Thursday, July 26, 2012

Changing my mind on Microsoft

Seldom have I looked at something that is a major long in the portfolio, changed my mind, sold the entire position and continued selling to go short (albeit in a small way).

I just did that on Microsoft. The immediate trigger was Windows 8 - but the thinking has been longer and harder than that.

This post is to run through my thinking - and maybe generate some comment. (Smart readers - and you are smart readers - are a great testing-board for my theories...)

Quick background to the Microsoft story

The background to Microsoft is well known. In the late 1990s Windows developed huge market power. Whilst not strictly a monopoly the company had plenty of monopoly characteristics. Sure you could buy a Macintosh - but that market was so small that people did not develop software for Macs and hence Macs were for people who did not need a wide range of software. You could also load a computer with Linux (although despite being a sometime-geek I could not imagine doing except for a server). In those days Microsoft even dominated the server market.

This was - for all effective purposes - a growing global monopoly with very low marginal costs producing for what was fast becoming one of the most important industries in the world (personal computers).

Moreover it had huge pricing power. I purchased a computer from Gateway (remember them) and spent about $1200. The $50 operating system was embedded - a small cost embedded in a large cost. I assure you Microsoft made more from the transaction than Gateway. Gateway even ran a store to sell me that beige box - the store ultimately being run for the benefit of Microsoft.

The company had a virtuous circle. People developed software to run on Microsoft using Microsoft developer tools. They did not bother developing for other platforms because those platforms were economically irrelevant and the Microsoft developer tools worked. Because all the software you might want to use ran on Windows you were effectively compelled to run a Windows machine thus perpetuating the cycle.

Microsoft used its power for better and for worse. My personal gripe was how poorly Microsoft thought about and handled security issues. My Linux computer is as far as I know virus free. Apple only had to remove their virus-immune claims recently. Windows security issues are everywhere and it did not need to be so. The first computer virus I ever saw was in 1989 and it was on a Mac - these problems - if not entirely soluble - were controllable. Microsoft did not control them. Whether this was arrogance or incompetence or monopolistic-disinterest I do not know though I have heard arguments for all three propositions.

Still Microsoft gave us acceptable if not brilliant product and I never quite bought the "evil-empire" line. In my view they were a large, increasingly fat, slightly disinterested monopolist that had stopped thinking clearly about users.

Developers: the key to the Microsoft virtuous circle

The key to Microsoft's market power was the virtuous circle whereby people used Microsoft computers because software was developed for Microsoft and people developed software for Microsoft because people used Microsoft computers.

Making all this work required that Microsoft make available easy to use "developer tools". A large developer tools business would include tools for software development and training tools to train future developers. If the developer tool business ran at (say) a billion dollars in loss that was perfectly acceptable so long as more and more software was developed to be Microsoft platform specific.* Indeed the developer tools business never played much of a role in the sector-breakup of Microsoft - but that did not diminish its importance.

If you are not convinced that developers are the key to Microsoft's lock-in look at this classic video of Steve Balmer:




Balmer is sufficiently worked up that the wags captioned this video with the text deodorant, deodorant, deodorant. However the extent to which he is worked up tells the Microsoft crowd what they should be focussed on.

The rise of platform-agnostic developer tools

The Microsoft virtuous circle is now dead. Two related things killed it: the rise of platform agnostic developer tools and the rise of alternative operating systems (Linux for servers, iOS and the "Big Cat" series for Apple, Android).

To my way of thinking the platform-agnostic developer tools came first - though this is a chicken-and-egg problem. The first really important platform-agnostic tool was Java. Programs written in Java run on Linux computers precisely the same way as they run on Apple computers or Microsoft computers. If you developed something on Java you could run it anywhere and you thus undermined the Microsoft virtuous circle.

Developing things for Java became widespread when people downloaded programs (applets really) from the internet. The person writing the applet had no idea what the customer computer set-up was and so had to write in a platform-agnostic fashion. Interactive Brokers for instance writes its software to run on Java - and they do this because it is a complex piece of software that has to run on many different flavours of client computer.

Over time Python developed as an even more important platform agnostic developer tool.

Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead. Firstly the kids out of the colleges know the platform agnostic stuff well. Secondly when half the computers leaving factories either run iOS or Android (that is are smart-phones) nobody sensible will write in a way that does not allow easy porting to these platforms.

Microsoft's developer tools business and the customer lock it created has had a bullet through the brain. The body is lying on the floor - and most the users who have never developed anything and did not know that there even was a developers tool business have not noticed the blood-soaked victim.

The lock that Steve Balmer worked himself into a frenzied sweat over is dead.

The lock is dead: long live the lock

An asset management firm I know well has 100 thousand or so customers. The customer relations system for the firm is proprietary. They developed it themselves and it integrates with their business practice.

And it runs on Microsoft. It was developed by people who are now over 35 - and hence used Microsoft developer tools.

This firm is very progressive with their computing structure. All internal computer now run as virtual machines (not desktops) running on two mondo-powerful Linux servers. The virtualization platform is Citrix. Nobody has a functional box under their desk any more.

However on top of this enterprise cloud is 65 virtual Microsoft machines all running Windows. The company has got rid of the desktop computers entirely (sorry Dell and HP), it has a hugely powerful internal network system (currently provided by Cisco but in the future provided probably provided by Nicira). Disaster recovery is a mirror of the two mondo-powerful servers 100km away.

In other words this is the enterprise computing platform of the future.

But they still use Microsoft as if they had the computing platform of 1999.

Why?

Because they used the developer tools of 1999 to build mission-critical enterprise software.

Nobody is locking new stuff up in Microsoft but there is huge amounts of intellectual capital built up in Microsoft's old platform and that intellectual capital continues to force people to use Microsoft. Some of this property is trivial (I know to shut down the computer I go to the "start" button). But things like the front end for a customer relations system for a largish financial firm - that is non-trivial and it is very sticky.

Why I owned Microsoft

When I purchased Microsoft I was well aware of the death of the lock (developer tools). I knew the future for Microsoft would not (unless they were very lucky and well managed) be anything like as glorious as the past - but there were two really decent trends in favour of Microsoft.

Firstly as enterprises moved their computing platforms to enterprise clouds the Microsoft computers - rented as virtual computers - would be pervasive. Microsoft was going to be able to charge rents for a long time. People would upgrade their computer (meaning the physical hardware running linux and Citrix or VMWare on top of that) but they would still pay rent to Microsoft.

Moreover these Microsoft dead-enders - locked in by the enterprise software that they wrote a long time ago - are very sticky. It is expensive to redevelop proprietary systems - and so they were likely to use Microsoft for decades. The pricing would be to lease seats to virtual computers and those lease fees could be high and increasing.

Second, there was one beautiful tailwind for Microsoft which has alas disappeared. In 1999 if you purchased a computer it was probably a beige box. (Laptops were prohibitively expensive and underpowered.) If you purchased a computer in India it was a beige box it came loaded with a hot (ie pirated) version of Microsoft.

By 2007 if you purchased a computer it was likely a laptop. Boxes have become objects for gaming enthusiasts, developers and dinosaurs (I say this as the proud owner of a couple of boxes). The computing power you need can (mostly) be put in a smaller package at a reasonable cost. It is almost impossible to buy a laptop which is not pre-loaded with an authentic version of Microsoft. That was true in India too. I do not even use Microsoft but if I buy a Lenovo computer in Australia on their website I am forced to include a copy of Windows. The tailwind de-jour was the rise of computing in developing countries and most importantly the shift to laptops reducing piracy to almost zero. This was profoundly nice to Microsoft - but as a trend it is dead. The new generation of computers is going to be pads - they may have plug in keyboards - but they are pads. Even laptop sales are problematic.

Moreover laptop prices are falling and falling. Five hundred dollars now buys quite a nice laptop. The laptop I use day-to-day is not worth much more than that (except for add-ons like a large solid state hard drive). Microsoft once buried $50-80 of software in a $2000 computer and that made their (fat and profitable) take disappear. It is much harder to bury $50 of software in a $300 computer - but that is where we are going.

But in essence we had two trends: pricing power on dinosaur enterprise computing driven by the old customer lock (previously developed enterprise software). That pricing power would remain and turn into rental contracts as computers disappeared into enterprise clouds. And we had developed world laptops (a trend that is now turned quite sour).

A Vision of Windows 8

I had a vision of Windows 8 which addressed all of this - and I doubt that it was a vision that was very far from Microsoft's own vision.

Windows 8 was to serve a dual purpose. It was to be above all a pad operating system - one that doubled as a desktop operating system. You were going to be presented with bunch of tiles - the functional equivalent of Apple's app icons. If you used it as a pad it would have the limited functionality of a pad.

However you could take the pad, put it on a docking stand and use it with a keyboard and mouse as a desktop computer. This solves a lot of problems.

(a) it offers a distinct improvement over existing pads which are not very good for content creation. I cannot see myself editing a video on a pad or writing a blog post this long. But hey - I could with a plug-in-keyboard and mouse,

(b) it offers enterprises a chance to take their existing enterprise software and make it mobile. For example if a customer relationship system runs on Windows you could - without much further development - make it run on a Windows pad. This means there would be no incentive to redevelop it using (say) Python to run on iOS.

(c) it gets a large number of people used to the Windows system. There is a lot of human capital developed in using computer systems - trying to change - even Windows to Mac or vice-versa costs a lot of time as you work out how to say copy a file to an external hard drive or from a camera.

(d) it leads you to a world where the pad has some computing power - but if you need more grunt you connect it to a docking station in turn connected to a fast internet connection and you put the power in a cloud and rent the power out by usage. A world of semi-smart terminals - a pad if not docked, a super-computer if docked.

But the combined desktop interface has a big problem. Because desktops and pads and phones do different things they have different interfaces. A windows, icons, mouse and pull down menu interface has a venerable history because it works.

The Ubuntu Unity failure


Microsoft is not the only party that sees a convergence of pads and computers. Ubuntu - by far the leading attempt to make a workable Linux desktop for a very large market - did a complete revamp of their desktop changing from a Windows type interface (Gnome 2) to a Mac/pad type interface (Unity). They had large, immovable buttons - just right to use with fingers. Pull down menus were dramatically reduced in frequency and importance.

This transition was a mess. Utterly horrible. You are not convinced: google the phrase unity sucks.

However - and this is fair - Linux desktop users (we are a small tribe) are probably the most motivated to learn new systems of any group on the planet. Moreover Unity did get better through time.

Apple also knows that combining the interface is very difficult. That is why they have never taken their Mac interface and put it on a pad or vice versa.

You could have worked out the difficulty just by trying to use Unity (but I doubt too many people in the Microsoft development team tried that trick - because it is Linux and not developed there).

I told the whole sorry Unity story to a senior former Microsoft employee and he thought they would not be so stupid to try the combined desktop. He thought that the interface would change dramatically when the computer was docked - looking more like Windows 7 (a good system) when docked and more like a Windows phone (also an adequate system) when mobile.

