I do not think the puzzling conjunction of Microsoft’s rising profits and declining stock price reflect investor pessimism about its principal products—the Windows operating system, the Office Suite (Word, Power Point, and Excel), and servers for large users. There will continue to be a heavy worldwide demand for them. The laptop and desk computer are not going away; they will continue to be indispensable in enterprises of all sort, public and private, individual and corporate, all over the world. And there is no compelling objective reason why Microsoft should lag in improving these products sufficiently to maintain its market share.
No reason, and yet the decline in its stock price suggests that investors are dubious. The problem is not that Microsoft has failed to achieve success in the hot new areas of mobile devices and of search, but that the failure strikes many investors as symptomatic of a more general problem, identified by organization economists such as Clayton Christensen of Harvard. And that is the difficulty that large, established, successful enterprises have in adapting to rapid changes in their markets. The number of large successful computer companies that have failed or (like Hewlett Packard) are struggling is quite
markable. The list includes (among the better known) Atari, Burroughs, Compaq, Control Data, Data General, DEC, NBI, Netscape, Prime Computer, Remington Rand, Sperry, and Wang.
What makes the computer industry so unstable from a producer standpoint is not only or even mainly the rapidity of technological change, which characterizes a number of other industries as well, but the rapidity with which a start-up can become a major producer because start-up costs in software and other computer-related business innovations are so cheap. Teenagers attuned more sharply to emerging tastes than adults, let alone middle-aged business leaders, can become formidable competitors of established businesses, seemingly in minutes. Smart teenagers become proficient in computer programming, are instinctively knowledgeable about the tastes and need of their contemporaries, and are able to raise the modest amount of money necessary to demonstrate the feasibility of their innovations.
What makes the young computer entrepreneurs so formidable is that established firms, especially successful established firms, such as Microsoft, which made Bill Gates the wealthiest person in the world, cannot adapt rapidly to market changes in the computer-Internet-social media world. It’s a bird in the hand, two birds in the bush, problem. Microsoft is very successful with a certain type of product, namely software designed to meet the work needs of professionals and businesspersons. Microsoft’s corporate culture, organization, leadership, and personnel are all optimized to improving,
producing, marketing, price, and servicing that type of product. It a huge organization. It has 100,000 employees. What is it to do with them, who are the successful core of its successful business, if it tries to transform itself an Apple, a Google, a Facebook? Erect a new business beside it—a start-up staffed by brilliant unruly college drop-outs? Can one see a Bill Gates type or a Steve Jobs type as Microsoft employee number 100,001? What kind of fit would that kimd of employee make with the company’s existing staff?
Large firms are organized hierarchically; it is the only way top management can exercise effective control. New ideas move slowly up a ladder of successively more senior supervisors. Because they are senior, older, experienced, they resist change, espcially change that may diminish their value to the company, or provoke turf battles with other divisions of the firm. They suffer from bureaucracy.
Yet the problem of adaptation to change is not limited to large companies. Small companies are nimbler, but also more fragile, and so equally or more reluctant to cannibalize themselves in order to move into a more promising business. It is start-ups that are most likely to embrace new, disruptive technologies—they have little to lose.
The tendency in economics is to think of corporate costs in opportunity-cost terms. A forgone opportunity is a cost measured by the profit that the opportunity would have yielded. Failure to exploit a promising business opportunity is like failing to pick up a $10 bill that you see lying in the gutter. But the individuals who make up a large organization tend not to think in opportunity-cost terms. They are not worker ants. They are individuals with their own utility functions. And one of the arguments in their utility functions is risk aversion. They weight a loss more heavily than an equivalent gain. They’d rather go with the office consensus, even if they think it wrong, because if everyone is wrong no one is blamed, than go out on a limb. Not all business people are risk averse. Entrepreneurs are not. But middle managers in large, established, successful firms are risk. They are doing well. They don’t want to rock the boat. Bureaucracy and the bureaucratic mentality are not limited to government agencies.
It would take a remarkable person to change Microsoft’s business culture. Investors apparently think it unlikely that CEO Ballmer will be succeeded by such a person. And apparently they fear that Microsoft’s established products, profitable as they are, might someday soon be subject to the same wave of creative destruction that has challenged so many computer companies and destroyed not a few of them.
You start with the wrong premise.
The PC market is expected to be 315.4 mil units in 2013 according to IDC. in 2011 sales were 359 mil units. IDC expects the market to decline next year and have minimal growth beyond that , I expect growth to never return to the old form factors.
Some organizations and users might always need a keyboard but new form factors can also host a keyboard and the hardware it's pretty much there,the software isn't.The need for a keyboard will also be lower and lower , just a few days ago a Microsoft researcher was talking about the topic .ARM chips are powerful enough to replace low end x86 chips but Android ,iOS, Blackberry and so on haven't pushed hard enough (yet) for their OSes to better scale on bigger screens.That could change and we already have more and more devices with Android going bigger, there is Chrome OS and soon the Ubuntu Touch.
