10.05.08

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Internal, Financial, Prospective Problems at Microsoft

Posted in Finance, Google, Hardware, Microsoft, Steve Ballmer at 5:08 pm by Dr. Roy Schestowitz

Man in money

The previous post focused on one particular problem with a product, combined or associated with a known corporate culture problem. The following accumulation of news from the past week will hopefully shed light on the problems Microsoft as a whole is facing. It is well deserved.

Scandalous Bonuses

The economy is slowing down, Microsoft’s financial reports have disappointed for two consecutive quarters, but this does not prevent people at the very pinnacle from rewarding only themselves.

Some days ago we wrote about the bonuses kerkuffle, which a prominent Microsoft blogger found outrageous.

Now it turns out that even departing executives are rewarded handsomely. Here’s the news about Johnson, whose departure we last mentioned a month ago.

Ex-Microsoft exec gets big bonus after joining Juniper

[...]

Johnson was set to receive a $5 million signing bonus when he arrived at Juniper earlier this month and a base salary of $800,000 a year.

More information is available here.

Johnson owned roughly 1.5 million Microsoft shares as of Sept. 5, according to the filing, which would currently be worth roughly $39.3 million.

They sure have a reason to buy back the stock then. Personal reasons, too. Steve Ballmer’s pay is now being revealed, specifically here and here.

According to Steve Ballmer, profitability is a priority in some areas of business where the company loses money.

Ballmer: Microsoft Is Up-Front About Its Money Motive

There, he said it. Microsoft is interested in making money. That’s what CEO Steve Ballmer said in reference to Microsoft’s motivation in the mobile space.

There are sour grapes and a continued desperate attempt to obtain stronger grip on market segments outside desktops. They now attack the iPhone, for example, through legal or verbal means. For Microsoft, the mobile unit performs badly (previously mentioned in [1, 2, 3]) and shipments of Windows Mobile have recently missed expectations.

Pay for Use

Rather than charge for use of its products, Microsoft seems to be paying out in search of greater market share (or just “in search”), i.e. it relies on deep pockets to compete. Moreover, as noted below, Microsoft uses its little “bribery” scheme also to ‘punish’ or to elbow aside competing Web browsers. Spying on the user (harvesting) is part of Microsoft’s ‘hidden’ income.

More Microsoft Live Search Bribery

[...]

Just using Microsoft online services isn’t enough to get your ticket punched, though. You must run Internet Explorer (6.0 or higher) when you use those services. Even visiting getsearchperks.com with Firefox or Opera is a futile exercise; you will have to start IE to see what goodies the site has to offer. Oh, and if you sign up you’ll have to install the Perk Counter toolbar to let Microsoft keep track of your tickets.

Here is another new example of Microsoft ‘incentives’ at play:

Microsoft Adds Incentives to Small-business Program

Microsoft has given small and mid-sized business customers more ways to earn cash to buy its software through partners by adding new products and product groups to its Big Easy program.

Legalised Bribery?

“Legalised bribery,” also known as “lobbying,” is a very serious issue. Large companies (mega-corporations) behave as though they own and run the country. Microsoft is among the very worst offenders/culprits in that respect.

As far as the bailout is concerned, Microsoft of course intervened in the name of its own interests (again pretending it’s “for the ‘little people’ or the public”).

The four representatives that Microsoft Corp. lobbied earlier in the week after the House of Representatives failed to pass a massive Wall Street bailout bill did not change their votes today as a revised bill sailed through Congress.

This is also covered here and here. Without delving into economics and politics, it’s worth emphasising that Microsoft promoted a scheme that defends ‘fat cats’ like itself while harming poor taxpayers the most. This gets more interesting when considering Microsoft's tax breaks.

Other risky or damaging sources of influence are actual employees, not just lobbyists, who may be hired just temporarily. A company called Lighthouse1 has just appointed as its CEO a former Microsoft executive.

Lighthouse1 has named former Microsoft executive Jeff Young as its president and CEO.