What Microsoft has done

Microsoft have tried what I originally thought impossible or at least stupid. They did not change the interface of Windows 8 much to deal with the different ways you communicate with that interface. (Fingers versus keyboard and mouse for instance.)

Here is the video which had me selling my Microsoft stake. Its a computer reviewer filming his dad trying to use Windows 8.




I watched this and the pain of problem recognition came over me.  This was exactly how I felt when I first used Ubuntu Unity.

This was a predictable problem. It is a problem that every user of Ubuntu suffered through. This is a management stuff up of the first order.

What Microsoft has done to its business

Firstly Microsoft has not understood its real franchise. Its real franchise is computers on which people do work. They don't play. They write stuff. They enter data. They manipulate graphs. They might even edit a video.

These computers are tools and the operating system is just the air they breathe. On a day to day basis they don't think about the operating system - they only think about it when it changes.

What they should have done is kept something close to a Windows 7 interface when the computer is docked and something close to a pad interface when the computer is mobile. Instead they forced people to relate to a pad interface via a keyboard. They assumed their users were as motivated as (say) Ubuntu users - whereas most their users don't give a fig about learning a new system. Changes to a proven interface either have to be incremental (so you bring your audience along with you) or so self explanatory that the audience learns in 20 minutes (thank you Apple). Windows 8 is neither.

Prediction: this will wind up with a lower corporate take up rate than Vista (ie next to none).

Prediction 2: this will accelerate, rather than slow down, the rate at which enterprises take their enterprise specific software into platform independent programs

Prediction 3: by stuffing this up Microsoft has just about lost its bet on moving the retail computer market into docking cloud computers. Apple will do this. And they will do it by stealth.

Apple, the forthcoming death of the Mac Pro and cloud computing

Bob Cringely laid out Apple's plans a while ago - commenting on all things the lack of an upgrade of the motherboard of a Mac Pro during the latest round of Apple upgrades. The Mac Pro is the most powerful Mac and the only Mac on which users can add their own components through expansion slots.

Being the most powerful Mac it is beloved by power users. The definitive power users are people like video editors. These people want to download huge amounts of data to their (expandable) machine and hence like the fastest download protocols. The fastest current USB protocol - used for say getting material from high definition camcorders - is USB3. You would think that USB3 would be standard in a Mac Pro.

But the motherboard does not have it despite USB3 being a few years old.

And when they did not upgrade the Mac Pro to USB3 Cringely rightly asked what Apple would do about their power users. Here was his conclusion:

Apple will eventually have to explain to those folks [power users] how less is more and how this new world [no expandable computers] is even better for them. I think I know how Apple will do it. 
When the Mac Pro dies for good Apple will replace it in the market with a combination of Thunderbolt-linked Mac Mini computing bricks backed up by rented cloud processing, all driven from an iMac or MacBook workstation. 
I just wonder when they’ll get around to telling us?
Apple's balance sheet is consistent with this vision. Apple has been developing huge cloud computing facilities evidenced by the vast expansion of property, plant and equipment in their balance sheet (which has been piling this stuff on in the billions).

Windows 8 - a product that gets people used to and software developed for a pad that docks - was Microsoft's way of getting used to the idea of portable computers with rented super-computer cloud space.


And it will be a failure because Microsoft, not for the first time, have lost their view of real users.

I held Microsoft for 18 months (and it was not a bad investment). But last night I gave up.

For comment.



John


*There are other lock-ins at Microsoft - for instance my business partner irregularly writes Visual Basic algorithms for spreadsheets. Visual Basic is Microsoft proprietary and these spreadsheets lock us into having at least one Microsoft machine in the office. I complain regularly about this - but Simon is over 40 and teaching old-dogs new tricks is hard. He has a lot of human capital invested in his ability to crank out something in Visual Basic.

120 comments:

Anonymous said...

The reason why MS did not go the AAPL route and fork Windows is because of internal politics.

The Windows OS group saw how the Mac OS group was marginalised when iOS took off and vowed not to let that happened at MS.

Of course MS being what MS is, they also had to screw up the execution by giving the world a new OS that nobody can use.

Anonymous said...

Spot on. Especially your comments about the pad. That IS where the world is headed.

Anonymous said...

Totally concur with your analysis.

The really sad thing here is the extent to which this is self inflicted.

All of the old functionality is there but hidden (the missing "start" button is still there, but is now an unlabeled square that you need to know about to use).

This is a classic case of people thinking they can use market power to change customer behavior ... as if that has ever worked.

SB

Gavin Carr said...

Nice post John.

I guess you've see Gabe Newell's comments on Windows 8 as a "catastrophe"? Valve's plans to move Steam onto Linux are probably relevant to your thesis too (Newell terms it a "hedging strategy"), since gaming is another area where MS still has a decent lock-in/moat.

Anonymous said...

I'll leave the Windows debate to your smarter readers (many are valid but debatable). But I think a good discussion of Microsoft needs to include Office and Business Division. Would care to hear your thoughts on that. -CT

Anonymous said...

I disagree with your assertion that Java/Python were the main drivers of platform agnosticism. It was the web, in general. MSFT felt confident after the release of IE6 (this really was the end of Netscape Navigator - the real threat to the desktop-oriented product lines) and did nothing to pursue the growth of web technologies.

The rise of Firefox, web techs, and Google had a bigger impact on MSFT than Python/Java.

And the assertion that nobody is using MSFT web tools is false. Web development is focused on Ruby/PHP/Javascript - but a lot of backend technology is being built on top of Microsoft's .NET stack - most notably C#. The latest version of C# is quite amazing from a developer's perspective, and has a huge technical lead over related languages.

Furthermore, the growth of the Mono project (now with Xamarin) has allowed MSFT technologies like C# to be deployed on the Linux stack, which marginalizes the MS' server business, but it certainly does not mean C# doesn't have a bright future.

whitwo said...

Interesting article, but overall I'd have to say that you may have been watching the wrong boat leave.
First, it's pretty misguided to say that all developers under 35 don't develop on MS tools. In reality, it has become pretty commonplace to have a wide array of programming skillsets, including .NET. I've heard many people predict everything will go Java - and a lot has. While you gain platform independence, you lose exponentially in the arena of speed and vulnerability. Java has become one of the largest attack vectors as it is cross platform - its strength is also its weakness. Every developer under 35 also knows it takes forever to initialize the runtime environment and then only receives a portion of the kernel for processing. The flexibility of interacting directly with the OS kernel still remain a necessity in large scale applications. Users today tend to forget that all applications are not 25MB apps that can run on an ARM processor. Those large line of business application need the horsepower and direct OS interaction.
Another important point is that MS is not banking on OS sales like they have before. MS has actually been saying for a while that the paradigm is shifting and such have invested the future in their Enterprise Cloud offerings - enter Azure and Office 365. Their top developers that used to spend their time writing NT kernel shifted to developing an enterprise cloud platform a few years ago (ie Mark Russinovich). Their cloud offerings differ from the market in that they are enterprise offerings. Azure is the direction Microsoft is heading for their future. They've bet the farm.
And that brings me to my last point - Microsoft = Enterprise. Other systems just aren't built to be enterprise. Microsoft's solutions scale to the thousands. You can't say that about the other vendors out there today. MS is still the benchmark in enterprise computing - and I don't see that changing anytime soon. They've learned some pretty drastic lessons from the past - some of which you pointed out. The plus of Windows of old being hacked to death is that it is now actually one of the most secure platforms around (and I'm a member of SANS so I have a pretty solid leg to stand on here). They've had to react, and they have in an enterprise manner. Don't think of your Gateway as their standard of enterprise computing - it's not. That's a home desktop.
Forgive me if I rant, but most of this comes from frustration of hearing people dismissing MS for reasons that don't hold technical merit. I hear to many people coming into my office asking to do the latest cool thing they saw on a commercial - when in reality they don't think about how that won't actually run in an enterprise switched network (sorry Bonjour - you're a stinking virus) or how there is a good chance that their data is now being mined and sold by Google (like this comment). We have compliance to adhere to - and for that we need an enterprise computing platform. That is one place that MS still has a Monopoly.
In short - if you went south on MS because Windows 8 won't be their cash cow - you weren't looking at the right picture. That's the plan.

CurtSeattle said...
This comment has been removed by the author.
Tom said...

I don't get it. I really don't. I keep reading complaints that Windows 8 is unusable. But I'm running Windows 8 everyday.

I don't have a touchscreen, so I just ignore Metro and use all my applications from Windows 7.

It couldn't be simpler. Boot up Windows 8 with a keyboard and mouse. Click "Desktop." Done.

Remember that plenty of pundits predicted disaster for Office 2007, too. "Nobody will be able to use a word processor without a menu bar," they said. "Everyone will switch to Google Apps and Open Office." You go to the Amazon reviews, and there are people angrily complaining that Microsoft removed the ability to print documents form Word, because they couldn't find the File menu.

Nothing of that sort happened. Office 2007 sold better than Office 2003. Office 2010 sold better than Office 2007. It wasn't that hard to teach someone that the round thing at the to-left is the equivalent of the file menu, and that if you click it, you could then click on Print.

CurtSeattle said...

Yes, OFFICE commentary is critical. There are 1 billion OFFICE users currently. 1 billion.

I believe that Office accounts for the bulk of their revenue doesn't it?

Maybe Windows, but I think it's Office.

PC sales slowing means a move to mobile platforms (tablets, phones, etc...), but $MSFT will make money on the licensing of the OS's no matter what hardware is the flavor of the decade.

I think a lot of people are missing the power of Win 8.

You use Metro for the TOUCH based devices (the new multi-touch acquisition was smart by the way) and you use the normal desktop look for PC's and Win 8 lets you toggle between them.

You then have a Win 8 phone, Surface Tablet, home PC and Xbox and EVERYTHING is linked through SmartGlass created (and cross platform I believe) software so you can finish movies no the go, work on your various things on whatever device is with you. Music/video/work product all available in an integrated platform.

Yes, there are others that have similar directions planned, but Microsoft's version seems to be the best I've seen if they deliver.

I know they have been connected to the "lost decade", but I don't see how anyone can argue that they have not finally woken up. More things coming out at once than I can ever remember and they appear to FINALLY be all on the same page with their various depts working cohesively.

I just bought in big and am a believer. :)

My two cents....

CurmudgeonlyTroll said...

Twice Microsoft took innovations that could have been disruptive to their franchise, and adapted them to sustain their franchise - the GUI, and then the Internet.

Mobile/cloud is the next one. But the market has spoken... Windows Phone has something like 4% market share after a year of practically giving away Lumias while people pay hefty premiums for iOS and Android devices like Galaxy S3.

Can't blame MSFT for going all in on a tablet/mobile OS based on Windows.

But right now, seems more likely they will alienate desktop users and OEMs than convert iOS users. And the mobile/cloud is the future.

They have multiple revenue streams including servers, but losing the desktop war is a big deal.

No computer company has retained domination through a shift in computing paradigm, and Microsoft doesn't look like they're going to break that streak.

Jake said...

