Microsoft: The Faint Smell of Rot

happycorp writes "A business reporter for ABC/Fortune is asking whether Microsoft is poised to collapse, based on years of industry observation (with successful calls in the past, he notes) rather than purely technical considerations. A short read, with this favorite quote: "if you sniff the air, you can just make out the first hints of rot.""

Comments

Collapse?

[2advanced.net]

They've got enough cash in the bank to run the business for decades if they never made another cent ... They may not be the 800lb gorilla, but I don't know how you could possible predict a collapse.

Re:Collapse?

[Anonymous Coward]

Um, I bet the shareholders would like their money invested somewhere else if the company stopped making profit. That scenario of spending all the cash reserves to keep going for several years just for the heck of it thus isn't likely.

Uh huh

[0racle]

Apple and Sun will be gone by the end of the year. IBM will collapse under its own weight, Nintendo will be out of business any day now, BSD is dead....

Same crap, different company.

Re:Uh huh

[Brandybuck]

Everybody who works at MS in any capacity shares in the responsibility for their corporation does.

What has Microsoft done that other small and large corporations don't also do? Nothing. Proprietary software and nasty EULAs? A dime a dozen! Exclusive OEM contracts? De rigeur! Bundling? Everyone who can does! The point is, if you're going to insult someone who works for Microsoft, then you might as well snub others for working for Apple, Sun, IBM, Philips, GE, Verizon, Dow, Monsanto, etc, etc. Before you know, you won't even be able to walk into a bar for fear of meeting someone.

I'm glad you're perfect. Standards are great, and the higher the better. But place them on yourself not others, or you'll live in a very lonely world.

Assuming everything went wrong for MS ...

[vlad_petric]

A company that has more cash reserves than the GNP of a couple of Eastern-European countries taken together, is gonna take a looong time to fall.

Esp. when its flagship products are monopolies.

Rot = Market Saturation

[reporter]

Microsoft's plight is closer to market saturation than it is to rot. Consider what would happen to General Motors (GM) if it almost wiped out all of its competitors in the automobile industry and captured 99% of the market. The remaining 1% goes to the barely surviving competitors. In that case, GM's rapid growth will slow to a crawl. That crawl would essentially be just the sales associated with replacements.

The situation for Microsoft is somewhat worse than GM in our example. Consider Microsoft Word 6.0. Unlike an automobile that wears out, breaks down, and needs to be replaced, Word 6.0 has eternal life. It does not ever wear out. After you have used Word 6.0 for 15 years, Word 6.0 works just as well as it worked 15 years ago.

So, you have no need to replace Word 6.0 unless you want to upgrade. For most people, the upgrade is unnecessary because Word 6.0 already has all the features that you need.

Other software programs have the same "problem". Microsoft has so relentlessly added feature after feature to its products in order to capture most of the marketshare that most consumers now have no further need for additional features.

The only way for Microsoft to grow is to enter into other markets. Hence, you see Bill Gate's fist print in the gaming market as Microsoft pushes the XBox. Unfortunately for Microsoft, there is no guarantee of success in markets beyond the computer-software market.

As a side note, Microsoft will continue to invest heavily in R&D in order to enhance the likelihood of success in those other markets. I would not rule out the possibility of buying Bell Laboratories.

When you're the environment, not the competition

[Beryllium Sphere(tm)]

Microsoft is where IBM was in the old days. The excitement that lures glamor-seeking job applicants can't last when you've already grown to fill your entire ecosystem. Ditto the press buzz.

In other words, where Malone sees senility, he may actually be looking at maturity.

A simple prediction

[Saint Stephen]

In 15 years, employers will no longer expect your resume to be in Microsoft Word format.

I think Microsoft will become like J.P. Morgan: still huge, still important, but not what it was.

You can "collapse" and still be rich

[fm6]

They've got enough cash in the bank to run the business for decades if they never made another cent ...

Which means nothing to a publically held business. If you start to screw up badly, having a lot of cash actually works against you. Your investors are not going to let you squander your assets on a business plan that isn't working. If you're a small company, your investors may well shut you down, since your assets are worth more liquidated than they could ever be as a long term investment.

Of course, Microsoft is too big for that to happen. But "collapse" doesn't necessarily (or even usually) mean total disappearance. It more often means mass firings, loss of market share, plummeting stock price. As happened at SGI.

Speaking of SGI, I worked there during their waning days as a graphic workstation powerhouse. When people talked about where the company went wrong, a common theme was this: Wall Street fell in love with SGI and threw money at the company. All that cash helped them avoid measuring risks carefully or look for efficient ways to do things. By the time money ran short and it was obvious SGI had to reform, it was too late to claim a permanent place in key markets.

