
Why Not All Earnings Are Equal; Microsoft Has the Wal-Mart Disease - vrikhter
http://blogs.forbes.com/adamhartung/2011/05/03/why-not-all-earnings-are-equal-and-microsoft-has-the-wal-mart-disease/
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kenjackson
The problem with this article is that it is based on an incorrect thesis,
which is that MS revenue has stalled. It hasn't. See:

<http://ycharts.com/companies/MSFT/revenues_ttm#zoom=5>

MS revenue has continued to climb to this very day, with only a drop during
the recession. Outside of Apple, there aren't many companies that wouldn't
take this type of revenue growth at this size.

The article makes a mistake a lot in the tech sector make which is that if MS
isn't doing better than Apple then its in serious trouble. Doing worse than
Apple is hardly an insult. There are probably no more than a couple of
companies in the world that are doing better than Apple. Yet, there are few
F500 companies that can match MS's revenue/profit growth -- yet almost all can
beat its market cap growth.

~~~
iamelgringo
Not only that, but there are precious few other tech companies that have
gotten spanked so hard by regulators litigation about anti-trust issues.

It was only 13 years ago the idea of Microsoft offering a free web browser
bundled with their OS was considered dirty pool. In fact, in the EU, Microsoft
is still facing issues about bundling a media player for free with it's OS.

Imagine Apple having to install a Zune store and Amazon store along side
iTunes with every iPhone or iPad they sold.

~~~
pickettd
Yes - seriously. The amount of effort (person-hours etc) that goes in inside
Microsoft to satisfy litigation demanded regulatory compliance is staggering.

------
lionhearted
I like Microsoft, but as a disclaimer before my analysis - I bought 400 shares
of Microsoft stock a little bit ago at $25.79 per share.

Here my thoughts:

-Microsoft's price/earnings ratio is around 10, which I feel is pretty good for a company with a lot of stable revenue base and a chance at upside.

-This article talks about Microsoft's poor performance in tablets, which is true and worrying. I'm not sure Microsoft will make that ground up. They do have an excellent research division, though, and I'm wondering if they can make a strong showing in the next generation of technology after this. I don't know what that'll be, but new input devices should be coming online. The Kinect is _amazing_ , I was really blown away playing with one in Singapore. If Microsoft can build on that to do alternative input and the next generation, they could have a huge renaissance.

-They have a very solid installed base. Government and business are very likely to keep running on Windows and Office. For consumers, even if tablets totally take over - and I'm not sure that'll happen - late adoptors will be buying those pre-installed Windows laptops and PCs just like always.

-$50 billion in cash reserves means they've got a lot of time to figure something out going forwards. Lots of cash + some very stable covering their fixed costs + big research division = seemingly a pretty safe buy with some upside.

I don't think it's a good stock to buy for short term appreciation - it might
well go down over the next 2-3 years. But I'm comfortable holding it for 10
years. I think there's a decent shot it pays well in dividends and holds its
value and a decent shot for lots of growth and appreciation.

Of course, maybe the house does fall over. Do your own research, etc, etc,
etc.

~~~
mixmax
It's not about how many people you've got in your R&D labs, it's about _which_
people you have in your R&D labs.

~~~
andreaja
Surely it's not about who does your R&D so much as what they produce?

Most of the MS R&D papers I've read have been very good, with excellent ideas.
Let's also not forget that GHC is maintained at MS R&D.

The problem lies in converting research into product. One example is the data
mountain[1]. The data mountain was way before its time (3d desktop in '98,
which is still struggling to make inroads), it's a bad interface for a mouse-
driven UI, but a good one for a touch-driven UI (probably not on a phone, but
maybe on a tablet and definitely on a 20" or larger screen). But they haven't
done anything with it.

I don't think the right stuff from MS R&D is transported to the product
development people, which is sad, but highlights one of the differences
between Google and MS. At Google a lot of research papers are driven by actual
solutions (cf. BigTable, GFS etc). At MS there's more 'pure' research going on
and as a consequence the divide between the research people and the product
people is larger.

That's what it looks like to me anyway. I don't think there's any problem with
the quality of the research being done at MS, quite the contrary.

[1] [http://research.microsoft.com/en-
us/um/people/dcr/work/datam...](http://research.microsoft.com/en-
us/um/people/dcr/work/datamountain.htm) (The video sadly seems to have fallen
off the web.)

