Microsoft examines threats posed by Google, Apple

Microsoft filed its quarterly report with the U.S. Securities and Exchange Commission on Thursday, and in addition to financial revelations about its recent acquisitions, the tech titan also gave a more formal glimpse at how it views and plans to deal with the growing threat posed by Google and Apple, as well as longtime nemesis open source. Microsoft CEO Steve Ballmer touched on many of these issues last week at the start of the company's financial analysts meeting.

In a section titled "Challenges to our business model may reduce our revenues and operating margins," Microsoft reiterated that its bottom line may suffer if it has to drop the prices of its products to compete with Linux.

Proponents of open-source software continue efforts to convince governments worldwide to mandate the use of open-source software in their purchase and deployment of software products. Although we believe our products provide customers with significant advantages in security, productivity, and total cost of ownership, the open-source software model continues to pose a significant challenge to our business model. To the extent open-source software gains increasing market acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenue and operating margins may decline.

In the same section, Microsoft also pointed to the business model challenge posed by its main search rival which has far more scale. The report seems to express admiration for the business model and says the company is throwing "significant resources" at attempting to emulate it.

Another development is the software-as-a-service business model, under which companies provide applications, data, and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and enabled the rapid growth of some of our competitors. We are devoting significant resources toward developing our own competing software plus services strategies. It is uncertain whether these strategies will be successful.

Another section addresses the threat posed by Apple, while conceding that competing with the model may prove expensive.

An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions. A competing vertically-integrated model, in which a single firm controls both the software and hardware elements of a product, has been successful with certain consumer products such as personal computers, mobile phones and digital music players. We also offer vertically-integrated hardware and software products; however, efforts to compete with the vertically integrated model may increase our cost of sales and reduce operating margins.

Also in its report, Microsoft confirmed that it spent $500 million for its acquisition earlier this year of Sidekick maker Danger.

The company also made its larger $1.3 billion purchase of Norway's Fast Search and Transfer and closed its $5.9 billion Aquantive purchase. Other deals made during the year added another $1.1 billion, Microsoft said.

Other interesting Microsoft facts from the report:

Microsoft now occupies 2 million square feet of real estate that it owns and 8 million square feet of leased space.

It ended the year with $23.66 billion in cash and short-term investments, up slightly from the $23.41 billion it had as of June 30, 2007.

That's what I got from a quick read. Let me know if I missed anything.

[Penguinisto]

That's a whole lot of money for a market they're losing terribly in... I'm not real sure that the whole sidekick meme, now that it's pretty much passed as a fad, would ever come back (the iPhone pretty much destroyed it, to the point where other makers are going nuts trying to mimic Apple's design).

Unless Danger had/has some massive world-shaking eye-grabbing design up their sleeve, it's going to be a hard row for MSFT to weed if they hope to recapture the slipping marketshare that WM is experiencing.

Then again, Maybe MSFT is testing the waters at adopting Apple's paradigm of owning the whole stack, from chips to bits to product?

[Vegaman_Dan]

If only you could back your comments up with something resembling facts, then perhaps people could take you seriously. As it is, you mostly quote blogs and opinion pieces instead of actual content. I would strongly suggest you back your comments up with evidence that can be indepedantly verified.

Remember folks, this is just his opinion. Anyone can have one.

[Penguinisto]

No prob, Dan... I present you with the iPhone's rocketing market share, which had a single product go from 0% to #2 in North American marketshare in less than a year. Canalys has the goods on that (and they're not a "blog" or "opinion piece" - read it for yourself right here: http://www.canalys.com/pr/2008/r2008021.htm )

Meanwhile, Windows Mobile is slipping, as proven by an article posted here in CNET yesterday concerning missed targets and lost marketshare (the lost marketshare can again be cross-referenced from Canalys).

Independent verification on the personal level is easy - go pretend to buy both a WM phone (of which you can get hold of easily), and an iPhone at an Apple Store (which, in most places, means standing in a long line).