Shorting stock of a corporation that grew earnings by 250% the last "lost" decade and sports a P/E of 10 (excluding the recent write down) doesn't seem like the wisest decision to me.

John Hempton said...

Jake - that is why I was long the stock.

The tailwind (massive increase in laptop use) is over. In that lost decade we went from having a desktop in a rich house in the developed world (we had one desktop at home) to having a laptop PER PERSON - and with no piracy.

That was one hell of a massive tailwind. And it is over.

It is a small short. But yes - I am aware how cheap this is - I was long it until about two days ago.

John

Anonymous said...

John,

I had definitely enlightening but ultimately dubious experience of working for Microsoft on some of their "projects" that naturally spanned all the way from acquisition of customer feedback and research to new developments.
Back at around '07 give or take a year.

While I was never big on the "evil empire" thing, I knew full well from that point onwards that MS's doom is clearly on the horizon. "big and not very caring" of your post is a very British-style statement, in that it's just a slight bit under.

What other spiral MS got itself into, and quite plenty of time ago, was the negative talent spiral.
It's not "cool" to work for MS for up-and-coming "hackers", it's not very kewlz to have MS on your resume (compared to Google or just a start-up that got to a product launch), all this leads to less "creative" and more "formal" corporate ethics (as when you get top talent you usually extract best value by not limiting them vbery much, when you have average talent you need to establish firm governance to get comparable results), which reinforces the former, etc etc chicken and egg thing.

What this practically means is that aside from Xbox, everything else MS has is, at it's core, a legacy which is already 10+ years old.
Windows lock-up? Legacy.
Default office standard? Legacy.
Even their "prehistoric cloud", e.g. Exchange servers etc, is legacy.

In other words, it's perfectly fine for a company to go from growth to stagnation to slowly going the way of the dinosaurs in 20 years, and this trajectory is "normal" at MS, e.g. without sharp declines but without miracle rejuvinations either.

What I can say for sure from my own observations, and what is supported by recent developments (stories like buying Danger into Kin phone, "transition" from aging yet solid WinMobile to DOA "win phone", Vista and now 8, etc), the present condition of MS talent, vision, management and execution competence all but precludes it from making projects both new and successful.

So as you correctly pointed out, they had a HUGE reserves of old gas, and are running mostly on it for 10 years. No wonder those reserves are starting to prove exhaustible.

A shame, really, because I also don't buy "good" Google, much less apple, but that's how it is.

Regards,
Dmitry.

P.S.
Not so sure about cloud computing craze. It adds a whole new mission-critical element, stable and wide Internet connection, which is not a given even at the center of Wall Street, much less in any less "sophisticated" area.
Huge driver for laptop-to-pad conversion is the fact many people "do nothing" on their computers (be it a box a pad a laptop or smartphone) save for few very simple scenarios (web prostacrisurfing, photo/video watchin, Twitter).
Everyone who does something else may get a pad in addition to a laptop, but hardly ionstead of it.

Anonymous said...

There is another very interesting topic regarding cloud, John, and that is

will transition to cloud mean more centralization (as naturally, if few big cloud providers "win" they could lock everyone else off the market much better then any OS manufacturer could), or more diversification as it becomes trivial to introduce new tools to users when they don't have to go through "setup" on local machines?

The soft trend I noticed from the sidelines is that many start-ups develop assorted "light" cloud enterprise systems and offer those SaS from the cloud (oft rented out from Amazon or the like).
Some of those are getting enough traction, too (salesforce being the poster child but far not the only or the "best" one)

Regards,
Dmitry.

IanJ said...

Office has already been mentioned. I think that may be a more interesting example because (broadly) Windows users don't actually use an OS that much. Find your app. Remember where it is. Start it.

The Office UI changes have tended to throw away the old interface. Yes, the Ribbon is usable, but when I have seen peoples screens on projectors/large displays even fewer people are actually able to do normal actions using the keyboard.

When Power Users get annoyed with yet another change, they will try Open Office. They will try Google Docs. And whole companies will move.

Anonymous said...

IanJ has a perfect point here: I myself, and few of my associates, moved from Ms Office to Open Office exactly cuz of "Ribbon" which our lame rearsides found no way to turn back into old-style dropdown interface.

E.g. we moved from Microsoft product to retain user experience Microsoft so firmly hooked us on.

That's one heck of a good job on their side.

Regards,
Dmitry.

Anonymous said...

I'm impressed with your level of tech savvie. I'm a huge Python fan and currently posting from a Slackware OS.

I read a book (alas, I can't remember the name) about tech innovation once. They looked at history, and discovered that "high tech" monopolies had about 2-4 decades before being superceded. Things did not end well for the encumbants. The book talking about canals being superceded by railways, telegraph companies having a stranglehold on long-distance communication that were eventually obsoleted, and so on.

From a purely statistical viewpoint, Microsoft must be getting near the tail end. Perhaps the most obvious threat is from smartphones. They are becoming more like computers every day. Google seems to be doing some interesting things with Linux on that front. What we see emerging is a trend that "it's not the OS, dummy, it's the browser". That is a big threat to MS, I think.

Having said that, tales of MS's death are currently greatly exaggerated. One place it does have a stranglehold on is Office. We use that extensively at our company, and Excel is used ubiquitously for performing calculations. Access is also used heavily. Yes, I know, it probably shouldn't be, but those are the facts. Currently, there is no credible threat to Office. It's been awhile since I've used LibreOffice, but I think they're far from sorting out some of the basics.

My conclusion? Well, I don't really have one. Just observations.

Anonymous said...

I dont know much about windows 8, but dont put your money on java. Its a pain in the ass and i always hated interactive broker for that. You will never beat native solutions with interpreter based languages. Its also a big security issue. You cant block just one java app from the internet, you have to block all java app or none. Java is still in use, but i doubt it will increase. Html5 and javascript are the new old kids in town. On iOS you dont get java even running. Rightly so.
When I was a kid i always loved all in one solutions. But over time i realized, they are always compromises and never the real deal. An hybridsolution will never have the experience and performance of a specialized one. Just watch our society. Only those who focus on a certain field will be the best in it. there is a reason you dont see many cars that can swim. And the same will be with os on devices. People have to decide. Buying an all in one solution will not work in the long run.
I dont believe in cloud solutions either. You dont want to put your private stuff (ok some do) and your confidential business stuff an somewhat elses server. You lose control. And you will have problems accessing your data in certain areas. Clouds are good for specific fields,, but thats it.
So to come to an end - i think there always will be two different iOS on the market. One for consuming data and one for creating.
Btw. You can connct a bluetooth keyboard to the ipad. But who wants that? Its ruining the concept, right?

uair01 said...

This is not an original thought (I read it on another blog) but there is a certain rhythm in MS OS versions.

Source:
http://orclev.tumblr.com/post/18555141412/why-windows-8-will-suck

Windows 3.1x (1992) - Good
Windows 95 (1995) - Mixed bag, at the beginning it sucked
Windows 98 (1998) - Good
Windows ME (2000) - Sucked (hard)
Windows XP (2001) - Good
Windows Vista (2006) - Sucked although not as hard as ME
Windows 7 (2009) - Good
Windows 8 (2012?) - ???

I leave the Win 8 prediction as an exercise for the reader :-)

Anonymous said...

It is all about Azure and enterprises, consumers are a lost battle for them. Though, Azure doesn't seem to gain traction so far either.

Manc Trader said...

I actually love the unity interface on a laptop. On a big desktop with multi-monitors not so much but I can get a really good workflow on a laptop.

Anyway, great article and I'm short mister softee along with you.

Rahul Deodhar said...

Don't short it yet. Let windows 8 come out. The phone and pad version is quite good and some of my friends who moved to Nokia Lumia have found move very easy.

In fact people who couldn't think beyond SMS are now tweeting and integrating things into their calenders. (and sending me reminders for God's sake).

I doubt if Windows 8 could be that bad.

Anonymous said...

JH, a very interesting post? ....but....I am confused about the process

I'll assume 5000 stocks in your pool of prospects., and assume you have 50 long, 50 short. I can't help but be concerned that in two days, you've reclassified Microsoft from the top 1% to the bottom 1%. Nothing catastrophic has happened over the past 2 days, so It's almost certain you were wrong either last week or this week, or both. You had 18 months to constantly consider it worthy of a long. You've drastically reconsidered recently.

Are you letting one bad experience with windows8 cloud your vision WRT the rest of the Microsoft revenue portfolio?

David said...

A lot of good comments here already. I don't think there is any specific issue that dooms Microsoft. It's a long drawn out saga as it is attacked from multiple angles including from within.

John you note somewhat the following when discussing falling prices.
Some time from the late 90s to the mid-2000s computing moved from being enterprise focused to being consumer focused. Cellphones, gaming consoles, software in cars and other appliances all became possible because of Moore's law. Performance/watt, bandwidth/watt and performance/$ reached attractive levels from which takeoff was possible in ever increasing market spaces (volume). These trends won't stop and I doubt they're linear at this point which is great news for Apple and Google. This enabled mobile computing on the hardware side.

On the operating and application software side Apple out innovated Microsoft because they could focus on future customers (mobile) when Microsoft has to keep a huge organization motivated on supporting legacies that kept their enterprise cash flows in place (as you note that's their real business).

Finally Steve Jobs learned from experience or at least did so on the insistence of his senior management team, and opened up Apple's platform in crucial areas from excessive Apple control. He moved software to Windows. Safari never caught on but iTunes sure did, and it started the slow migration away from Windows (Apple has more than 400 million credit cards in their system because of this move).
With iOS he made the App Store which clearly sets it apart from Google's bungled attempts at developer support including a lot worse developer tools, and Microsoft's same with Windows Phone.

These Apps actually enable content creation and hence usefulness beyond browsing and email. It may not be heavy typing or spreadsheets but look at how education, medical and general enterprise users are using iOS. New use cases are being discovered all the time because with a mobile computer you can do new things besides sitting at a desk with a mouse or trackpad.

Apple today has the better operating systems by a fair margin. This of course is not a decisive factor, if not for the fact that Google has copied/emulated/invented the approach with Android and spread it far and wide. Microsoft trying to make two operating systems in one (touch and mouse inputs) while charging a substantial percentage of total revenues for a hardware unit, doesn't pass the smell test. It won't work when users either pay up for iOS or go cheap on Android. Windows 8 lacks focus.

to be continued

David said...

part 2...

The second front is the move away from operating systems being the choke hold of value. This was Google's strategy of being the choke hold in the browser. Search instinctively is the place to go to make sense of the web. And Google owns it. I believe Android is a defense of search against Apple. Siri is a far more dangerous play than ten years of Microsoft wasting billions on Bing and the like.

In the battle between rich and thin clients I doubt any side will win decisively, but clearly Microsoft and Apple want a lot to take place in the client with the cloud being a support infrastructure. Google, Amazon and the like wants the opposite.

Thirdly there is the lack of talent, internal politics and of course the "DNA" of Microsoft that tends towards legacy support rather than cannibalism.

