Microsoft reported Q3 results yesterday and they weren’t pretty – the first ever drop in overall revenues compared with the year ago quarter and online revenues down 14% were the main lowlights, although good news was thin on the ground. I will leave the detailed commentary to others more qualified, but it looks to me like this beast is in terminal decline and won’t escape without some very radical change, which probably means new leadership.
First take a look at what their share price has done over the last five years:
This isn’t the picture of a company that is moving forwards. It isn’t much different to other old school tech giants like IBM and Oracle, or even the NASDAQ over the same period, but it is a story of a company that is moving sideways.
To their credit Gates and Ballmer have long recognised that they need to re-orient the Microsoft around the web, and have tried to use the huge cash thrown off by their core software franchises to do that. However, there isn’t a single web sector that they dominate, at least one that I can think of, and it looks to me like Windows and Office are at the start of what could turn out to be a pretty steep decline.
As successive generations of Windows underwhelm open source alternatives make steady progress, particularly in the high growth netbook area (the Microsoft offering for netbooks is still XP!), and at the same time Open Office and Google Docs are effective low end competitors for Word and Excel – so no good news on the horizon here.
And as I said at the beginning their online business is performing terribly as well. They are nowhere in search, their social media story doesn’t go much beyond an over-priced investment in Facebook and the chat that I hear suggests that aQuantive the display ad business they acquired last year for $6bn isn’t prospering under their ownership. At 14%, the decline in Microsoft’s online business over the last twelve months is worse than Yahoo!’s 13%.
It is hard to see what they might do to engineer a turnaround – so cue some more over-priced M&A and investments.
With AOL, Yahoo! and MSN all looking weak we are left with Google as the only strong player in this market, which doesn’t strike me as healthy for the world economy, but is likely to mean there are more opportunities for new companies.