So while you're waving your hands and claiming "oh, that's just your opinion", I happen to have indepenent facts to back mine up. Now where's yours? ;)

[AppleSuxLeo]

Paradigm ? That is quite a big word ...from such a nimrod.

[Kwasiowusu]

@ Penguinisto ?That's a whole lot of money for a market they're losing terribly in?
Groan!
The zero credibility Apple shill, ? Penguinisto?, spews out again, shows exactly how clueless he is. Windows Mobile has been profitable for years. And so has the Zune. Microsoft has never sold the Zune at a loss. Not to mention, Windows Mobiles phones sell a heck of a lot more units than the measly 717,000 iPhones that Apple sold in the WHOLE of the June quarter

[Penguinisto]

WM missed its shipping targets and is losing marketshare. I said nothing about profitability - I said they're losing the market. Please learn the difference.

[Thomas, David]

It's so Zune!

Windows Mobile has a large market share, we all know that. But the Zune? ... Thanks for the laugh. Help yourself by not mentioning that if you want to win an argument/debate.

[getwired]

@ Kwasiowusu... you're kidding, right? You're counting a quarter that consisted of SEVERAL DAYS of iPhone sales against an entire year? Windows Mobile surely doesn't lose money. But the share is slipping. Twice now MS has had to announce at the end of the quarter that the number they expected isn't what they got. I'm curious about your statement of the "never sold the Zune at a loss". You mean it's been profitable from day 1? AMAZING! No, no it hasn't. It's been hemorrhaging money. It's a piddly distant third in the music market after plumbing billions in design, marketing, and infrastructure. I have to agree. $.5B is a lot to spend on something that they're really going to get limited value back out of.

[Vegaman_Dan]

Facts, figures, evidence. Your comments are lacking any and all of those. Back up your comments with real evidene and you'll have a much stronger argument. Right now... it's just fluff.

I agree that the iPhone argument is silly. Apple does sell a ton of units in surges, but there's no steady growth there as there is for the other handset makers. Nokia still outsells Apple's entirely yearly output in a single day. Windows Mobile? I can believe it's #3 in sales. No problem with tha in my opinion. Call it a failure? Hardly. If you call that a failure, then you'll have to call Apple a failure since they too are not #1 in their market. Are you willing to call all Apple products and their customers a failure? Nah, you can spin things however you want. It really doesn't matter.

[Kwasiowusu]

@getwired :?You're counting a quarter that consisted of SEVERAL DAYS of iPhone sales against an entire year ?
Nope. I am counting Apple iPhone sales from March 1st to June 30th. That is 3 FULL MONTHS(90 days) of iPhone sales, that came in at a measly 717,000 units. That is totally trumped by the over 4 million Windows Mobile phones that were sold in the same period. I suggest you go read Apple's earnings report for the last quarter.

[Vegaman_Dan]

I'm not sure that's a really fair quarter to compare though. Apple ceased production of the unit early on and sold out of their existing inventory. That will affect their numbers accordingly. It would be a better comparison if you looked at the quarter before that- I don't know what those numbers are and really don't know where to look.

[technewsjunkie]

YOur drinking the MS koolaid. You can't consider yourself unbiased or rational based on your statements.

How long has Windows Mobile been available (years). And how long has iPhone been around?? Humm?

[Iggyo]

You're an idiot. WM is software loaded on other manufacturers hardware. So tell us how many WM units sold during that same quarter and we'll get a more accurate picture. Yes MS gets paid every time a WM products gets sold but that is nothing compared to the margin that Apple is making on each and every one of those 717K units sold (and now are you talking in the US or Worldwide?). Face it, MS is dead. You'd better sell your shares now while you're ahead.

