Microsoft: Its Party's Over

Dr. Roy Schestowitz

2008-07-20 11:17:50 UTC
Modified: 2008-07-20 11:17:50 UTC

At reader's request: Microsoft's financial disappointment

It almost feels like covering an old story, so herein we mention only a few new developments and reference the rest at the bottom.

As many have realised before the week ended, Microsoft is not in a good shape. It's nothing like it used to be, but Microsoft goes out of its way to keep up appearances, even using aggression. Perceptual momentum is essential for growth through customer obedience and investor confidence.

“Ask what it is not telling you. It has plenty to conceal.”Just as predicted, Microsoft emhasised revenue, which the massive acquisitions make rather meaningless (buying revenue is easy at the expense of savings). Those who have read this site for a while might not be surprised, but the Microsoft-owned press can be hugely self-serving, i.e. deceiving. Contradictions to it can be painted black... like a black sheep that Big Lies make possible.

Microsoft shares fell sharply, just as they did in the previous quarter when profits fell and Microsoft was no longer able to pretend and conceal its pains. This marked the beginning of a stage where we are likely to see Microsoft's estimates and forecasts lowered and then potentially missed again and again. Recall the fact that Microsoft lowered its projection in the last quarter (and missed them again).

When looking at the financial results, do not ask what Microsoft wants to show you and get journalists blinded by. Ask what it is not telling you. It has plenty to conceal. Being a large company, it can do a lot of division- and bucket-shuffling to impress investors. Here is just one old example: Microsoft Hides Its Mobile and Business Apps Divisions

The company is folding its two worst-performing divisions -- Microsoft Business Solutions (its business applications unit) and its Mobile and Embedded units -- into the Microsoft Business Division and Microsoft Home and Entertainment units, respectively.

For details about Microsoft's financial game, see some of the many previous posts (listed at the very bottom).

Let's take a quick look at some of the realistic (in-depth, as opposed to 'Microsoft parroting') press coverage that Microsoft received at the end of the week.

The Bad

From CNN:

Shares of Microsoft Corp. dropped more than 6% in after-hours trading after the software giant posted a fiscal fourth-quarter profit that fell short of Wall Street's estimates as it forecast lower-than-expected revenue for the following quarter.

According to an analyst quoted by The Street, Microsoft is "not doing well on the earnings front."

Karen Finerman said that Microsoft was "a little disappointing," and that she does not "love two quarters in a row of them being lower."

Adami said that Microsoft's major problem is that it does not tell what is going on. He said that it must "communicate with the Street better."

[...]

Najarian said that Microsoft was "not doing well on the earnings front," and "don't buy this name thinking you're going to get a monster pop."

Buying lots and lots of companies (wasting money) for increase in revenue and employees just makes the company clumsy and overweight. John Dvorak opines that the strategy of the company as a whole is misguided and hubris-driven.

The secondary message, which we've all heard for some time now, is that the business model for the software giant is a dead end, if not over already

[...]

To make matters worse, the company is now making itself look more desperate over the new toy in the sandbox called Yahoo Inc.

We wrote about the Microsoft-Icahn duo before. They are now visibly united as they carry on with their planned proxy war. It does not help Microsoft in any way because it makes it look bad, never mind the distraction it causes.

In the latest salvo in the proxy fight for control of Yahoo, the company is urging shareholders to beware of the “odd couple” — Microsoft and the corporate raider Carl C. Icahn — who are locked in a “marriage of convenience” but have no clear plan for what they would do if they took control of the board.

Yahoo is now also using its Web space to attack Microsoft and Icahn, apart from describing the latter as a corporate agitator. It's not good for business.

The Sad

Even the Microsoft-associated financial Web site, Motley Fool, comes off with the headline: "Whither Microsoft?"

But the bears have a response or two ready. "Microsoft is currently too big to expand significantly above where they currently are," says all-star Fool simultaneouslee. "Also, with Bill Gates no longer involved in Microsoft and the more eccentric Steve Ballmer running the show on his own, not as many investors will be inspired by Steve Ballmer's visions for Microsoft as they were Gates."

[...]

OK, so Microsoft is on sale right now -- but perhaps with good reason. The company is facing unprecedented obstacles on every side.

In some 'mainstream press' articles, the economy as a whole takes the blame (Microsoft too tried to use that as an excuse). Examples:

Microsoft CFO says company facing "tough environment"

Microsoft Issues Error Message With Forecast

It may run deeper than this. Consider some new observations, as follows.

The Online Unit does badly:

Shares in Microsoft were trading down 6.3% in after-hours trading at $25.78, after closing up 0.95% to 27.52.

Microsoft said earlier that its online services business lost $488 million, on sales of $838 million. In the year-earlier period, the online services business lost $210 million.

The entertainment unit too has some serious trouble ahead. Relative sales of XBox 360 fell sharply in the month of June and the company seems unlikely to recover, even with considerable discounts. The XBox division/unit has lost about $7 billion since 2001 and other products like the Zune seem to be approaching death.

