When I started this blog I promised to explore the negatives in my stock positions at least in part because it forced me to think clearly. We have a small position in Microsoft - and there is news today which lays out precisely how crushed a company Mr Softee has become. That news comes from - of all places - Verizon.
The new hot mobile phone operating system is linux-based with overlay system developed by Google called Android. It is open source and phone makers (HTC, Samsung and even Motorola) can take this system and incorporate it in their phone and not pay a penny. At first glance it is hard to see how Google makes a dime out of this operating systems.
At second glance it is not. The way people (especially the young and especially in developing countries) are interacting to the internet is through their phone. There are plenty of opportunities. With an Android system it is likely that will be with the Googleplex. Google - if you haven't noticed - is making plenty of revenue opportunities - and Android is part of the key to catching them.
Bill Gurley nailed it with possibly the best blog post I have read in the past year on any topic - where he described Google's business model as the "less than free" model - where Google will pay people to use their operating system provided they link the end-customer into the Googleplex.
Of course since anyone can modify the Android system anyone can compete with Google by modifying android and linking into their cloud services. We could have the Yahoo mobile phone that links you to Yahoo search and Yahoo maps and Yahoo mail. Or for that matter we could even have the Microsoft Android phone.
No wait - we do have the Microsoft Android phone - courtesy of Verizon. Verizon has just launched a very-high-powered Samsung phone that runs Android. Google has been disabled - and everything is linked to Microsoft. To quote Gizmodo:
Verizon, unfortunately, is also what ruins the phone. Or, rather, what it's forced Samsung to do to the phone, which you could sum up in a word: Bing. Bing is the default—and only—search engine on the Fascinate. A Google Android phone. In the search widget, in the browser, when you press the search button. Bing. No, you can't change it. There's no setting for it, and the Google Search widget that you can snag from the Market is blocked (or at least very carefully hidden). Being unwittingly forced into Verizon and Bing's conjugal relationship is infuriating on its own, but the implementation also feels like the sloppy hack that it is. The co-branded Bing/Verizon portal that an in-browser search takes you to is ripped from the circa-2005 dumbphone-approved "internet," while the Bing Maps app that it pushes you toward is vastly inferior to Google Maps (no multitouch, Latitude, etc.). To be clear, Bing itself is fine. This implementation of it is not.
Now presumably Microsoft paid Verizon handsomely for this. And that lays reveals precisely how bare the Microsoft business model has become. Microsoft is in the business of selling operating systems. Almost all other businesses are extras or adjacencies. They were once thought to have a "monopoly" on operating systems and were taken to task by the Justice Department.
Well Justice was wrong. Flat wrong. Microsoft is now paying telephone companies to use somebody else's operating system - a total business inversion - and one that lays out just how much BS was in Justice's argument. Ouch.
But worse - Gizmodo argues that Microsoft ruined this phone. So now Microsoft is paying phone companies to use other people's operating systems and even then they can't get the customers to like them.
Microsoft is darn cheap - even breathtakingly cheap. But boy is this a dramatically weakened business.
For discussion.
John
38 comments:
It won't be long before cell phone companies and cable TV companies will only exist as internet providers. All content will be streamed over the internet, including movies, TV shows, and phone calls. Why would anyone pay $60 a month for cell phone service so a handful of companies can run full page ads every day for services that are almost indistinguishable, when Google lets you make calls free anywhere in the North America? If, instead of duplicating cell phone towers all over the country, we would expanded the internet to everywhere in the country cell phone companies wouldn't exist.
Google has the formula. Consumers love them, other companies hate them. That's why they will succeed. Provide all services free of charge and pay for them through directed, inconspicuous advertising. It's the business model of the future. Old businesses just don't get it. Amazon has a similar philosophy, a total customer and service orientation, no gimmicks, no tricks, nothing complicated, no interrupting you entertainment to sell you something, etc. It's the wave of the future. If other companies don't get on board soon, they won't be around.
Hi,
I mentioned in your first blog about Microsoft, that Google will be king Microsoft once was. Technology has changed so much so that your hardware will require very light software as to be able to stay as fast as possible. Microsoft has never developed a light operating system, and Google is so advanced as far as its flexiblity and easiness.