[robvme]

This is all about setting expectations and then exceeding them. If you look at Microsoft's earnings and growth it is pretty clear it is an upward trend - almost exponentially so. Microsoft has vertually unlimited resources to pursue something, even if it is not profitable at first, and eventually winning. It took 9 versions of Word to win the market over a 10 year period of trying. If you look at most products Microsoft has produced, you will see a similar trend. Apple is great at providing an end-to-end user experience in limited areas. Let's no forget that Microsoft pumped $100M into Apple to keep it afloat and committed to providing more and frequent updates of Office for the Mac. There is a synergy there. Servers and Tools growht is phenomenal at MS, and will probably dominate the market in the near term. I don't think there is any danger of seeing big iron Apple in the server room anytime soon. As for Open Source, it continues to be propped up by commercial giants like IBM and Oracle. if not for that support it would be little more than a nuisance. Not that it isn't good stuff, people just don't want to have to have a degree in elecrical engineering to mount a cd rom drive or to understand how to boot. It is just still too complicated and is still only "just good enough" Microsoft has several core businesses that are in different stages of maturity, some win, and some still lose, Microsoft is in for the long run. This is something Wall Street doesn't get. This article is all about setting expectations with shareholders and how many pennies of earninigs they should expect and nothing more. Wall Street needs to get back to the basics of measuring performance instead of trying to drive companies. When the glitz and glamour of Apple and Google fade, there will be a Microsoft.

[Penguinisto]

"If you look at Microsoft's earnings and growth it is pretty clear it is an upward trend - almost exponentially so."

If that's the case then Apple's growth must be pretty frickin' astronomical by comparison, huh? MSFt barely (and often doesn't) keep pace with overall PC growth, while Apple triples it.

So, err, you were saying?

[JuggerNaut]

Dude, trust me, Microsoft's $150 million dollar investment was not what kept Apple afloat (that's the biggest myth of all time). Apple had purchased NeXT (Steve Job's 2nd computer company) for an estimated $420 million before getting cozy with Microsoft in 1997. Microsoft also paid Apple a heft sum for IP related infringements related to Mac OS and Quicktime, which more than eclipsed the amount of the sign of good faith amount you speak of. Apple had enough money in its coffers to survive without Microsoft's help. Microsoft's alliance with Apple was a saving of Apple's relevance in the industry, nothing financial related. And you won't see Apple (or Google) fade as Apple is nearly worth as much as Microsoft in cash value (only off by about 3+ billion) minus the market cap. Apple's brand is too strong to fade.

[Universal_Indie_Records]

1. Xbox and the Zune have not been money makers. I suggest YOU do your research.

2. No other company has sold that many phones in that short amount of time. ONE phone from ONE manufacturer. That's the point.

[Vegaman_Dan]

Xbox hardware sales are not profitable, it's true. Xbox licensing to game makers has been hugely profitable though. One feeds the other. Look at the Apple TV. Financially, that's a complete and utter failure, but it has iTunes to absorb that loss and make up for it. It's all how you want to spin things.

Personally I would rather just look at the company's bottom line. That's the real number to look at.

[Vegaman_Dan]

"2. No other company has sold that many phones in that short amount of time. ONE phone from ONE manufacturer. That's the point. "

Nokia Q2 shipments: 122 million handsets

Apple Q2 shipments: 1.7 mllion handsets

Say what you will, but the facts don't lie. Don't even start about 'domestic' vs 'world' market. The iPhone was available in Europe during that time. It had trickled into other markets as well. Make of that as you will.

Sources: http://www.alleyinsider.com/2008/7/live-nokia-q2-in-line-optimistic-about-industry-now-here-comes-the-hard-part-nok-

http://www.apple.com/pr/library/2008/04/23results.html

[The_Decider]

Dan, as usual you get it wrong.

Even if you include licensing, it doesn't make the XBOX profitable, UNLESS you count them seperately. Add the "profits" from licensing into the losses of hardware and the billion+ sunk into fixing major issues and you will be lucky if the end result is 0.

Nokia makes several types of phones. He said one phone from one company. I realize it is a stretch to get you to understand simple concepts but this isn't rocket science.

