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2/9/2008 10:47:46 PM - Microsoft - An Empire in Decline

As I mentioned over a year ago on this site, the leaders of Microsoft continue to try and expand their empire to the detriment of their shareholders.

They recently offered $44.6 billion for Yahoo. To summarize the logic behind this insanity, Microsoft has been unable to compete with Google in the Internet advertising space (despite ramping up the number of acquisitions - and the dilutive prices - that they've been paying recently for companies such as aQuantive.) Thus, they're going to buy Yahoo - another company that has been annihilated by Google in the marketplace (as evidenced by their latest stock slide to $18 from $23 when they gave a very grim forecast for 2008, and down from $40 a couple of years ago.) Apparently, somewhere in Redmond someone thinks that it's a winning idea to combine two losers. The most humorous - and arrogant - part of the whole thing is that Microsoft apparently believes that their executives...who have been unable to make MSN much more than a trivia question in terms of advertising market share...will do a much better job than the executives at Yahoo (who despite their failure against Google are considerably larger than Microsoft in the Internet advertising space.)

I think that Microsoft got far too used to being able to enter marketplaces where they had no experience, spend billions, and eventually come to dominate other companies who were less well capitalized. That won't happen here.

My biggest point, though, would be that - again, as mentioned in my earlier postings - is that Microsoft doesn't even need to be in this space. Microsoft is more interested nowadays in expanding their empire - everywhere - rather than focusing on what they do well. More examples? Netscape made a browser...so Microsoft had to make one (and give it away, which basically means that it's a net money loser.) After Netscape folded (and was sold to AOL for a fraction of its peak net worth), Microsoft lost interest in the industry and stopped updating its browser for half a decade before finally being forced to come out with a token update because free competition was beginning to make their browser look pathetic in comparison.

Google found a way to make money by giving search technology away for free - they subsidize it with ads. It's strange that Microsoft only follows such trailblazers instead of forging their own unique path. What if using Internet Explorer - with ads enabled - gave you a free minute of Microsoft Office usage for every ad that you saw? There are an infinite number of such possibilities, but Microsoft hasn't tried any of them. Instead, it's decided (after someone else already seized a strong lead) that it needs to index the Internet, too...and sell ads the same way.

Microsoft frequently does this. They see an industry that might take off, is taking off, or has taken off, and then decide that - whether it's within their range of competency or not, and whether or not it truly makes long-term, strategic sense - they need to get into that area in a serious way. Examples of this would include Internet browsers, Web TV, PDA operating systems, tablet PC operating systems, cell phone operating systems, video game consoles, MP3 players, search-based advertising, et cetera.

Here's a question. Looking at the list above, how many of those extremely expensive attempts have earned a significant return for the shareholders that footed the bill? The answer? None of them. Most of them, in fact, have been huge sinkholes of money. Wouldn't that money have been better off being distributed to shareholders in the form of, say, stock buybacks or dividends?

What is the corporate vision, again? If something utilizes computer chips and can access the Internet Microsoft will dive in head first, regardless as to whether or not the company has any expertise in that particular category, how much competing in that environment will cost, whether their chances of success and potential rewards are sufficient to justify the risk, or even any unique vision of their own in terms of the category itself?

It took Apple to point out the fairly obvious fact that given the small size of cell phones, a touch-sensitive screen would be a large positive. Apple then went with that idea and took things even farther, adapting their interface to take full advantage of that new mechanism. Guess what comes next. That's right. Microsoft will follow right along, as they typically do. They'll be adding touch sensitive capabilities not because they have a vision, but because someone else had one and customers seem to really like it. It is not in their corporate culture to innovate or lead. They can plod along and add basic, mundane features to something, but they are amazingly - and I mean amazingly - bad at utilizing their heft and dominance to really change the world.

When I wrote about Microsoft earlier, I stated how I would sell their stock when it rose to $30-32. I said that it was unlikely to hit $40 any time soon and didn't pay a meaningful dividend. Sure enough, they got up to - very briefly - $35 before it all came crashing down, accelerating upon the release of the Yahoo purchase offer (that took them from $33+ to $28 in about a week.)

While on the subject of stock prices, Google got up to about $750. That made my statement that they were seriously overvalued at about $475 look wildly premature...until they came crashing back to $500 in about a month. What happened was what I predicted. The wild growth eventually dipped and while still impressive, the stock was priced for perfection for years into the future.

Here is a link to an article repeating some of the same points that I've previously made about Microsoft: Silicon Alley Article

- TZ

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