As you mentioned about the different type of uses for computers going forward, Google is ready to take to this space, ie Phones and Pad's. Microsoft is still stuck on touch screen computers!
Microsoft is cheap for a reason, just look at where the money is heading in the VC area. Its all to web based apps and sisters of Google.
Again Microsoft is the Telstra of the Australian Market.
Keep this discussion going!
Thanks
And you know how fast this things can change if you missed the next wave.
Just ask Digital, Wang and Data General. Or even better, some other former DOJ targets: IBM and Xerox
Apple and Google are pressing their advantage and it is not clear how Microsoft can leverage any of their strengths in mobile that is a Trojan horse to the corporate sector.
Isn't it the case that the very fact that Microsoft pays Verizon to "ruin" a Google Android phone is an example of a firm with substantial market power? A firm without market power would never be able to do something like this. We might agree that Microsoft's actions are unlikely to be effective. The attempt to leverage market power from a market in which Microsoft is still dominant (albeit a fading dominance) into a competitive market of mobile computers might be unsuccessful, but Microsoft could not even make the attempt if it did not have substantial market power in the fixed computer world.
I really don't understand the justification for investing in any company with a market cap over 200 billion.
1. The up side seems limited by the rule that companies don't grow to the moon.
2. Why not invest in qqqq instead?
At the moment I can barely see the justification for investing in any company with a market cap below $100 billion.
The ones above are so cheap. The stuff below $5 billion is so sketchy.
Short small caps, long large caps is the deal at the moment.
Microsoft is big in last century's technology (business computers on desktops). They will probably remain dominant there for some time to come. However, it is a relatively stagnant market.
Unfortunately for them all the growth is in mobile consumer devices and access to information from the internet. Apple (iPhone, iPad, iPod Touch) and Google (Android, Chrome, GMail, Google Maps, search, etc) both get this and are running as hard as they can in this direction. Apple is targeting the high value/high margin niche, Google is going for the mass market.
Hey, Mr. Hempton, give VZ a break--it's good to see that they can think of some way to make money. As far as I can tell, they are generating about 1% FCF ROA.
They were accused of having a monopoly in Desktop Operating Systems, which they did and still do.
This does not mean they have a monopoly in 'phone OSes, TV OSes, washing machine OSes or anything else.
This should be obvious, no?
Looks like Microsoft coughed up $500MM for 5-year search exclusivity on Verizon. From NY Times:
Microsoft Buys Search Distribution
...
Under a five-year agreement, Microsoft Live Search will become the default search service on cellphones and smartphones running on the Verizon Wireless network. Verizon’s customers will still be able to access other search services through their mobile Web browsers. Terms of the agreement, which begins in the spring, were not disclosed. But a person familiar with the deal, who asked to remain anonymous because he was not authorized to discuss it, said Microsoft will be paying Verizon upwards of $500 million over its duration.
...
http://bits.blogs.nytimes.com/2009/01/07/microsoft-buys-search-distribution-from-verizon-and-dell/
I'm very interested to see how the next 3 months play out for MSFT, considering their fall launch of the new Windows 7 Phone and the sizable investment that they've made it in. It could possibly be a flop like the new RIM Torch but I wouldn't count them out so quickly.
I admit I don't currently have any positions on GOOG, YHOO or MSFT and thus have no skin in the game, but I would caveat that medium-to-large size businesses will always have server side infrastructure to have continuity of control of their data so don't count their core business dead yet. I once met a senior executive for a business transaction tech company that got absorbed by MSFT. They focused on a tech. suite for running and tracking transactions for small businesses but had somehow been introduced to an individual representing a medium sized bank. The conversation went something like this:
Tech Exec: "Our software is affordable and will guarantee you a 99.9% reliability rate"
Bank Exec: "So that means if I run 1,000,000 transactions a day I'll lose 1,000?"
Tech Exec: "Er, I suppose.."
Bank Exec stands up and leaves.