The company is unlikely to be GNU/Linux-friendly then. Why are Microsoft executives leaving anyway?

Internal and/or Financial Problems

There are a lot of headlines out there about a serious Microsoft leak claiming that its workforce is already affected negatively. This IDG report suggests that Microsoft’s pain is showing more than before.

Microsoft hiring freeze? From recession to depression

Confusion arises over Microsoft’s hiring plans. The company issued a memo that hinted at a freeze, one employee said, but a spokesperson denies a freeze.

Here is a more extensive report about this (also from IDG).

Microsoft has instituted a hiring freeze, likely spurred by the worsening economic conditions in the U.S., according to a source close to the company.

Microsoft denies it, but its denial is weak. It’s more like damage control. Here is a summary.

Yesterday, Microsoft (NASDAQ: MSFT), the world’s largest software company, said it was taking a look at hiring. That is probably code for the firm saying it plans to cut or level out expense growth.

According to Reuters, Microsoft said, “Given the current economic environment we are taking the prudent step of reviewing our hiring plans and will make some adjustments as appropriate.”

The Microsoft-adjunct press has had its own take, though it’s as biased as always. Spendings at Microsoft may be suspended too, according to some other reports.

The axing at Microsoft, which was mentioned recently on at least a couple of occasions [1, 2, 3], could have a wider effect, according to this op-ed that alludes to Ensemble Studios.

Is Microsoft’s Xbox 360 studio Rare next on the chopping block?

A couple of days ago I wrote a story about how Microsoft announced the closure of one of its first party studio, Ensemble Studios. The stated reason behind this decision to close one of its studios was due to lack of scalability. In other words, Microsoft execs felt that Ensemble as a venture could not grow profitably. This raises an interesting question; could the same fate fall upon Rare as well?

This was followed by this report from the same site.

Xbox 360 fans angry at Microsoft studio Rare for not listening to them

Microsoft’s first party studio Rare has been in the video game news recently due to some criticism it has received by Peter Moore, former head of Microsoft Game Studios.

The press still covers the Ensemble Studios shocker.

It’s hard to believe that any developer making a game based on Halo could be shut down for financial reasons, but that’s the fate awaiting Dallas-based Ensemble Studios.

Emphasis is to be put on “financial reasons.” Previous posts about this subject contained more examples of discontinued or shut-down Microsoft products and services.

Outages

Problems with XBox run deeper and there was a prolonged outage last week.

An unplanned outage hit Microsoft’s Xbox Live service starting Tuesday night, leaving online gamers unable to connect.

There was downtimes for Zune as well. This is not a way to market Microsoft products. It inspires no confidence as the LSE downtimes repeatedly show.

Iffy Outlook

According to the following report from India, Microsoft is poised to lose billions of dollars.

The cut in the IT budgets of the revered investment banks like Lehman Brothers and Merrill Lynch due to their failure may lead industry giants like U.S. based Microsoft and California based Cisco to lose $4.3 billion in orders next year. While Cisco earns about three percent to four percent of annual revenue from the U.S. financial industry, Microsoft accounted for 22 percent last year.

Even some analysts are not entirely optimistic, to say the very least.

Microsoft will be hurt by financial crisis, RBC analyst says

The devastating U.S. financial crisis will hurt software giant Microsoft Corp.’s bottom line this holiday season as shoppers tighten their purse strings, RBC Capital Markets says.

Cash Cow (Office) Under Fire

One of Microsoft’s few profitable products (and the most important one too) meets another challenge from Google.

Does Google Apps pose a threat to Microsoft? No way, said Microsoft CEO Steve Ballmer in April 2007. He made his point clear to attendees at the USA Today CEO Forum: “[Google has] come out with what I might call—what’s the politically correct way of saying it?—they’ve come out with some of the lowest functionality, lowest capability applications of all time.”

The room filled with laughter.

Ballmer—for one—is not laughing now. That hubris and short-sightedness is coming back to haunt him.

