Mircosoft Troubles - IV

Previously I've posted on my conjecture that Microsoft will hit turbulent financial times in 2010: Microsoft Troubles III, Microsfot Troubles II and Microsoft Financial woes in 2010

This article in CNN Money/Dow Jones Newswire cites data on some of the early effects becoming apparent.
Sales of Windows grew just 2% in the first quarter of fiscal 2009, which ended Sept. 30, 2008. In most years, Windows posts double-digit revenue growth, according to company data.

There are three dimensions on which Microsoft profits will be squeezed.
Partly on volume, but mostly on margin.
[Update 1-Mar-09: Another dimension - Moore's Law CPU-speed]

Note: I'm not predicting Mircosoft will go away - I expect their brand (or descendants) to still be available in 25-50 years. I'm only saying that MSFT (the 'stock ticker' symbol of Microsoft) will hit a financial pot-hole around 2010.

The economic fundamental is their 90+% gross margin - it is much too high to sustain. Manufacturers can only sustain 25-30% long-term.

Note 2: I'm only discussing Desktop O/S. 'Office' is more exposed.
All the other products don't have huge market share.
X-box is still loss making, as far as I know.

The Dimensions of Challenge:

Desktop O/S Substitutes:
  • OS/X is the fastest way to run Windows [on high-end Macs]
  • there are viable desktop alternatives - Linux & OS/X [others?]

=> MS market share on desktop PC's can only drop.

Total PC Sales:
  • At the low end: PC substitutes are eroding sales
  • 'Appliances' like: iPhone, game consoles, SMS + phone browser, blackberry, ...
  • PC sales in Japan had 5-Qtrs in decline to Mar-08. Leading indicator?
  • PC sales growth in mature markets was almost stalled early 2008
  • only gonna get worse in Current Financial Crisis
  • PC market has changed - now >50% laptops

=> whilst the Total PC sales may increase for a time, the 'market mix' means the average PC value must be in rapid decline. At the low-end, Microsoft has to discount to retain market share.

Substitutes at Bottom-End & Top-End of PC market:
  • Mac is disproportionately growing market share at the high-end
  • Ulta Low Cost PC's - the low-end (eg ASUS Eee etc) is taking sales or causing MSFT to offer low-priced versions.

=> Both Market Share and Average Unit Price are dropping. Microsoft is being outsold at both the top-end and bottom-end of the 'classic' PC market.

CPU-speed Moore's Law change:
Around the start of 2004 , the speed of CPU's stopped doubling every 18-24 months.
After 5 years, per-CPU speeds have increased from around 2Ghz to a touch over 3Ghz.
Chip makers are compensating by creating more 'cores' per chip.
Throughput notionally increases, but not compute speed.

Businesses have extended their desktop 'refresh cycle' - they are extending the life of PC's and hence buying fewer.

Very often a hardware refresh was used to roll out major O/S changes, especially if it needed increased resources.
With corporate desktop hardware not being changed very often, vendors now need to be very aware of the need to restrain O/S resources required.

This dual effect accounts in large part for why Corporates have not embraced Vista.
Another reason - absence of convincing need or benefit.

Windows 2000 was a necessary upgrade for both Y2K issues and Active Directory solved the scalability problem.
Win-XP was useful - more functionality, integration of USB and maybe 64-bit.

So here's how I think it plays out:
  • Total PC sales drop - market saturation, 'recession' and appliances shrink global PC market,
  • MSFT achieves lower average unit price - competition from ULCPC & appliances,
  • and MSFT market share drops as profits fall.
Secondary effects will come into play:
  • as sales & margins drop, corporate clients will squeeze MSFT for better deals.
  • clients can threaten to 'defect' to Apple etc or even threaten to go low-end to get better deal.
  • MSFT sales teams will scramble to make targets - 'lets do a deal' will be their mantra, especially just before End of Year.
  • MSFT will (radically) increase prices where customers are locked in and it perceives they have no alternative.
  • think IBM mainframes pre-1990 - IBM kept ratcheting up prices as customers fled.
  • the more people that have MS-Office replacements on their not-a-PC, then the more people will use Office substitutes. Microsoft will feel pain on multiple fronts.
  • Google docs effect - maybe. But only as yet another substitute.
  • MSFT management will react & thrash around wildly/blindly
    • think Yahoo! merger
    • guaranteed to do 'more of the same'
    • deep discounts to buy market share, disregarding profit and cash flow (X-box)
  • buy more products & attempt to take-over markets again.
  • will throw huge teams into building ever-bigger and fancier products.
  • lots of hyperbolic advertising - selling sizzle w/o steak
  • The management team will be totally distracted with bizarre tactics and will lose focus on fundamentals. They will not form and execute a good strategic plan.

Tertiary Effects:
  • MSFT share price will plummet on their first poor profit performance.
  • MSFT will 'cut costs' - at the expense of employees, not Management bonuses.
  • Staff will leave as pay & condition decrease and work pressure increases.
  • Long term staffers will see the Stock Price tank and their (paper) wealth evaporate
    • become demotivated & unresponsive/unproductive.
    • massive turf wars and blame-fests will erupt and drive down output even more.
  • Key staff will jump ship (Gates said in an interview he had 6-12 key software people)
  • Multiple board & management coups will be repelled.
  • Stock market and customers will recoil in horror, but MS-Mgt won't notice [not our fault, we're do what we know works, things will come good again as they have in the past]
  • The new lemming rush of corporate clients will be finding another "we can't be fired for buying" vendor.
  • Spending will peak, Revenues will tank, Massive red-ink will flow.
  • One last gasp - give away product 'to make it up to loyal customers'?
  • Senior Management changes too late, market inertia drives sales down.
The only variation I can think of - will Bill Gates come back?

I think it possible he would buy all outstanding MSFT stock when it's cheap enough and then run it again by himself for a while... But I don't know the man, I can't tell.

Gates is the world's most successful business man.
You have to admire him for that and not underestimate his abilities.

In Microsoft, AntiTrust (Monopolies) and Patents, I wrote:
Why Smart Executives Fail
Sydney Finelstein wrote on the Causes of failure - the sorts of mistakes that really smart, successful people make. More at the Dartmouth Tuck Business School site.
This is a great resource on how Great Companies go bad - by doing exactly the things that made them top of the heap.

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