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Microsoft's Midlife Crisis
pillageplunder writes "This article from Businessweek covers the recent memo sent to all Microsoft employees by Steve Ballmer. Interesting tidbits through-out: how Microsoft will try to cut a Billion dollars in expenses, and its cost per employee is about $300K"
If you've costed in the salary of a professional, fringe benefits, vacation, employer's contribution to social security, etc. and then add in a multiplier to account for the infrastructural overhead services (people in accounting, facilities maintenance, management, etc.) in a large corporation or university, this figure is not at all unusual.
That said, however, Microsoft enjoys a surfeit of talent that, like ATT Bell Labs in its day (when it, too, had a monopoly) could afford to do lots of interesting work.
Unfortunately, the need for innovative work to reinforce and expand the existing business model and never ever undermine it is constraining and prevents the company from releasing the full talent of its employees.
So what you see instead are people leaving Microsoft to start entirely new ventures.
"Provided by the management for your protection."
$300k per employee is a high stat, but the typical office worker costs a company $100k-$150k a year when things beyond salary such as the cost of supplying that employee with the office space and supplies needed to do their job, insurance costs, administrative expenses, and other such costs are factored in.
I wonder if this is an example of Microsoft trying to be the "end all, be all" of everything, and it's finally catching up with them.
So far, they have 4 sources of real revenue:
Windows OS/Server
Office
Development Tool Sales
Some hardware (mice, keyboards, etc)
Everything else that MS is involved in has been money losing ventures. Cell phones, PDA, cable TV, "Ultimate TV" - heck, the "raging successful Xbox" has lost over $2 billion for the company (and if that's success, I'd hate to see what failure is).
MS has $56 billion in the bank (some cash, some investments), and so far, revenues are still outstripping costs. But I think Ballmer can look ahead and read the writing on the wall. Other than the MS tax on computers (yes, it exists, deal with it), people aren't rushing out to upgrade with every new OS release. Lots of folks are still on Windows 98/2000 Server and Office 95.
So what will be cut away? WIll they just reduce the number of employees? Shift more developers to India? Or cut on some projects and say "OK, so we're not going to take over the cable market."
The Xbox2, for example, is being retooled not to be "successful" (as in "Beat Sony!"), but "profitable", which should be their focus: making a game system that is cheaper to produce, harder to hack, and even if they aren't #1 in the game industry they can make money at it (wait - that sounds like another console company out there). Why be #1 in the home media player market when sometimes being #2 makes money too?
Odds are, MS is, as the article mentions, just going through a "mid-life crisis". They'll either recoup, tighten down, and keep chugging along - or just proceed with "business as usual" for all their talk, then wonder 5 years from now why all of the business are running Slinux (simple Linux - easy enough for Grandma to figure out how to change the screen resolution) or Apple OS X instead of Windows.
52 Weeks, 52 Religions with John Hummel
On growth and costs: "We have as much opportunity to grow as any other company in the world. That's a big statement, but the opportunities we've scoped out are very big. Make no mistake -- we must grow our revenues to grow profits. We cannot just cut costs. At the same time, we must ensure a competitive cost structure, or competitors will offer prices, services or innovations that we cannot afford to match. Other companies have been severe in tightening costs the last few years -- layoffs, major benefit reductions, etc. We have not done those things and want to be prudent now so we avoid severe measures later."
On the need to innovate: "The key to our growth is innovation. Microsoft was built on innovation, has thrived on innovation, and its future depends on innovation. We are filing for over 2,000 patents a year for new technologies, and we see that number increasing. We lead in innovation in most areas where we compete, and where we do lag - like search and online music distribution - rest assured that the race to innovate has just begun and we will pull ahead."
On Microsoft's share price: "Obviously, we all want to increase the value of our stock, and we have the best opportunity to do that since the end of FY98. Our stock was around $25 then, as it is now, and we have more than doubled our operating profits since. Shareholders then were betting we would work hard for all these years to make the company worth that mid-98 stock price. We have done so."
On aiming products at various markets: "Our products must also be better segmented for different users with different needs. And we must evolve marketing to focus more squarely on the value proposition throughout the product lifecycle, not just at launch. So many customers have yet to deploy our most recent advances, so we must not only help them understand why to deploy, but also demonstrate the benefits of deploying before we reach the Longhorn generation."