Fourthly the move to a consumer electronics focus has also enabled Apple to break the former Wintel-OEM business model (Intel is still good but for how long?). Software firms let OEMs do the dirty work on hardware on margins so thin they couldn't compete with the beast Apple has become in supply chain management, retail, marketing/PR and of course hardware design. Retail in itself has been a huge factor in creating positive awareness and the creation of human capital among customers. Most people are simply not very good at computers and even incremental change is fought despite good reasons as you point out.

Apple teaches customers what their software can do in their lives before they leave the shop. 10 years of that matters. 83 million Apple Retail visitors last quarter alone. 90% of products set up upon purchase according to Ron Johnson former Apple retail VP. It's easy for geeks to miss the human capital part.
Good interview see: http://tech.fortune.cnn.com/2012/07/18/transcript-ron-johnson/

Of course there are lots of other reasons. A million small things change and if you don't or can't change with them...

Anonymous said...

Anonymous said...
...I am confused about the process

...I can't help but be concerned that in two days, you've reclassified Microsoft from the top 1% to the bottom 1%. Nothing catastrophic has happened over the past 2 days...."

As an independent floor trader, when expectations fail to materialize, you reverse your positions. John's expectations failed to materialize. There are low borrowing costs on the short,the stock is not going to run away and it is liquid. It is a low risk short. I do not understand MS, so I have no position in the company.

Anonymous said...

Actually Win 8 is the first OS in 10+ years to challenge OS X. Apple software has become predictable and risk averse as of late.

Matt Barrie said...

Back in the olden days, people used to think that what was really important about a computer was that it was made by IBM. Then people realised that anyone can make a clone of this, and what was really special was the Intel chip Inside. After a while, AMD came along and showed you could clone that, and then people realised that the Microsoft Operating System was the special bit. A few years later, other operating systems came along that could do all that Microsoft did, but also more things, and better. But the reason they stil didn't switch was because all their work (documents) got screwed up. So you needed to stay because of Office.

Now that's been cloned with Google Docs, and for the average case, gDocs is a lot better.

MS is on its last legs. Developer interest in all its products is tanking. Just look at our quarterly reports:

The latest
http://finance.yahoo.com/news/freelancer-com-reveals-50-fastest-130000521.html

We slammed MS here
http://press.freelancer.com.s3.amazonaws.com/2012-02-27-Freelancer.com-FAST-50-2011.pdf

"As we repeatedly point out in our quarterly Freelancer Fast 50 reports, the universal decline in
online jobs related to Microsoft products leads us to believe that the company’s days are
numbered. The Microsoft report is covered in red ink; Microsoft missed out on the Internet and as a
result core Microsoft products are seeing interest drop like a rock, with upticks only really seen in
programming languages associated with the company: Windows Desktop down 37% for the year
(to a paltry 1,256 jobs), IIS down 37% (to a piddling 331 jobs), Microsoft down 39% (to 888 jobs),
Word down 12% (to 808 jobs), Windows Mobile down 8% (to 515 jobs), .NET down 5% (to 12,108
jobs), Microsoft Access up 1% (to 1,166 jobs), Microsoft Exchange up 1% (to 236 jobs). The only bright spots in the report are ASP up 12% (to 4,544 jobs), Visual Basic up 12% (to 4,103 jobs), C#
Programming up 27% (to 7,369 jobs), Sharepoint up 38% (to a tiny 413 jobs) and Windows Server
up 84% (to 872 jobs)."

Anonymous said...

I'm a programmer, used to do C#, now PHP.

Most commercial PCs I see these days are still winXP. The local hospital, the garage, most shop tills are XP touch. I have no idea how the new windows will fit into these peoples lives.

Anonymous said...

You sold out a position and shorted a stock based on a YouTube video of an unreleased product you've yet to use?

And that's smart how?

Microsoft has a few other lines of business to consider. Xbox, online gaming and entertainment, server, office, mobile, CRM, cloud computing, etc, etc, etc. Dominant and growing market share in nearly all of these areas.

And you sold based on this video!?

Anonymous said...

>You are not convinced: google the phrase unity sucks.

You might be true or not, I'm not sure that is best way to prove it.

NB: replace google by a generic word;

Wandspiegel said...

Whether one agrees or not with the facts and reasoning of the author (a successful hedge-fund manager with a widely followed blog), this blog post is important in and of itself because of what it represents: a tectonic shift in the business community's perception of Microsoft.
The business community is now openly doubting the future relevance of the Windows platform!

Charlie@HockeyBias.com said...

Wtiting code for a MAC or iPad/iPhone is one of the most violent experiences a developer will have. Please Apple, amek a dececnt IDE and abandon 25-year-old Objective C as the main language for writing code for your products. It is a mess - the amount of code one has to write to do relatively simple things is mind-boggling. Kindly kill Xcode and Objective C.

I will take the

jy said...

Dear John,

Coincidently today I brought a Lenovo x61t home to install Windows 7 on it. I'd finally had enough of Windows 8. Between this, your article, and the slew of articles on what a crappy play MS is to work for with its very odd rating system, I've written to both of my stockbrokers asking them for advice on how to bet against MS in the short term (i.e., post end of Oct 2012) and the long term (i.e., approximately one year from now).

I'm sad for MS. I've had several friends who went to work there, and I've happily used their products for years. But there is something wrong there. RIM-wrong.

Thanks again for articulating the situation much more clearly that I could have done.

John Young

Anonymous said...

But let's not forget Microsoft has been developing huge cloud power as well. They are moving Office 365 to Windows Azure.

This must be their new cash cow. Because they priced Windows 8 relatively cheap, just like OS X (cheaper).

The strategy is to get people into your cloud. I think it will work for Microsoft, but they will have to contend with a third of the market, shared with Google and Apple.

Not sure how to translate that to stock strategy though.

Veysel said...

[Microsoft's] real franchise is computers on which people do work. They don't play.

There's a neat little startup that Microsoft has recently been backing, it's called the XBox. I think they're in the entertainment space or something.

Also, since when has Windows not led the PC gaming market? While this *may* be changing in the near future, historically the majority of PC gamers have always used Windows.

Anonymous said...

Aren't we missing the major fact that MS is becoming so open with Win8 and Azure that you don't need MS Tools to build on them? I have not built yet on Azure nor Win8 but would be interested to hear from others who have. The skills accepted by both platforms are way beyond MS VS.

Trevor de Koekkoek said...

Have you heard of desktop mode?

Anonymous said...

Enjoyed reading your post. Some of your commenters really need to get a clue.

Microsoft on its last legs? If you call continuing record quarters on last legs then you need your head examined.

Also if you think of the Steam/Gabe Newells comments with any kind of objection then its pretty easy to realise that the Microsoft Store with Windows 8 could easily take profits away from Steam. If the process is easier, works well with XBOX Live then its pretty easy to see why Valve would have their backs up.

Matt

Anonymous said...

Windows 8 works great on new devices. The trackpad can be used for gestures and the old desktop UI is still there, if you want to use it in the same way it's still there. Windows 8 UI will be perfect for the new touchscreen laptops and ultra-books that are about to come out. There are some times when a keyboard and mouse/trackpad works best, but if you use tablets a lot there are times with a laptop where you try to swipe on your screen. With Windows 8 you can now do that.

And not to mention their Xbox Live customer base and how this will interact with it.

Anonymous said...

I will admit the 'metro' feature of windows 8 is kind of like the 'media center edition' feature of Windows XP. The rest of the Windows experience remains the same. It becomes much richer with each release. There are several versions of Windows 8 that will be available. Do you honestly think Windows 8 Enterprise edition will demand professionals to use the 'metro' piece? These users will enjoy the enhancements to the regular Windows experience.

Anonymous said...

After reading all of the comments, I can't help but think that JH has yet to make any moves, and is smartly crowd-sourcing an expert technical opinion.

Ralph Elliott said...

You now seem to have reached the conclusion that I thought was probably the right one when you last broached this topic. But ...

The case you made then was plausible, and I have to say that the case you make in this blog post seems fairly sketchy to me -- not really enough to destroy the one that previously convinced you to invest in MS. You've talked to a nerd or two who have no special gifts as industry analysts but who like Python and Ubuntu, you've read what Cringely has to say, and you've seen the celebrated video of Chris Pirillo's dad. I trust you are aware that Chris Pirillo did another video of his dad with Mac OS X -- certainly not identical to the Windows 8 one, but enough to make the casual observer swear off investment in Apple. Myself, I like Cringely, but I'd say that he's now generally, and not unreasonably, regarded as a bit of a relic of a bygone era.

I find it hard to believe that these are your only reasons for flipping your previous decision on MS. Are there not other, sounder, sources of industry analysis on which you're basing your own assessment -- ones that you've yet to let us know about? Personally, I'd have said Ballmer is quite a good reason not to be investing in MS -- see, e.g., Horace Dediu's recent post on the Poetry of Steve Ballmer -- but I'd have said that last time, and Ballmer's been in charge for well over ten years, and he didn't seem to put you off last time. I expect you, if not your readers, are already familiar with Dediu's writing at asymco.com. Would his/Christensen's "jobs to be done" approach suggest a different answer on MS now by comparison with that you came up with last time?

I have a technical background rather than a financial one, but I find it disconcerting that you could reverse your previous, painstakingly reached, decision without considerably stronger reasons than you've given here. Consider: MS do indeed have a rather uncertain grasp of the distinction between touch and mouse-based input, and Apple systems are indeed much more user friendly than MS/Windows ones. But similar things could have been -- and were -- said in the Windows 3.1 era back in the early 90s -- and that didn't turn out so bad for MS, did it?

o. nate said...

I think selling MSFT on the basis of one lousy OS release is a bit hasty. They've survived lousy releases before without too much impact on the bottom line (Vista, for example). I'm not sure why this time would be different. The more important question is whether or not the dominant trends in IT are moving away from them. I basically agree with you that they are, but maybe not for exactly the reasons you gave. I think your discussion of Java kind of misses the point. Cross-platform software is not a serious threat to MSFT - Java on the desktop is still clunky after how many years? The threat is the web. Web applications are becoming better and better all the time. MSFT's only hope was to build proprietary browser add-ons that would lock people in to their platform, but that has failed. In a stunningly quick upset, Google's Chrome now has a bigger market share than IE. Google wants the browser to be the computer, and they want that browser to run on open standards. So far they seem to be winning that war. Tablets are part of the trend towards smaller, smart, non-computer devices. This is also a threat to MSFT's business model, since they won't be able to dominate this space like they did the desktop. Those are reasons to sell MSFT. The reasons to buy MSFT are legacy application lock-in and the fact that there is still not much of a credible alternative in the corporate enterprise space, but that's a smaller market than MSFT is used to (although they can still wring a decent profit from it if they play their cards right).

Eric James Soltys said...

"Unity sucks" was a kneejerk reaction by many to change. My sense is the Ubuntu community—including me—have been won over by the improvements made to Unity.

I expect a similar reaction and adaption to Win 8. People complain and then discover the good parts.

Anonymous said...

"Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead" You view on this is about 10 years out of date. .Net is an exceptional development platform, and there is no comparable language to C#. They are both seriously awesome. I know this and I am not even a .net developer or a Microsoft fan, but I have done .net development in the past for a short period.

You comment about Python being more important than Java is a bit off as well. From 96-2006ish Java was the undisputed king of programming languages. It is still extremely important, more so than Python by any reasonable measure (http://www.tiobe.com/index.php/content/paperinfo/tpci/index.html). Not that Python isn't awesome and important as well.

Anonymous said...

@ anon "Microsoft has a few other lines of business to consider. Xbox, online gaming and entertainment, server, office, mobile, CRM, cloud computing, etc, etc, etc. Dominant and growing market share in nearly all of these areas"

the only highly profitable sectors are the "enterprise" ones. Like IBM there's certainly a future for MSFT in the Enterprise but it's a much different future than their past. They certainly won't be getting the $100-400 per computer they used to charge end users for Office with the rise of Google Docs, Open Office etc. that are "good enough"

JJ McHughes said...

I remember your GO LONG thesis on Freddie Mac and Fannie Mae ... since then , I wouldn't follow one of your recommendations

Anonymous said...

Excellent article and I think you are on to something. One thing that you don't discuss, and I would be interested to get your take on, is Azure. From talking to people very high up in the organization (1-2 levels from the top), I know that they are betting big on Azure and I think that many are hoping it can be their saving grace.

On an unrelated note, it would be great if you would add social media buttons for Facebook, Twitter, etc, to make it easier for people to share your (excellent) posts.

Anonymous said...

My fund owned MSFT for quite some time. I sold it June 21, and my reasons are similar.

MSFT's traditional advantages were scale, network effect (file format interoperability), and other lock-in (user interface, developers).

Network effect has eroded because of better interoperability with other OS and application vendors. Scale has eroded because Apple now out-earns MSFT by at least 2x, and Google is catching up fast. All that's left is lock-in, which at the moment is still as powerful as ever.

Yet both Windows 8's Metro interface, and the "Surface" product, erode that lock-in (both customer and developer), by using a different fundamental UI.

"Surface," if successful, additionally erodes margins, as it is positioned to replace Windows laptops (high OEM license fee) with a new subcompact mobile device (lower license fee).

For MSFT to move from a locked-in position to a new defensible position requires R&D and/or capex. But for the first time in decades, MSFT is at a substantial scale disadvantage here. Apple, which earned at least 2x more than MSFT over the past 3 quarters, can vastly out-invest them, other things equal. Google is smaller than MSFT, but closing fast, and will soon be able to do the same.

There is one way they can salvage this, and I think it's likely to happen: abandon Metro, and release Windows 8 with the traditional interface turned on by default. This will restore lock-in, and buy them years more of fat profits.

But the fact that they've let it go this far says to me they do not understand their own business, and so I no longer want the stock.

Anonymous said...

you forgot excel; it's used everywhere

Anonymous said...

I like any sort of investment recommendation with no math. Does price paid matter?

Anonymous said...

Interesting article and even more interesting comments. I have only two thoughts.

First, when Windows 8 is released in October, though there will be a lot of fanfare, I suspect its actual effect will be minimal. It will ship on mobile devices and some ultrabooks - both devices made for the touchscreen interface of Metro, so no one will care. And virtually no one will be running it on desktops, so people like that guy's grandfather isn't going to care. I mean how many people have even upgraded to Windows 7?

Second, to me the real test of MSFT is what they do with Kinect. From what I understand, Kinect is still a leader in motion control, and if they can marry this up before anyone else does (with XBox as well), MSFT will be the undisputed king.

I'm staying long for the time being.

Julius Davies said...

Writing from a Lenovo X230t running Debian that nonetheless came pre-installed with Windows 7 Pro...

I'm in school now working on a PhD in computer science, so out of touch with what's going on in corporate world, but here are the things I am curious about:

- Did anyone mention the CAL licensing? I believe Windows Server and Exchange and Terminal Services usually operate under that scheme, and it means you have to send around $100 to Microsoft every time you hire a new person (even if they're using a Mac). But you can recycle these CAL licenses if you've had layoffs, until you finally breach your previous high water mark for number-of-staff. I wonder how much CAL recycling has hurt Microsoft.

- Does Microsoft hit companies much with license audits? If so, how many eventually decide to ditch Microsoft altogether after a bad experience? I suspect a license audit is a huge pain in the ass and a noticeable waste of internal money even for a 110% compliant company (e.g., one that is over-paying Microsoft and accidentally buying more licenses than it really needs).


- How is Microsoft SQL Server doing these days, now that PostgreSQL, SQLite, MySQL and NoSQL are so hip? But probably SQL Server was never that important to Microsoft?

- At the bank where I used to work everyone gets a new computer every 3 years. And these days everyone requests either a big 27" iMac, or a Mac Book Pro.

- My hat is still off to Microsoft. I have never enjoyed email/calendaring as much as I did with them (Outlook/Exchange).


(My take on Java: it's not that it runs on everything. It's that there was *nothing else* that could run on Linux/Unix! Java saved Linux, not the other way. Banks would not have switched to Linux on their servers if Java wasn't there.)

Anonymous said...

You think the old guy baffled by Windows 8 is bad, you should see me try to use my own Android smartphone or my Mom's iPad... I can barely figure out how to minimize the screens and every foray into new functionality basically involves me smashing and clicking things at random - so it seems to MSFT has simply caught up to its peers :-)

John Hempton said...

Of course the price paid matters.

Microsoft used to be priced at 50 times earnings and it did ferociously well over the next decade - and the stock did not.

It now looks really cheap (which was why I owned it). The franchise was damaged - very damaged - but also potentially very long lived whilst damaged (see Azure for instance as the obvious extension).

I believed they would and could extend the franchise for another 15 plus years in which case the stock is a buy.

I am not so sure any more. But whilst I am short lets put this in perspective - at peak I was long about 6 percent of the fund in this.

I am now short about 30bps.

My long position was 20 times larger than my short position.

I once really cared about this company.

I do not care any more.

I don't use their products and I do not much care about their stock.

John

Entsophy said...

I had never used Linux before Ubuntu 12.04 and never heard of the unity controversy.

12.04 took about 30 seconds to learn on a desktop and I love it. It's a real pleasure to use.

It makes me wonder what else you got wrong.

John Hempton said...

The really painful glitches were removed in 12.04.

But I had a massively personalized computer before - and none of that works in any way that makes me happy.

Old dog. New tricks. Worse THE OLD TRICKS DO NOT WORK.

Wound up doing huge amounts in terminal for a while.

John

Anonymous said...

Really interesting.

My take is that Microsoft recognizes that there are no competitors to their desktop/laptop monopoly and so is using, and risking, that monopoly in order to (a) build familiarity with touch-optimised Metro and (b) force developers to build a critical mass of touch-optimised Metro apps. Both (a) and (b) should result in W8/WRT getting solid tablet market share. All of the above will drive phone market share.

It is brilliant. They are using their monopoly to force consumers and developers onto their tablet and phone OSs. The only risk that they are taking is that people don't update desktops/laptops to W8 or don't like the Metro/desktop design). Since there is no viable alternative, Microsoft thinks this is a bet it has to take.

I think they will be successful. Windows will keep its 90% market share on desktops/laptops. And MS will gain a solid market share in tablets and phones.

But I think you are right in that long-term, Apple products and Android and more importantly powerful web browsers mean that applications will be written in cross-platform code that is easily ported. Moreover, a lot of new enterprise applications will be written for iOS only because iOS dominates the enterprise right now in tablets and phones. Generally, this environment is much more chaotic, with many more devices and OSs, and I think the result will increasingly be that applications will be web-based and written in HTML5, etc. It will take many years, but the MS monopoly on the OS will not be able to survive this.

In the future I would also not count out Chrome OS. The advances in browsers in the last few years have been amazing. A few more years at the current pace and browsers will be incredibly powerful. If Google in the next couple of years built a solid $200 or under Chrome OS laptop with 16gb of flash storage and an ARM processor, I think this would sell well all over the world.

Anonymous said...

I can understand your decision to sell regarding the business although even that seems 50/50 based on the comments here but is Microsoft really a short? You couldn't find another stock to short before this one?

Financially secure with over 1 year of expenses just sitting as cash in the bank and royalty type revenue streams and not selling for a high multiple of earnings. Not one I would want to short regardless of how little I thought of the business, it's products or managers.

Anonymous said...

Good God - what complete nonsense! I was an engineer at MSFT 1989-2000 and (full disclosure) do not currently hold any MSFT shares. It's not because of Windows 8; I'm just more interested in macro stock market work these days.

But the misunderstandings you have, both about history ("in the late 1990s Windows developed huge market power"?) and about how software is written ("People developed software to run on Microsoft using Microsoft developer tools"?) are simply too profound to make it worth further engagement. I stopped reading when I hit the line "the Microsoft virtuous circle is now dead" - I remember reading the same sentence verbatim in an article by Montieth Illingsworth in...1991? 1992? I took it seriously at the time, but since then I've learned my lessons.

michael said...

I too first had windows on a Gateway. Microsoft has never truly invented anything, but yet had a monopoly and earned money on every p.c. sold, but the world is changing to devices Microsoft has yet to demonstrate any competitive advantage on. I too also owned Microsoft for several years on the basis of cheap valuation, monopoly position and new cycles of Windows. With all these cycles the earnings explosion never came while it's position weakened. Eventually I sold my shares about two years ago and made more money elsewhere. For Microsoft to be a good investment it would need to adopt Big Tobacco's business model, which means pay out profits and only invest sufficiently to keep existing businesses going. All those new ventures Microsoft has dreamt up and inested in have not been the home run that windows and office were and will never be as such. It's time to get out of Microsoft and maybe sell it short.

Conscience of a Conservative said...

I too owned Microsoft. They refuse to acknowledge that they need to adopt Tobacco's business model which is to wind down and pay out profits only investing enough to maintain the franchise. Each successive version of Windows has proved less profitable than the last while alternative platforms grab more market share (phones, tablets, pads, etc). And like G.M. they invest in new businesses only to see those investments not deliver the profits their old busineses once did.

AAA said...

"I am now short about 30bps."

So what's the point?

狂猪 said...

I've been a software engineer since the early 90s. From an application development perspective, what changed the game for MS (and the world) was not Java (not even close).

It was the web.

The networking protocol is the same everywhere. The user interface is handled by the web browser which supported a common html standard. The actual end user computer became irrelevant. As a software engineer, we didn't have to learn the programming APIs for the PC, the Mac, the Linux boxes or the phone in our pocket. We write the app on a web server and the app immediately works everywhere that has a web browser. Now this is development efficiency!

Why did Unix variances won the server war? First, back in the mid 90s when the web took off, Windows wasn't even close to the robustness and scalability of Unix; simply no contest. Second, the software application programming interface (api) from MS was terrible. The api I loved to hate was the MS OLE interface. It even had an interface with an existential crisis call IUnknown at the core! The third reason is Unix has much better tools for web app development. The open source movement had Darwinism baked in and the best raise to the top. Simply put, it was the engineers from MS competing against all the open source engineers from the whole world on who can build better tools. The difference in intellectual fire power and resources were completely lopsided.

