Novice Investing - Microsoft Getting Soft

Date: Thursday 28th 2008f August 2008 01:03:58 AM

Microsoft Getting Soft - 06/23/2008

By: Hari Wibowo

		Microsoft Corporation. One Microsoft Way Redmond, WA 98052 United States

Two years ago, Microsoft Corp. (MSFT) cofounder, Bill Gates, announced his intention to retire. We argued that he left a lot of unfinished work behind. Microsoft, however, gives two years transition period from the day the announcement was made. As it turns out, his unfinished work may still threaten Microsoft's dominant existence. Let's check them one by one.

Search Engine. Two years ago, it was a big problem for Microsoft. This time around, the problem got worse. With Google Inc. (GOOG) global market share reportedly as high as 78% (gasp!), Microsoft threw out a bid to acquire the second biggest player in the arena, Yahoo! Inc. (YHOO) for $ 31 per share or $ 44.6 Billion in cash and stock. That doesn't go well. Yahoo! looked it as a cheap effort to acquire a struggling company. The proposed deal is definitely off now and furthermore, Yahoo! has run towards Microsoft's search nemesis (a.k.a Google) for a deal that allows Google to sell search ads on Yahoo!'s properties. If you can't summarize it, here is what it means; Eroding market share, failed acquisition, stronger competitor. What is worse than that?

Window Vista. After a prolonged delay, Vista was finally launched in 2007. There was this fiasco with Symante where the company had threatened to block the distribution of Vista. But it seemed to die off now. It is all smooth sailing for Window Vista now, right? Wrong. Google (the nemesis again) has launched an anti competitive complaints towards Window Vista. Along the way, consumers and businesses seem to be ambivalent towards Window Vista with sales trailing its predecessor, Window XP. This despite Microsoft effort to discontinue support for Window XP set at certain date after Window Vista's launch. At this point, it seems like consumers still love their XP more.

X-Box. Two years ago, X-box was losing more and more money for each console sold. Fortunately, this is one thing that has done well for Microsoft for the past two years. Microsoft latest earning report shows that its Entertainment and Devices Division (which includes X-box and Zune) reports a positive operating income. So does its nine month result with operating profit of $ 614 Million. Phew. Finally Microsoft can drop some champagne. Do not be overly excited, however. While we expect the positive trend to continue, please note that the Entertainment & Devices Division incurred operating loss of $ 746 Million in the first nine months of fiscal 2007. Thus, overall the division has not made any money for Microsoft.

Microsoft Office. Two years ago, we saw an eminent threat of free office program with Google partnering with Sun Microsystems to provide Star Office from the internet. Further, Google has released Google Docs, which is a free web-based word processor and spreadsheet. Has it made a dent to Microsoft's office dominance? One can look at Microsoft Business Division for a clue. While the past three months showed lower operating income ($3.138 Billion) compared to 2007 ($ 3.399 Billion), Microsoft nine month's result shows that the dominance continues with $ 9.017 Billion of net operating income compared to $ 7.794 Billion in the previous year.

The above were problems that had persisted two years ago. As Bill Gates' retirement came close, however, there were other missteps that would cost Microsoft in the future.

Doubleclick. In 2007Google was willing to dig in $ 3.1 Billion for Doubleclick, which is a dominant leader in display advertising. While Doubleclick valuation was quite stratospheric with 10x revenue, it was widely seen as a way to prevent Microsoft from having a hand on Doubleclick. Three months later, Microsoft acquired aQuantive Inc. for $ 6 Billion, almost double the price of Doubleclick's acquisition. While aQuantive is a much more established player, the intention was to acquire aQuantive's Razorfish which provides advertisers with digital marketing consultation.

Facebook. Having been beaten by Google for Doubleclick and Youtube acquisition previously, it is time for Microsoft to strike back and fast, right? After Google beat Microsoft (yet again) to provide advertising for Myspace, Microsoft rushed to make its own deal to supply advertising with Facebook. Further, trying to outdone Google, Microsoft took the plunge by acquiring 1.6% stake of Facebook at the cost of $ 240 Million. A simple math shows that Microsoft would buy all of Facebook for a mouth-watering $ 15 Billion. So, Microsoft was paying up $ 15 Billion for one networking site while at the same time, it is not willing to pay more than $ 45 Billion for a worldwide brand like Yahoo? That is hard to fathom but it is happening.

In short, there are many unfinished business at Microsoft. However, Bill Gates has to move on. Microsoft should be able to survive despite these several issues. Whether Microsoft would be better off without Bill Gates remains to be seen.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Microsoft Corp. (MSFT) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]