Monthly Archives: April 2008
Many have commented on Microsoft’s pending Windows collapse based on Gartner analysts Mike Silver and Neil MacDonald’s recent comments. Some of discussed how, by extention, this sets Google up to win over the long-term.
I know both Mike and Neil, and I think think that they are astute, fair-minded and customer focused. I think their specific comments — Windows’ viability in the enterprise long-term given Windows Vista’s challenges — are reasonable.
I think that whoever’s taking those comments and extending them to a death sentence of Microsoft broadly are blowing things way out of proportion.
I actually think that Microsoft is probably a strong medium- to long-term tech buys at this point in time. (Note: Though I have a small stake in MSFT at this time, I am not planning to trade in or out of the stock in the medium term.)
My hypothesis is relatively straightforward.
First, I do a heads-up comparison MSFT against Google on key financial metrics. Here are several I chose:
|Net Inc. (2007FY)||14.0B$||4.2B$|
|CFLO from operating||17.7B$||5.7B$|
Source: Google Finance
I think these growth numbers are staggering — for both companies. Both companies are growing like gangbusters. Google trounced the online market and delivered heart-thumping growth for a company it’s size. Still, MSFT can feel proud in that it actually grew earning more than GOOG in 2007 on an absolute numbers basis. (Check the math.)
Still when you stack up both sets of numbers and you put an investor’s perspective against them, I start thinking MSFT looks far more attractive. To me this distinction–the investor’s perspective–is vital. To an investor, absolute growth (where GOOG has the edge) is important, but not decisive. Rather, to an investor, what one should look for is consistently better growth versus expectations. Beating expected growth (and a consistently high dividend yield) over time is the best way to grow shareholder value over the long-term.
Expectations are made clear in the PE number, where GOOG is literally more than double MSFT’s. While I do buy that GOOG’s growth prospects on a growth rate trajectory are strong over the next 5 years, it’s hard to believe that it’s worth 2x a PE of MSFT over that period.
MSFT is a big company, and it may be lumbering at times. I think though that reports of its death are greatly exaggerated. It is still a profit juggernaut. It throws off oceans of free cash flow, which it can use to invest. It does still attract and retain amazing engineers who want to ship things that will show up on millions/billions of devices or PCs. Many have left, but many haven’t. And it is a company that doesn’t know how to quit.
It also has two undiscussed “aces” up its sleeve that I think are not yet factored into the PE difference that I see.
First, MSFT has been a big company longer and has gone through many (not all) of the growing pains of being a big company with more than 50K people. It knows how to execute pretty well with it’s 80K people.
By contrast, GOOG has just hit 20K+ people and is growing liek gangbusters. No matter how smart (and I know they are really really smart) they are, at some point there are too many people at any company, and there is the dreaded feeling of overhead. Great engineers bolt; too many people want to see powerpoints with pretty designs and good punctuation; and decision-making will start to take longer.
This is a law of physics, in my view, where over about 30K people, innovation starts slowing until management processes catch-up. This is particularly hard at technical companies as engineers tend to scoff at management types as Dilberts who just screw things up and put processes in place. But guess what happens if you let 30K people run around and just be engineers who have fun and no one puts a plan in place? I’ll tell you what you get. You lose the ability to ship great stuff. You get too many cooks in the kitchen. You get products that don’t meet their full potential (Vista’s a decent example).
This will hit GOOG (no offense), as it hits any company to some degree. It may mitigate this somewhat, but it will have an impact. The recent HuddleChat / AppEngine fiasco was a good lightweight example–looked to me like amateur hour over there at GOOG. These types of things will happen again. It’s unclear how well they’ll deal with this, but MSFT has had more runway with this problem. My Vista crack aside, the sales force at MSFT is cranking these days, as are numerous product groups (like Server and Tools).