I have nothing useful to add to your main point, which I think is correct. But speaking as your ex-antitrust-lawyer, I can tell you you're completely out to lunch on the antitrust law. You have to look at specific product markets; to determine whether market power exists (it doesn't have to be a total "monopoly,"), you ask whether a 5% price rise would cause material numbers of customers to switch to something else. Would a 5% increase in the price of Windows _in the mid-1990s_ have caused people to switch? The only credible answer is the teenage one: "Well, duh. Of course not." Anything happening 15 years later in a market that didn't even exist back then isn't very relevant. Even today, few people can give up their PC for a smartphone, so the two are not sufficient substitutes.
Kien's comment is also off base. If Microsoft could get Verizon to ruin _all_ its phones in that way, _and_ AT&T and maybe one more of the big four carriers, then maybe we could talk about substantial market power. As it is, all Microsoft has shown it has is substantial mountains of cash.
Fully agree... I would also add that Microsoft is doing many other things that reveal how bare its various businesses have become.
Things like threatening to sue (or in the case of TomTom, actually suing) customers so as to force them into patent licensing deals. (You know a software company feels threatened when it starts suing customers!)
Things like publishing the inner workings of its (hitherto proprietary) Office file formats, and publicly agreeing not to sue anyone who implements them, so as to stave off adoption of OpenDocument by various standards bodies around the world.
Things like publicly allowing the Mono Project to build a mirror copy of the .NET framework for Linux and other platforms. (Did you know that customers can now run their Microsoft .NET applications on Linux -- without paying anything to Microsoft?)
Things like aggressively lowering license fees in many emerging markets, supposedly to fend piracy but more likely to defend itself against the various free, localized implementations of Linux, OpenOffice, etc. pushed by local governments.
These are just the things that come to mind quickly, but there are others...
These are not the kinds of things that a dominant company does! These are the kinds of things that a company is forced to do when under threat.
Unlike you, I'm not sure it makes sense to bet on Microsoft either way.
[If I am duping comments sorry this is long and has to be broken up]
I thinks its way off base to say that the Justice department was wrong in bringing its case. The industry has changed dramatically in the last few years, and the case itself took so long to wind its way through the court system that by the time the judges were talking about an issue it was long since irrelevant (and the harmed competitors were already out of business).
Its cliche but if you compare the timeframes of say the oil industry and its major developments to that of the computer industry you will see how inappropriate the anti-trust law is. Standard Oil was established in 1870, Microsoft in 1975. The peak of their powers were around 1904, and 1995 respectively. The first major competitor at the consumer level has yet to even appear for the oil industry. Google was founded in 1998, and didnt start creating applications like gmail and google docs until 2004-2006. So if 1870=1975 and 1904=1995 then bringing a case in 1998 would be comparable to going after Standard Oil in 1910, which is pretty much what happened, and if the Oil industry was anything like the software industry we would have expected feasible alternatives to oil appear by 1921. The fact that they didn't just shows how different these industries are, but someone living in the late 90s looking at historical examples like Standard Oil could easily have missed the significance of the internet, and thought that preventing microsoft from abusing its monopoly in the new arena was important. Its also possible that the effects of the suit have allowed the internet to grow. If Microsoft had made Internet Explorer standard and disallowed the user the ability to set other browsers as their defaults (which they certainly couldn't do under the watchful eyes of the DOJ) then Netscape/Firefox may have never taken off, and without Netscape pushing technologies like Javascript/DOM/xmlHttpRequest building applications like Gmail and Google Docs may have been totally impossible.
If you want to critize the US DOJ I would say that it was flawed as policy to attempt to apply antitrust acts written in the 1890s to prevent large industrial monopolies from abusing there power to the rapidly developing digital world. The EU has been more sensible about this and has done things that help competitors (without as much legal overhead) by requiring the documentation of document formats (like XLS and DOC). The DOJ could have accomplished a great deal by asking the US courts, the Pentagon, and all manner of other Government agencies to refuse to accept any Microsoft Office file formats, and to mandate the use of common interchange formats. If you can't communicate with the Government in a DOC format, then you have to start using other formats, and they HAVE to preserve your formatting and be better support. Microsoft wouldn't have been able to get away with the scary "Loss of formatting" messages, and poor importing of other file formats.