[Kwasiowusu]

@ Universal_Indie_Records
# 1. No one even mentioned XBOX. NIce way to try and change the topic. No to mention, the E & D Divsion, which is made of the XBOX 360 and the Zune, DID indeed make a profit of approx $400 million in the just ended fiscal year. Feel free to check Microsoft's earnings report.
#2. NOPE. It's not the point that that the iPhone is made by one company, and Windows Mobile phones are made by several. That is NOT the point. The Windows Mobile business is just like the PC business. Microsoft does not actually make any PC's themselves, instead just licensing Windows to OEM's and PC makers. That's the same model Microsoft has with Windows Mobile where Micrsoft does not actually make cell phones, so the only way you can compare Windows Mobile phone sales to iPhone sales, is to take all Windows Mobile sales and compare them to iPhone sales. Windows Mobile sales easily trump iPhone sales.

[Vegaman_Dan]

It's tricky and largely all just accounting magic. How do you want your earnings report to look? Change the numbers to match what you want. That's about how it is these days. Find me a company that doesn't do this and I'll be very surprised.

[Waam]

One or two quarters of profit do not mean they made money when you account for the last 7-8 years of reckless spending with the x-box division in trying to catch Sony and Nintendo. And now with Zune - all we have is another black eye product with all the negative press it's been getting. I own Microsoft stock, and as a stock holder, they need to get back at what they do best, and that's kick major tail in software. I hate this new weak Microsoft.

[JuggerNaut]

I don't think easily would be a phrase I would use in this debate...

http://www.roughlydrafted.com/2007/12/14/canalys-symbian-apple-iphone-already-leads-windows-mobile-in-us-market-share-q3-2007/

[JuggerNaut]

Some more numbers and such on this hot topic...

http://blogs.zdnet.com/microsoft/?p=1163

[delf76]

This is probabably one of the most intelligent comments i've seen on these boards in a long time.

[CTO_Dude]

@delf76 - Since you didnt specify which post... I'll take credit and say thanks! :)

[Penguinisto]

Thanks! :)

(just kidding... BTW, CTO_Dude is one of many clone accounts.)

[RompStar_420]

For the most part, Microsoft makes really bad quality software, Windows Mobile is a piece of stinky crap that my cat takes every mornings. I owned a phone, didn't last 6 months, constant reboots, freezes, crap, that's what the Windows Mobile is, total shill crap~!!!!!

And there is plenty of those at Microsoft.

[CTO_Dude]

Your experience has more to do with the device than the OS. Palm made crappy drivers and I constantly had to pull the battery on it. However, the Moto Qm9 has never needed a battery pull or reboot since I've had it one year. Just wait until people start loading crapware on iPhones like they do on Windows. All these platforms that you love (besides Windows) dont get loaded down with crapware from the vendor and the net effect makes the OS look bad. Apple will now get to see that bad developers are everywhere and they will bring down the iPhone in short order.

[hounddoglgs]

For all you M$ fanboys- If M$ is doing so great, why has their stock price been basically flat over the last 8 years? Why is Windows losing market share? More and more people are jumping ship every day as more alternatives to M$ are emerging in the market- OSX and Ubuntu, Wii and PS3, android phones and IPhones, IPods and Sansa's, etc. And with an egotistical moron like Balmer at the helm, I don't see a turnaround for M$ any time soon- in fact, I won't be surprised if he manages to damage the company beyond repair. Enjoy that HD-DVD player on your XBox (at least until you get that red ring of death- again)!

[Vegaman_Dan]

I'm afraid that while your comments are snarky and uninformed, they do little to better the conversation and are best kept to yourself unless you wish to sit at the grown-ups table.

[Penguinisto]

Hey Dan - anyone with five minutes' access to Yahoo Finance can prove him right on the stock prices. Marketshare reports all over the planet prove him right on Apple's growth (and since 100% means zero-sum game, this means that MSFT is indeed losing marketshare).