Microsoft is now taking the threat from Google quite seriously: In July 2008 COO Kevin Turner was dispatched to consumer-products giant Procter & Gamble to dissuade P&G from moving to Google Apps—and ditching Microsoft.

This further justifies Microsoft’s fear of Google, which it constantly attacks.

Weakening Market Grip

Not many flattering reports have appeared in these difficult times. Tech Radar asks whether Microsoft has lost it and Salon, which is typically ultra-pro-Microsoft, writes to say that “Microsoft doesn’t matter anymore.”

Rejected by Yahoo!, outgunned by Google and humiliated by Apple, Microsoft is fighting for its very survival

 

Yes, Microsoft has made a truckload of money on smart business decisions in the past. But these days, it seems like its just pissing its future away by releasing products that no one is actually interested in. If this is the brilliant strategy that Steve Ballmer is planning on using to take on Apple and Google as Gates fades into the sunset, he might want to reconsider.

Another article says that Microsoft struggles to innovate or lead in the Web era. The Register presents an example of a new struggle.

Earlier this year, when Microsoft was making a play for Yahoo, I observed that the Internet is not in Microsoft’s DNA. Ballmer’s acknowledgement of Microsoft’s slow move into search, and Mundie’s demonstrations at EmTech indicate that it continues to struggle to establish itself as a true leader in Internet innovation

 

Microsoft’s Hotmail hybrid struggles to life

The long-awaited merger of Microsoft “classic” and “full” Hotmail services has got off to spotty and painful start.

Microsoft is not as invincible as it wants you to believe. The hype in the press can be hugely deceiving and possible financial fraud [1, 2] puts an eternal grey cloud over Microsoft’s extravagant claims.

“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

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17 Comments

  1. RyanT said,

    October 5, 2008 at 5:43 pm

    Gravatar

    Ballmer is wrong when he says GDocs isn’t a threat.

    A classic sign of disruption as I mentioned previously – a disruptive product can be epitomised by “crappy products for non consumers” – Google Docs might be low functionality now, but if Google plays its cards right and slowly increases functionality while still keep the web based appeal intact, they’ve got a sure fire way of taking out Word.

    Couple that with a failing games division, a lack of a Google competitor, and an OS that will become irrelevant going forward through diversification of devices and extra needed mobility and customisability, and they have a shaky future.

  2. RyanT said,

    October 5, 2008 at 6:01 pm

    Gravatar

    Also, try taking a look at this:

    http://www.guardian.co.uk/media/2008/oct/05/media.microsoft.ballmer

    http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=windows&articleId=9116258&taxonomyId=125&intsrc=kc_top

    http://machinist.salon.com/blog/2008/10/03/microsoft_search/

    The software worlds business models are changing, and Microsoft is stuck in the 90′s of OS and Office.

  3. Roy Schestowitz said,

    October 5, 2008 at 6:14 pm

    Gravatar

    The theory of disruption says that they absolutely must drop the existing model and adapt (not overnight) because they fight something that cannot be stopped. There are examples of inability to react on time (Microsoft is already many years late), e.g. the US steel industry.

  4. David Gerard said,

    October 6, 2008 at 10:17 am

    Gravatar

    The XBox 360 is an example of Microsoft snatching defeat from the jaws of victory. They made a good gaming console, with great games, that should have been profitable … then they cut so many corners in manufacturing that it’s stuck with an indelible reputation as a lemon. The red ring of death is as iconic amongst gamers as the blue screen. How on Earth did they flub this one?

  5. Roy Schestowitz said,

    October 6, 2008 at 11:14 am

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    The failure rate (2 in 3) is outrageous enough. What’s more bothersome, however, is the way Microsoft handled the truth:

    Microsoft Gags Own Employees to Put Customers’ Life at Risk
    http://boycottnovell.com/2008/09/15/microsoft-gags-own-employees/

  6. AlexH said,

    October 6, 2008 at 11:45 am

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    2 in 3 XBox 360s fail?

    Where does that figure come from?

