A dividend would have been out of the question due to tax repatriation issues.
There is a significant difference between bringing in a new product and having that product be a part of the standard install on every laptop/desktop from the perspective of Enterprise IT.
Yes, but wouldn't that get them in trouble because of the anti-monopoly laws? If I remember correctly, they got sued just for bundling IE with Windows, right?
Do you have a source for "32x earnings"? I suspect it's even worse than that. In other HN thread someone mentioned the price was about 300x earnings, and via google I could find this:
Skype's revenues for the first six months of 2010 were $406 million, with a net income of only $13 million.
Not only a commodity business, a declining one. A specialized desktop application to chat. Hello, it's 2011, people do web-based peer-to-peer video chat for free. Just, ask the Chatroulette users. Free.
I bet this will go down as one of the most stupid buyouts in history.
Skype is free for video chat too. And I must say it's worth every penny for its phone line in service when compared to free offerings like Google Voice.
Skype and VoIP in general have all kinds of potential synergies with current MSFT products, difficult to materialize as they may be. Remember that they just put out an incredibly powerful 3D camera called the Kinect. With Skype on Xbox, we could see the beginnings of accessible 3D teleconferencing. Even if it's just Skype, its inclusion further cements Xbox's place in a living room by replacing another utility.
Some analysts are forecasting for the telepresence market to grow at ~30% annually through to 2015, with a strong driver being enterprise clients. Why not bundle Skype into Office? Microsoft Communicator already does video chat, but only with other Exchange users. Expanding the install base by 124M users might be the kick in the pants teleconference needs.
Whether or not these scenarios are achievable by MSFT is up for debate.
Skype on Xbox? 3D conferencing? Setting aside the horrendous culture on Xbox Live, does anybody want "3D conferencing"? Most people don't even use Skype for video conferencing today.
I get the impression that Ballmer does not have great vision. I dont have evidence to support it. That said, I dont buy many of the arguments made in this article.
He is comparing Skype to Facetime. I dont think buying an app for 8 billion dollars make sense. I am sure there is more to skype deal than just the GUI app. The deal may have brought rights for usage of certain IP networks or something along those lines.
I am not sure how MSFT is planning to leverage this deal with plans of pushing into the mobile market. I am sure there is something in the works there.
Stock Price comparison:
There were many Billion dollar companies that are doing fine without a staggering growth seen in Apple or Google, that does not mean that CEO's are doing a bad job.
So this seems to be largely a rehash of existing arguments against Steve Ballmer with the added bonus of the skype purchase being thrown in. I cant say that I disagree with the article, but I would agree with others' comments that direct comparisons of MS to Apple and Google are not completely valid. I personally think that there is space for all 3 companies to thrive(which to some degree is the case) since they all have a different niche. It does seem that MS is not the less agile and forward thinking company of the 3. I could liken it somewhat to Detroit vs japan/Korea
If you take into account stock split and dividends for Microsoft, the total return from 2000 until today is about 13% which is not great but much different than the misrepresentation of a 60% loss. The returns would be much higher if you had not bought in 2000 before the crash which Ballmer could have had no control over. For example if you had bought shares at the end of 2002 than your total return over that time would have been about 130%.
I'm not saying that Microsoft hasn't missed opportunities or that Ballmer shouldn't be replaced but its not quite as bad as pictured in that graph.
One thing I never see considered in comparisons to younger or more nimble and retooled competitors is that by 2000, Microsoft was already a convicted monopolist!
For the first few years of the decade, the company was still dealing with governments on two continents on what and how they could compete in the software business.
As others have mentioned, in this time frame they have also paid billions in dividends.
It may well be time for Ballmer to go, but the comparisons in stock price to Apple and Google over these short time frames don't reflect all the context and dynamics of the share prices.
The bothersome thing about the Skype acquisition is that it's really not going to save them at all. It was a statement purchase. They bought it to show off.
They could have bought up a lot of innovative, smaller companies for $8.5B... some that might rebuild their character.
That's definitely overstating it. They are better than everyone else in the consumer space. Not enough to be worth 8.5 billion for but the core underlying technology is good(They suck at client development though). People underestimate how hard VOIP is because it sounds so simple.
The echo cancellation algorithms, the speed of their sip like algorithm as well as the infrastructure to run their entire network is an engineering marvel. While, Skype's UI could use an update as well as some usability testing, their backend infrastructure is most definitely not a POS.
Hardly, here's why: If you can link the phone with desktop
applications you have a hit that neither Apple or Google can duplicate. Think of you desktop as a server for your phone.
Who better to coordinate the operating systems of the two
than Microsoft. If that's what he is thinking, I can't wait
to watch the dog fight between the three of them.
CEO doesn't control the price of his company's stock. It's silly to use stock price, which is set by the market as a performance indicator. It's makes more sense to compare metrics like net income, free cash flow, etc.
Not to mention those were small companies in 2000. For Microsoft stock to have increased 1200% (as Google's did) it would have probably had to grow into some very significant portion of the world economy.
Obviously Microsoft hasn't outperformed over the past 10 years, and it looks like the rest of the article gets into actual substantive critique, but it's hard for me to trust substance from someone who starts out with such an unfair introduction.