I wonder why Steve Ballmer freaks out at the thought of losing the search and advertising wars to Google (Nasdaq: GOOG), but not at handing the game-console crown to Nintendo (OTC BB: NTDOY.PK) or the music market to Apple (Nasdaq: AAPL). How is it worth throwing billions after a major rival, only to scare away the engineering talent that makes (made?) Yahoo! great? In the second case, well, let's just throw more bad money after that Zune abomination and hope the Xbox saves the day.

On the Microsoft Office division:

The Microsoft Office division numbers were a disappointment. Operating earnings there only grew a disappointing 12% for the period. The company's online division posted an increase in revenue to $838 million from $677 million a year ago. However, losses for that division doubled to $488 million from $210 million, as management spent heavily on data centers and new employees to ramp up ad sales.

"Fear, uncertainty and doubt" are blamed also:

Citigroup analyst Brent Thill wrote Friday that the stock's low price-to-earnings multiple reflects investors' fear, uncertainty and doubt: fear that the product cycle will never deliver margin expansion, uncertainty that Microsoft will ever do a deal with Yahoo! and doubt that further online investments will pay off.

Lastly, The Ugly

As the links at the bottom will show, there's a lot in Microsoft's past about financial irregularity and misconduct as well. And fresh from the news:

Former manager gets 22 months in prison, fines for embezzling

[...]

Gudmundson was responsible for managing Microsoft's domain names from 2000 to 2004.

Remember what Robert Bach, a Microsoft Vice President, did last year while escaping investigation or punishment.

And wait! Watch this newly-disclosed gem (Microsoft's mortgage issue) from a source that is close to Microsoft:

In another surprise disclosure, Microsoft said its investments include mortgage-backed securities but they're mostly "prime" mortgages and the portfolio is not directly exposed to the sub-prime meltdown:

"While we own certain mortgage and asset-backed fixed-income securities, our portfolio as of June 30, 2008, does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from sub-prime collateral. The majority of the mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. The remainder of the mortgage position is collateralized by high quality international prime residential mortgage loans."

For more information, see our previous posts which are filled with many informative references handpicked from the press.

Criticism, if any, should be directed at the sources, not the messengers. The truth will come out one day. ⬆

"Sadly, many of these brilliant people have been blinded by the stock price and unable to see that Microsoft is also the key architect of the greatest financial pyramid scheme this century.

"It is not uncommon for participants in pyramid schemes to lose their emotional bearings. My close friends who work at Microsoft are particularly upset over my work and it is possible that even Bill Gates and Steve Ballmer do not realize the implications of their financial practices."

--Bill Parish

"Microsoft has clearly entered a phase of self destructive behavior that began with the "tissue paper campaign" in 1995. This report will document this campaign for the first time."

--Bill Parish

Comments

Robert Millan

2008-07-20 21:37:49

So where are the expenses of the "OOXML war campaign" accounted? They surely belong in the Office division, I hope they didn't miss it ;-)
Jim

2008-07-20 23:38:16

I suspect a lot of this has to do with the economic times. Most businesses are having trouble meeting their projections right now. Yet I read that Microsoft has been selling 20 million copies of Vista per month for the last year and a half.

I hope Microsoft's outlooks improve, it's one of the few competitive American businesses left.
Jim Powers

2008-07-21 01:13:21

It is true that there is somewhat of an economic downturn here in the states (i.e. we are heading into a recession), but the impact of that impending recession is not uniform: Intel recently announced rather impressive profits. Now, perhaps those profits are to some degree ill-gotten as Roy is likely to point out, but then it appears that Intel is better at finding the right opportunities to "grease" than Microsoft. Perhaps they need a better quality criminal. ;-)
IGnatius T Foobar

2008-07-21 04:06:54

Microsoft has been raping and pillaging the industry for decades. In the end, though, we reap what we sow. May they go down in flames as soon as possible.
Stephane Rodriguez

2008-07-21 08:38:40

"It is true that there is somewhat of an economic downturn here in the states (i.e. we are heading into a recession)"

You must not be talking about anything remotely related to the financial industry, because the opposite is true. Behind the "downturn" media blitz, financials institutions and virtually every single actor of the inter-bank network (hedge funds, ...) are making more money than ever.

The cynical thing about it is that they are doing it by speculating ten times more than a year before in commodity markets therefore at the expense of the so-called real economy, therefore citizens. And here this applies to every single "free-trade" place in the world, not just the US.
Roy Schestowitz

2008-07-21 09:04:25

In a conversation I had at lunch the other day, the situation was described a bit differently. The weakening of the dollar (possession of oil in Euros partly 'to blame' here) led to quite a deficit.

Large sums of money are still quietly centralised in the financial sector (loans affects not only citizens but the government too), which belittles Microsoft by leaps and bounds. Greed and ego suffer from the decline of the dollar, so the burden is being passed downstream. Sadly enough, this kills and already-shriveling middle class and now leads to people losing their homes. Does your media cover the tent cities crisis?
anonymous coward

2008-07-21 11:30:24

I masturbated while reading this article. I long for the downfall of Microsoft's little corrupt mafia. Fuck them and the aliens who work for them.
Stephane Rodriguez

2008-07-21 13:15:38

"The weakening of the dollar (possession of oil in Euros partly ‘to blame’ here) led to quite a deficit."