------
carsongross
The world is addicted to exponential curves, and yet everywhere we look, we
see logistic curves in a finite world. Unfortunately, it is quite profitable
to con people into thinking that the latter is really the former. Our whole
financial system is built on this fraud, from the VCs on down.

Microsoft ran up the logistic curve, stalled out and, sure, made some bad
decisions.

Apple made some bad decisions, went way down the logistic curve, and now is
climbing back up it.

That isn't to say there aren't lessons to be learned by looking at the two
companies. It is to say that one of the premises of the article, that there is
some exponential growth curve that all companies need to stay on, is flawed. I
would expect no less from one of the chief financial ponzi rah-rah mags,
though.

------
fleitz
Customers don't need to be excited about your products to make a boatload of
money.

I don't think anyone is excited to buy gas at $4 a gallon, but that doesn't
make it an unprofitable business to be in. MS has been running with out it's
founder for years and has been moderately successful.

If one is to believe the reality distortion field that Jobs is central to
Apple's success then his health problems pose a major problem to the long term
value of the stock.

Apple has some very serious competitive risks (Android) and some very serious
internal risks (Jobs' health). Apple's stock price is based on the idea of
maintaining 30% growth for the next few years, that's a much more difficult
goal than to lose 2% per year. Also, Moore's law is still relevant in the
mobile market meaning that people replace their phones fairly frequently to
get better hardware support. A mobile phone from 5 years ago is clearly
inferior to most people whereas a computer from 5 years ago is mostly adequate
for most users. What this means is that there is still time in mobile for a
major competitor to emerge. The desktop PC market is locked up and belongs to
Microsoft. The desktop PC running Windows is also a core part of the business
to a lot of companies in the same way that Mainframes are to the financial
industry. Yes, Microsoft's Desktop PC business will continue to decline for
years, but it's a steady essentially risk free revenue stream. The mobile
revenue stream is still largely up for grabs.

Microsoft also has big inroads into enterprise sales which could solidify
WinPhone 7 in the enterprise which would bring in some pretty big bucks.

~~~
j_baker
_Customers don't need to be excited about your products to make a boatload of
money._

Then why does Microsoft keep wasting money trying to get people excited about
its products? I see what you're saying, which is that there are still
strategies Microsoft can use to keep their business going. The problem is that
they aren't using those strategies. They keep trying and failing at putting
together exciting new products for end users because they just aren't as good
at it as Apple.

------
wglb
So while the article notes several times that "Microsoft is not making items
that customers want", it seems that this is addressing the consumer customer.
But isn't Microsoft addressing what the enterprise customer wants? And isn't
this a serious chunk of where their income is coming from.

While I am not seeing flaws in the argument here, I am slightly skeptical, as
for multiple decades I have witnessed many people underestimating Bill Gates,
and now I wonder if that continues.

(I remember a time where Intel was skeptical of compilers produced by tiny
companies such as Microsoft--they got no respect whatsoever.)

~~~
jimbokun
"While I am not seeing flaws in the argument here, I am slightly skeptical, as
for multiple decades I have witnessed many people underestimating Bill Gates,
and now I wonder if that continues."

I would certainly rate Microsoft's chances much higher, _if_ Bill Gates still
held an active role in the company.

~~~
crcastle
Agreed.

I don't understand how a CEO (Ballmer) can last so long at a company with
share price effectively flat between $20 and $30 since 2002 (1). Especially in
the tech industry -- unless shareholders think the results would be worse
without him. MSFT has dividends which maybe offset the flat share price in the
investors mind, but oracle (2) and ibm (3) pay dividends and they have had
good share price growth since 2002.

(1) MSFT: <http://goo.gl/He849> (2) ORCL: <http://goo.gl/iNWs1> (3) IBM:
<http://goo.gl/0W6Kz>

~~~
yuhong
Personally I think expecting stock price to always increase is horrible these
days.

~~~
crcastle
I agree somewhat with that. I can't place my finger on it, but there's
something I don't like about growth needing to be the norm... but that's a
whole new topic.

Regardless, the opportunity for profit is why people purchase public shares of
a company. Profit can only be made by an increase in share price (assuming no
splits) or dividend payout (i think).

EDIT: realized there are many other ways to make money (sell short,
derivatives based on price volatility, etc) but i think my point is still
valid that the shareholders of a company want growth in share price or they'll
invest their money elsewhere.

