Van Knapp’s Take On Microsoft

Continuing our recent look at why Microsoft has grown its business but not its stock price under Steve Ballmer’s leadership, here’s an installment from Dave Van Knapp of

After I read your article on Ballmer, and your readers’ responses to it, I looked up MSFT’s numbers…revenue growth, profit growth, P/E, all the usual stuff. Blended together, they seem to make a case for SCREAMING BUY! But then, as I always do, I asked, “How’s it doing?” And you had already answered that: MSFT has been dead money for eight years or so.

You personalized that with Ballmer’s tenure, concluding “no innovation, no growth, and Google’s eating their lunch.” But MSFT’s growth numbers don’t lie, there has been strong growth. However, as you pointed out yesterday, the P/E has shrunk, with the net result that the stock price is about the same as it was eight years ago.

I’d like to offer some points that have been overlooked in the discussion so far:

  • When MSFT was growing as fast as Google is now, let’s not forget that they were cheating. I’m not referring to taking others’ ideas and marketing them better, that’s not cheating. No, they were breaking antitrust laws left and right. They made an art form of anticompetitive practices. They have been convicted by the U.S. government, several states, and Europe. I think (after years) they finally have settled everything on this side of the Atlantic, but I believe they may still be trying to settle a few charges in Europe. That’s how they built their huge moat. As long as a significant part of the game stays the same (i.e., business software), they are going to continue to grow, because they dominate that sector and are essentially impregnable within it.

  • Their cheating — along with some innovation, more copying, and great marketing — gave them an essential monopoly in business software. Their operating system, Internet browser, and essential office products (like Word, Excel, and PowerPoint) all became industry standards. Except in a few niches such as graphic design and education, they completely swamped Apple. That gave them huge network-effect advantages. It doesn’t matter that people don’t line up overnight to buy Vista. What matters is that Vista is installed on all new PCs except Apple’s.

  • MSFT out-maneuvered Apple in another way, and it was brilliant: They made their systems available to all computer makers. Remember when “PC” meant only the personal computer made by IBM, and all others like it were called “clones”? That’s because IBM hooked up with MSFT first. Apple (except for a brief flirtation) closed themselves up and did not allow clones. They insisted on forcing users to buy their computer if they wanted Apple’s (superior) OS and other programs. Apple boxed themselves in for years with this fundamental strategic mistake.

    I worked in huge companies, and there was never a question about buying Apple products. We had to have the business standard. The only question was who made the best/fastest/cheapest computer, and there were lots of choices. They all worked together. None worked with Apple. The IT choice was a no-brainer: PCs with MSFT software. This also contributed to MSFT’s moat, and they deserve credit for a masterful strategic move.

  • Another area where MSFT out-strategized Apple was in their partnership with Intel. Remember “Wintel”? It’s only in the past couple years that Apple has used Intel processors, and it has been one of the keys to their resurgence in PCs (a term that is now generic, not referring only to IBM products).

  • Meanwhile, MSFT was beaten down by Google in paid search, not just in search. MSFT tried (as did Yahoo and many others), but Google hit on the winning formula, tying ads to search results in an appealing and effective way.

    It’s Google’s strength and also their greatest vulnerability. I think more than 95% of Google’s revenue comes from paid search (AdWords and AdSense). Google essentially did an end run. While others were trying to become “portals” to the Internet (which usually meant keeping you on their own site for as long as possible — AOL, MSN, Yahoo, etc.) — Google recognized that a simple search of the Internet was what most users wanted. That allowed them to take advantage of a ridiculously simple interface, which many found superior to the portals’ hodgepodges. Google gets huge innovation credits for that, although it can be argued that appealing paid search is their only successful commercial innovation to date.

  • Google ideas that you are touting — such as Google Apps — have been around for years. (They were formerly called ASPs…application service providers). Google has no lock on winning that race, if indeed there is a race.

    Just in the past couple of days, I have seen Microsoft ads for their version of Internet-provided workspaces, just like Google Apps. Adobe has been doing it for a long time. There is no guarantee that working on the Internet will supplant working within one’s own PC…although I personally think that will happen. I do know that there are many professions — doctors and lawyers come to mind — that have yet to come close to the trust needed that they would place their clients’ confidential information “out there” on the Internet.

    Every time Google (the inaptly sloganed “do no evil” company) pulls a stunt like scanning and publishing copyrighted material, or publishing “geographic” photos so detailed that men can be identified walking out of strip clubs, they hurt their own cause in regard to Web-based applications.

What’s the bottom line? I sold my MSFT 8-9 years ago when they were adjudicated to have violated antitrust laws…I happen to have strong feelings about things like that. I’ve never been sorry. I think the stock was about $31 when I sold it, and I don’t believe it has ever re-attained that level.

Maybe it’s paid its debt to society and is worth a look again. As I said earlier, it’s a cash machine that apears to be a screaming buy. But I wouldn’t buy it until it turns upward. As you said, there’s something the market doesn’t like about the stock or its prospects. Maybe it is Ballmer. (Those clips were priceless!)

It may be as simple as the realization that the monopoly power behind Microsoft’s early success is waning. It’s not gone yet as the business results show, and I suppose the company could post respectable numbers on just the fumes of its earlier achievements.

But when the future of computing is seen to be Internet-based, and Microsoft is seen as having bungled and continuing to bungle the Internet, then Microsoft’s future appears cloudy.

For instance, while many people are not eager to put confidential information online yet, the fact that more and more people do it every day for free is itself a cause for concern. Between, Google Docs,, ThinkFree, Zoho, and whatever else is in the works, there are a lot of ways to get work done without paying through the nose for MS Office. Perception: users don’t need Microsoft to do work anymore.

Browsing the Internet is best handled by Firefox, and that just gets better every year — for free. Perception: users don’t need Microsoft to get online.

The Internet has quickly rendered compatibility issues moot (unless you’re still tethered to Microsoft’s proprietary formats), which means that more people are for the
first time free to choose Apple’s elegant products for their computing needs. That makes Apple’s non-open platform strategy finally sensible because if you want an Apple computer you have to get one made by Apple. Perception: users don’t need Microsoft Windows on their new computer.

And on and on. So far, even though people don’t need Microsoft across these and other categories, they’re still ending up using them or choosing to use them. For investors, though, the lack of need means that eventually Microsoft will need to prove that its products stack up to the competition, and win loyalty on merit rather than monopoly — and it has a poor track record there.

Microsoft is not known for its innovation or quality, it’s known for its business acumen at boxing users into having only one choice: Microsoft.

When that list expands to include others, Microsoft loses its edge. The perception that the list of alternatives to Microsoft is growing in all categories and that Microsoft’s edge is dulling may be the dim future that has investors hesitating to pay much for the company’s business results.

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