Finally, I want to say that I think the ownership of Microsoft stock is riskier than you think. The standard feeling is that Microsoft will still make money even if they never sell to consumers again because businesses won't be able to leave them. I would direct you to: http://www.schneier.com/blog/archives/2010/09/consumerization.html I think if the consumer electronics world keeps growing and developing the way it has been recently, then Corporate IT departments are going to have to adjust and accept that their employees are 100% connected and carry their primary computers with them in their pockets. When the man in the corner office wants to use his iPad, Droid etc to access the corporate network because "thats his primary computer and he always has it" then the IT department will have to adjust, and they will web enable their internal systems.
I don't understand Microsofts strategic response to this VBA/VB6 hasn't been updated since 2000? and VBA.NET requires a complete application rewrite and scripting support is at this point rather primitive. So there is no forward path for developers. I'm not sure if this is just incompetence or a strategic plan. Perhaps they think that by leaving their platform static they can make it even harder to port key applications over. Maybe their concern is that if they were forced to update the language then they would have to add new technologies and ideas like AJAX support which would only facilitate the movement away. The problem is that at this point the languages are so old and crufty (just looking at VBA syntax makes me want to vomit), that the developers have left and everyone KNOWS that it has to be rewritten completely. When it is rewritten what platform do you think that IT managers will pick. Google Web Toolkit or VB.NET?
"At the moment I can barely see the justification for investing in any company with a market cap below $100 billion."
That's an interesting statement. According to a quick Yahoo stock screen, there are only 40 U.S. listed equities with market caps above 100 billion. That sounds to me like a very crowded trade with little hope of generating any excess return. You're basically just running with the pack.
Perhaps you'll generate Alpha with the small caps you choose to short.
FSLR comes to mind. ;-)
I can tell you why Linux is not used much on the desktop. It is a pain. I speak as someone writing this on Ubuntu 10.04 and Chrome - both of which are open source.
I generate plenty of alpha with my small cap shorts. They have been off-the-scale good.
My longs. Them more of a problem of late. Much more.
J
I may be off base on this, but without the threat of government intervention, wouldn't Microsoft have blocked the ability to do internet searches by any engine other than Microsoft's?
It seems that Google is now winning with a superior product only because the government mandated competition.
I really enjoy your posts, so if I am wrong please correct me. I won't be offended.
Google might have tried to insert their browser as standard - but there were always competitor browsers and the competitor browsers always went to Alta Vista (remember them!)
MSFT might have inserted lots of features as standard and relied on inertia to stop people changing them. But there would have been some people who changed them.
Strangely the value in AOL is the number of people who STILL have AOL as their home page. Inertia provides a LOT of value... The government stopped MSFT using inertia as quite as strong a weapon - and that I think is it.
The Walled Garden of the phone companies and AOL was a much bigger threat.
You are engaging in historical revisionism. Microsoft did not get sued because they were a monopoly. They got sued because they were using their monopoly to engage in anticompetitive practices.
For example, in order to bundle Windows vendors had to pay MS per box whether Windows was shipped on it or not. If you bought an Intel PC in that time frame you received a sealed envelope stating that if you did not accept the license agreement you could return it for a refund. Yet this was a practical matter impossible for the consumer, and only concerted and expensive legal proceedings produced results for consumers.
This does not indicate bad judgment by govt antitrust lawyers. On the contrary it exposes some very bad judgment on the part of Microsoft. I'll use a familiar analogy. They were absolutely committed to collecting pennies in front of the steam roller and they got crushed. Whose fault is that?
MS, now and at the time the Justice Dept went afte them, holds a monopoly in desktop/laptop operating systems.
UNIX/Linux were and are a true competitor in the server market. What has changed since then is the emergence of Linux as the OS of choice in a range of devices where Windows was never previously used - the embedded and phone market.
The phone market may be a way to attack the desktop market. *Maybe*. The phone OS, where it is for highly non-computing people, presents functionality in a highly application-specific manner. It's will be like using a console, not like using a PC.
However, it seems to me this approach is *needed* on the PC, to make the PC accessable to non-computing users.
How would you feel if your PC OS made your PC like a giant phone?
But then why have a PC? your phone can do a lot of what you want anyway. Just hook it up to a monitor/keyboard. For a wide range of users, the phone alone may offer sufficient functionality.
But what if *MS* come up with a Windows which offers the phone-like functionality? it won't be identical to the Linux phones, but will it matter more than being able to use all your existing software?