On a side note, because of the technical short coming and cost of the mobile network, native apps still holds an advantage to web apps on a mobile device. Engineers have to learn how to program the iphone, android phone, etc. This will come to pass in a few years. This is the HTML5 vs. native app debate.

As for Java, it is just one tool. It was over-hyped and has under delivered in many area (marketing's fault). Any particular programming language is never that important. It is the environment, the ecosystem that matters.

Anonymous said...

A couple of points where I disagree John:

- Windows 8 is bad on desktops. This is an opinion that seems most popular with people who haven't tried the previews. If approached with the perspective that only the start menu has been replaced and all the desktop apps and functionality are still available then it makes the transition pretty smooth. My dad appreciated the speed and simplicity improvements coming from WinXP (that was just a shirt term experiment for the fun of it). And yeah that video you linked to is a recognised groaner.

- .Net isn't used by the young folk. It was a strong element of my Computer Systems Engineering degree a few years ago (along with Java and lots of C++ and embedded C), I have seen it in every place I've worked at since (not always exclusively). A good friend is a front office developer at a leading hedge fund in London (including decent amount of young talent) and they continually choose to be a .Net development house largely because of speed of development, to quote: "nothing else comes close".

Other points:

- Free office solutions are fine for small houses and simple files, but Office 2010 is the leader for any serious spreadsheeting, lengthy report writing, and integrating with other systems.

- HyperV is being aggressively developed and pushed by MS, along with Azure, SharePoint (and Skydrive at the user level). They aren't standing flat footed when it comes to rethinking computing environments and architectures.

- At the enterprise level I agree with other posters that MS has it sown up still.
Broadly speaking I think it is mostly low end of their market shares being eroded (eg Linux/python and free Office options at small organisations mostly) and for simple or narrow scope implementations. Higher up the value chain MS has little competition.

- Sometimes MS products are actually better. My Dad's Lumia 800 has my mother in law jealous with her Galaxy S II that "feels clunky and not obvious" alongside. Bing Maps is much better for local businesses and for pedestrian directions in Brisbane than Google Maps. (Not that I'm giving up Chrome mind you.)

- Is their problem more of an image one? Can that even be fixed now?


Really enjoying this thread,

TimS

Anonymous said...

Since I use Unity - daily - and like it very much and think it is a big improvement over earlier Gnome desktops, should that lead me to dismiss your evaluation of Windows 8?

Anonymous said...

I appreciate the thoughts but I must say these speculations seem like pretty off-base reasons to go short MSFT. Sell, sure, whatever, but you're going short because some old guy on a video created by a mac enthusiast (check out the text on the screen behind) can't get his head out of his ass? That's lunacy. Are people like him going to put down money for Apple machines or are they going to take the day or so it takes to get used to the new OS? At the end of the day, it will be a disruptive transition but given that they will probably substantially cut down on piracy due to the new sales model, I think the bottom line isn't about to crater. Disclosure, I'm not long or short MSFT or AAPL, but I am recently long NOK, so obviously I have a horse in this race.
My 2 cents: you probably should have sold AAPL to go short, instead, THAT would have been timely.

狂猪 said...

Windows 8 has two different interfaces, a touch interface (metro) and a desktop interface. I haven't use it but I did look at youtube videos of it. I think there is a usability hit if someone has to switch between the touch interface and the desktop interface. I also think it is overstating the case to suggest the usability issue is serious. Also, the desktop interface for Windows 8 is an improvement to Windows 7. People who prefer the desktop experience will spend a few minute to make the desktop UI the default and that is it. A minutes to fix some setting isn't a strong reason to short.

I wouldn't short MSFT. MSFT will not tank quickly in the next 12 months over Windows 8. MSFT is a slow grind downward.

MSFT has a much more defensible business then AAPL. This is because AAPL sells fashionable hardware. However, when every one has an iphone; it is hardly fashion forward. AAPL does have a usability advantage. On the other hand, Android has a cost advantage and an eco system advantage. The total resource behind each platform for development and marketing is completely lopsided. IPhone and IPad are hardware commodities when the fashion changes. When the Apple hardware faulters, there is no fallback. Forget about iCloud.

The best part? Given AAPL's $538 billion market cap, it is very difficult to come up with an idea big enough to make a difference.

On the other hand, MS Windows and Office aren't going anywhere for the next 3 years. I would consider shorting MSFT only when Google doc or similar service takes off in the corporate env (there is some traction now). I am skeptical of Google doc (my company uses it and I like it a lot). There is a powerful counter argument to google doc: certain information are best kept in house. This view may require a generational change to dislodge.

John said...

Have you considered this possible game plan MSFT has:

- Win8's priority is tablet/pad, mainly consumer oriented.

- Corporates upgrade cycle is always slower than consumers. When XP support discontinues, they will upgrade to Win7 regardless Win8 is brilliant or not, because corporates will never upgrade to an unproven OS (considered that Win7 consists of only 50% of the Windows installment basis).

- In the meantime, fix Win8 in Win9 for corporate users.

Anonymous said...

66 comments. Many of which demonstrate fare more intelligence and technical knowledge then me.

I only know this: pads are wonderful for those who do not use computers for much beyond Facebook, surfing the web, email, and light gaming. My grandmother is a perfect candidate.

Who will write a 120 page paper on one though? Tablets compete with smartphones but neither compete with desktops. They are grown up Gameboys.

MS is a unregulated pipeline. It sells a commodity which is a vital feedstock for productive work. It will remain profitable long term selling that product, although its market will shrink slightly over time.

It may even be more profitable once the casual users leave. Those that remain will want what MS delivers: a highly functional product that modestly technical people can use. Until kids in school no longer use Windows it will be the only OS that fits that. Compared to the cost of retraining and dealing with bother of moving platforms, Windows will seem very cheap.

It's a pipeline that throws off cash that MS can invest. Shorting it is betting they cannot invest that cash well. Perhaps a reasonable bet. But there's little upside relative to the downside. Mostly it seems to be going nowhere fast. Which makes me wonder why not look for a better use of capital?

Anonymous said...

The next "format war" will be Chrome OS/Google Fiber/Android v. Apple iOS/iCloud + incumbent telcos.

Microsoft is going to be left without a dance partner unless it starts hooking up the the telcos before Apple does.

Anonymous said...

"And it will be a failure because Microsoft, not for the first time, have lost their view of real users."

Should be, And it will be a failure because Microsoft, not for the first time, HAS lost ITS view of real users.

Michael Bond said...

"Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead."

Frankly, I find this commment abrasive and uninformed.

When I was finishing high school (and later starting college courses) they were still teaching VB and VB.Net. There just wasn't an available course in Java, or C / C++, or Python.

If I wanted to learn platform agnostic development, I was going to have to find it on my own.

Anonymous said...

Interesting analysis. One thing that it is clear that ms and indeed most of the commenters here don't understand is that it is not about touch vs mouse or pad vs notebook or cloud vs desktop. It is about creating a layer that clarifies the abstract notions of how an applications content is consumed and how it is created. *This* is the innovation that ms needed to deliver with win8 in order to regain relevance. Instead, we get some kludgey hack of an o/s. Unfortunately, such outcomes are rather typical of Microsoft.

peter said...

although i'm a die hard linux user and use it as my main work plataform, i have to agree with you, specially the first part. there's a lot of people still developing with MS tools, and calling these very talented people demented or brain-dead is just wrong and sad.

there's a lot MS can do in the next few years and Win8 isn't just Metro. there are many valuable OS features inside.

with all that being said, i still wish a quick death to MS ;)

martinp said...

I am posting this from a Windows 8 tablet and I am a fan. An iPad or Android tablet could never cut it as they don't run the software I need to be productive and they don't have the necessary fire power - nor the flexibility with external devices.

The desktop functions pretty much as any Windows XP or 2007 user would expect but quicker. And the tablet-style interface allows multi-tasking well beyond iOS. Right now I have a twitter feed on one third of my screen and a browser on the other 2/3. I can with a flick share or email this page while these apps both remain open.

For any commercial user Win8 is the only tablet offering that makes sense. For the lounge iOS is the easy option.

Anonymous said...

Charlie@HockeyBias.com: Violent? Did the IDE punch you in the face every time you had a syntax error.

Languages do not rust. ObjC is a modern language which gets updates regularly. Just because it is different doesn't mean it is bad.

John said...

More thoughts.

Deconstructing your analysis:

MSFT has moats to collect rents. It has staying power which will deteriorate slowly if no new product arrives. You think if MSFT got the next version of Windows right, with the ability to bridge tablet and desktop properly, it has a good chance to win back a lot of the market. But you thinks Win8 is no such product. A flopped Win8 will deteriorate MSFT's staying power further. But it still has staying power. It takes times to completely destroy MSFT's staying power. In the meantime, MSFT can correct the problems in Win9, Win10, etc...

I'm pretty sure you see through this. So, this isn't your objection. I think your objection is, if the management is so dysfunctional that it allows such a crap and unusable product to get into the market, it is dysfunctional enough that it won't be able to correct itself.

raj said...

Although most of your opinions are well-formed, I think this one is not based in fact: "Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead."

Please go to any freelance hiring website (eLance, Odesk, etc) and type ".Net". You will get a few thousand young programmer resumes.

As long as businesses use Windows Server, MS Outlook, MS Excel (and Office) there will continue to be a strong need for .Net development.

Calling these programmers demented is a poor judgment (or judgement) call.

Anonymous said...

Wow a whole 18 months. What a stud.

Amanda M said...

I agree that Apple software is predictable - with every release of OS X to the common consumer it looks the same, just they add more things that most won't ever use. I moved from my iPhone (having owned every one, and been a very long-time apple user) to the lovely Nokia Lumia 900. Before moving to that, I have been dabbling with Win8 Preview and have to say it is a great refresh from the normal system. I think it is something my parents could pick up on easily (if I hadn't moved them to Mac quite a few years ago). I think MS has something great and will take some time for folks to get used to, but I think it will go smoother than others think.

I also look at the fact that when the Surface comes out, you can work on your stuff and then continue on your W8 desktop in the exact same environment with the same apps. No apps that act differently (which Apple has done for their own apps: iWork, iPhoto, etc).

I say give MS a chance. This coming from an avid, happy and loyal Apple user.

uair01 said...

Just some loose ends about MS:

1) AFAIK no other platform has the in-built central management functions that Windows has. You can manages the settings of millions of computers centrally through Active Directory and Group Policies. You can build a decentralized world-wide infrastructure of Domain Controlers for decentral login. You can reach any other system on this world-wide infrastructure. This is ideal for enterprise use. No other platform has this functionality.

2) Security wise MS Windows is very good and compares well with Linux, Android and iOS. MS had many bad security years but they've improved dramatically.

3) With MS Active Directory you get a lot of interesting functionality for free: CA (for cryptography), DRM (for data leakage protection), and more.