On perceptions of Microsoft: "We must also work to change a number of customer perceptions, including the views that older versions of Office and Windows are good enough and that Microsoft is not sufficiently focused on security. We must emphasize key positive perceptions of the strong manageability, and developer and information-worker preference, for our platform."
On avoiding the trappings of size: "Nothing solves 'big company' ills quite like a strong focus on accountability for results with customers and shareholders. Innovating, growing share and profits, and serving customers all ensure that we have no time for wasted motion. To do this, we need to prioritize the things that matter the most with our customers and for the company, and then be accountable for executing on those choices."
Microsoft made almost $10 billion in profits last year. If they can cut $1 billion in expenses, they will be making 10% more profits assuming they don't hurt their revenues in the process. Since investors tend to look at price/earnings ratios when deciding what a stock is worth, we might expect a 10% increase in profits to translate into a 10% increase in stock price. If you own large quantities of Microsoft stock options (as I'm sure everyone in Microsoft senior management does), you'll make a lot of money if the stock price goes up 10%.
Remember the days when Republicans were the party of fiscal responsibility?
It's increasingly tough to get funding for anything truly innovative because the investment community understands that Microsoft will "innovate" the idea into their operating system franchise if it has the potential to be successful.
Also don't forget, it's not just health insurance, it's physical office space, utilities, provided hardware (PCs/laptops, phones, pagers, etc), training, business insurance, biz expense accounts, and lots of other non-tangeables that go into employee costs. If you look at it that way, you can see how the numbers can add up.
'The unexamined life is not worth living' - Socrates
Unless of course they are top-heavy in the VP of VP department. Overlycompensated execs do tend to skew stats.
"Learning is not compulsory... neither is survival."
--Dr.W.Edwards Deming
The problem is the way they word the statistic, "$300,000 in annual expenses per employee." This could entail both fixed and variable costs, meaning that simply eliminating an average employee wouldn't shave $300,000 from the bottom line. If you're looking at employee-related expenses overall, SRC (Salary-related costs, such as benefits) would normally run something like 30-50% over and above the employee's salary. Of course, since they're in the Seattle area, who knows what their average salary is...
Stop by my site where I write about ERP systems & more
No shit.
I love this bit from the article:
Does Microsoft's midlife struggle signal that the glory days are over for tech? Not a bit. While industry revenue growth is slowing, there's still plenty of innovating to do. Microsoft just has to figure out a better way of going about it.
No, it means the rest of the tech world will go on innovating, and Microsoft will go on copying, and make money -- not insane shit-tons of money, maybe, but plenty of it -- just like always. They've never innovated anything; they've always made their money by being clever businessmen, not brilliant inventors. Nothing has to change.
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
28kg.
Twice the eye candy, and its so much more powerful, you get to reboot twice as often.
Maybe twice the eye candy... but Windows XP is just as stable as Windows 2000. I have it installed for my Dad and he reboots about once every 1-3 months. And thats only because of things such as software installation, etc.. but what version of Windows doesn't ask you to reboot after installing most types of software anyways?
You're missing the point. They've NEVER issued a dividend, and after 30 years they have only made, TOTAL, $6 per share.
Let's assume, just for a moment, that Microsoft has the potential in the future to make as much as it has in the past (I doubt this highly, but let's go with it). Let's also say that they spent their first 15 years in "growth mode", so they really made their $6 per share in the last 15 years. That means it will take at least 60 years for it to earn it's share price.
If you think that Microsoft is going to take off again and all-of-a-sudden go back into boom mode, by all means, it would be a great stock. But the fact that after 30 years it has only netted $6 per share for a $27/share stock, I think you're putting your money in the wrong place. Microsoft is way over-diluted, which is one of the ways they made such a large cash position.
Engineering and the Ultimate
Most larger US high tech companies have expenses of more than $250k per employee. This refers to taking the total expenses of the company (which not only includes salaries, but facilities, equipment, IT, benefits, insurance, ... everything) and dividing by the number of the employees.
Usually the average salary is about 40% of the expense. In this case average employee salary of about $120k. That is probably close.
I can believe it. The working conditions for developers at Microsoft are incredibly beyond anything I've personally seen at a company of any size elsewhere.
I did an interview there back when I was in college. Mind you, I didn't like a one of the people on the team I'd have been working with, but beyond that I was just blown away. Developers in large, comfortable, well-furnished (and, importantly, to their wishes rather than a corporate mold) offices rather than cube farms. Employee cafeterias which blew away any cafeteria or buffet-like restaurant I've ever seen.
