Microsoft's online gamble could be smart bet

As I listened to financial analysts grumble about how Microsoft continues to pour its hard-earned software profits back into its online services effort, I couldn't help but think that maybe Microsoft is on to something.

Wouldn't newspaper industry analysts have had the same grumbles if the Gannetts and Knight Ridders of the world had poured a huge chunk of their profits into online ventures a decade ago at a time when their ad revenues were still enjoying healthy growth? And wouldn't they now say such a move, if well done, would have been brilliant?

Newspapers have traditionally been funded by things like classified advertising in areas like real estate, help wanted, and car sales. Had one of the newspaper companies seen the online threat and said, "We need to own those categories online," perhaps they would be in better shape. Instead, they are faced trying to reinvent themselves at a time when their revenue is in sharp decline.

Of course, it's not a direct parallel. There's an argument to be made that, while newspapers were inevitably going to lose revenue to online sources, Microsoft could steer clear of advertising by focusing on business software.

But if the biggest long-term threat to Windows and Office is free rivals and Web-based services, shouldn't Microsoft be using a significant fraction of its profits to develop its online advertising capacity?

A long-term battle between Microsoft and Google is shaping up. The question is whose economic engine will be stronger. Google is funding its legions of data centers and armies of engineers via online advertising, while Microsoft is using Windows.

Importantly, after reporting weak Windows results in April, Microsoft saw that unit post healthy and better-than-expected 15 percent growth for the most recent quarter.

Obviously, Microsoft needs to execute better on the Web. Pouring money into online ventures is only good if it produces returns. To date, Microsoft has not seen the kind of gains it will need to have to make it pay off. Some newspaper companies did, for example, build online job sites and auto sites and just weren't able to grab enough money to replace the ad dollars being lost. It's not enough to see the threat and try. To prove the grumblers wrong, Microsoft will have to do more than throw money online. It will have to win.

[MSSlayer]

That is why Microsoft is a failure online. They are going after advertising dollars without having anything to drive people to them. Like usual, they are completely ass-backwards on this.

Develop a search engine to rival or beat Google.

Develop free online tools that people would want to use.

Handle privacy issues better than Google has.

Once they do that, the advertising dollars they are so focused on will come. Until they accomplish this, they will fail again and again.

That is why they get ridiculed for investing so much money, especially when their flagship products are failing.

[bensobel]

People are quick to write off whatever Microsoft does as failure. Microsoft was written off completely when they entered the game console business against Sony. Now they have a sizable market share.

[john55440]

Yup, Microsoft is right. They are investing in the future, a sound long term strategy.

Stock analysts only care about the next quarter. They can't grasp the concept of long term strategies.

[Penguinisto]

Actually, MSFT doesn't have much choice but to invest online.

Operating systems are almost mere commodities now. OEM's have razor-thin margins as it is, and nowadays Windows licensing per-machine eats a VERY substantial portion of the costs... As competition increases, I can easily see OEM's looking to reduce that cost from their budgets, by turning to Linux (as Asus has big-time w/ the Eee PC, and Dell has begun to), or by putting pricing pressure on Microsoft. This in turn leads to lower income for MSFT in the face of rising competition. On the Enterprise front, Linux dominates with drastically lower TCO and an even smaller cost up-front.

Office? Their only real medium-term hope, but one which is steadily seeing competition (from Google, from OpenOffice, etc), and which is itself becoming a commodity. On the apps side in general, Open Source is taking the enterprise by storm, and there isn't much that MSFT can do about it (though not for lack of trying, and to their credit they did manage to confuse and FUD some of it back, combining that with enough vendor lock-in to give them some breathing room).

MSFT has been casting about for new markets for a long time now - their xbox venture might see a profit this year (after 8 years or so), but the margins won't match what they need to stay competitive there, let alone stay alive long-term at their current rate of money consumption. marketshare for the xbox is also eroding in favor of the Wii and the PS3, which doesn't bode well.

The Zune? Pfft! It's pretty much dead minus the corpse knowing about it. See also "Ultimate TV".

Online, Google has proven that there is an obscene amount of money to be made in search and in online adverts. Microsoft naturally wants a piece of that. Problem is, they already have a long history of failure in this arena (MSN the ISP is pretty much a minor player at best --and would be dead if not for Qwest--, Hotmail has become a ginormous spam-hole, MSN Messenger doesn't make any real profits to speak of, and MSN/Live is a distant third place in nearly every metric...) and is the case in spite of Windows' once-absolute dominance.

But... online is one of the only similar markets left where Microsoft actually has a chance at surviving 10 years hence. Problem is, Google got there first, and unlike w/ Windows, MSFT can't simply swipe and co-opt what they need to compete. Again, not for lack of trying (see also the attempts at buying Yahoo).

As recent as five years ago, MSFT might have stood a chance of being ahead online - by bolstering MSN, doing something to actually curb Hotmail's spam-o-rama (instead of counting all those accounts as some sort of proof-of-popularity), and monetizing MSN Messenger in a way that made sense. If they also had done something useful with their search business instead of trying to soak the page in adverts, as well as provided useful features like Yahoo and Google does today, they might be in a far more favorable position today. As it stands, they are not, vis-a-vis online.

