What If Microsoft Is Pursuing the Wrong Business?

by: Kevin Maney posted on: May 06, 2008 | about stocks: MSFT    

I was just re-reading Ballmer's email to employees explaining the decision to drop the Yahoo (YHOO) bid, and something struck me. When Ballmer detailed Microsoft's (MSFT) strategy, he never once used the word "software."

Check out this section from the email:

Our strategy has three components:

Deliver on the basics. We will continue to improve search relevance and build out our ad platform.

Change the game through innovation. We will expand investments in engineering and deliver transformative tools and Web experiences.

Expand our global scale and focus. We will pursue partnerships and investments to realize the competitive advantages that come with scale.

At the heart of our strategy is a commitment to bring the benefits of competition, choice, and innovation to everyone who uses the Internet--from consumers to content creators to advertisers.

We are 100 percent focused on executing on this strategy and we have made good progress in a very short time.

Now, Microsoft is a software company. That is its heart and soul. Anytime a company veers from its heart and soul, it gets into trouble. (Those are lessons Jim Collins has researched and detailed in both Good to Great and Built to Last. Microsoft needs to get back to being a hedgehog!) When Lou Gerstner took charge of IBM (IBM) during its crisis, he didn't rebuild the company by taking it in an entirely new direction. He took the time to understand IBM's heart and soul (data processing for large enterprises) and build on that.

Todd Bishop's Microsoft Blog has a terrific interview with MIT's Michael Cusumano, who thinks Microsoft is taking its eye off the ball with this whole Web push. "I think they believe the future of software revenues is going to be mostly advertising," Cusumano tells Bishop. "I don't actually see that in my own research."

The way to sell, deliver and monetize software may be changing, but the need for great software is only going to grow. Microsoft can't compete with Google in search because, maybe, it shouldn't be trying to. It should be able to kick Google's butt in delivering software for businesses and consumers -- IF Microsoft doesn't get distracted so it puts out products like Vista, which has made a lot of users unhappy.

I'd say that maybe, post-Yahoo, Microsoft will re-focus on its inner strength. But judging from Ballmer's email, that doesn't seem likely.

This article has 5 comments! Add yours below...
Kevin Maney

Kevin Maney

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This article has 5 comments:

  •  
    jamin1122
    May 06 04:52 AM
    You ever think that maybe a multi-billion dollar company could have more than one focus, there acer? I'm sure their plan is not to have all their software developers start to work on online advertising...

    I see no reason why a company as large as Microsoft couldn't handle moving forward and being successful in multiple channels. Why not?

    And this "strategy" you quote I'm sure is not the new company wide mission - He is talking about only this specific aspect of the business that they plan to expand.

    Think before you stink, slick Rick.
  •  
    nickgogerty
    May 06 09:21 AM
    My Website
    Ballmer has never struck me personally as the correct leader for a software company, much less one trying to woo a consumer who isn't locked into choice based on prior behaviour and tacit knowledge. The markets MSFT seeks to enter are based on consumer choice and are greenfield. The brownfield business franchises will be milked for years to come, but the growth story isn't there and the inspiration for it won't come from Ballmer. MSFT should hope Ray Ozzie is cooking up something somewhere in the labs. The Xbox was the last interesting greenfield innovation to show up. The margins on that business are probably very different from the rest of MSFT.
  •  
    dan-49
    May 06 10:45 AM
    Microsoft is running scared because of the platform shift from the pc to the internet. They have never recovered from their realization that the pc operating system will eventually become obsolete. Ballmer's ill advised strategy is evidence of Microsoft's panic.

    I agree with Kevin's article. Microsoft should focus on developing personal and business software that operates effectively and efficiently in the cloud computing environment. With their technical expertise and billions in cash, they should be able to dominate the internet software space. Instead, Microsoft wants to be an internet conglomerate. Well, good managers running good businesses are required (like a GE) - this is not part of Microsoft's DNA.

    The real issue is Microsoft's unwillingness to accept that they cannot and will not dominate the internet computing platform. Microsoft must come to terms with this before they can develop an effective corporate strategy. Until then, I do not see MSFT as a good long term investment.
  •  
    dan-49
    May 06 10:45 AM
    Microsoft is running scared because of the platform shift from the pc to the internet. They have never recovered from their realization that the pc operating system will eventually become obsolete. Ballmer's ill advised strategy is evidence of Microsoft's panic.

    I agree with Kevin's article. Microsoft should focus on developing personal and business software that operates effectively and efficiently in the cloud computing environment. With their technical expertise and billions in cash, they should be able to dominate the internet software space. Instead, Microsoft wants to be an internet conglomerate. Well, good managers running good businesses are required (like a GE) - this is not part of Microsoft's DNA.

    The real issue is Microsoft's unwillingness to accept that they cannot and will not dominate the internet computing platform. Microsoft must come to terms with this before they can develop an effective corporate strategy. Until then, I do not see MSFT as a good long term investment.
  •  
    Malkiel
    May 06 10:54 AM
    Thank you, I've been saying the same thing, that MS is decades premature in anticipating where their business is going and has been damaging their outrageously successful software business with all of this obsession about "web 2.0" and online services. Milking your cow may not be glamorous, but it rewards the shareholders big time. Ironically, AT&T, Apple's partner in the iphone and arguably the spokesman for the internet since their wires ARE the internet, said recently that online services will shut down the net in just a couple of years unless massive infrastructure improvements happen. Then software will look very good, indeed.

    Another concept you'll never see in a Ballmer speech is the customer--those of us who buy his stuff and have to evaluate how it fits in our lives and budgets are totally taken for granted by this schmo. It must be nice to be a monopoly and not have to worry about defections by the masses, but like eBay discovered just a little honey would go a long way in keeping consumer loyalty and making everything else they do so much less abrasive...
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