The second ace up the sleeve is starting to be more recognizeable: Ray Ozzie. He is clearly stepping into about the biggest shoes one could ever fill in teh technology world, namely Bill Gates’. His Live Mesh strategy is ground-breaking. He is as visionary and web-centric a technical leader as there is on the planet. If you watch and listen to him speak–without all the ABM bias–I think you’ll see a man who truly ‘gets it.’ He’s someone who sees the enormous power of the web, connectivity, devices, and so on to deliver amazing experiences. His impact and influence appear to be rising–this bodes well for MSFT over the next 5-10 years.
So that’s my case. I find the lower PE and cheaper MSFT a better value to buy for medium- to long-term equity buyers. If you want pure growth, go Google, if you want a better investment, go MSFT.
Yesterday someone asked me at lunch whether I thought MSFT would complete the deal with Yahoo. I’ve got no insider information, I’m not trading on this at all. I’m just a guy who worked within the ‘Soft for a decade. Here was my prediction:
Microsoft would get Yahoo. MSFT may have to pay slightly more.
My rationale is that the current ploys of AOL/TW or the YHOO/GOOG don’t seem credible as deals. They seem more credible as the final moves of YHOO’s end-game to get MSFT to raise it’s bid. The moves as end-game likely have the capacity, in conjunction with the recent fall in MSFT’s share price, to drive a slight price increase on MSFT’s side.
Here’s my rationale:
First, the more interesting of the two ploys is the AOL/Time Warner one. If I were Mr. Bewkes, newly minted CEO who plans to take over Chairman role at the end of this year, I wouldn’t get in a bidding war with MSFT on this with a 50′ pole. Two key reasons.
One, MSFT has a far better balance sheet: a ton of cash, margins that still throw off a ton of free cashflow, and effectively no debt. Time Warner, on the other hand, not so much.
Two, Mr. Bewkes is taking over a company still scarred by the historically catastrophic acquisition of AOL at the height of the bubble. I could see an argument that things are calmer now, but think about it. If you were Mr. Bewkes, would you really want your first big acquisition to be an internet juggernaut that you ‘won’ in a bidding war with Microsoft? It’d be an interesting choice, I guess, but I’m dubious. It’s more credible to me that Mr. Bewkes and TW are proving a stalking horse, ensuring that MSFT / MSN don’t get it too cheaply.
The second Goog/Yhoo ploy is, in my mind, goofy. The scenario appears here to be a short-term road test of a Google Ad Partnership, hopefully yielding data that would make a YHOO/GOOG partnership break-through or drive MSFT to a higher bid. The level of crispness and detail around this is shallow–sounds like something being hacked together last second. Are we supposed to buy that some short-term 2 week test is going to provide material data that’s going to really take things over the top? It seems particularly random, given YHOOs claim it discussed a larger partnership with GOOG in Europe last year, but decided not to last year. If the partnership wasn’t worth doing in Europe last year, why should I believe that a smaller test now is one that will make a difference now?
This “test” partnership sounds cute and spunky, but despite the name brand of GOOG being there, it just doesn’t ring true as a credible alternative.
Sum it up together, I think MSFT ups it’s bid by under 10% and gets Yahoo deal by the end of the month.
Other estimations welcome.
Professor Pausch’s Last Lecture gained international fame last year. In the course of watching this and reading about him, I stumbled upon a talk of which he is more proud. It’s his tips on Time Management, a topic (weirdly) I’m really into.
Here’s the HTML link to his notes from this–keep it close. I refer to it about once a week!
Fred Wilson’s post here is spot on, based on my experience as an entrepreneur. ‘Having code’ > “Not having code’ by a country mile.
There was a great saying that rock-star coders I knew at MSFT would use at times: “The code doesn’t lie.” Reinforces the point, and in my view makes Fred’s assertion stronger.
Having worked now as an entrepreneur for a few months after a decade at a big co, what’s weird to me is the relative usage and implied value of ‘good decks’ at big co’s, relative to trying to get a company started, where it’s all about the code.