The reality is that the Brent curve and the FOREX EUR/USD curve are moving in parallel since at least 2007 and in same strength. This is, for me, evidence of market manipulation (eg. Exxon/Total and others asking hedge funds to change currency rates proportionally as Brent goes up, and vice versa).
Stephane Rodriguez

2008-07-21 13:18:34

"ow leads to people losing their homes. Does your media cover the tent cities crisis? "

No, not here in France since nobody buys a house with a variable rate. The subprime problem is entirely a US thing, and I think it's because americans have grown arrogant over years, with a mindset : we'll buy now at any rate, and worry later how to pay for it. I guess this is also a consequence of PR propaganda.

But, while the subprime crisis, only touches the US, the commodity market crisis is a completely different animal.
Bob Robertson

2008-07-21 14:19:36

To inject a little economics into the discussion, "sub-prime" has nothing to do with the rate of interest. It means making the loan to someone with a "less than optimal" credit record or otherwise likelyhood of paying off the loan.

The US.Fed.gov has been pushing, through their mortgage insurance and direct money "corporations" Fannie-May and Freddy-Mac, the illusion that lenders could make these risky loans "safely".

Put the blame directly where it belongs: Political interference in the housing market.

The result was a bubble, a "false boom", where prices were inflated without the real assets to back them up. Just like the stock bubble 8 years ago.

The only thing which will let this bubble burst quickly so that people can reallocate their money rationally would be to get the US.fed.gov out of the way entirely and let the house of cards fall where it may.

But no, they will fiddle and interfere, throw huge quantities of ever more worthless fiat money at the "problem", and we'll have to suffer through this for years instead of months, coming out far poorer than we went in.
Bob Robertson

2008-07-21 14:29:49

Here's an article on the issue, in case anyone is interested.

http://mises.org/story/3053
Roy Schestowitz

2008-07-21 14:34:50

Thanks, I like Mises.

Wherever the blame belongs, investments (VCs) in what falls under "open source' (subjective) reached an all-time high and maintained this for two consecutive quarters, so there's hope for change.
Alex C.

2008-07-21 16:52:33

Microsoft is having trouble for several reasons. 1. Vista wasn't the success it was supposed to be. The OS offered little over XP but requires double the system resources, with a revamped interface that hasn't been embraced by joe avg. 2. Office 2007 wasn't the success it was supposed to be. The office suite offered little over office 2003, the new interface turned off many 'power' users. 3. Economy issues are forcing businesses to hold on to older computers,. MS WIndows is pre-installed on almost every new computer. Office is included as a two month demo. No new computers, no new license revenue. 4. Gates leaving M Love him or hate him, Bill Gates is a major force. Ballmer is an unknown for many and an aggressive jerk to others. This makes MS seem less stable because of Gates departure.

5. Competition from Apple and Free Software Free software is becoming more mainstream. Many businesses are seeing the advantages of OSS. Especially on the server side (file/mail/print). Apple has a powerful marketing machine and offers more "ooh-ahh that's shiny" then Microsoft.

This is why I see MS as having trouble.

Cheers,

Alex C.
Nick

2008-07-22 19:10:21

Quote from above: "I hope Microsoft’s outlooks improve, it’s one of the few competitive American businesses left. "

Microsoft is only surpassed by GW Bush as far as making the USA look bad on the world stage.

I won't miss Microsoft when it is gone.
Rufus Polson

2008-07-23 16:44:55

Mr. Robertson is right in a sense, but in political terms utterly misleading. To read his post, it seems as if the poor private sector businesses are taking a fall because of those awful government people interfering where they're not wanted. The reality is the reverse--all the government interventions that helped create the current financial crisis, along with, on the flip side, all of the failures of government regulation that equally helped create it, were assiduously lobbied for, indeed bought and paid for, by private sector financial interests. The problem is not interference with business by government. The problem is interference in government by business. American businesspeople decided decades ago now that they could make more money by financial manipulation than by productive endeavours, and have spent the intervening time getting government to let them take more risks and use taxpayers' money to guarantee that they won't have to actually deal with the downside of those risks. It's an old game: Privatize profit, socialize cost/risk. But the impetus comes from the private sector, not the government; the power and influence that need reining in is private, not public.
Shocky

2008-07-24 17:16:55

You made my day with this article. I'm happy to see them reaping what they've sowed. I don't expect to ever see M$ disappear. I just want to see them humbled like IBM of old, forced to actually start innovating and stop bullying/bribing/stealing/libeling/etc.

And hopefully Intel will be next in line, for their crimes against AMD. Despite their making some contributions to FOSS and being less evil than M$, it would be better for everyone to have the chip industry returned to a fair and competitive market.

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Microsoft: Its Party's Over

The Bad

The Sad

Lastly, The Ugly

Former manager gets 22 months in prison, fines for embezzling

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