I won’t regurgitate all the line items in Microsoft’s earnings report. The raw data is available from multiple sources and from Microsoft’s website. I want to make a few observations, though, regarding aspects of the results and guidance that seem salient, at least to these tired eyes.
First, I suppose Microsoft is capable of listening to its investors. The company’s announcement of a share-repurchase program, which will include a $20-billion tender offer for shares until Aug. 17 and authorization for as much as $20 billion in additional buybacks through 2011, was in direct response to shareholder agitation for Microsoft to use its mountain of cash more gainfully and to buttress a share price that had been suffering from the company’s market identity crisis — namely, the ongoing uncertainty about whether Microsoft remains a growth stock, has transmogrified into a value play, or whether it is sitting in the purgatory between those two worlds.
Of course, the buyback isn’t just a magnanimous gesture by Microsoft board of directors toward the company’s shareholders. The buyback also is in the company’s best interests. With the shares it will repurchase, which will total 8.1 percent of its outstanding shares, Microsoft will put itself in a better position to retain employees who have been defecting to arch enemy Google and to other firms with seemingly better growth prospects. By bolstering its share price, and by having more shares under its control, Microsoft can now do a better job of attracting new staff and retaining high-value personnel being lured elsewhere.
As for problem areas, it’s now obvious that MSN is listing badly. Compared to performance in the corresponding quarter of last year, MSN revenues fell nearly 10 percent, to $580 million, and the unit lost $190 million. We also know from market-share figures that it is losing ground in Internet search to Google and falling a bit further behind Yahoo in the race for second place. MSN just isn’t a great place to hang out online — it’s hard to ascertain exactly what Microsoft wants it to become — and its search, search-related advertising, and content just aren’t compelling enough to steal share from Google or Yahoo, respectively. Microsoft needs seriously rethink its objectives for MSN and its Live.com services. What’s the raison d’être for this stuff?
On the bright side, the XBox 360 appears to be knocking the cover off the ball. Yes, Microsoft continues to lose money on hardware sales, but the company eventually will benefit from making the right moves in product management and development and Sony making what appear to be the wrong ones, especially in overpricing their forthcoming PlayStation 3 for the mass market. Sony seems willing to cede market share to Microsoft in exchange for profit margin on a lower number of units sold. That’s good conservative business practice, but Microsoft will see a a huge benefit in a growing wave of software titles that get ported to its console. It also will see greater unit sales of its gaming consoles going forward. Microsoft would rather take the mainstream than the rarefied high end in any market segment, and Sony, of choice or necessity, is letting Microsoft have its way.
Microsoft’s core business, the Windows and Office franchises, are chugging along, and they’ll get an infusion of new revenue with new revisions of those flagship offerings next year.
What’s interesting, too, is where Microsoft is choosing to invest its research-and-development money. Approximately $1 billion is being allocated for development of what Microsoft deems “high-growth” products and services, in areas such as business intelligence, unified communications and IPTV (Internet Protocol TV). Security is another area where Microsoft will continue to place considerable emphasis.
The focus on unified communications isn’t only beneficial in its own right, as I explained in a previous post, but also because it will drive and support future sales of Microsoft’s operating systems and its personal productivity and business applications, embedding presence everywhere and incorporating multimode communication into an extensive range of enterprise processes and workflow. It’s a smart move, and it is vintage Microsoft, leveraging its existing enterprise real estate, in this case Windows and Office, to help establish a new offering (unified communications), which in turn reinforces and revives the original product franchises. It’s a mutually reinforcing product strategy.
Microsoft also intends to spend $500 million to bolster its embattled online business, including its adCenter advertising platform, as well as its Live services, such as Office Live, CRM Live, Windows Live Search and other Web-based offerings. These need the investment, but most of all they need a plan with strategic coherence.
If Microsoft knew where it wanted to go online as much as it knows what it wants in the enterprise and home gaming, respectively, it would be poised for a second era of industry domination rather than having to repurchase its share to lift its sagging stock price and retain its most talented employees.