Motley Fool Writes Off Microsoft

The Vista disaster has caught Wall Street's attention before but I've never seen the popular press understand the issues like this argument in the Motley Fool. The opposing argument is a weak statement of faith, essentially "as it was in the beginning is now and forever shall be." "You don't need to watch the 'I'm a Mac, I'm a PC' commercials to see that Microsoft is taking a beating. You see it in the company's financials where its online unit, incredibly, is operating at a loss; overheating Xbox 360 consoles find the company taking a huge warranty hit for a system losing market share to the Wii; and the upgrade wave of its flagship operating system has been more of a ripple than a tsunami. That last point is important. This was supposed to be Microsoft's final feast, the major last hurrah for its Windows Vista operating entry and its Office 2007 suite of applications before the inevitable embrace of cheaper open source operating systems and Web-based apps... In fact, even Microsoft will tell you that its fortunes peaked several months ago."

Comments

Most interesting part of article...

[je ne sais quoi]

I read the bull and bear arguments, whatever, they're both waving their arms. The most interesting part I saw was in the bear rebuttal:

MS Cash and Short-Term Investments
6/30/04 $60.6 billion
6/30/05 $37.8 billion
6/30/06 $31.1 billion
6/30/07 $21.1 billion

Notice a trend? It would seem that MS' me-too policy (Xbox, Zune, live search, etc.) over the last couple of years has been pretty hard on their cash reserves. I think if they can turn a profit on these things it will have been worth it because $60 billion of cash reserves sounds like too much.... but if that trend continues, we'll see MS in debt by the time the coming recession is over.

He's right, you know.

[Simon Brooke]

OK, I'm old enough to have been in this industry when IBM were as dominant as Microsoft are now. We didn't see them start to slide, either. We were only aware that IBM were falling when their decline was already well advanced and unstoppable. I think we're in that position with Microsoft now. Why?

We're heading for a recession. The rebuttal to the FA says:

Sure -- Microsoft's dependence on its Office and Windows products makes it vulnerable to a slowdown in business spending. Then again, GE's power turbine and aircraft engine businesses are vulnerable, too. When the economy turns south, virtually every company is affected in one way or another.

That's true, of course. But GE's customers can't download an open source aircraft engine for free. Also, and significantly, aircraft engines wear out. If the airlines want to keep flying at all, they have to continue to buy spare parts, sub-assemblies, refurbished engines and, from time to time, new engines. No matter how tight the economy gets, unless all GE's customers go belly up, they will have to continue to buy parts - and GE can at least hope to get some of that business.

As the economy tightens up, one of the things that happens is people start looking at where they can save some money. Software does not wear out. Software carries on working just as well as it did when it was new, until the hardware platform which supports it wears out. And even then, it can usually be transferred to a new hardware platform. So as the economy tightens up, people simply stop buying new software. Where's the need to upgrade, when the software you have works acceptably well?

There are fewer reasons to buy software in a recession, anyway. The total number of seats is not increasing - most companies will be laying off staff. And hardware upgrades which had been planned will be put off, so there will be no need to buy software for new hardware...

And if people have to get new software for one reason or another, for every significant profitable product in Microsoft's inventory, there's a free alternative. Not 'cheap', free. Usually, of as high quality as the Microsoft product or higher. Increasingly, as easy to use as the Microsoft product. The tighter the economy gets, the harder it becomes to justify choosing 'expensive' over 'free'. Furthermore, unlike GE's competitors, Microsoft's free competitors are not subject to the normal rules of the financial market. they can't go bankrupt. The recession will not hurt them much - it is more likely to help them.

I won't hide the fact that I think it's bad for this industry to have one dominant player, be that IBM, Microsoft or Google. I didn't mourn IBM's fall and I shan't mourn Microsoft's. But I don't think you can any longer pretend it isn't happening.

It's neither.

[babbling]

I doubt Vista is a huge flop or a tremendous success.

What's much more interesting is the cash reserves. Dropping by over $10 billion per year? Really?! Are those numbers accurate?

Re:Who thinks The Fool is a good source?

[moderatorrater]

It was a debate. While slashdot wrote off the rebuttal, it's actually a well written and well thought out argument. Also, you'll notice that Microsoft is an inside value pick, meaning it's a safe bet stock because it's undervalued compared to it's debt, earnings and holding.

The arguments boil down to one guy saying that you're an idiot if you think that Microsoft is going away, the other one says that Microsoft is on the decline, and since it's not the big winner it's a loser. In my opinion, they're both right, although the one saying that Microsoft is a loser takes the longer look and, therefore, more risk of being wrong (what happens if the XBox becomes the PS2 of this generation of systems?). Slashdot got this one wrong, not The Fool.