That's different from Microsoft, of course, since MS's pile of cash comes from their tithe on every PC sold. But the effect on corporate culture is the same. Cash can be toxic to a good organization.

Re:You can "collapse" and still be rich

[demachina]

If you mean the rather high value of their stock at the time they went on the merger binge with Cray, Alias and Wavefront it probably did fuel some insanity but I doubt it was the driving factor. At the time there was a lot of merger mania and the McCracken/Jermoluk management team was not a good one. I'm guessing Jermoluk was the one mentioned in the article who forgot the meeting with Fortune. He was a partier, and a hard charger, he had some charisma and some brilliance but he was also a flake much of the time and weak on strategy and vision.

SGI did make all the people that owned Cray, Alias and Wavefront stock rich because they bought them at a huge premium and most of those people dumped their stock right after the merger. SGI later sold both of them at huge writoffs(though they bought them with stock so it wasn't real money).

Cray was a basket case when SGI bought them. The one era when supercomputing rocked SGI's world was when the R8000 came out. It was revolutionary in having a lot of floating point and I/O in a cheap multiprocessor machine. It totally wiped out the bottom end of Cray's market. It was rumored at the time the government may have coerced SGI in to buying Cray because they didn't want Cray to go under because they were a still a strategic asset to the U.S. and certain agencies.

Unfortunately the one high value asset Cray had in the pipe was in a partnership with SUN, (what was the name?) Starfire, E-10000, something like that. Unfortunately SUN held the rights to it when SGI/Cray merged and it proved to be a raging success for SUN and totally hammered SGI in the HPC market right after the merger. It was irony that SGI got the smoldering ruin part of Cray when they bought them and SUN got the one Cray product that rocked, though its was SPARC based so SGI couldn't have made it work whatever.

SGI plunged into supercomputing partially because the R-8000 was such a success but they never matched that success in any subsequent product. The R-8000 totally messed up the MIPS road map because it was all floating point and no integer so it sucked in their workstation market. R-10000 was mediocre in both integer and floating point so wasn't a raging success in either. IA-64 is back to the R-8000 model great floating point on vector Fortran code but sucking wind at everything else. SGI can't win now because they have no viable CPU strategy at this point other than beg IBM for theirs or maybe jump on the 64 bit AMD bandwagon but I imagine their partnership with Intel precludes that.

It shold also be noted there was also a massive culture clash between the SGI and Cray camps after the merger, like there often is. They fought like cats and dogs, and knifed each other in the back at every opportunity, often in front of customers. It was a complete disaster of a merger and hastened SGI's demise.

As I recall Ed McCracken and Tom Jermolak were completely awed by the Cray name and all that impressive looking big iron and they bought the company using their dicks to do the thinking instead of their brains.

Right again

[jamesl]

On October 5, 2000, Mr. Malone predicted the end of Apple and the PC.

But with falling profits and plummeting stock, and having hastened the end of the desktop PC era, Steve Jobs has put Apple again in a precarious position.
http://www.forbes.com/columnists/2000/10/09/1005ma lone.html/

Microsoft may have a few years left too.

What truly compelling thing has MS done recently?

[bbahner]

Microsoft makes almost all of their profits on sales of XP and Office. I would argue that both of these products are adequate, but neither compelling nor great. Both continue to be successful because people must endure great pain if they try to choose any other alternative.

Lets list the other great applications or product categories MS has pioneered since the beginning of the internet era- the early 90's:

(sound of crickets chirping)

Where have they completely missed the boat?

1. The Web. If it weren't for Netscape we would all be using a closed, proprietary, for-pay MS network much closer to the old pre-internet AOL model than the public internet we have today. And since MS stole the browser market from them how much innovation has happened in the browser space? For all practical purposes - Nada! Hopefully the Firefox phenomenon will convince smart, hungry people that success can be had inovating in this space.

2. Search. Google is kicking their butt back and forth and truly innovating on a regular basis. I never realized how piss-poor the Windows search functionality was until I tried Google Desktop Search. It is a revelation to get results immediately that would take several minutes or hours of searching to find with the MS provided pap. And have you seen the other stuff coming from Google Labs like the new Maps? Great stuff.

3. Music. Tiny little Apple has single-handedly eaten Microsofts lunch on this one. Even though MS compatible players are (or at least were) far more widely available to consumers.

4. Gaming. The XBox seems like a contender, but only because it has been propped up by the profits from other divisions. MS blew it in the first generation - using PC components sealed their fate - the machine was too big for the Japanese market and too expensive to make a profit on. Xbox would have tanked long ago if the division was actually dependent on making money. Switching to G5 chips may help with those issues but will consumers buy a machine that isn't backward compatible? If the PSP is any indicator, Sony has not forgotten how to make hardware that inpires lust in the average /.er. And they know how to build hardware that they can sell *for profit*. The PS3 will own the next generation just like PS2 owns this one.

