Monday Note

Lots of earnings reports this week, mostly good ones. Apple did better than expected, even by the most enthusiastic earnings seers, so did Amazon whose shares went up 26.8% today, adding more than $10B to its market cap in one day. I’m happy to see a quality company, one that treats its customer better than the vast majority of short-term oriented businesses, reap rewards for a combination of long-term vision and everyday attention to detail. We’ll get back to Amazon in a future Monday Note, when we discuss the flurry of e-book readers.

You might have heard Microsoft just launched Windows 7 this past Thursday, to good reviews and newish Apple ads, more installments of the ‘I’m a PC, I’m a Mac’ age-old campaign. The gent who plays the PC, John Hodgman, is much more than the character he’s become known for. See the speech he wrote and delivered at the June 2009 White House Correspondents dinner: he roasts the newly elected Barack Obama, calling him the first nerd president. This YouTube video won’t bore you, I’m not sure I can say the same for the latest, somewhat repetitious Apple ads.

As for Windows 7 itself, I haven’t updated any of the four candidate computers I mentioned last week. In part because I want to hear from early upgraders before I take the plunge, I still have the expensive and painful memories of being a Vista early adopter in 2007. I was the first one in line at Fry’s, in Palo Alto, at 8:00 am on January 30th — and proud of it. When the door opened, I turned around and saw I was also the only one in line. Instead of taking the hint, I forged ahead, bought a big HP laptop and the full Office 2007 Professional DVD. I had grown reasonably adept at running Windows Xp machines and couldn’t imagine how painful the Vista experience would turn out to be. I’m more careful, this time.
There is also the money. Upgrading the four machines, including a first install on a Linux netbook will cost me about $800, plus some application software, plus my time. Upgrading five Macs in my family cost me $49 and not too much time as the process was, for me at least, uneventful.
(This said, I plan to write a few short subjects on strange bugs, UI caprice or ergonomics non-sense in Apple’s products. Being a polite optimist, I’ll marvel: if the products sell so well in spite of these kinks, imagine what would happen if these problems disappeared!)

We’re now turning to Microsoft’s quarterly numbers. They weren’t as bad as Wall Street feared and, as a result, the stock went up. Sales (revenue) reached $12.9B, down 4% when compared to the same quarter a year ago. In a depressed economy, that’s a very decent result, especially when you consider the inevitable delay in purchases prior to the Windows 7 launch. An even more impressive number is cash and cash generation: Microsoft added $5B to its cash reserves in one quarter, not one year, to reach a total of $36.7B. For all the criticism of Microsoft “falling behind”, for all the barbs thrown at its cheerleading CEO, such numbers are the envy of the high-tech world. No matter what critics say, Microsoft is showing tremendous staying power, it has the means to weather many more storms and still come ahead.

And yet… There is this feeling Microsoft is sustained by its Enterprise franchise (Windows + Exchange + Office) but fails to make headway anywhere else. For example, its on-line activities lose almost as much money as they bring in revenue, $490M in revenue, down from $520M a year ago, with losses of $480M, up from $321M the same quarter last year. This says, roughly, that, on-line, Microsoft spends $2 for each $1 of revenue.
Even more mystifying, Microsoft’s position, real and “official”, in the Mobile Internet space.

Take a look at the following three slides from Mary Meeker’s presentation at the Web 2.0 Conference last week, full 68 pages PDF here, worth your bandwidth. (The old fogies with some memory left will recall Mary Meeker gained unwanted fame when the Internet Bubble burst. She was vilified, but not indicted, for her unrelenting promotion of Internet stocks. She recovered and stands as a very respected Wall Street analyst, a Managing Director at Morgan Stanley.)

First, the computing cycles, a quick recap:

The explosion, the number of devices involved with each cycle:

And, finally, for each cycle, the speed of adoption:

Two conclusions from these three slides (and, trust me, the other 65 are also very meaty): what Meeker calls the Mobile Internet is the fastest accelerating computing cycle the world has witnessed. Further, it’s going to be larger than the cycles before it, see the second slide, 10B units or more.