~~~
carsongross
Your discomfiture is well placed:

    
    
      http://www.youtube.com/watch?v=F-QA2rkpBSY
    

The world is mostly logistic curves, but the ponzi needs us to all believe in
exponential curves.

~~~
swombat
Just a clarification for those (like me) who didn't get it:

A logistic curve is basically an S-shaped curve, also known as a sigmoid.

------
edoloughlin
Is there anyone out there with a background in economics who could explain why
it's reasonable to expect a company's revenues to grow indefinitely? I get
that there's inflation, so there will always/usually be some upward pressure,
but surely there are natural limits?

------
jimbokun
It would seem "Wal-Mart disease" is a good place to look for start up
opportunities. Look for companies suffering from Wal-Mart disease, then think
up ways to compete against them.

~~~
ikono
I don't really understand where the term "Walmart disease" comes from.
Certainly, Walmart is not an exciting company but it's far from poorly
managed. The fact that it's stock has been in a holding pattern for a few
years does not mean that it's future is bleak.

Walmart as a company has incredible focus at their core competency. It may be
true that they've come close to saturating their market but they still do what
they do better than anyone else. Microsoft has saturated their core markets,
are losing ground in their core business, and have no idea where they're going
to go in the future. But hey if they throw enough money at everything they
might hit something...

The one thing they do have going for them is that they still have an
incredibly smart collection of engineers. If they somehow find a way to get
some leadership at the top, they could turn it around much the way Apple was
able to turn it around once Jobs retook the reins.

~~~
danssig
>The fact that it's stock has been in a holding pattern for a few years does
not mean that it's future is bleak.

Their stock doesn't move because there's way too much of it out there. I've
heard talk of considering it AAA.

>It may be true that they've come close to saturating their market but they
still do what they do better than anyone else.

The leverage their market position better than most but I've worked there and
I found the quality of the management there pretty appalling. In fact, usually
when a manager from Walmart went somewhere else they did poorly. As if they
only know how to win when they already have a massively dominant position in
the market. The only one who knew how to actually _get_ that position was Sam
Walton.

~~~
ikono
"There's a difference between the quality of a business and the quality of a
management. If it's a strong enough business, it should be able to withstand
poor management. If you gave me the number-one pick in the CEO draft, and said
he had to run Ford Motor, I wouldn't do it. It would be too tough. A CEO
depends on too many things happening that are outside his control, even if
he's the best in the world." -Warren Buffett

------
brudgers
_"Microsoft has caught the “Wal-Mart Disease” – constantly trying to do more
of what it always did, hoping it can regain old results – even as the market
keeps shifting. In stalled companies, executives cut costs in sales,
marketing, new product development and outsource like crazy in order to prop
up earnings. They can outsource many functions. And they go the resorvoir_
[sic]* of accounting rules to restate depreciation and expenses, delaying
expenses while working to accelerate revenue recognition. While Microsoft had
higher earnings than last quarter, it wasn’t because customers were excited
about their products!"*

Not only is Hartug's claim regarding Microsoft suffering from Walmart disease
unsupported by a substantial evidence, e.g. examples of Microsoft cutting back
on marketing - just look at WP7; or outsourcing new product development (one
example would be nice), but it also ignores the fact that although one could
argue that Windows 7 was more of the same, the Kinect was not exactly what
their customers wanted but that it was delivered at the right price and in
high volume.

------
josephcooney
Not surprising. In 2005 they hired wal-mart's COO.
[http://www.microsoft.com/presspass/press/2005/aug05/08-04Tur...](http://www.microsoft.com/presspass/press/2005/aug05/08-04TurnerPR.mspx)

Edit: (or to be more pedantic, they hired Kevin Turner, a Wal-Mart executive
to be their COO)

~~~
danssig
Kevin Turner was the CEO of Sam's Club. CIO before that.

~~~
josephcooney
Sam's club is a subsidiary of wal-mart
<http://en.wikipedia.org/wiki/Sam%27s_Club> He was also executive vice
president of Wal-Mart Stores Inc.

~~~
danssig
Yes, sorry that wasn't clear. I meant he was Walmart CIO, then Sam's CEO.

------
timfpark
the Microsoft COO is from Walmart, so its hard to see why anyone should be
surprised by this turn of events.

------
cubicle67
I did a quick sum of the quarterly losses in that chart, and came to a total
just shy of $8 billion

