Microsoft Needs a New CEO
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are mostly two lines of thought regarding Microsoft (NASDAQ: MSFT) stock at current levels, it’s either considered an undervalued opportunity or value trap.
The company generates tons of cash; it pays a very attractive dividend yield of 3.4% and it's still a big player in different business segments with interesting possibilities. On the other hand, Microsoft has made some remarkably serious management mistakes over the last years, and the company seems to be in on a long term path to decay. Maybe it's time for a change at the top before it’s too late for a turnaround.
Microsoft has missed many of the most exciting opportunities for growth in the tech scene over the last decade, and it wasn´t because the company didn´t have enough resources to capitalize them. On the contrary, Microsoft was the king of tech a decade ago, benefiting from a near monopolistic position provided by Windows and Office. This meant not only big fat profit margins for the company, but also an invaluable strategic asset in terms of competitive strength.
Microsoft had more than enough resources at hand to benefit from innovations like search, mobile, and social networks to name a few important trends, but the company´s management made the wrong strategic decisions. Steve Ballmer famously mocked the iPhone early in the game, saying it was too expensive and lacking critical features like a detachable keyword.
No chance that the iPhone is going to get any significant market share,” Ballmer said in 2007, adding that same year, “iPod is a hot brand—not Apple.”
Ballmer downplayed the iPad when it came out, in 2010, and now the iPad is stealing market share from PCs at the speed of light. He made an equally mistaken comment about Google (NASDAQ: GOOG) in 2005: “Google’s not a real company. It’s a house of cards.”
Microsoft did invest $240 million for a 2.6% stake in Facebook (NASDAQ: FB) at a valuation of $15 billion in October of 2007. This was a smart deal which yielded juicy financial returns and showed some vision regarding innovative trends. But it was the exception to the rule more than anything else, as the company´s other investments over the years delivered miserable results.
Apple (NASDAQ: AAPL) has been riding the mobile revolution since 2007, first with the iPhone and then with the iPad in 2010. Now tablets are inflicting serious damage to PCs and, adding insult to injury, Macs are also gaining market share versus Windows PCs. That statement about Apple not being a hot brand looks almost hilarious in retrospect.
According to a report by NPD, consumer sales of Windows-powered personal computers fell 21% overall in November versus the same month in the previous year. The data doesn´t include holiday sales, and it’s still early in the game for Windows 8, but the trend doesn´t look pretty from Microsoft´s perspective.
Different reports regarding sales of the company´s Surface tablet are even more dismal. And Microsoft´s alliance with Nokia (NYSE: NOK) has not yielded the expected results in terms of penetration in the smartphones market, in spite of some positive reviews for the products by industry experts.
Office is still very popular, especially in the corporate segment, but even there Microsoft is under attack. Google charges $50 per person annually for Google Apps, while Microsoft sells Office for around $400 per person. Although many customers end up paying around $200 per person due to bulk pricing, the difference is still remarkable.
Microsoft should not underestimate the threat that Google represents in productivity, taking the competition too lightly has been an expensive mistake the company has done repeatedly over the last years. Besides, if tablets continue displacing PCs, Microsoft will be in a tough position to compensate for the lost sales in Office for PCs, since most Apps sell for $10 or less.
Microsoft is still a profitable business with plenty of money to sail through the storm and invest in research and development. Besides, the company could also do some strategic acquisition in order to adapt to the new tech parading. From that point of view, there is no reason to believe that Microsoft can´t come up with intelligent ideas to turn things around and become a growing business again.
But Ballmer and his management team have made some very serious mistakes over the last decade, mostly because of stubbornness, arrogance or simply lack of vision. Also, Microsoft´s latest moves don´t seem to be baring the expected results, and time is running against the company. A change of management is probably the best way, perhaps even a prerequisite, to increase the chances of a successful recovery for Microsoft.
acardenal owns shares of Apple and Google. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!