Back to Microsoft, they’ve been “at it” for more than 9 years, Windows Mobile, the child of Windows CE first appeared on a Pocket PC in 2000. (See the somewhat slanted Wikipedia history here.)
According to this August 2009 Mobile Metrics report, Windows Mobile market share went from 7% in February 2009 to 4% last August.
Last year, at Walt Mossberg’s All Things D conference, Steve Ballmer predicted a 40% market share for Windows Mobile in 2012, this after repeatedly calling the iPhone a “passing fad”.
(Bill Gates did the same for the iPod in 2005. He was a tad more prophetic, but not in Microsoft’s favor, when he concluded that “mobile phones with an ever-growing list of multimedia capabilities as being one of the biggest threats to Apple’s portable music player domination.” Right, that’s why Steve Jobs introduced the iPhone as the iPod of mobile phones.)
Ballmer keeps going: in a TechCrunch interview, he contends that “non-niche” products need to be “north of 300 million [units] a year”, explaining that iPods, for example are niche products. He then moves to making his main point: when volumes reach 500 million or 1 billion units “the software that’s gonna be most popular in those phones is gonna be software that’s sold by somebody who doesn’t make their own phone. And, we don’t want to cross the chasm in the short run and lose the war in the long run and that’s why we think the software play is the right play for us for high volume, even though some of the guys in the market today with vertically oriented solutions may do just fine.”

In other words, RIM, Palm and Apple might do fine for a while but Microsoft will win when the 1 billion unit game really starts.
How Microsoft expects to win against the free and open Android, supported by god-rich Google, Ballmer doesn’t say.
The present is unimportant, anecdotal, the future belongs to us.
In a way, I admire Steve Ballmer’s consistency, deny, deny, play the Jesuitic Holy Effrontery game, an established Microsoft strategy. Another example came up last week when Ballmer said this in an AP story:
“Let’s face it, the Internet was designed for the PC. The Internet is not designed for the iPhone,” Ballmer said. “That’s why they’ve got 75,000 applications — they’re all trying to make the Internet look decent on the iPhone.”
Insightful. And honest, yes, probably honest as a genuine reflection of Ballmer’s and Microsoft’s internal belief system. And schizoid as well, as in forgetting the state of their own Windows Mobile browser.

But let’s leave smartphones and go back to Ballmer’s prayer wheel, the “we keep trying and trying and eventually get it right” mantra.

Search. Microsoft has been trying search for how long? Five years, seven years? No, since 1998 when they announced MSN Search. The latest incarnation, Bing, after their Yahoo! deal, now gets about 9% market share while Google still hovers around 65%.

Facebook. According to Silicon Alley Insider’s Henry Blodget (another Internet Bubble repentito), Facebook is about to become the largest website on the planet, more than 300 million users, about 1 in 4 Internet pageviews. Is Microsoft anywhere in this space, other than being a Facebook minority shareholder (1.6%, $240M invested at a $15B valuation and an advertising deal)?

iTunes. Growing much beyond it early iPod supporting role, beyond giving consumers a reason to prefer iPods, iTunes has evolved into a monster digital content distribution service cum micropayment engine with more than 100 million credit cards attached. iTunes will soon be  9 years old. Where is Microsoft in that space? How do they plan to become relevant?

Microsoft has money, engineers, executives, consultants, a great Board of Directors, including a very successful and very awake Silicon Valley VC, David Marquardt of August Capital, as well as another local icon, Reed Hastings, who founded and runs Netflix.
What are they telling Ballmer, the CEO, and Bill Gates, the Chairman?
How much would you pay to be a fly on the Microsoft’s boardroom wall?

We have this great company with tons of money and talent and, yet, an enterprise that seems unable to become relevant in any of the new growth engines. Something will have to happen, but what? —JLG@mondaynote.com

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