Microsoft Death Watch – January 2011 Update

Back to the fun stuff. Like telling everyone that the most profitable company in the entire world will enter bankruptcy protection shortly. Just after the next Winter Olympics if I’m right.

Yes I’m crazy. But I know what I’m talking about. Let’s look at things one at a time.

I’ve been running behind on things, which is why an update wasn’t published in October. For those who want to look at Microsoft’s SEC reports directly, they can be found here on the Securities and Exchange Commission website.

Basic Numbers

Total Revenue is always interesting. A company’s total revenue can look good, but the company still be loosing money. General Motors was selling billions of dollars worth of vehicles, but since their costs were high, the company was forced into bankruptcy.

Microsoft isn’t in that position. Currently Microsoft’s expenses are far lower than their sales, in fact the company is in the enviable position of having one of the best earnings to profits ratios ever.

Microsoft FInancials
Microsoft FInancials

There’s a large difference between Revenue, which is the company’s total income from all sources, and Net Income, which is what is left after subtracting all corporate expenses from Revenue. Yes, there’s a huge drop. But most companies wish they were doing as well as Microsoft. If you wish to look at the spreadsheet I used to produce the chart above, feel free to download it. You will need an Open Document compliant program, such as KOffice, OpenOffice, or LibreOffice to view and modify the spreadsheet.

Microsoft Actions To Avoid Bankruptcy

So why do I say that Microsoft is heading towards bankruptcy?

For several reasons. Please remember that my prediction is based on the assumption that all of Microsoft’s staff is dumber than a fence post, and won’t attempt to do anything to stop the oncoming disaster.

We all know that Microsoft’s staff isn’t that stupid. Jokes about flying chairs aside, there are some damned smart people working at Microsoft. Even Steve Ballmer, who I think has been a disaster as a leader, is far from stupid.

We also know that Microsoft is aware of the problem, and is fighting to stay alive. Microsoft has not, and will never publicly admit there is a problem. To do so would be to destroy the value of the company’s stock. They cannot however totally hid their actions. Rules in the United States require companies to make certain disclosures, so prospective and current shareholders can make a reasoned judgement on the share value.

Microsoft can, and does, like every other company, attempt to limit the negative information it gives out. A common trick is to make announcements late on Friday, before a long weekend, when analysts may not notice the move.

In the past three years Microsoft has killed a long list of products:

2008-2009

  • Dynamics ERP (mobile version) 1 2
  • Dynamics Entrepreneur
  • Recite 1
  • Ensemble 1 2 3
  • MSN Web Messenger 1
  • MSN Groups
  • MSN Direct 1
  • Encarta 1
  • Popfly 1 2
  • Soapbox 1 2
  • Microsoft Money 1 2
  • Office Accounting 1
  • Channel 8 and Channel 10 1
  • Flight Simulator 1
  • Equipt 1
  • Response Point 1 2
  • Live Search product upload tool 1
  • Iowa Datacentre 1
  • adCenter Analytics 1
  • ESP (not confirmed) 1
  • Musiwave 1
  • MSN Music 1
  • Questions & Answers Site 1
  • Book scanning project 1
  • Numerous developer magazines 1
  • Razorfish (sold) 1
  • RoundTable (now at Polycom)
  • Live Labs 1
  • Microsoft Works 1
  • Connected Services Framework
  • Automated Service Agents
  • Forms Server
  • Office Live (renamed/merged into another product)
  • OneCare (renamed/merged into another product)
  • PerformancePoint Server, SharePoint Designer (subsumed or became free)
  • Oslo (may be folded 1)

2010

  • Xbox Live For Original Xbox Games 1
  • Microsoft System Center Capacity Planner (SCCP) 1
  • Windows Essential Business Server 1
  • Forefront/Stirling 1
  • Courier 1 2
  • Slate 1 2
  • Expression Media (sold) 1
  • KIN 1 (Sidekick problems too)
  • Quadrant 1
  • IronRuby 1 2
  • SteadyState 1
  • Windows Presentation Foundation (WPF) 1
  • Vine 1
  • Oslo (key portions) 1
  • Milo 1 (to be confirmed)
  • Windows Live Spaces (user accounts migrated to another company) 1
  • Massive (product and division/unit) 1, 2
  • Live Labs 1
  • IronPython 1
  • Silverlight (rendered dead for most purposes) 1
  • Bing Maps 3-D Component 1
  • Pivot 1
  • Unnamed flagship project in cloud computing 1

My thanks to Doctor Roy at Techrights for the list. Impressive, isn’t it? Each of those fifty-nine products, would have been a complete business for any other company. For Microsoft they were sidelines, that they abandoned, so that Microsoft could keep their earnings/profits ratio within the limits that the financial analysts were expecting.

Microsoft has also conducted a series of layoffs. Again, my thanks to Doctor Roy for documenting them:

November 2008

December 2008

January 2009

February 2009

March 2009

April 2009

May 2009

June-September 2009

October 2009

November 2009

December 2009

2010

Impressive list, isn’t it? When you are looking at one of the largest, most profitable companies in existence, almost everything it does looks impressive.

