Microsoft: How to screw up a monopoly

The following is a guest post written by Mike McDonald. McDonald owns 118,000 shares of Microsoft, bought in 2000 at an average price of $36 share (adjusted for splits and dividend payouts). He has since seen the company grow its revenue and profits while his equity has been halved. He points out that Microsoft is losing share in its most profitable areas. For all the billions invested in R&D, he feels the company's decisions to stay the course are slowly killing it.

"Arguably, the most powerful engine of productivity for the global economy in the latter decades of the 20th century was the software developed by Microsoft. By the turn of the century, over ninety-five percent of personal computers used Microsoft’s Windows OS and related application software.

"On Thursday morning, January 22, 2009, Microsoft released its FY 2009, second quarter results, preceded with the announcement of a major staff reduction, its first ever of this magnitude.

"The worldwide economy is in freefall and the technology sector is not immune, commented Steve Ballmer, CEO of Microsoft. Or so it would appear. Apple reported a 10% growth in sales of Macintosh computers despite an 8% decline in personal computers, mainly Microsoft Windows OS PCs.

"During the analysts’ conference call, Steve Ballmer was asked, in light of the poor performance of most of Microsoft’s business sectors: “What do you think of your portfolio?” Ballmer confidently answered: “I like it!” …  He then paused for several seconds and, without further prompting, authoritatively proclaimed: “The board likes it!”

"Therein lies the problem. Mr. Ballmer doesn’t get it. The board doesn’t get it; and the paternoster of Microsoft, his eminence, Bill Gates, is off tending to the ills of the world while the sugar daddy for all his largesse, is rapidly becoming a basket case.

"Neely Kooes, dominatrix of the EU, the management and aficionados of Apple, IBM, Google, Linux zealots et al, cheer wildly; while Microsoft’s loyal stakeholders sink into further despair and economic loss.

"Here’s what happened to the once invincible Goliath, Microsoft, between October and December of 2008 during the tenth anniversary of the reign of the bellicose Steve (Take-No-Prisoners) Ballmer.

"Microsoft’s business is in serious decline: sales, margins, share of market segments and overall profitability are all dramatically down in its top two business segments. Anecdotal evidence, including brand valuation surveys, strongly suggests that the overall Microsoft brand (esteem and economic worth) is declining precipitously from its once lofty preeminence. Market capitalization decline is prima facie evidence, if there is any remaining doubt.

"In its 2009 second quarter, the Client Division (Windows) which has always been its biggest cash cow, delivered less income, $2.946B, than its Business Division (Office) which had income of $3.140B. MSFT clearly lost major share to Apple whose revenue increased 10% vs. MSFT’s –8% decline. Windows margin declined 5% or 3 basis points versus year ago. This is a dire situation that portends a dismal future for Windows OS. Windows 7 is facing the headwinds of a lousy global economy, the stigma of Vista’s poor quality and false promises, the momentum and coolness of Mac, the economy and growing popularity of Linux and the dramatic growth of mini portables with stripped down, cheap operating systems. A lethal cocktail, indeed.

"MS Business Division (Office) lost 2 basis points of margin vs. a year ago and was basically flat on revenue and operating income.

"The lone bright spot with gains across the board was Services and Tools Division with a 15% gain in revenue, a 29% gain in operating income and an increase in margin from 35% to 40%. Unfortunately, this division’s operating income is less than 50% that of Client and Business.

"The fourth largest segment, Entertainment and Devices Division delivers chump change in operating income: $151M, which is off 60% from year ago.

"The fifth largest division, Online Services is a complete disaster. Despite enormous infusions of investment capital in the form of cash and expensive acquisitions, such as aQuantive at $6B, this division had a puny $866M in revenue and a loss of $471M, doubling the earnings loss of a year ago.

"What can management (and the board) be thinking while spending precious treasury and vast amounts of management time on these two losing businesses?

"Another key indicator of the weakening of Microsoft’s vaunted financial muscularity is the almost $3B drop in total cash, cash equivalents and short-term investments from $23.662B to $20.715B. This cash position is shockingly low by Microsoft standards and pales in comparison to much smaller competitors such as Apple, Cisco, Oracle and Google.

"Bill Gates must be completely 'out to lunch' to permit the golden goose to be slaughtered by the inept Ballmer, whose ten-year reign as operating head has been a total disaster to the business and its constituents.

"Bernie Madoff has allegedly bilked investors of $50B in a Ponzi scheme over a quarter of a century. The media have whipped an outraged public into a frenzy, and rightly so. Meanwhile, Ballmer and Gates have destroyed $170B in actual shareholder value since 2000. The opportunity loss is close to an additional $700B.

"Where is the palpable outrage?"

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