For me, the really painful thing to pass up was the free beverage package. Sure, some of the places I've worked have had something like that. The words don't really describe Microsoft's setup. Imagine a huge wall of soda fridges like you'd see at most gas stations, except on a grander scale -- imagine they have every brand or flavor you've ever heard of, including some you were previously pretty sure they didn't make anymore. Imagine there's one or two of those on every floor on every building.
You can say a lot about Microsoft's business strategy, ethics, products, etc. But as far as working environment goes, it's hard to beat. They mean to provide an environment that no competitor (as in for hiring their developers away, not as in for the marketplace) can match. I can believe the high price tag.
Actually cisco was voted the best place to work in the UK. Microsoft was in the top 20 but not top 10 in the UK.
sPh
after 30 years of doing business, they have only made about $6 per share (which costs $27.89).
Actually, you don't read it right. Microsoft's stock has split 9 times, and 1 share in 1987 would give you 288 today. The value of one share on Sept 18, 1987 was $114.50, and the value of one share on Feb 14, 2003 was $24.96. Given that you would have 288 shares, your beginning value of $114.50 would have ended up at $7,188.48.
A quick trip to CNNMoney's Financial Calculator will tell you that's an annualized rate of return of 44%. The historical average of the DOW Jones is about 10%, the S&P 500 12%, and the NASDAQ about 14%. I'd say MSFT would have been a worthwhile investment until February of 2003.
MSFT's P/E is 40.76, while the S&P 500 is 19.4, definitely a much higher price to earnings. However, Microsoft was traditionally a growth stock, not a dividend payer.
Conclusion - MSFT may not be a great stock to own now, but it was a great stock to own for 16 years or more.
Saying Android is a family of phones is akin to saying Linux is a family of PCs.
Dude, I interviewed there too, and I'm sure we've got some others here who have, as well as some current and/or ex- employees. All I can say is: if you were that impressed with the drinks and food, I feel sorry for you. No, they did not have every flavor I ever heard of, that's your exaggeration. My local 7-11 is ways better, so your "grander scale" description is also BS. The food was okay, but to say that it "blew away any cafeteria" is simply ridiculous -- that is, unless you live on snails out in the woods or something. I mean, come off it. Get out of your bedroom more often and see the real world out there. Or maybe save up some money and take a trip to the city some day...
And it looks like you missed it: the point of all their free drinks and the food court theme is to keep you THERE and WORKING, as much as possible. No need to go out for lunch (even if a brief change of scenery would be refreshing), nor even a stroll to the corner 7-11 for a soda or Starbucks for a coffee.
Please tell me you are kidding - I'm no MSFT fan, but let's take a look up and down the balance sheet shall we?
According to MSFT's last balance sheet filing (3/31/04), they had current assets of 65 Billion. Now these are things that reasonably can be turned to cash if the need arose in fairly short order. So based on just that number, yes, they have about $6/share. However, the company also has about 25 Billion more in Long term assets (the building(s) they own, any longer term investments, etc).
Now balanced against that is about 19 Billion in liabilities, showing that the net assets of the company is about 70 Billion (also known as shareholder equity).
However, even using that value is a really bad idea for valuation. Unlike manufacturing companies, MSFT can't actually put its biggest asset on the balance sheet - it's intellectual property! GAAP say that only IP that is BOUGHT can be put on the balance sheet, and that which is internally developed cannot - take a look, and MSFT only has 600 MM in intangible assets. This means that the IP value of Windows, Office, etc, etc, etc, is nowhere on the sheet. Now, however much we may agree that they don't make the greatest software, you'd be hard pressed to find someone who thinks that having all that IP isn't worth some major bucks. Add all that back in, and the cost of MSFT stock doesn't look that bad at all. After all, do you think everyone who owns the stock is stupid?
Disclaimer- I do not own any MSFT stock, nor do I plan to buy any in the near future - index funds rock!
-nod- As is often said, I and Bill Gates make an average of 2 billion a year, each.
Bill Gates is paid no where near $2 billion a year from Microsoft though. No stock options either. He (and now Balmer) are actually some of the lowest paid CEOs.
C|Net: Gates, Ballmer get slight pay raises
CEO Steve Ballmer and Chairman Bill Gates each received $551,667 in pay and $313,447 in bonus last year, up from $547,500 in salary and $205,810 in bonus a year ago.