But I think that's actually an incorrect question. If Windows is to be like a phone app, *no existing software can be used*. The entire use paradym is inappropriate.
Of course, you'll have OfficePhone being released - but how can you have a phone-app-simplicity-level *complex application*?
I begin to think for complex tasks, you need detailed control and that means not-like-a-phone.
But there are lots of non-complex tasks. They all fit on a like-a-phone OS.
But of course Linux *is* a not-like-a-phone OS. But it has a like-a-phone layer on top, when it's on a phone.
And that I think brings this full circle. MS could make a like-a-phone layer for Windows. Linux already has. Which wins on the desktop? answer I think depends on who starts first and who's incumbent. So MS are incumbent, but Linux seems to have a head start.
I heard rumours Windows will be ported to ARM (the main phone CPU). I can see it making sense for Windows to try to get onto phones - if you can have the same like-a-phone layer on the desktop and the phone, great! but they don't *have* a like-a-phone layer yet. Linux does. But I can't yet see anyone trying to push Linux-like-a-phone onto desktops for non-computing users.
Part 1
======
MS, now and at the time the Justice Dept went afte them, holds a monopoly in desktop/laptop operating systems.
UNIX/Linux were and are a true competitor in the server market. What has changed since then is the emergence of Linux as the OS of choice in a range of devices where Windows was never previously used - the embedded and phone market.
The phone market may be a way to attack the desktop market. *Maybe*. The phone OS, where it is for highly non-computing people, presents functionality in a highly application-specific manner. It's will be like using a console, not like using a PC.
However, it seems to me this approach is *needed* on the PC, to make the PC accessable to non-computing users.
How would you feel if your PC OS made your PC like a giant phone?
But then why have a PC? your phone can do a lot of what you want anyway. Just hook it up to a monitor/keyboard. For a wide range of users, the phone alone may offer sufficient functionality.
But what if *MS* come up with a Windows which offers the phone-like functionality? it won't be identical to the Linux phones, but will it matter more than being able to use all your existing software?
Part 2
======
But I think that's actually an incorrect question. If Windows is to be like a phone app, *no existing software can be used*. The entire use paradym is inappropriate.
Of course, you'll have OfficePhone being released - but how can you have a phone-app-simplicity-level *complex application*?
I begin to think for complex tasks, you need detailed control and that means not-like-a-phone.
But there are lots of non-complex tasks. They all fit on a like-a-phone OS.
But of course Linux *is* a not-like-a-phone OS. But it has a like-a-phone layer on top, when it's on a phone.
And that I think brings this full circle. MS could make a like-a-phone layer for Windows. Linux already has. Which wins on the desktop? answer I think depends on who starts first and who's incumbent. So MS are incumbent, but Linux seems to have a head start.
I heard rumours Windows will be ported to ARM (the main phone CPU). I can see it making sense for Windows to try to get onto phones - if you can have the same like-a-phone layer on the desktop and the phone, great! but they don't *have* a like-a-phone layer yet. Linux does. But I can't yet see anyone trying to push Linux-like-a-phone onto desktops for non-computing users.
Google/blogger just really annoyed me. If your post is too long, it can't be posted - that's okay - but IN TELLING YOU THIS IT LOSES YOUR POST.
Good thing I've seen this particular blazing incompetence so many times that I always to copy the contents of a form before posting.
A friend recently announced that he was thinking of buying MS shares: I tried to talk him out of it.
His argument was that dividends will be very good over the next 2 years on the back of sales of Windows 7. Which is true.
My points were twofold:
Firstly that Microsoft has no tablet strategy, with touch device sales predicted to overtake PC sales in as little as 2 years. This will seriously hit PC revenues. Windows 7 is not fit for purpose on a touch a device, and W7 Mobile is a) functionally two years behind the competition and b) not yet targetted at slates. Look at the proportion of Apple's revenues that come from touch devices - Macs are now just an interesting sideline!
Secondly, the Microsoft that dominated the PC world is gone. That version understood leverage like no other: it would use contracts with PC makers to get Windows on every box, OS market share (Windows) to sell applications (Office), applications to sell server software (Exchange Server), etc. in a 'virtuous circle'. It built a stack that was incredibly difficult for competitors to penetrate.