Please somebody provide a single example of something important that Microsoft has truly inovated with in the past decade!

Organizational paralysis?

[fbg111]

"Now the company seems to have trouble executing even the one task that should take precedence over everything else: getting 'Longhorn,' its Windows replacement, to market. Longhorn is now two years late. That would be disastrous for a beloved product like the Macintosh, but for a product that is universally reviled as a necessary, but foul-tasting, medicine, this verges on criminal insanity. Or, more likely, organizational paralysis."

Or, more likely, Windows, with its backwards compatability, integrated applications, and security flaws, among other design problems, is so sprawlingly complex that it is reaching the level unmanageability. IANAME (MS Employee), nor have I been, but I know they hire the best. If even teams of such people struggle for so long to produce a major upgrade to Windows, then that seems to me to be a sign that they're now dealing with an unmanageable monstrosity, rather than a sign of organizational paralysis. Not that such a distinction matters much to the author's argument, though...

Re:ABC Columnist Confirms: Something Is Rotting

[Jboy_24]

Interesting, I picked this key statement out of the quote you provided.

"If he was smart he'd do the same thing as NeXT. Remember, NeXT almost died, he managed to go sideways with it, establish it with a certain amount of prestige but not a lot of long-term potential, and sold it to Apple."

Jobs did go sideways. The columnist got it wrong tho, in that he thought that meant sell Apple. But Jobs' put apple into the portable music market and online distrubution of music. When that quote was written NO big companies were getting into portible music, probably afraid of a Music Disk situation. Without that, apple would be a fraction of the company it is, and headed for disaster. Its powerbook line has stagnated, desktops are a niche machine and its home machine can't play the hot games.

The Ipod saved all that, Malone smelt something, he just got the source wrong.

Re:Record profits

[vsprintf]

A well run company that initially succeeds and then fails will carry on making record profits right up until it starts going downhill.

Is it me, or does this sound a lot like 'A car will continue to coast until it stops moving'...

Perhaps it's more like Enron recording record profits until it collapsed. I'm not saying it's the same thing, but don't believe everything an accountant tells you. Keep your guard up. Record profits don't mean much if an IT company isn't spending much on research and development and is just coasting on licensing revenue.

Not for a long time

[Aeron65432]

Consider this. They have a monopoly (the Justice Department has said so) They have $55 BILLION dollars in CASH. To take an example, American Airlines lost about 300million this year. At this rate, Microsoft can keep on kicking for 183 years. And this is a bad scenario. If companies like Dell continue to patronize them, Microsoft will continue to post profits. As much as /. may want it, it probably won't happen. At least until we are dead.

It will be a slow decline

[Jeppe Salvesen]

Microsoft has as far as I understand two cash cows: Microsoft Windows and Microsoft Office.

Now both of those are being challenged by open software.

Microsoft Windows is being challenged by both Linux and Mac. Windows is still king, but Mac is gaining popularity and Linux is becoming ever easier to use. I think Windows will lose substantial market share over the next 3 years or so.

Microsoft Office is also being challenged. Open Office has come along nicely. A main threat here is the fact that users don't use more than a few percent of all the functionality within Microsoft Office. They pay for stuff they don't use or need. Once Open Office comes with some really slick templates and default fonts, I bet it will gain popularity. I think Open Office will start stealing license money in the not too distant future. The 2.0 release is coming up, and then that will become really good after a few minor updates.

Once profits decline for Office and Windows, Microsoft will lose a lot of its current freedom to waste money. They will need to be more focused. Given the impression they have a nasty case of infighting already, this focusing will not happen. They will instead continue to decline.

Re:ABC Columnist Confirms: Something Is Rotting

[demachina]

I suspect you are reading more in to the options thing that is really there. You see taxation and regulation is running against options and in favor of dividends at the moment. Options used to be practicly free money to hand out in previous years, but there is huge pressure now for companies to account for options since they dilute the value of shares owned by shareholders who bought them and previously were largely unaccounted for. Executives in particularly were massively abusing them to give themselves windfall profits, even if they weren't performing.

If you are a Microsoft employee I imagine you are maxing out your stock purchases lately and wanting cash bonuses to buy more stock.

You see, Microsoft paid out a $3 dollar dividend in December. It single handedly raised average income in the U.S. by 3.7% in December, without the dividend it would have been 0.8%. Though it should be noted that is an average, chances are the lion's share of it went in to the pockets of a few people, Gate's, Balmer, Allen, etc.