The Internet blindsided Microsoft in ~1995... but they managed to recover from it. Problem is, they didn't really learn what they were supposed to from it. If they had, they would've gone to incredible lengths to charge ahead and pour as much as they could into pushing their online presence... instead, they dithered and did half-measures, buying what they could to establish what they could. Now, they're stuck with a long, hard game of catch-up... and I daresay that they're going to have a very hard time of it at best.

[solomonrex]

If MS was serious, they would REALLY put Office online. But they aren't. They have to milk this franchise for as long as possible and hope they can catch up in the end. But that's a bad strategy. They've abandoned VBA and by the time office online is ready, all the developers will have salesforce, google, iphone, etc. alternatives. They're losing the platform battle.

[NewsReader_]

One of your more insightful posts. Good stuff.

I agree that Microsoft is making a wise investment. It demonstrates good vision is is really a very safe bet. The industry is moving in that direction and they would be foolish to resist.

It always amuses me to read comments about how Microsoft's platform business is dead or dying. The numbers simply do not back that up. Year after year, they have consistent revenue growth from those businesses. If you do not want to take my word for it, look at the numbers yourself. Stats do not lie. $16 billion in revenue is nothing to sneeze at.

http://www.microsoft.com/msft/earnings/FY08/earn_rel_q4_08.mspx

There is certainly a "perception" that Macs, Linux, Google Docs, etc. are putting a dent in those businesses but that is all that it is. People like to talk about market share but you also have to realize that the market is growing. That means even if you lose 1% of the market, the gain in the size of the market still generates growth. Microsoft is actually gaining market share in the server market despite the perception that Linux is out performing it.

By investing in online services, Microsoft is ensuring continued growth. It is a move to have a more diverse portfolio of revenue generating businesses. Unlike Google which has a single source or revenue, ads, Microsft already has a multitude of sources. That is why Google is taking more of a beating in the stock market right now.

[The Harper]

Most of these CNet blg postings are utter crap. Poorly written, not very insightful, and very much "bandwagon"-ish in their diatribes. But I must say, this is one of the better written ones. I applaud that.

[letterrepdotcom]

MSFT's failed bid for Yahoo tolled the death knell for proprietary software and signals the true dawn of open-source. Welcome.

Had MSFT been successful, with Yahoo!'s directory and huge member base, we would likely have been looking at a longer life for Windows, Office, etc., of some form.

Ubuntu watched the showdown closely and released Hardy with bugs just shortly before Yahoo!'s answer to MS was due. It didn't make sense to release a 'free' (open-source) OS with bugs.

[RegCrowder]

Okay, I will buy the argument that Microsoft has to DO SOMETHING new to avoid fading slowly into oblivion. But if they don't have a plan that relates to reality, throwing money at undefined problems is NOT going to save them from themselves.

(Microsoft would do well to learn from Pogo and adopt the motto: "We have met the enemy and it is us.")

MSFT is becoming an IT clone of Citibank. When the macro economy pushes huge amounts of profits into the lap of Citigroup (a/k/a Citicorp, a/k/a Citibank, a/k/a, Citi, etc.) it buys companies and bulks up, talking all the time about synergy, blah blah blah. Then the economy turns and they "slim down" by selling off non-core businesses. Then the buy-sell-buy cycle repeats. Over and over and over again.

Microsoft seems to have joined Citi wandering around in left field with this finger up its nose.

When Microsoft rolls out something new, it always looks to me as if it was designed to impress the Board of Directors of a Fortune 500 company - NOT me. I think that's it.

I will part company with your premise that it is between Google and Microsoft. Any of a hundred early-stage private companies being built today by fresh, hungry innovators could out-compete and out-perform both Google and Microsoft in the next five years.

Make that two years.

I think Google is doing quite well, by the way. It seems to have a clear focus of the need to continually reinvent itself. So, none of this is intended to suggest that Google isn't going to be a formidable competitor to anybody and everybody for a few more years. But if Mr. Google decides to lay back and relax and take a snooze, when it wakes up it will discover that somebody has eaten its lunch, chopped off its legs, run off with its wife and hound dog and stolen the pickup truck. As well has having snatched the bank cards and found all the PIN numbers written on the last page of the desk calendar.

IBM ruled the world of computers once. ITT ruled telecommunications once. Who are these guys? Exactly.

REG CROWDER
Freelance Financial and Investment Writer
London, UK & Brittany, France

[http://www.utalkmarketing.com/Blogs/UserBlogs.aspx?UserID=6304]

[http://www.journalistdirectory.com/journalist/TgTQ/REG-CROWDER]

[Sumatra-Bosch]

Battle between Google and MSFT? Ha. Haha. Hahahahahhahahahaha. Like a sword fight between Jet Li and a blind quadriplegic.

[df561]

it's a branding game. Google is synonymous with search, until that changes there's nothing MSFT can do to win in that space.

[chlamydia-test]

Give Microsoft some credit here. They were written off but now they have a sizable market share. (Editor's note: Ad link deleted.)