And yeah, Ballmer is an idiot. Well, on second thought I'd him the benefit of a doubt, but I will say that he's the wrong guy for the situation that MSFT is stuck in...and its a situation that is rapidly becoming untenable. Between Google, Apple, Linux, and internal failures of flagship products such as "Vista"? Wouldn't want to have his situation, no matter how big the paycheck is.

/P

[rapier1]

Well, thats sort of red herring there. MSFT did do a 2:1 split in 2003 and paid out $4.72 in dividends during that time. Basically over 8 years you are getting a 8.7% ROI over 96 months. Which isn't fantastic but its not bad.

[CTO_Dude]

@hounddoglgs I dont know where you get your info! Microsoft revenue and margin has grown consistently for the last 23 quarters! They sold way more Windows Mobile than Apple sold iPhones last year by a margin of something like 18-1.

Are you seriously saying that Ubuntu is being deployed more frequently or even at an uptick than XP or Vista? Come back down from your balloon ride. People need to get in one line as well... what is OS doing in the gaming industry? Android hasnt even hit the streets and you're already saying it's taking market share away from everyone else?!?!

BTW: HD-DVD is still a pretty inexpensive way to upscale traditional DVD's even if it's dead as a door nail :)

[Vegaman_Dan]

Blu-Ray isn't exactly flying off the shelves either. After the format war was ended, the prices for Blu-Ray players and the movies themselves increased dramatically. When you have a Walmart shopper looking at the same movie for $8.88 DVD price and $29.99 Blu-Ray, they are not likely to buy the higher priced movie. That's the real issue and block to Blu-Ray right now. Make it affordable to the masses and you have a shot, but right now- the public simply doesn't see a need for it.

[Penguinisto]

"HD-DVD is still a pretty inexpensive way to upscale traditional DVD's even if it's dead as a door nail"

Just like Betamax was a great way to get up a movie collection... well, until they stopped making media in it anyway.

"They sold way more Windows Mobile than Apple sold iPhones last year by a margin of something like 18-1. "

Proof, please.

[CoolArsh]

To all MS haters, Just see how Microsoft is fighting back on each and every front. whether it is with Oracle on databases, SUN on Java, Linux on OS, Sony on PS3, etc. Look at everyfront if they are not the no.1 company on each front they definately are a major player and giving tough time to competitoe and wining in most cases at the end. So wait and see.

[Penguinisto]

Databases: MySQL holds the biggest percentage of 'em all, not Oracle.
Java: pretty much owns the store, esp. in development languages.
Linux: also competes alongside OSX, and while Linux is demonstrably taking MSFT marketshare away at the low and server ends, OSX is taking it away at the high end.

Did you know that MSFT finally broke down and started contributing to the Apache Foundation?

MSFT is still a major player, yes... but its influence is fading, and it has few friends in this biz.

[technewsjunkie]

And you think that ONE company should do this??
Do you understand what competition is and a fair marketplace? What other monopolies (that have lost a major antiturust case) would you support? Just Microsoft? Are you invested in them??

[Thomas, David]

@CoolArsh

The entire problem with Microsoft is it's unfocused efforts on a few quality products, such as it's operating system, and its desire to own, and be on top of the entire sphere/scope of software. This has always been their true problem.

In the past, when they felt "danger" or a "threat" (by the way, I think these terms are counter productive in this industry, but that's how Microsoft views it), the simply resorted to dirty tricks to keep their footing. They haven't been able to get away with some of those outrageous past tactics, now that the consumer place is a little more savvy. But their vision of being the patriarch of the software industry has never waned.

Right now they are too spread out, too diversified, and while concentrating a beam of light in to the vast space of software is a form a "focus", it is simply diffused light.

[isadora_05]

Twenty years from now, we'll look back and say, "Ah those were the Windows days... Did people really paid for operating systems back then??" hahahaha!

[danielszabo1981]

its a slow, painful death.