Microsoft is dead in theory
April 27, 2007
But whether it's dead or just irrelevant, the company remains an extraordinarily healthy economic organism. Its latest quarterly results, released late yesterday, blew past analysts' expectations, thanks in large part to unexpectedly strong demand for the much-maligned Vista operating system as well as the new verion of Office. The stock popped in response to the numbers.
To put Microsoft's results in context, it's useful to compare them to those of the juggernaut that is Apple Inc. Apple's sales in the last quarter soared 21% over year-earlier levels, rising from $4.4 billion to $5.3 billion. It was, as headline writers put it, a "blowout" quarter. But Apple's growth pales in comparison to Microsoft's. Microsoft, a much larger company than Apple, increased its sales by 32% in the quarter, from $10.9 to $14.4 billion. It's true that Microsoft's first-quarter numbers were goosed by deferred revenue from pre-sales of Vista in the prior quarter, but nevertheless Microsoft is growing at a remarkably robust pace for a company its size.
Of course, even Microsoft's growth pales in comparison to Google's, which posted a 66% rise in sales in the quarter, from $1.5 billion to $2.5 billion. But Google is still, of course, a much smaller business, and it's worth noting that the $1 billion that it added to its sales is a fraction of the $3.5 billion that Microsoft added. To put it another way, the increase in Microsoft's sales during the quarter is greater than Google's total sales - by far ($3.5 billion vs. $2.5 billion).
Many writers, including this one, have argued that Microsoft is facing its biggest challenge ever, as the importance of its stronghold - the PC desktop - diminishes. And many writers, including this one, have also argued that the company's continuing success may prove the biggest obstacle to its ability to adapt to the changing world of computers and software. But let's face it: these are theories about an unknowable future. Right now, Microsoft remains a formidable company and competitor, with a whole lot of cash at its disposal. Take it for dead, or irrelevant, at your own risk.
I'm pretty sure you meant Paul Graham, right? ;)
Posted by: Berislav Lopac at April 27, 2007 11:14 AM
Thank you. Fixed.
IBM's revenue growth over the same period is bigger in cash terms than that of either Apple or Google (although it's less than half Microsoft's). But since IBM's so damn big already, in relative terms it comes in at a piffling 7%. Mind you, IBM's sales are no longer bigger than those of Apple, Microsoft and Google combined - as of 07Q1 they're approximately equal to those of Apple, Microsoft and Google combined.
Posted by: Phil at April 27, 2007 12:38 PM
[Added after reading Paul Graham's two posts]
What I meant was not that Microsoft is suddenly going to stop making money, but that people at the leading edge of the software business no longer have to think about them. ... When I said that Microsoft was dead, I meant they had, like IBM before them, passed across into this underworld.
Perhaps Paul Graham could save us all some time and just tell us which companies he thinks are alive?
Posted by: Phil at April 27, 2007 12:43 PM
Apple makes half of what MS makes. Apple only holds 5% (& growing) of the computer market....I'd say that's pretty strong. MS makes 80% of it's money from OEMs. They lose money on Xbox, Zune & just about every consumer venture they try.
It's fair counsel, Nick.
What encourages the Graham view -- with which I'm aligned -- is that the continuation of earning power at Microsoft looks strong but was undercut by the deferrals brought in from the Vista vouchers delivered in the prior quarter to people who purchased systems before Vista's release in late Jan 2007. This was BEFORE people has a clear look at the system, which has thrown up a few substantial questions on quality, since.
The landscape supporting this drama is Microsoft's remarkable lack of ideas away from its core Windows & Office monopolies (e.g., Zune), its evident inability to speak with a human voice (i.e., with self-effacing candor), its continued bullying of governments (e.g., in the document formats conflict) and the evident erosion of its influence over OEMs (e.g., Dell's WinXP and Linux offerings). Not to mention your and myown favorite trends toward the browser -- like salmon...
In the illumination of this scene, the financial report has the quality of the first of a series of final belches after really big meal celebrating the Occupation of the Farmstead.
Microsoft is dead to me, and tomorrow it will be dead to a few more, and so on, and so on...
For an accurate forcast of M$'s future. Remember all of those record breaking quarters that Dell had for the past 4 years, where did all the money and customers go?
Methinks both Dell and M$ cooks their books. For every copy of Office and Vista sold doesn't balance how much of a loss the 360 and Zune generate. Plus Vista sales looks like Mac sales circa 1994. It will take them years to pull out of this dive.
I commented over on Scoble that the MS doomsayers don't appreciate either 1) the breadth and depth of MS revenue streams and 2) the precarious position of Google in the same regard. Should another economic downturn of the kind that followed 9/11 happen and ad sales contract like they did for years following and Google is in deep trouble.
Apple is the real "2.0" success story in that they are successfully turning Apple 2.0 into a smart consumer electronics company. But more a threat to Sony I think than MS.
As long as Apple locks its software to its effete, overpriced hardware, it will fail to take advantage of Microsoft's perennial and deepening mediocrity. This puts strict limits on its potential market share.
That's the real tragedy of Apple: that even as it's hotter than it's been in years (or ever?), it insists on repeating the historic blunder that handed the industry to Microsoft.
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