Version 1 of Microsoft died about 10 years ago. The leverage that it used so effectively was severely hampered by the DOJ, and it allowed competitors enough oxygen to breathe.
It also relied on continual change to keep one step ahead of the competition: e.g. the feature set of Office kept growing, not from consumer demand, but from the need to sell new versions and remain 'ahead' of the competition. Today, there are many office suites that have every feature that the customer could think of: there is no scope for MS to add new features.
This may be of interest to you: http://broadcast.oreilly.com/2010/09/debunking-the-1-myth.html
to become a better investor,
accept blame for losses.
banish gains to being pure luck.
anon,
R. Dobb
John Whats up with your fund's website?
The fund website is a little embarrasing - but we someone dig up the Telstra cable... and our server went off-line.
Everything will be cloud-hosted soon.
(:
J
What do you think of telstra?
They don't seem at all competitive for web or mobile and the competition is increasing. Google mail apparently lets you call over the web for basically nothing.
At first it looks cheap with a 10% yield but you would think that they continue to decline.
Hi John-
What are your thoughts on shorting Nokia? I just don't feel that they can take market share from RIM + AAPL, even with new CEO. Has the opportunity passed?
Thanks
With RIM trading at about 8x forward earnings....is there a play here for MSFT to buy their way into the mobile market. Given both MSFTs and RIMs dominance in the corporate/enterprise market would RIM provide MSFT with the mobile platform that MSFT could leverage to continue to hold on to their competitive advantage?
This continues from my first post...
The new growth area is in 'reduced' devices. This is Apple's territory, as it understands stripping down feature sets to create easy to use devices, and also of Google and other Web 2.0 companies. It is an anathema to Microsoft, whose strategy has been to add features, not remove them.
Windows Mobile has been a disaster up until now for exactly that reason. W7 Mobile shows a first glimmer of hope that at least one team in the company have grasped this. However it will require a seismic shift in the attitudes of the top management for Microsoft to maintain its position in this new market.
My conclusion was, yes, dividends will be good for the next couple of years, but if the market takes fright at the signs that Microsoft no longer understands the market it is selling to (Kin, for instance) the investor stands to lose much more in the stock price.
The question is: when (or if) will the market will grasp this? (Which is why I don't play the markets: It's about second-guessing the state of mind of other investors, not about predicting the future!)
[This is my fourth attempt to post this: the first failed for being too long, the second lost this second part, the third gave service unavailable. If Blogger cannot create a decent commenting system of their own, maybe they should use Disqus?!]
MSFT's handicap is its aging desktop operating system monopoly: everything it does--everything--is built to drive the Windows OS onto other platforms, including, miserably, smart-phones.
The exception, of course, is X-Box, which is why X-Box is the only success MSFT has had outside its original OS monopoly.
My question--and I am an older demographic, so this may not be worth much--is based on the fact that while I regularly search for restaurants, street addresses and businesses on an iPhone, I almost never click through an ad or URL that comes up: how does GOOG replace its desktop search franchise with a mobile search franchise?
JM
P.S. as to the MSFT valuation issue, I believe, FWIW, that MSFT is a value trap, and will remain so as long as Steve Ballmer refuses to let his children use Apple products.
I had no idea that Microsoft dropped the ball on this. I have seen Microsoft loosely handle other aspects of their business. Example. I am an avid online Xbox 360 player and Microsoft just announced they are increasing the buy in price for their full one year subscription from $50 to $60. What does this extra $10 do for me. Absolutely nothing!! Since the fee increase I have not seen any changes to the service they promised to deliver. Even better, Microsoft seems to not care about the consumer at this point and makes most of us feel they are in this business to make a quick dollar.
Come on Micorsoft. Pull it together.
Come check out my blog at,
http://www.wealthvest.com/blog
nice, MSFT up 5% on news that it's going to a dividend.
now all the value funds can breath a sigh of relief
These two recent developments may be of interest to you too:
* http://gigaom.com/2010/10/12/linux-starts-to-eat-microsofts-lunch-in-servers/
* http://blogs.computerworlduk.com/open-enterprise/2010/10/microsoft-gives-its-blessing-to-openofficeorg/index.htm?cmpid=sbslashdotschapman
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