In the end, most meetings you have in BigCo (all due respect to my fellow softies out there) are less ‘bet the company’ occurrences. They’re updates, discussions, whatever in the vastly safe environment of being all in the same company, often with people you’ve worked with over a long period of time.
With a start-up, meetings are literally life-and-death. And what’s more, you’re often meeting people whom you don’t have years of experience with. (I’m meeting folks basically for the first or second times.)
And yet, I’ve had many meetings in start-up land where we don’t even look at the PPT. At MSFT, conversely, all anyone cared about was what was literally printed on the slides.
What’s a BigCo to do: I think two things–both apply to start-ups too 🙂
1) Enforce Guy K’s 10/20/30 rule. If you’re going to use PPT, follow Guy’s rules.
2) Always ‘bring a demo.’ That could be an interactive ad (for the mktg people), a playback of support calls (customer support), or good old fashioned coding (for the engineers)
TC reported: Google Rips Down HuddleChat and bloggers jumped in with both feet. Was Google censoring apps built by their own developers? was 37Signals’ response appropriate or effective?
These are decent questions. To me, though, the more interesting discussion is this: what do utility computing platforms (broadly defining offerings such as Google’s App Engine and Amazon’s AWS) mean for companies, particularly startups.
To quote Bill Cosby’s impersonation in of the Almighty in his Noah routine: “How long can you tread water?” Put another way, here’s how I thought about this during my time at Microsoft in Windows and Windows Server: “the waterline is going up, and it’s time to climb.”
Popular platforms that have the capacity to impact or run-over small firms tend to be owned and driven by well-capitalized, leading firms. Think Google, Amazon or Microsoft. There very size makes them scary.
Through no desire to “do evil,” these platform companies have a responsibility to customers and shareholders to innovate. Windows Server’s engineers strive to make their platform more manageable, more robust, more secure, etc. I know this directly. While I don’t know the engineers at AWS or at Google App Engine, I would posit that most likely as they listen to customers, they’ll learn that they need their products to be more manageable, more robust, and more secure, etc.
So as they make these platforms mo’better, what happens? The companies that have built a customer base by making say Windows Servers more manageable find the waterline rising on them. They have to respond–they climb the waterline or they drown.
In the old days of server infrastructure, the rising waterline problem was a pretty straightforward competitive strategy problem. The server infra apps had (and still have to) climb the waterline as the platform evolves and munches away at the ‘core’ functionality that some of those apps do. Painful, but straightforward.
But in the new world of AWS and GAE, what’s the story? My sense is that the rising waterline is a bigger problem, impacting more firms.
With AWS & GAE, and with more robust rapid prototyping and development tools, the waterline is rising ever faster… With 37Signals case, 3 Googlers basically rebuilt the app in their spare time and foul was cried. I’m less interested in the foul than I am in the fact that apps are so easily rebuilt.
What’s a start-up to do?
First, it’s all about innovation, as always. Spend time building conversations with customers and do things they value. Little innovations count here IMHO–depth of product, cleanliness of functions–these things matter. Do them.
Second, I think the value of having a network and building loyalty is never higher. If the app can be copied instantly by someone else, then you need to have other tangible benefits, a network of other people that makes your real estate more interesting than a clone. Note that this requires a bunch of marketing work–it comes down to building converstaions with customers and giving them tangible benefits to get involved.
Third, think about and have a competitive strategy. What is it that’s going to differentiate you when the app itself can be copied? You’d better have an answer to that–hand-waving here is unattractive.
Fourth, and probably most useful over time, choose a good market. At the end of the day, this might be a cop out statement, as it’s kind of saying there’s only so much you can do with the first three above. I’d say that the first three are all necessary and may be sufficient. It sure would help though if despite the competitiev entry, you had the ability to be digging in a rich mine. All things being equal, most firms should choose to work to enter a rich mine versus a spent one. Choose wisely.