This reader idea has real merit for Microsoft (MSFT)
Reader submits:
“I have avoided MSFT for some time as too expensive. If you do the math, owner’s earnings have been 2-4% even though revenues have grown since 1997 and the stock was very flat. However, since 2006, they have been buying back stock and Net Income has risen so that 2009 is forecasted to be ~$2.20. With the stock under $20shr I began looking about for information and found that Ray Ozzie wants to remake MSFT into a start-up mode.
Ozzie looks like a man on a mission. The issue will be if Ballmer lets Ozzie have his way. Will Ballmer even be there? If I were a Board member I would be seriously concerned with Ballmer’s actions re: Yahoo. Offer $40Bill then back away with what appear to be immature negotiations.”
Just who is Ray Ozzie and what is the deal?
At Microsoft, he says, there must be a shift from the traditional model of software to what he calls software plus services. As slogans go, it’s not particularly catchy. But the sentiment is clear: Just packaging software, collecting the money, and then producing a new version a few years later (whether people want one or not) is no longer a sustainable business plan.
The relationship with customers must be constant and continuous. Instead of discrete onetime transactions, the money—whether from subscription fees or advertising—will flow constantly. For the user, everything will happen when it’s needed, as if pulled down from a cloud. The metaphor has been around for years, along with the more recent spinoff, cloud computing. But the phenomenon is anything but ethereal. Billions of dollars are at stake.
According to Microsoft, one example of a successful service is Windows Update, which automatically installs patches and bug fixes on users’ operating systems. Hotmail, like all Web-based mail applications, is also a service. Virtual Earth? A service. Software, but not from a box. Still, Ozzie draws the line at the idea that you can do anything and everything in the cloud, that every application can become Web-based, that the desktop is dead. Some things, he says, still require local computation, offline persistence, and the control that only one’s own desktop processor offers.
This defense of the desktop dovetails nicely with Microsoft’s historic strengths. So, while Ozzie actively evangelizes for the disruptive move to services, he’s also saying that for many purposes the ideal software model is a hybrid: a heavy-duty application (known as client software) combined with an ongoing Internet service. A great example is Apple’s iTunes, which you install on your computer and use as an offline media organizer but which also serves as an Internet app that lets you buy songs, stream music, and get recommendations.
In Ozzie’s view, Microsoft must make this model the centerpiece of all its future efforts. The company must transform itself from a manufacturer that dumps out a big product every couple of years to a customer-obsessed enterprise devoted to continually producing, updating, and supporting a full panoply of services. In his speech, Ozzie puts it this way: “When packaged software ships, services go live. What was our end is now the beginning. The gold disk”—from which all retail copies of a new piece of software are made—”is now the grand opening.”
At that point, Ozzie unveils the new products that he’s been laboring over for more than two years: a top-secret set of initiatives designed to make Microsoft as dominant in the cloud era as it was in the days of the desktop. First up is a new operating system for Web-based applications, codenamed Red Dog—it’s Windows for the cloud. (See Editor’s update below.) Then comes a demonstration of Live Mesh, which will allow people to seamlessly synchronize all their information with as many people and places as they want, across as many devices (computer, phone, camera) as they want. Finally, another engineer demonstrates how Microsoft will make even its legacy apps accessible via the cloud. It’s a shocker. After years of Microsoft insisting that the desktop is the only proper place for its crown-jewel applications—the venerable Office suite—it appears that Word, Excel, and PowerPoint will levitate from the desktop and become services as well. In this demo, an Excel spreadsheet is running in the cloud with almost all its functionality intact, including features like auto-complete and auto-formatting as well as built-in collaboration and a way to link the spreadsheet results to emails and Web pages.
Now Balmer has been in charge at Microsoft for a while now and the time has come to take a real close look at things. The Yahoo (YHOO) deal was a fiasco for Yahoo but had the deal been accepted, it would have meant Microsoft paid $40 billion for a company worth $15 billion today. Not good..
The desktop software model is dying thank to Google (GOOG) and Balmer is being dragged into. Ozzie is already there, why not let him run the show?
It is a question the Board must begin to consider…
Disclosure (“none” means no position):None
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