I said that my prediction was based on Microsoft not doing anything, and as you can see the firm is doing many things to maintain it’s strength. This will no doubt have an effect on how long Microsoft stays in business. Overall I don’t think that the current moves have made a significant difference. While the shear number of things Microsoft has done does look impressive, compared to the size of the company as a whole, well, it’s like painting over wallpaper…

And there are limitations that Microsoft cannot work around.

The Weaknesses

This is the fun part. Microsoft is the most profitable company in the world. So what are it’s weaknesses? Or weakness in this case, because it all comes down to one thing.

Microsoft has one spectacularly profitable product. One. Microsoft Office is responsible for nearly 50% of Microsoft’s profits. Anything that impacts on Microsoft’s ability to sell Office, hit’s Microsoft hard.

Most of the rest of Microsoft’s profits come from Microsoft Windows. But Windows is a relatively low margin business. Compare the total sales of the two divisions:

Windows & Windows Live Division – $18,491,000,000.00

Microsoft Business Division – $18,642,000,000.00

As you can see total sales in dollars are relatively equivalent. Total sales in units are another matter. The vast majority of computers sold in North America are sold with Microsoft Windows pre-installed. A certain percentage (Apple now claims it has captured 25% of the consumer market) use Mac OS X, and a certain small percentage like Dell and System 76 do pre-install Linux. But Windows owns most of the market.

Microsoft Office sales are a different matter. Most home computer users don’t need an Office Suite, even though Microsoft pays many computer OEMS to pre-install Microsoft Office Home Edition. Many business users don’t need an Office Suite either. Microsoft Business Division manages higher sales than Windows & Windows Live Division on far lower volumes.

Any losses or increases in volume of sales of Microsoft Office will have a far greater effect than losses or increases in volume of sales of Microsoft Windows.

Microsoft knows this. And that’s why Microsoft Office is the best product Microsoft has ever produced. Even with the advantages of knowing the operating system it was designed for work on better than anyone else could, Microsoft still had to produce a good product. If they didn’t, customers would have continued to use Word Perfect and Lotus 123. Yes, Microsoft worked hard to sabotage both of those products (see the Comes v. Microsoft documents at Groklaw for the details). But Microsoft still had competition, and still had to supply a really good product to win.

Microsoft has it’s eggs all in one basket, as the old saying goes. If Microsoft drops the basket, it won’t get to eat. As Arron Rouse of Techeye worded it in a recent article title, Microsoft’s Achilles Heel is still Office.

Arron’s thesis is that governments are attempting to cut costs, and software licenses are costs. Cutting licensing costs will drive adoption of the ODF file format (which Microsoft Office doesn’t implement well), which will drive businesses doing business with governments to move to ODF capable office suites as well. He thinks that ODF adoption will be driven by government.

I don’t think it’s that simple. There are other factors at play here, and that Microsoft is partly responsible for them.

Everyone has heard the Business Software Alliance radio ads. They’ll reward you for turning in your boss, for using unlicensed software. Rather reminds me of the Gestapo during World War II, or the KGB during the Cold War. Want to turn someone in? You can do it on their website!

The ads appear to have had two effects. The first was to ruin the reputations of the members of the Business Software Alliance. Would you trust a company that is willing to pay you to betray the place you work at? Seriously. Would you? I wouldn’t. Listen carefully to the ads, the next time you hear one. They are very McCarthyesque. The average person after hearing one of these ads, is far less likely to recommend Microsoft, if they know of an alternative.

And the ads have also had an impact on management. Management now has far less reason to trust employees. After all, a disgruntled employee might decide to make some extra money after leaving, by turning the company in for running unlicensed software. Considering how difficult it can be for even a moderate sized firm to keep track of all of their software licenses, this is a terrifying prospect.

The Business Software Alliance announcements of ‘enforcement actions’ make things even worse. There is a level of paranoia in the business community about the BSA member companies, Microsoft in particular. Anyone who has read the interview with Sterling Ball, the president of Ernie Ball, the leading manufacturer of guitar strings, would have good reason to be terrified.

Reducing your exposure to accusations of license violations is a good idea. Doing that, and cutting costs at the same time, is even better. Effectively this page on the BSA website is like the Poison Logo, a warning to avoid using software from these vendors. The most common vendor is of course Microsoft…

Now consider the perfect storm – what if both government and business migrate away from Microsoft Office at the same time?

Usually when there is major shift of any sort, it takes years to happen. The move from horse drawn wagons to automobiles, the move from phonographic records to cassette tapes, the move from VHS tapes to digital video discs are all good examples. But…

Each of the above examples existed in hardware. It’s impossible to put a DVD in a VHS drive. But it is possible to import a Microsoft Office file into Google Docs or Open Office. Yes, there may be some issues with formatting. However the vast majority of documents use almost no formatting. And if there’s a market, someone if going to develop a batch converter.