This still makes MS an ideal infrastructure for serious enterprise use. Of course there are possible negative trends:

4) Virtualization and thin-clients remove a lot of Windows desktops from companies. (Still a lot of them use old hardware and XP.)

5) Cloud infrastructures remove a lot of servers from companies.

6) All the managers want an iPad and an iPhone. All the large enterprise system builders (SAP, Oracle) make their systems available through iPad apps.

Still I hope that MS can make a breakthrough with their tablet and their phone. I hate the extremely closed and proprietary infrastructure of Apple. But they also might go the way of the BlackBerry.

I assume you've read the financial documents of MS? In contrasts to others (like Cisco) they analyze their competition risks quite exhaustively.

And have you looked at the prospects of Cisco versus Huawei? Very interesting trends.

SBTrades said...

Do a search on the job boards for the following technologies. "sharepoint", "SAP", "Java", "C#", you can see where the demand for the developers are. Sharepoint, silverlight and C# still in demand.

Also search for "silverlight and iPad", you can see there is still plenty of demand for microsoft products on the iPad. I would love to run TC2000 on my iPad.

uair01 said...

I had never expected that your financial blog would stimulate my technical curiosity :-)

But just now I installed Windows 8 in a virtual machine to play with it. The first impression is that underneath the interface all things have stayed the same (command line, event logs, accounts, settings). There is heavy integration with the cloud (they ask your live-account to log into your PC).

But at first sight the interface is a PITA. I had to google how to find the command line and how to switch the machine off (!). And I'm not the only one:
http://news.cnet.com/8301-10805_3-57389397-75/how-to-uh-turn-windows-8-off/

On the other hand, once you know the tricks you get used to the new interface very quickly. But it certainly will scare the casual users.

Anonymous said...

"I am now short about 30bps."

So presumably you are just short a broad basket (S&P or similar), which is implicitly short MSFT?

JoshK said...

The consipracy theory:

One thing you missed is that MS has a two-old support cycle for their OS's. I think that MSFT probably wants to get something out after Win7 to allow them to come out with Win9 to be able to force upgrades from their users.

John Douglas said...

A great observation regarding alienating enterprise users with Windows 8. That will happen. It's a design flaw.

You probably need to bring a concept to market with the alternative technology stacks before you can summarily dismiss msft, however, esp. in the enterprise domain. People who do this daily dismiss the wanna-be hip-hop ramblings of speculators as dotcom-think version.[N]

The Microsoft top-down model of delivering a technology stack brings the majority of developers the tools to be successful. There are edge-cases where abnormally talented groups willing to knit community contributions together will succeed, or distinct domains (e.g. bio / pharma) that are, ironically, platform-locked outside of MSFT, but survey every person and system you interact with for a day, and you'll see that the things you count on... run Windows.

Anonymous said...

"do I click the fish? no, that didn't do it"

Classic.

I remember people joking about Windows 98 when it came out, saying it should have been called "Windows 95.1".

Then they put out Windows ME (Mistake Edition), which was a colossal disaster.

Windows XP was a big hit, but it was launched in 2001. So it has now been 11 years since they have put out a worthwhile operating system that offered anything new.

There are plenty of stories online about people "downgrading" from Vista or Windows 7 back to XP. People are probably still doing this.

No one is excited about Windows 8. Everyone knows it will still have the same vulnerabilities that Windows has always had.

It's time to move on. As soon as people realize that they don't need Windows, it will all be over.

Anonymous said...

MSFT's customer captivity is incredible and it's still combined with economies of scale. Not only do they have tons of applications built on their products, they have pretty much every business document (contract, spreadsheet,etc) ever created is a MSFT document. The switching costs are enormous.

It might not be a long because the operating leverage cuts both ways, but at 10ish times EBIT aggressively repurchasing stock, I don't see it as a short.

Anonymous said...

I'm a developer, and I'm favorably impressed by Windows 8 and recent moves by Microsoft. I would correct one thing from the blog post, and another thing I read in the comment thread.

In the original blog post, it sounds like there are thoughts of (a.) a disconnected pad; and then sometimes (b.) docking it in order to have a full desktop experience with cloud connection. Windows 8 is spanning the whole gamut of use cases, but tablet devices are occasionally (and often) connected devices - which means, they can communicate and do I/O with the cloud almost any time, no docking necessary. In fact, why be stuck on the idea of docking? In an earlier generation of devices, it made sense to have a docking station; but now, not so much. Laptops have shown us that full computing power fits into their small form factor; I don't use a docking station with my laptop; I simply plug in external drives, keyboard, mouse, and printer.

There's no real advantage to any docking station, that's why it doesn't exist. The cloud is equally available for any device with an internet connection. (Sure, there are faster and slower connections, but that's life.)

So, Windows 8 will let the full horsepower of Windows go everywhere with its users on tablets. To keep with my labels above, that means full horsepower in scenario (a.) although as explained, scenario (a.) is different than the blog post seems to envision in that it is both mobile AND connected. Because the connection is present, scenario (b.) is obviated.

As for how to locate and find that horsepower, another commenter already said it: You click "desktop." Once you do that, you're there at a familiar old Windows experience.

I really don't think that Microsoft is laying an egg. In fact, for the younger generation, it's bringing out the digital equivalent of fresh new threads. Windows hasn't had a bigger sea change since the release of Windows 95.

Okay, a commenter groused of MS, "alternative platforms grab more market share (phones, tablets, pads, etc)" like this is the problem. Wrong, this is the opportunity. Most on this thread acknowledge that MS has a lock in the enterprise space. So, with nothing to lose, Win8 is now the OS that allows MS to gain share in tablets and phones. They'll keep their desktop/laptop dominance, and they'll begin reaching into the tablet and phone space.

To get them from point A to B, they need Win8 to be the cat's meow; that's a tall order, but as a developer who runs the Win8 beta (and researches the developer story), I can say - they're actually doing it. And as for developer tools, Win8's "Metro" style apps can be written either with XAML/.NET (established MS tools) or with HTML5 and JavaScript.

They've improved the developer story by announcing Windows Phone 8, which will allow the reuse of code between projects for Win8 and WP8. It also empowers developers to write VOIP applications.

And, the Microsoft acquisition of Skype is still something that I expect will lead to more nifty developer tools to come.

It's a nifty time to be a developer....With all of that being said, I hold no position vis-a-vis MS shares at all. I'm fully in bullion, expecting the financial system to collapse.

Anonymous said...

RE " Whilst not strictly a monopoly the company had plenty of monopoly characteristics": a reminder that Microsoft was _convicted_ of illegal monopoly practices - is there no memory any more?

Akipekka said...

A wrote a small blog post on the subject. I think John jumped the gun and sold his shares at absolutely wrong time.

Wexboy said...

John - think that's bad, look at this video (Why Windows 8 Scares Me):

http://www.youtube.com/watch?v=qIMuJTrxuhQ

Despite my wife being a Mac user, I've never dreamed of leaving Windows before. Watching this terrifies me though - I use my laptop for 'real' work, if Microsoft want to turn it into some idiot apps smartphone/boob-tube, I think it may be time to say good-bye!

Sean Mcardle said...

To say that MS is on their way out in the consumer space is getting a little ahead of yourself. That said, in the Win 8 world, power users probably wont feel at home, I sure don't. That said I've been a Linux user for 6 years and also enjoy Windows 7 (it really is a nice release), and also write software at work primarily in .Net. MS commitment to attracting devs by making the platform developer friendly has really paid off, the tooling in VS especially with C#/.Net is really nice. However, if you are strict about keeping your UX code isolated, porting a 10K+ line app to Mono takes hours (took me 4 hrs from .Net/Xaml to Gtk#).

So if Windows developers aren't as locked in as they used to be, MS really is riding out the mind share they've acquired over the years. Their web dev strategy isn't that great. Don't get me wrong, ASP.Net is an easy platform to develop for from a desktop dev perspective, but if you are a dev who only drinks the MS kool-aid, you aren't going to be taking advantage of everything the web has to offer until the tooling is in VS, and for Javascript it's just not there. There's not a whole lot to entice existing web devs to jump on the ASP.Net bandwagon. Honestly the best tools I've found to apply web skills to a desktop platform comes in QT QML/Javascript.

So if they are playing catch up on the web and their handhelds just aren't selling, that does just leave business users, the are the largest consumers of Office, and are sure to be the largest users of Azure (it's interesting to note, Apple's homepage is ASP.NET and Siri's infrastructure runs on Azure). On the consumer side, I see more and more people using gDocs and LibreOffice is more that sufficient for anything that doesn't "require" VBA. MS as a corporation is a large lumbering beast, there are too many people in their executive chain who are lifetime MS people to change that. IBM has always been a business focused company and I see MS just becoming the next "Big Blue". The XBox is their last best contender for gaining market share in the consumer space and that's largely to do with the fact that PS3 and Wii dev tools SUCK! It's far easier for an independent developer to build an app for XBox than the other consoles, but MS still doesn't know what drives the gaming community, that as proven loud and clear when they trot Usher onto the stage at E2 2012.

I think the issue really is that Apple is better at guessing what will click with consumers and converging the desktop and mobile experience is the one thing they haven't done yet. I can just imaging how the Win 8 project started "We're gonna do this like they do in Cupertino, lets hire a bunch of designers to make something shiny and people will camp out at Best Buy to get their hands on it", that's why Win 8 is actually two operating systems Metro and Win 7 (if you don't think Metro is it's own OS, it has it's own set of core libraries, it's own resource sandbox, totally portable, it's an OS). They missed the mark and I don't think they'll make it back to the consumer space until at least Win 9 but who knows, with the rate of change we're seeing in the mobile and web space, they may never really catch up.

Stefan said...

Thanks for that article and also thanks to the many commenters, who added certainly much value to that article.

There is one small thing I want to add:

I am working at a small company specialized in simulation software. Our software is available for windows only. And it will never be available as a cloud-based service you can access with your browser. That will not be possible, mainly due to performance reasons. And I doubt, that it will ever be available for another operating system within the next decades.

And I don't think we are the only example, were this is the case. Especially in the business world, there is no alternative to windows and I am sure this will remain true for a long time.

The PC is not dead and will never be. And the same with windows. It is true, that growth is slowing down and PCs are replaced by Pads in some areas. And nobody can be sure, if Microsoft will ever play an important role there. But that does not mean, Microsoft is dead.

I am convinced, that Microsoft stock is cheap, and it is one of my largest investments. It is true, that past growth rates are very likely not achievable in the future for microsoft. But even with zero growth, the current share price is not expensive at all.

christine said...

Microsoft has really helped the world become what it is today. The technology of today just proves that more and more developments could also come in the future.

Anonymous said...

I'm one of those dinosaurs you mention, I'm 39 and I write in C. I'm a hardcore software engineer. I work on ultra-high performance code and exotic data structures.

I use Windows at home and so use the MS development tools. Problem for me is MS froze C support. There have been two revisions of the standard since 1991 and MS hasn't implemented support. I'm now thinking I need to move to Linux to keep using my language.

C on Windows is a niche, though; compiled-language developers use C++, which MS supports.

