In the last decade Microsoft has grown profit margins without creating new product lines. That is great for current profitability, but not for future revenues.
At this point it is only a question of time until free alternatives to core Microsoft products become good enough that people are willing to stop paying the Microsoft tax. The growing popularity of mobile and semi-mobile devices without Microsoft software suggests that this day is coming sooner rather than later. And Microsoft's attempts to increase its profit margins aren't helping any.
In short the relative stock prices of Apple and Microsoft is a vote of belief that Apple understands and is inventing the future, while Microsoft has no realistic plan for how to adapt.
You're right that the Xbox is now profitable. (When I first googled this I came up with some links that suggested recent non-profitability, but I had misread the dates on them.) But at this point it still doesn't look to me like the kind of product line that can grow into something to sustain the Microsoft we are used to.
As for the critics, they missed what was obvious to me at the time. The main purpose of the Xbox was not initially to make money. Few remember now, but a decade ago Microsoft and Sony were butting heads in many different areas. (Particularly ones involving DRM, storage formats, and other things of interest for media providers.) In typical Microsoft fashion, they went after Sony's air supply. Competition from the Xbox forced Sony to slash prices on the playstation, which cut Sony's profits in half. This distracted Sony, which made them a less dangerous competitor in areas where Microsoft was going head to head with them.
(Of course in the end Apple did an end run about both by demonstrating with iTunes that you can deliver content without DRM and make everyone happy. Microsoft never sold the world on DRM everywhere, all the time. And Sony learned the hard way that people really don't like having a rootkit slipped on your computer without your permission...)
Now I grant you that Microsoft put a lot of energy into .Net, and it has achieved some success. But I look at that as more of a sustaining effort. Microsoft has always had programming tools aimed at certain sections of the business market. They have changed the tools, so what used to be done with VB and Access is now done with C# and SQL Server. But fundamentally it doesn't seem to me to be a radically new market, nor do I see much evidence that their market share has changed significantly.
As for Xbox and Bing, I absolutely agree with you that they are very similar stories. Just as Microsoft used the Xbox to try to neuter Sony, they are using Bing to try and undercut Google. It will be interesting to see how that goes. I think that Google's recent stock price is evidence that the market thinks there is a real threat.
However the bigger threat to Microsoft is coming from Apple. And Microsoft is nowhere to be seen in that space. Furthermore despite the threat to Google from Microsoft, there is more of a brain drain from Microsoft to Google than vice versa. And I see more entrepreneurs worrying about competing against Google's offerings than Microsoft.
Last time I looked into this there was much confusion about posting a small yearly profit (which they've done for the last few years) and actually having a positive return on the umpteen billion dollar investment they've made.
Various figures I looked at then (maybe 6 months ago) suggested they were still 1-10 Billion in the hole overall with some hope that they'd break even after this generation, though obviously the model they've followed means another giant investment at the beginning of the next round of the console war.
You've missed my point. If you gave me 20 Billion dollars and several years later I gave you 1 Billion back that's not a 'profitable' business proposition, even if you write that Billion up as a yearly profit.
Can you find anything to suggest that the XBox project as a whole is in the red or black for Microsoft?
Well, the thinking is that once the division is profitable with profit graph going up it will keep bringing more money... Isn't this one of the basic presumption behind P/E's and stock market.
With so many xbox 360 users out there who will keep paying for Xbox live and buying new games and further innovation (Natal) and more features (Hulu integration) I suspect Xbox division will be profitable for some time.
Also, the numbers include money "invested" in kin and windows phone 7 so Xbox alone is probably making more money than the numbers suggest
There is a misconception that Google is giving everything away for free. That misconception is supported by the fact that Google reports the bulk of its revenue as just ads.
The truth is that Google has many different profitable product lines, and all are ad supported. Exactly how many, and how profitable, can't be told from the way they report earnings.
In any case, you don't really need to convince me. I'm just trying to interpret what the market is saying. And the market is saying that they think Microsoft is walking off of a cliff. That's why they are worth a P/E of about 13, while Google is worth one of 22 and Apple is worth one of 21.
The market projection only gets more stark when you subtract current book value to find how much the market values future revenue. Microsoft's market cap is 221 B, their book value is 46 B, and therefore 175 B of their market cap is projected future earnings. Their current profit is 46.28 B/year, and that works out to the market valuing them at their current earnings stream projected over a bit under 4 years.
For Google the equivalent exercise says a market cap of 154 B, and book value of 38 B so 116 B of market cap is projected future earnings. Their current profit is 14.81 B/year, which translates into the market valuing them at their current earnings stream projected over a bit over a decade. (10.4 years.)
For Apple the equivalent exercise says a market cap of 225 B, a book value of 39.4 B for 185.6 B of market cap due to projected future earnings. Their current profit is 17.22 B/year, which translates into their current earnings stream projected over a decade. (10.8 years.)
So the projection that Microsoft is walking over a cliff in a few years while both Google and Apple have a decent future isn't just claimed by some random haters on the Internet. This is the consensus of the stock market, which is based on people putting their money where their mouths are.
Actually the market is saying that MSFT has 10 to 14 years left (bloomberg data), using trailing and normalized (ie cyclically adjusted) earnings, respectively.
For the market in general the median "life" expectation is lower between 8 and 10 years (and negative for banks). Thus maybe we should conclude that in 10 years time the average U.S. company is going to be death...