Mindset

Mindset is also an issue. At one point, Microsoft was the 800 pound gorilla of the Information Technology business. Now, a series of failures (Windows Mobile 6, KIN, Zune, Windows for Tablets, etc.) have hurt Microsoft’s reputation as an innovator. Apple in particular has hurt Microsoft badly, first, by taking over the music player market, second by changing the smartphone market, and third by knocking Microsoft out of the tablet computer market.

Microsoft worked for over ten years to bring Tablet computing to the mainstream, and failed. Apple literally came from nowhere with the IPad, and rejuvenated the Tablet computing market. This enhanced Apple’s reputation as an innovator, and also opened up the market to other operating systems, such as Android and Ubuntu. Effectively what Apple had done was redefine a Tablet computer as something that didn’t run Windows.

And now there are a ton of tablets on sale, none of which run Windows.

And this is a series of huge problems for Microsoft.

  1. Not one of those tablet computers can run Microsoft Office.
  2. Not one of those tablet computers can run Microsoft Windows.
  3. Windows Phone 7 was two years too late, and being outsold by Apple’s IOS and Google’s Android.
  4. Kinect, Microsoft’s motion sensing add on for the XBox 360 is being outsold by Sony’s motion sensing add on.
  5. The OEMs are learning that depending upon Microsoft is dangerous.

Can Microsoft turn things around? Off course they could. The question is will the company make the hard choices that need to be made, and I think that they won’t.

Regards

Wayne Borean

Thursday January 6, 2010

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11 Responses to Microsoft Death Watch – January 2011 Update

  1. Pingback: Wayne Borean Explains Why Microsoft May be Heading Towards Bankruptcy | Techrights

  2. Anishman says:

    A very interesting read Wayne. There is nothing I would want more.. than for this unimaginative Goliath,, with its years of anti-competitive bullying to fall.. and fall hard at that. The countless companies and innovations that it has swallowed or suppressed over the past few decades is mind boggling.

    Anishman

    P.S. thnx for U.S. Hosting heads up!

    • Anonymous says:

      No, thank you for the compliments!

      Re the U.S. hosting deal, I have a strong feeling that it’s going to get worse before it gets better, and that anything which is ‘controversial’ may end up being targeted.

      Wayne

  3. Simon says:

    Could you expand on your first point “But I know what I’m talking about”

    Er… what qualifies you to know what you are talking about?

    I have also ‘held a variety of positions, in a variety of industries’ – that doesn’t immediately qualify me to ‘know what I’m talking about’

    e.g. If you genuinely think that “4.Kinect, Microsoft’s motion sensing add on for the XBox 360 is being outsold by Sony’s motion sensing add on.” is one of a “series of huge problems” then you probably don’t have the first clue about how Microsoft operates, how it makes money, how it relates to its customers, etc.

    I have no doubt that Microsoft is going to have some tough times ahead – but this is a poorly thought out piece of screed. Go do some proper homework.

    • Simon,

      I spent many years in sales, marketing, and product design. I know what you have to do to move product, and to me it appears that Microsoft isn’t doing those things. We are talking about basic things, that affect their connection with their customers (and another point I’ve made is that Microsoft has misidentified who their customers are – they think their customers are the OEMS, not the users).

      As to Kinect, yes, according to the numbers that I’m seeing. Of course if you look at North American only numbers, you’ll get a different answer. I looked at worldwide numbers. Curiously the Kinect is probably far more valuable long term, because of it’s ability to be hacked and used in other applications.

      One final point. Have you bothered to read Microsoft’s SEC reports? If you haven’t, you aren’t going to understand.

      Wayne aka The Mad Hatter

  4. Pingback: Are Microsoft’s days numbered? – report | Nebulos Tech News & Support

  5. You can’t really kill IronPython and IronRuby.
    They’re both Open Source, they can’t really be killed.

    Also Silverlight and WPF are not dead.

    • Wayne Borean says:

      You can stop supplying money and programmers, which is what Microsoft did. That can strangle a project, especially one with a limited range. Mainline Python and Ruby are far more attractive to programmers than IronPython and IronRuby.

      As to Silverlight and Windows Presentation Foundation, it all depends on how you define dead, because they are dead, but they are alive.

      Microsoft is making huge changes to Windows. Windows 8 will have a totally different security model than Windows 7. It will also have a totally different user interface. At least two of them, and possibly three or four.

      So what does that do to the programming interfaces?

      You change the operating system that much, the programming interfaces have to change. That’s just the way things are. So Silverlight and Windows Presentation Foundation are dead, but they will be reborn. The new versions may have new names, or they may keep the same names. They will have new capabilities.

      Does it change my view of where Microsoft is going?

      No. I still cannot see Microsoft being able to maintain the current level of profitability. And if they can’t maintain it, they are headed for bankruptcy.

      Wayne

  6. Anonymous says:

    You don’t know what the hell you’re talking about.

    • Wayne Borean says:

      What a fantastically intelligent comment! Please enlighten us with your expertise as to exactly why I don’t know “what the hell” I’m talking about.

      It is easy to blindly criticize. Let’s see some details. Come, I went to the trouble of reading Microsoft’s financials. You should do the same, and come back with a list of detailed criticisms, pointing out the exact errors in my thesis.

      Wayne

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