Apple doesn't compete in the sub 1000$ laptop category at all and the vast majority of laptops sold are in the 300-700$ range,if Apple had a 600$ laptop (they should do that and might do that soon) they could double their market share.
Many internet users in developing countries might never buy a traditional PC,they use the new devices and that's all they need.
You also have glasses emerging as a segment. Things like Google Glass and Oculus Rift, 2 very different devices that should converge soon enough and Microsoft is not ideally placed there.If glasses start to replace big screens , like monitors and TVs, it could be a major problem for Microsoft in a few years.
In server Microsoft has been losing share for a long time now and this is before the ARM attack on the segment starts. ARM chips will run on Linux and Microsoft's share in server could decline quite fast in the next few years.
As for Office , there have been no reason what so ever to use it for quite some time now when you have free (or cheaper) alternatives like Libre Office or Google Docs/Drive. Somehow Office is still selling, in enterprise change is difficult and Govs are easily corrupted. In Europe many Gov entities moved to free, open software it's cheaper and there is room for many more to do the same. In the US Microsoft's " marketing "is stronger so this trend is yet to start for the most part. For home users Office sells mostly because it comes bundled with the PC, something regulators should maybe look into.
Bing is loosing a lot of money , it's a pretty poor product and not gaining much traction. Consoles are loosing a lot of money and it's a dead segment.
Windows RT failed (for now) and it will be an uphill battle to make it relevant.
Windows Phone is gaining some share but slow and not much and it's all on Nokia, without them the OS would be dead in the water.
So Microsoft is endangered, they do have a lot of resources and they do have a few years before it's too late but there is a high risk for them to fade into irrelevance.
The stock price is quite high given the medium and long term prospects.Microsoft an Intel can be another Kodak so i'm always amazed that the stock is not at 20$.
For now they are trying to mask the decline with higher prices for Windows but that's not a long term strategy and customers are more motivated now to jump ship. They also seem to have included their tablets in the Windows division results and that distorts a bit the results for that division.
They alienated their partners by launching their own tablets, since they did that a few of their biggest customers launched Chrome OS products and are relying heavier on Android too.
Posted by: Jjj Jjj | 09/02/2013 at 01:10 PM
Office and Windows have been amazing cash cows, but both of these are expected to be on the decline. Microsoft knows this and they have been trying to establish replacement revenue streams. Fortunately, the decline of Office and Windows revenues hasn't happened yet, their profits are excellent for now, but there's a lot of skepticism that Microsoft will be able to successfully replace Windows/Office revenue with revenue from new products.
Posted by: Clayton Wohl | 09/02/2013 at 03:47 PM
Correct me if I'm wrong, but the last time we had a "Communications Technology Revolution" of this scale was when we moved from Telegraphy to Telephones/Faxes. And the decision was made then to create a public regulated monopoly and utility. This allowed the Industry to create efficiencies and economies of scale unknown at the time. Some of these effciencies and economies created, but not limited to, systems standardization and integration, hardware standardization, operational standardization, transmission standardization, single source investing, to name just a few. And the end result? A communications system the envy of the World.
What do we have today? A system that is incredibilly wasteful, inefficient, and essentially non-operational due to it's lack of standardization, operability and full systems integration...
Posted by: Neilehat | 09/04/2013 at 08:34 AM
Microsoft's dilemma is more fundamental than any of this. The earth is of a limited size, and there is a certain population which is increasing in size but not nearly as fast as a "growth" company wants to, and so there is a ceiling - not quite static but calcuable - to the aggregate production (and consumption) of mankind.
If you start with a penny and double it every day for a month, you end up with millions of dollars. Similarly, a company can only double in size so many times. When you already have 51% market share in a market of fixed size you cannot double your market share. When you are already the largest company in the world, you can buy other companies but that's not really new production.
Judge Posner does hit squarely on the psychological barrier to dramatically increasing already large wealth - Microsoft got fat and happy early, and their once-young guys are now gray beards hanging on for a comfortable retirement, content to wait out their days wearing their golden shackles. As Warren Buffett said of marrying for money, "It's probably a bad idea in any case - but it's really stupid if you're already rich."
Neilehat, to which "system" do you refer? Maybe it's just me, but I generally have no trouble making phone calls, even to other countries, and it's twenty-fold cheaper now than it was back in '84 - though there was a rough patch there... Monopoly is efficient by definition, in that it eliminates duplication. The Soviets had that in mind when Stalin put out his five-year plans. We on the other hand had more than one private company competing to produce better products to serve the same market, and the benefits of that competition dwarfed the waste of the overlapped effort.
Posted by: Terry Bennett | 09/05/2013 at 09:47 PM
Terry, Your comment proves the point. The reason the "phone" system works reasonablly well is because of the "monopoly" status granted to AT&T, Ma Bell, Western Electric and the innovations that came out of Bell Labs... As for today, ever tried to get Apples and Microsofts, etc. etc., to work together properly?
Need I say more?
Posted by: Neilehat | 09/06/2013 at 08:07 AM
I understand your point now.
Posted by: Terry Bennett | 09/06/2013 at 07:29 PM