12.15.08
Microsoft Under the Scalpel
“There is such an overvaluation of technology stocks that it is absurd. I would include our stock in that category. It is bad for the long-term worth of the economy.”
–Steve Ballmer
AN interesting new headline has entered Google News. It states: “Why Microsoft Is Headed to $4.” While it seems like an exaggeration, depending on what time range one considers, it does raise some valid points.
A while back, when Microsoft shares were trading in the mid-$20s, we used charts to predict they would eventually fall to $4 or lower. How could such a thing happen to a company with a product that dominates the software world, and with cash reserves totaling more than $20 billion? For starters, consider that Microsoft used to have twice that sum on hand but squandered a big chunk of it on investments that would make the guys at Bear Stearns look like visionaries. Also, they have not exactly enticed new customers in droves with the clunky Vista operating system. While the Redmond behemoth may have been able to ram this product down the throats of captive business and institutional customers, much as they have been doing for years with each new, gratuitously enhanced version of Windows, individual buyers have deserted the platform en masse. Just look around you the next time you’re at Starbucks: probably half of the computers one sees these days outside of the office and commercial airliners are Macs. The percentage is even higher at college libraries. These are tomorrow’s business users, and most of them wouldn’t use a PC if it were given to them free.
[...]
But the stake through Microsoft’s cold, monopolistic heart may be the new product announced last week by IBM –an office suite that runs on cheap :thin clients” connected to a backroom Linux server. IBM says customers will save $500-$800 compared to what they would spend to license Microsoft’s office suite, which includes the ever popular Excel, PowerPoint and Word. The savings would come not just from the software, but from, reduced costs for hardware, electricity and air conditioning.
Microsoft’s stock is already shaken and a formal warning from Microsoft seems likely following at least one warning from analysts. This was covered by quite a few Microsoft watchers:
Todd Bishop: More questions over Microsoft profits
Microsoft shares are currently down about 6 percent on the day, to $19.38.
What would a Microsoft earnings warning look like? For a clue, you have to go all the way back to December 2000, in the middle of the dot-com bust, which appears to be last time the company issued such a warning. It came out around the middle of the month, on Dec. 14, so if the past practice is any indication, any new warning could be a few days away.
Mary Jo Foley: Microsoft walks the downturn-messaging tightrope
Is Microsoft poised to join other tech vendors in announcing dismal second quarter earnings or is the company going to yet again manage to meet or beat its traditionally conservative guidance (this time against seemingly impossible odds)?
Joe Wilcox: What Happens if Microsoft Warns?
Microsoft issued a dire profit warning at the start of the last recession, in December 2000. Will the 2008 recession lead to another warning?
Eric Savitz: Microsoft: Waiting For The Warning
Morgan Stanley’s Adam Holt this morning notes that the company has not negatively pre-announced earnings since December 2000. But given that business conditions have deteriorated since the company last provided guidance in October, he thinks the company could come up short of its targets for the quarter, whether or not they give the Street advance warning.
In addition to this, IDG has an article about something it calls “Microsoft’s identity crisis,” which is characterised by odd steps they have recently been taking.
The Softwear t-shirts seem like another directionless Microsoft move, much like the short-lived Bill Gates/Jerry Seinfeld ad campaign, which by the way, was voted the No. 1 bad commercial while Apple’s “I’m a Mac, I’m a PC” ads were voted the No. 1 good commercial in Anderson Analytics’ 2008 survey of 1,000 college students.
Microsoft layoffs have already begun [1, 2, 3, 4] and the following erroneous report [via Google News] says “EXCLUSIVE: Microsoft To Lay Off 1,500 In California; 200 In L.A.” It’s not true, not just yet anyway. But what if Microsoft issues a warning? █
amd-linux said,
December 15, 2008 at 7:48 am
MS is currently trying to defend the Linux market entrance in the netbook segment and they are somewhat successful, unfortunately for their shareholders:
They close marketing agreements that the producer gets a per-device marketing subsidiary for every device sold that contains Windows. They also have to obligate themselfes not to sell comparable devices without Windows but only devices with limited capabilities.
They maybe charge roughly 30 USD / copy for Windows XP per pre-installed device. They maybe pay, on the other side, 25 USD for every Windows machine sold.
The manufacturer pays de facto only 5 USD per device, close to the costs for an customized Linux.
MS can show the world that their revenue still is high and growing with netbooks. However, their marketing costs, that basically set the license income off, will sooner or later bite them hard.
Since marketing costs and license revenue might be deferred, you can not compare this on a quarter-by-quarter comparision, the subsidies are not easy to detect.
I am going so far to say that in some cases (Asus?), subsidies for marketing might be even higher than Window license costs, so MS might already be PAYING per license just to defend the netbook market segment.
They might be able to hide the costs for a while but sooner or later, this will really hurt. Not even MS can fight off FOSS with subsidies – their treasure chest is not an unlimited ressource….