  7. Roy Schestowitz said,

    October 6, 2008 at 12:06 pm

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    “Come from” or “leak”?

    I suppose you did not follow the URL above.

  8. AlexH said,

    October 6, 2008 at 12:10 pm

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    I did follow the URL above, but there were a couple of ~60% figures: one which seemed to refer to manufacturing faults, another which referred to the proportion of returned units having general hardware faults.

    I’ve seen estimates of the actual customer return rate between 15% and 40%, hence me asking where your figure comes from?

    I’m not a gamer, so I don’t really care what Microsoft widdles its money away on, I’m just interested.

  9. Roy Schestowitz said,

    October 6, 2008 at 12:20 pm

    Gravatar

    Xbox 360: 61 per cent failure rate
    http://www.360-gamer.com/news.asp?id=964

    Gamers Say Microsoft Understates Xbox Problems

    “Game Daily BIZ, a gaming industry publication, reported that the anonymous source tallied that of the 300 consoles EA has received, 30-50 percent of them have failed.

    http://www.consumeraffairs.com/news04/2006/08/xbox_gamers02.html

    HTH.

  10. AlexH said,

    October 6, 2008 at 12:36 pm

    Gravatar

    Well, it does help a bit, but it still seems a bit high – the 61% figure is from a survey which mostly got responses from angry owners. I think you might be being a bit credulous with that one.

    I think a failure rate of 20-30% – which seems more reasonable to me based on the facts – is disastrous enough without having to pump it up. YMMV.

  11. Roy Schestowitz said,

    October 6, 2008 at 2:24 pm

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    Published just in time (moments ago):

    http://www.itwire.com/content/view/21017/1063/

  12. AlexH said,

    October 6, 2008 at 2:33 pm

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    Given they’ve just dropped the price, I doubt they’re about to throw the towel in somehow.

  13. Roy Schestowitz said,

    October 6, 2008 at 2:37 pm

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    Wet towels made of cash, yes? :-)

    Sony loses lots of money too, I don’t doubt it. Earlier on I saw a report suggesting that both might quit this business at the end (after this ‘generation’).

  14. AlexH said,

    October 6, 2008 at 4:22 pm

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    To be honest, that wouldn’t surprise me at all.

    I think I’m right in saying that until Playstation 2 or Gamecube (I can’t remember which, but certainly pre-Xbox) it wasn’t at all common for manufacturers to sell consoles at a loss for any period of time. Now, it seems virtually de rigeur for them to be loss leaders.

    I wonder if Sony only care about Playstation because it’s pushing blu-ray, which is probably going to bring in as much revenue as the games do if not more.

    It’s somewhat amazing Nintendo are still in the game at all – I think they got slightly lucky with the Wii and I don’t think they can replicate that success. The current generation of consoles will probably be around with us for a little while, but then, I guess PS2 has been around for ages now.

  15. Roy Schestowitz said,

    October 6, 2008 at 4:29 pm

    Gravatar

    Sales of consoles (and games) shouldn’t so rosy this December. Microsoft has just shut down a studio for financial reasons.

    Investors sent the Redmond, Wash.-based company’s stock down $1.23, or 4.7 percent, to $25.09 in midday trading. The stock is still above its 52-week low of $23.50 set Sept. 19.

    http://www.businessweek.com/ap/financialnews/D93L3JGO0.htm

    it’s down about 7% now.

  16. AlexH said,

    October 6, 2008 at 4:38 pm

    Gravatar

    Everything is down at the moment, though.

    What remains to be seen is who is going to come through this Christmas in some of the toughest trading conditions in many years. Consoles will be down, but I doubt by a large amount – children’s gifts are the last to go in a recession.

  17. Roy Schestowitz said,

    October 6, 2008 at 4:48 pm

    Gravatar

    Yes, that’s what I’ve been reading too (and not from those with vested interest).

    Regarding Microsoft, the weakening of software megacorps in general can advance Free software and further weaken an already-dysfunctional patent regime.

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