How can I say that Microsoft Corp., one of the most profitable companies ever to exist is going to go bankrupt, and actually mean it?
Because I’ve done a lot of work studying the company, and understand some things about it, its markets, and its customers, that aren’t common knowledge. It is an exceptionally complex issue that I’ve never explained fully before, to anyone. In this series of posts I’m going to break down my reasoning step by step, explaining how I found the data I’m using, where I’m guessing, and most importantly why I think the way I do.
Are you ready for a wild ride? I’m going to feed this to you in 1000 word segments every day, until I’m finished.
One warning. There are a lot of explanations scattered through this. Some of them cover really dry topics, but if you don’t read them, the series won’t make sense. Please bear with me, and I’ll try to make it entertaining.
What is Microsoft
The first question is, what is Microsoft? We all know that it is a company that produces software, but is “a software company” a reasonable description for it? And if so, how does that work into the company’s actions.
The best place to look for information like this is on the United States Securities and Exchange Commission website.
At this point we must digress. Stock fraud is a recurring problem. On June 6, 1934, as a response to the Stock Market crash that happened on Black Tuesday, the United States Government formed the Securities and Exchange Commission (see Wikipedia).
The aim was to prevent, in as much as possible, stock fraud. Fraud of course is impossible to wipe out, Bernie Madoff is proof of that. But by adding additional protections, the United States Government hoped to limit the damage, by forcing companies that were publicly traded to disclose their financial condition.
To a large extent the system has worked. While there are always cheats, the damage that they do to the system is far more limited than what happened on Black Tuesday. Effectively the S.E.C. levels the system, so that the small stockholder, who can’t afford to hire detectives to inquire into whether or not a company is honest, is on an even tier with large stockholders, who could afford to do that.
Problems still exist, but there’s never been another Black Tuesday.
The S.E.C. reporting system has had unintended consequences. Instead of only investors reading S.E.C. reports, competitors, customers, and suppliers also read them.
Assume you are a supplier. You have a potential client, and you want to know if they have the money to pay their bills. Read their S.E.C. report. You’ll be able to get a decent idea of the company’s fiscal status pretty quickly.
Assume you are a customer. You have a potential supplier, and you want to make sure that they can really supply the goods. You are worried that they are too small (or too large) to be a reliable vendor. Read their S.E.C. report.
Assume you are a competitor. You really want to know what your competitor is doing. Read all their S.E.C. filings. Seriously. I used to do this all the time. By regulation the company has to announce anything which could impact on the stock price, and almost everything that could impact the stock price is going to impact you, the competitor.
Take Microsoft. If Microsoft sells a consumer one (1) copy of Windows, Microsoft doesn’t need to make an announcement. The sale isn’t going to have any impact on the price of the stock.
But if Microsoft landed computer OEM the size of Dell, who Microsoft had never sold to before, Microsoft would have to announce the deal.
This is great from a competitor’s viewpoint. Now I know who your new customer is, and I can cold call them, attempting to make some sales myself, BECAUSE I KNOW THERE IS A MARKET FOR MY PRODUCT (disclosure – I was the Major Accounts Sales Person at a company for nearly ten years).
Seriously. I used to do this all of the time. Most of the time I didn’t make any sales, but about 10% of the time I did, and added to the new customers I was already chasing, this was gravy. One of the hardest jobs a sales representative has is identifying potential customers. Even the smallest advantage can be the difference between your company making a profit, or loosing money and having to lay off staff. If you don’t use this advantage, you are in breach of your fiduciary duty to your employer.
To help investors know more about the company, in the 10K Annual reports, the company is required to explain the risk factors that might impact on the business (Link to Microsoft’s most recent 10K Risk Factors). This quite often lists competing corporations. To a sales representative, finding your own company listed in the Risk Factors of a larger rival brings an intense sense of validation. Of course it also means they are watching you too…
Besides, they might have noticed a risk factor you missed. You have to read the risk factors. Absolutely have to, because that missed risk factor can kill your job!
In addition to Microsoft’s own website, the S.E.C. reports that Microsoft files, and the press releases when they announce a major deal, have been instrumental in teaching me about the company.
Oh, and there’s the courts. Microsoft has been involved in a lot of litigation over the last twenty years. There are several sites which keep copies of court filings, the best of which is Groklaw. There is an entire section of Groklaw with copies of Microsoft Court Filings, many of which have been converted from Portable Document Format (PDF) to text using Optical Character Recognition (OCR) software.
The second best site I’ve found for information on Microsoft’s court cases is Techrights, which has an archive of the filings from the Comes v. Microsoft case. Techrights also has a news feed, which catchs most of the current articles on computers and software, useful for finding out things like Kingston is releasing a one terrabyte flash drive. It’s $1750.00 so I won’t be buying one, but storage is getting smaller!
Disclosure: I know the operators of both sites.
Last but not least, you have to read the advertisements, and not just the ones in PC Magazine. A large portion of Microsoft’s profits have nothing to do with consumer software, and any evaluation of the company that doesn’t take those profit sources into account, will be wrong.
I’ll continue my explanation of what Microsoft is tomorrow.
Tuesday January 8, 2013