I concur these days much development occurs in Java/Python/other languages which do not use MS development tools.

I've seen and read a bit about Windows 8. I'm not going to buy it or use it, as it is. The user interface is impossible, inconceivable. I would have to move to Linux, rather than use Windows 8 (but for now, of course, I just keep using Windows 7).

(In fact, relating to this, I used Windows 2000 until I upgraded to Windows 7).

Most end users still use Windows, on their PC/laptop. Most end users now use Apple/Android on their phones. More and more apps are now web-based, which does not require Windows.

I see MS as a natural monopoly which is dissolving due to technological change, which they (in theory) could have mastered and implemented themselves, but did not.

(Blank Xavier)

Martin Gercsak said...

It's beyond me why anyone would own Microsoft shares. Forget about growth prospects and look at the capital allocation. They wasted billions and billions on upgrades that didn't change much since WinXP. Not to mention Bing, MSN, Zune (remember that?) A hopeless company that is just running after it's competitors. And what's their dividend yield? Hardly 2%. They should have given all this wasted money to shareholders. Then they would probably have a 10% dividend. If you are a shareholder there you are just financing Balmer's idiosyncrasies.

The PM said...

Unfortunately I have to disagree.

While you may make a good point, the devil is always in the details. What you are referring to is the general development of software platforms using Microsoft tools.

Have a look at their Server & Tools category. Their cloud service (Azure) has had a lot of very very positive writeups including being superior to Amazon's service. SQL server continues to increase market share. This is outpacing software revenues of say Oracle. The proof is in the pudding. Visual Studio is also within this business revenue category. All these tools are all used by the developers you refer to!

Windows market share erosion is relatively negligible. Business division continues to tick along.

The online services / gaming divisions are just hanging around not really contributing much profit/loss.

At the moment, there is no evidence that MSFT is having issues.

Your argument could be that - qualitatively, you are detecting trends which may flow down to the entire business say 5 years down the line. My point is that if you look at their Server & Tools division, it answers your concerns - it is still solidly chugging along.

Don't forget that also, the company is obviously not expensively valued. It is actually a diversified software business (ie will provide industry growth + alpha, if any) and not a 3 product business (eg AAPL). It has heaps of optionality (eg on Android via licensing fees, mobile platform penetration which is basically only upside for MSFT, online services and games).

I used to be a developer myself in my younger days (and still do some, but terrible at it now). I can tell you the new generation of Microsoft development tools continue to be good, if not the best. Definitely within any one's mandate to consider its services and software.

This is a company people love to hate, but I also recognise that an amazingly large amount of exceptional individuals are recruited by Microsoft and continue to do so. Some of the smartest people I knew at university work at Microsoft and have done so for years. Yes, it screwed up around Vista but every company screws up. What else did it screw up? Sure maybe it missed the boat on smart phones and tablets, but this is not screwing up - it is still executing its core franchies strongly. When people wave their arms and generically say Microsoft has a lot of cultural issues and that MSFT always stuffs things up - I fail to see proper evidence of this.

I don't think this stock can double any time soon, but it can safely deliver outperformance.

I'm long and believe it's a decent for the medium and possibly long term.

Martin Gercsak said...

Regarding Apple and no USB3 support on the Mac Pro:
1. If you are a professional you would use Firewire.
2. I guess they did a survey among their users and figured there was not much demand for USB 3 (perhaps because everyone was using Firewire). So instead of wasting millions on a feature that was not required they decided to invest it in more productive areas.

Just for reference, I have a 6 years old HDTV tuner that transfers HDTV just fine on USB 2.

Martin Gercsak said...

This is a $25,000 camera and still doesn't have USB 3. http://www.bhphotovideo.com/c/product/676192-REG/Panasonic_AJ_HPX2000_AJ_HPX2000_2_3_3CCD_P2.html

It's pretty obvious the market doesn't think usb 3 is particularly important and it is just investing in over capacity.

Anonymous said...

Here is a link to an article which might be of interest:

http://mobileopportunity.blogspot.com.au/2012/05/fear-and-loathing-and-windows-8.html

The author, Mike Mace, is a tech guy (ex Apple, Palm, etc) who tries to analyse what it all means from a business stategy perspective. I expect he can predict the future as well as anybody (ie, not at all) but his views are always interesting.

Stefan said...

Martin Gercsak said...

And what's their dividend yield? Hardly 2%. They should have given all this wasted money to shareholders. Then they would probably have a 10% dividend. If you are a shareholder there you are just financing Balmer's idiosyncrasies.

Looking at Microsoft's dividend yield is highly misleading. They buy back shares agressively, so they return most of their earnings back to shareholders. Share Buybacks are even better for a long-term holder because of tax benefits.

Eric Titus said...

While microsoft is certainly facing a lot of issues, it has its lead in the enterprise to fall back on. Office and legacy software are a big reason why, but I think sharepoint has a good deal of potential. Having looked into it for a previous company, it may be the top collaboration program out there and integrates pretty well with their other software. If I were microsoft, I'd spend much more time teaching businesses about how to use it.

On the downside, Apple now has a hardware lead, a usability lead, and a money lead, and I just don't see any vendor matching the iPad's hardware at its price point. And I don't see anything Microsoft has in the pipeline is going to be gamechanger. You can already put a keyboard on an iPad, and Apple is already pretty good at integrating between devices.

But I think microsoft has a huge culture problem: it focuses on usability and providing options, apple emphasizes design. If you walk into an apple store after any other electronics store, you will have a pretty good idea why apple is doing so well, and what microsoft needs to work on. And microsoft's seattle bubble certainly doesn't help--I recently visited some friends in Seattle who seemed far more enthusiastic about microsoft's pipeline than was actually merited.

Anonymous said...

You are very biased and have no clue what you're talking about. For example: "Nowadays nobody under thirty writes anything on Microsoft developer tools unless they are demented or brain-dead."

SpaceX (ever heard of them?) has an average age of 32 and they code all their software in C#..

Hank said...

How quickly can they bring Windows 9 out?

GlennC said...

1- I think cloud computing is overhyped to some degree. Firstly, cloud computing has been around for a long time.

Secondly, there are just some programs that don't work too well in a cloud format. Google Docs is not as good as Microsoft Office, and Adobe's online version of Photoshop is awful.

2- Programs that push the limits of what a PC can do (e.g. video editing, games) will likely stay on the desktop and give Microsoft an edge. The companies that make video editing software are always trying to kill their Mac version. Sometimes it is because Apple decides to screw over its partners by not making high-end Mac hardware (which is awful for companies that make very high end editing systems). Secondly, Apple doesn't put as many resources towards supporting developers. If you wrote a Mac program in 1999, it cannot run on a Mac computer today. And it can't easily be ported to Mac either.

3- To add on about the difficulties of developing software for Mac, Adobe made a 64-bit version of Photoshop for the PC first. Only in the next version of Photoshop did they make the Mac version 64-bit. This is because Photoshop used Carbon for its user interface and there is no 64-bit support for Carbon; Adobe had to rewrite its entire user interface (!).

Apple is focusing its resources and development efforts on tablet/cell phones. Its development tool (Xcode) only supports one programming language (Objective C). Whereas Microsoft supports multiple programming languages.

4- I don't think that people will ditch tablets for a notebook/desktop. There's something to be said for a wider range of software and a larger screen. I'm not sure I can picture somebody owning only a tablet and a smartphone.

Though we may be at the point where many people don't need to upgrade their computers. (Then again something new always comes along.)

Anonymous said...

Nice article. I'll only make one point:

"Prediction 2: this will accelerate, rather than slow down, the rate at which enterprises take their enterprise specific software into platform independent programs"

I think you're 3-4 years behind, it's now moving in the other direction. The rise of the app store via iOS and Android is leading to more platform fragmentation rather than less. Although the web can provide a decent software environment (at least for geeks), apps are far more popular on smartphones. The rush for HTML5 and the problems caused by this, such browser incompatabilities (IE anyone!) and the two main bodies involved have just parted ways, is only going to increase this fragmentation.

The hilarious irony of all this is that the best tools I've seen for supporting multiple native smartphone platforms are based on Microsoft's .NET! (http://xamarin.com/)

Garrett said...

If you think teaching an old dog new tricks is challenging, you should try to teach a young dog old tricks...

:-)

Mike said...

"I am now short about 30bps."

So presumably you are just short a broad basket (S&P or similar), which is implicitly short MSFT?

Anonymous said...

Wow, wow, wow! Absolutely BRILLIANT review of Windows 8. John, write more on it!

My two-cents:

First, I'm a web-app programmer & web developer turned executive. I currently use Windows 8 for productivity, graphic design, etc - but ONLY in Windows 7 mode. I never use the apps.

Second, TOUCH SCREEN is very different than TOUCH PAD. You have to reach UP and hold your arm in the air to use a laptop touch screen. That hurts for 8 hours a day. Therefore, I will continue using my mouse.

As for touch pads, I had one of the very first ones made, back in the mid 90's. They're wonderful, but not for programming or graphic design. They also require a lot of getting used to.

I guess that if Windows dumps the desktop I'll be switching to a Mac. I don't like their UI very much, but I just don't see how I can use Adobe products in Metro.

I did just purchase Win 8 on Newegg: it works fine in "Windows 7" mode. It's going to be Windows 9 that really kills them.

Anonymous said...

Hey, I would split MS into two separate companies. Move the people and org from the consumer products side out. Give them a bunch of cash. Let them go, let them be young. Then OldSoft can concentrate on the business products and services - go after it, make it better. Take Oracle, SAP, whomever.

Anonymous said...

I hate and love .NET and Windows 8 for the same reason. They both have wonderful positives but completely LACK benefits previously accomplished. Why do they have to kill wonderful "Past" accomplishments when adding new benefits?????? ".NET" great for development poor for performance & simplicity. Windows 8 great for home users - horrid for developers/business users. Fact remains, although support & options hardware/software wise is being diminished from XP (which is really what's pissing off the XP community.) no-one can logically argue that doing simple things like open program/close program was just simpler in XP - and simpler goes in hand with easier and exactly why craigslist.org is not a terrible failure like msn.com

Leuchten said...

It is all about Azure and enterprises, consumers are a lost battle for them. Though, Azure doesn't seem to gain traction so far either.

Svenja said...

Shorting stock of a corporation that grew earnings by 250% the last "lost" decade and sports a P/E of 10 (excluding the recent write down) doesn't seem like the wisest decision to me. jes?

Leuchten said...

I'm a programmer, used to do C#, now PHP.

Most commercial PCs I see these days are still winXP. The local hospital, the garage, most shop tills are XP touch. I have no idea how the new windows will fit into these peoples lives.

Anonymous said...

As of mid-morning today, MSFT is up 34.3% (on a dividend adjusted basis) from the time our blogger sold and shorted. The S&P 500 is up 29.8% in the same period.

Anonymous said...

You would have to add about a 2% yield to the S&P 500 return to make it comparable to the dividend adjusted MSFT return. Still the point was valid on the day I posted that comment.

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