You see the Republican's passed a dividend tax cut in 2003 I think it was. I'm a little hazy on it but I think the tax on dividends is 0% at the moment. Just remember that if you work for a living when you see all those massive deductions out of your paycheck you can't escape. If you make $30K a year you are still probably paying 30% in withholding and payroll deductions. If you're Bill Gates at the moment you can pay billions of dollars to yourself in dividends and pay almost no taxes. Here is what Warren Buffet had to say about it when the Republicans were shoving it through.

The Republican argument was dividend taxes were double taxation, because the company paid taxes on it when the money was made and it was unfair to tax it again when it was paid out as a dividend. The little catch they didn't mention was big corporations exploit so many loopholes in the tax code, and take advantage of so many shelters they often don't pay any taxes in the first iteration.

If you were to go the options route you would pay a big chunk of the windfall of cashing them in capital gains taxes, not as much as you used to but a lot, compared to the 0% you pay on dividends at the money. Its pretty rare in the country to be able to make money and not pay any taxes on it. Bill Gates is not stupid, its pretty obvious now is a GREAT time to dole out all that cash in Microsoft's coffers as dividends, tax free. The dividend tax returns in 2007 though Little George is no doubt going to push to make the cut permanent.

Much of the recent economic "prosperity" is being pumped by tax policy that is letting the wealthy make out like bandits. The current tax code is a huge economic stimulus and that is good to pull an economy out of a recession. It is bad because its leading to huge deficits, and it is MASSIVELY unfair to working people who are getting chump change for tax incentives while the rich are harvesting huge windfalls, some of which they may reinvest in the U.S. and U.S. jobs, much of which is probably being invested in China, India, etc. or being blown on luxury goods.

You can sure tell when Republican's have complete control of things, because it is TOTALLY sweet to be a wealthy shareholder and it totally sucks to work for a living. The amazing thing is millions of working people who are being totally screwed by the Republicans, economicly, keep voting for them anyway. Republicans have some true genius, because they can sucker working people in to voting against their own economic interest by using wedge issues and scare tactics like terrorism, gay marriage, abortion, religion, etc.

A glacier always gets to where its heading

[saddino]

The collapse has been evident, and although it's surprising to see someone go out on a limb, I think those in the know have felt the tide turning for a while:

1) Stalled growth. The stock price has flattened. MS has thrown out dividends to keep investors interested, but the stock is played out.

2) Tapped markets. Financials show a disturbing trend: the only operations in the black are the Windows and Office units. Despite relentless spending in R&D, acquistions and experimental to expand their market (MSN, WebTV, etc.), nothing seems to pan out.

3) Apathetic customers. Inability to move entrenched (NT, 95, 98, ME) users, especially business users towards new products. The threats to drop legacy OS support have always ended in retreat -- and for a company as powerful as MS, those actions betray their ultimate dependence on Windows sales to stay alive.

3) Longhorn. For a company that makes so much of its money in OS sales, the inability to deliver a next-generation OS on time and as promised (Avalon, Indigo, WinFS moved out either to bolt on to XP or "for the future") is not an indication of engineering failure, but instead management failure. MS is too large to turn on a dime anymore.

4) Security. This is the death knell, and truly the slippery slope that Apple and the Linux community will use to the most advantage. If you can't get your customers to upgrade to a faser OS (see 3), then you're doomed to see them suffer the fate of today's spyware, malware, trojan and virus ridden reality.

5) Dubious "initiatives." IPTV? Tablet PCs? Wired watches? Again a management failure. Someone needs to keep their "visionaries" on an even keel.

And you can add to this list for a long time. Do one or two of these things signify the end of MS? No, but the trend is clear and the "end of MS" meme is gaining momentum. MS has finally become IBM of yesteryear. IMHO, their pathetic "grasp" at Google's share makes this clear.

When a company throws the term "innovation" around like rice at a wedding, you know that's the thing they're most nervous about.

Re:ABC Columnist Confirms: Something Is Rotting

[BasilBrush]

Apple didn't get where they are today through holding on through the black times. Apple had black times because they sacked the CEO that had all the ideas, and re-emerged from the black times because they hired that CEO back again.

Microsoft is beginning to rot with it's founders still there. They don't have a Steve Jobs to bring back.

Re:ABC Columnist Confirms: Something Is Rotting

[fymidos]

>having 1/10th of a TRILLION dollars in the bank
>before the large dividend

actually this was the first sign. They had 80 billions in the bank, why didn't they throw 20 billions in R&D to get loghorn out in time ??? Instead they lost 4+ billion trying to get a piece of the home entertainment market with xbox.

The stock is stagnant because the whole company is. There is absolutely nothing exciting going on in redmond these days: When linux started gaining market share their reaction was to double their marketing budget, as "their message wasn't coming through". Not R&D budget, *marketing*. And it's getting worse. They are still cutting R&D expenses, while loghorn is 2 years late. A company that is run by accountants IS rottent in IT industry.