While Gates and Ballmer received no stock options, other Microsoft executives did:
We don't really work 60 hours per week anymore. Some chose to do so, and they do quite well for it. But many work 40 hours and do perfectly fine as well. I personally have done quite well in my first few years here, and I only work 40 hours a week. Like any software job, I have worked a couple of 50 or 60 hour weeks at deadlines, but by no means is this common.
That's an utter lie. I defy you to find anyone who is "forced" to work "60 hours a week" minimum at Microsoft.
Read the developer blogs over at blogs.msdn.com. These people love their jobs, but they all have vibrant social and family lives.
Maybe 5 or 10 years ago things were different, but I know by e-mail and by longtime friendship several developers across the MS board and NONE work a regular work week more than 40-45 hours. Around shiptime do they work some long hours and short weekends? Yes.
Here I am feeding a troll...
My local 7-11 is ways better, so your "grander scale" description is also BS.
I've never seen a 7-11 that had more than 2/3 of what I saw in the fridges in the Redmond campus. Your mileage may vary.
The food was okay, but to say that it "blew away any cafeteria" is simply ridiculous -- that is, unless you live on snails out in the woods or something.
You'll notice I didn't say it blows away every restaurant, because it doesn't. Every college/corporate cafeteria or similar eatery I've seen? Absolutely.
I mean, come off it. Get out of your bedroom more often and see the real world out there. Or maybe save up some money and take a trip to the city some day...
I've lived and worked in three major cities. I've certainly visited others. I'm not a world traveller, but certainly beyond your asinine accusations.
And it looks like you missed it: the point of all their free drinks and the food court theme is to keep you THERE and WORKING, as much as possible. No need to go out for lunch (even if a brief change of scenery would be refreshing), nor even a stroll to the corner 7-11 for a soda or Starbucks for a coffee.
No, I quite got that. Point is, it's something Microsoft does right that the vast majority of companies that employ programmers do wrong. Yes, it absolutely is in a company's best economic interest if I just grab a handy soda and go back to work without losing my train of thought, rather than walk or drive to get one. They make up the $0.50 for the soda in my greater than $0.50 value of productivity. I wouldn't be disallowed the choice to go out for a drink or for lunch if I wanted -- but I have that choice, I don't have to if I don't want to.
All things being equal, why would you not rather work for a company that makes smart, rather than dumb, choices in managing you and your work environment?
Correction: Microsoft has paid dividends twice in the past year and a half. The first dividend was paid Feb 19, 2003 (one day after the Feb 18 2:1 split), and was 8 cents a share (16 cents a share pre-split). The second one was Oct 15, 2003, and was 16 cents per share.
At 10-11 billion shares outstanding, the first payout was $800-880M, and the second payout was 1.6-1.76B.
You can verify these claims here (dividends) and here (outstanding shares).
Perhaps Gates knew exactly when the right time to leave was :)
He didn't exactly leave, but he could indeed see the writing on the wall. He handed off to Ballmer so that five years from now when Microsoft is a pale shadow of its former self, Bill will be able to say, "See, it wasn't me! This other guy came along and ran the company into the ground. How dare he betray me and murder my child!"
This is a completely misleading statement. The fact that Microsoft expenses options is a *Good Thing* and is something that all corporations should be doing in the wake of recent accounting scandals.
And by saying "MS doesn't pay any corporate tax" you are insinuating that it somehow is hiding revenue, which is ludicrous. Recently, MS stock options have been "underwater" so they have not been popular to exercise. But any money that *is* spent on exercised option discounts is written off as additional employee salary expenses, which it is (the number of options purchased times the difference between the option strike price and the cost basis is added to the employee's W-2 taxable income total). MS should certainly not have to pay taxes on employee salaries: the employees already pay taxes on their salaries! Making the company pay taxes on the same money would amount to double-taxation. This is how all companies handle their options plans, assuming they are expensed on their books. If not, then investors beware...
Now, whether this deduction alone can wipe out the total taxable corporate net income of Microsoft is a different story entirely. There would have to be a LOT of options exercised to amount to that kind of money, and in recent years it just hasn't happened. Back in the late 90's, it's possible. MS net profit was much smaller back then. Today, with MS stock price stagnant for 5 years and profits stronger than ever, there is no way that options deductions could come close to offsetting their tax burden.