Why Microsoft Will Never Be Great Again

There was a time when analysts or cocktail party napkin passers would describe a company as "the next Microsoft" -- and they meant it as a compliment.

That was a decade or so ago, when computers and paperclip assistants mattered and Microsoft (MSFT) ruled the roost by cranking out the operating system of choice in the PC world.

We all know how Bill Gates and his Redmond cronies made Microsoft the anointed navigator of the computing realm: As box makers struggled with the low-margin nature of selling bulky hardware at cutthroat prices, Microsoft was there to cash in on the high-margin software end. The company shooed away the pioneers of Web browsers, word processing, and spreadsheets by shoehorning its own Internet Explorer, Word, and Excel into new computers.

Everything was great -- until it wasn't anymore.

If You Had Invested in Microsoft 11 Years Ago, Today You'd Have...

Eleven years ago nearly to the day, the software giant's stock closed at $27.43 -- adjusted for all of the splits, dividends, and distributions along the way. The stock is trading just shy of that mark right now, making it the poster child for what some investors are calling "the lost decade."

Not every stock has been stuck on flypaper this side of the millennium. Apple (AAPL) has seen its shares pop 12-fold in that time.

To be fair, Microsoft's fundamentals have improved over the years. It is making more money than it was during the frothy dot-com bubble days. However, slower growth and iffy prospects are keeping investors from paying the kind of multiples they were willing to pay when Mr. Softy was at the top of its game.

What's so lamentable about the company behind Windows, Bing, and Microsoft Office these days? You don't have to go back very far to see where Microsoft went wrong.

What Went Wrong, In Reverse

Let's start with its latest quarter.

Things may look rosy on the surface. Revenue climbed by just 8%, but earnings soared by a better-than-expected 30%. Unfortunately, the bottom-line pop wasn't a case of widening margins or a dramatic turnaround in its profitless online business. A huge reduction in its provision for income taxes is at the heart of the illusion. The more telling operating profit inched just 4% higher.

Windows 7 may have avoided the critical lashings of Vista before it, but consumers aren't convinced. Revenue and operating profits actually declined in that division, leading the company to begin hyping up the prospects of Windows 8.

Don't hold your breath for some magical resurgence. U.S. PC shipments fell by 10.7% in the first quarter and a still worrisome 4.2% during the second quarter, according to industry tracker IDC. Back out the Windows-less Apple that's gaining market share and the numbers look worse for Microsoft-fueled systems.

"It's not you, it's me."
Consumers have become everything that Microsoft didn't want us to become.

  • We rely on cloud computing, so we no longer need to update our PCs as often in a server-stored world.
  • We've become complacent with "good enough" computing through smartphones and tablets where Microsoft is far behind Apple's iOS and Google's (GOOG) Android as the operating systems of choice.
  • We're stuck in our ways, but that doesn't deter Microsoft from spending money to try to make money. It's paying billions to Nokia (NOK) to promote its mobile operating system, just as it will be paying billions to Yahoo! (YHOO) to make Bing more popular (the jury's still out on that one). It seems almost impossible for it to catch up with Apple and Google in mobile through a fading Nokia.
  • We can be wooed by free stuff. Office is holding up better with its recent update, but it's going to be hard to compete on the cloud when Sun and Google are giving their alternatives away.

There is still strength for Microsoft when it comes to server software -- the one silver lining in the cloud computing revolution -- but it's not going to be enough to carry this $220 billion company.

Thinking Outside the Xbox

The only two divisions that we have left to cover are the company's fastest growing, but they're also the biggest financial drains.

Bing is holding up well, but Microsoft is far from turning its online businesses profitable. Its $728 million loss there in its latest quarter was actually more than the division's $662 million in revenue!

Things are looking better on the gaming front, but Microsoft is barely profitable there despite selling a ton of Xbox 360 consoles and Kinect controllers and collecting juicy software royalties.

Add it all up and you get a great company in a horrible situation. Google is finally succeeding in championing free operating systems, with Apple cleaning up on the other end. Barring something miraculous, Microsoft's relevance will continue to fade with every passing year. The "good enough" computing revolution is "bad enough" for Microsoft.

Think about it. The next time you hear someone call a company "the next Microsoft," it won't be a compliment.

Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Yahoo!, Google, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Google, and Yahoo!.


Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

13 Comments

Filter by:
john

Pretty kind to MS. Redmond's attempt to join the very innovative (& extremely competitive) phone market was complete flop the 1st time. Windows Mobile was released 19 April 2000. MS has a 10 year lead in reaching retail market to Google's Android. Android is nearing 50% worldwide. Windows Phone owned 1 percent of the U.S. smartphone OS market in July. The growth curve of competing products mirrors that of the parent company's. MS may dominate company desks with it's desktop pc's but that may actually be a negative. Having to service XP forward at no return when those companies are "happy enough" using IE7 isn't going to win any wars.
It's just MS corporate mentality. Ransoming IE9 to purchase of windows 7 makes sense to them. Never mind that the market showed clear signs away from PC's. HP is only 7+ years in running away from pc's (IBM to Lenovo). So
you give up market share in browser business because your 6 month late carbon copies of other's browsers is going to do WHAT?
Competing in a market which products have a 9 month shelf life when it takes you 10 years to (Windows Mobile) to react.
MS stock is overpriced

September 04 2011 at 11:33 AM Report abuse rate up rate down Reply
spork947

I don't like any of them but I would rather have microsoft in charge than apple or google. I also get tired of hearing how tablets and phones are going to replace the pc. Great for travel but I prefer a real keyboard. Once sp1 for vista came out it worked fine. Some experts say that apple is slower to close security holes than microsoft because they assume they won't be a target but this could change quickly. I think it would be better for everyone to go linux and get rid of most the corporate drama.

September 04 2011 at 11:20 AM Report abuse rate up rate down Reply
Ronnie

MicroSoft's biggest problems come from their organizational size and their myopic MicroSoft centric vision of the world. Balmer's ultimate fanboyism is truely destructive to the company. His dismissal of new technologies (Search, Smartphones, iPods, iPads) has resulted in MicroSoft being terribly behind on each technology. But ultimately MicroSoft's biggest weakness is their disrespect for their customers. Vista being the ultimate example.

September 04 2011 at 11:04 AM Report abuse rate up rate down Reply
x00x

**and Microsoft ruled the roost by cranking out the operating system of choice in the PC world.**

Rick Aristotle Munarriz, you don't know what you're talking about, do you? First of all, Microsoft was never great except in the way a Great White Shark is great. Microsoft as anyone's operating system of choice? The era of Microsoft ruling the roost you write about was hardly one in which it was anyone's system of choice. It was, clunky, cumbersome, buggy, prone to crashing, not a very well-engineered product.
It ruled the roost mostly due to it being at the right place at the right time, its willingness, wherewithal to lay waste to any nascent competitive programs effectively stifled competition, innovation, that made the industry, consumer market much worse off. Why Microsoft will never be great again is one of the best things to ever happen to the computer industry

September 04 2011 at 10:55 AM Report abuse rate up rate down Reply
John S

OK I think the author is dreaming a bit of maybe a time down the road. The cloud is coming but storm clouds are coming with it. The trouble with the cloud is you have to really pick a service to store your information. Apple of course is going to have one and obviously Google is going that direction with Chrome OS. But neither to me is going to attract a large percentage of users. Considering most computers still run Windows and considering that if Microsoft offers a similar service similar to their Skydrive service already in place. I would think a great number of Windows users would choose Microsoft over switching to say Google or Apple. Most of the slowdown in Microsoft is the slowdown in the economy and the lack of true need to upgrade hardware. After all we do not see leaps in speed anymore. Considering that a ten year old OS like XP is still around and kicking tells me that we as American's tend to over buy hardware. Not everyone is as brainwashed as Apple fans to think they need a new computer every time Apple tells you that you one year old Macbook Pro is too slow.

September 04 2011 at 10:24 AM Report abuse rate up rate down Reply
secularreligion

Will all the Google and Apple fanboys bite their pillows and cry if Microsoft has a huge success in the next couple of years?

All of these "journalists" are just that kook at a party who doesn't have any old friends cause the new guy is always cool no matter what. Google doesn't have any problems? They're still giving away the only thing other than search that they do well and Motorola is the same oversized uninventive cell phone company as Nokia.

And everyone keeps talking about "the next openoffice.org" as if that won't also suck. Microsoft still owns the business segment and has plenty of opportunity to turn things around in mobile and cloud computing.

All this article is proof of is that some geeks have an unhealthy obsession with Microsoft's demise. (And I hate Bill Gates, he wants to murder your whole family so his nerd troop doesn't have to sit in traffic..heaven forbid we ever need a real man for anything if guys like him are the only ones left!)

September 04 2011 at 10:05 AM Report abuse rate up rate down Reply
moresteps

i would suggest that microsoft's strength in its years of growth was its business strategy of buying up and monopolizing any really good idea. now with technologies companies of equal financial power such as google, apple and, yes, amazon, now any company being pressured by microsoft to be bought out has several others to run to. thus it would create a bidding war not a monopoly opportunity.

September 03 2011 at 5:07 PM Report abuse rate up rate down Reply
Jon DeMuria

When was microsoft ever the best product for your money? The "good enough" revolution is light years better than any Microsoft offering from the past, wether it be Windows Mobile 6-6.5, Vista, 98, etc. XP was decent, but Apple OS's have always been better, the problem was lack off app support.

Microsoft is going to die a slow and painfull death, which is sad, however if you want to see their stock rally (100% guaranteed) then the board should fire Ballmer. He is the #1 reason why they are in the position that they are now.

September 01 2011 at 4:48 PM Report abuse rate up rate down Reply
matxox

I would rather own Microsoft stock than AOL/Huffington Post. At least Microsoft will be around in five years:http://www.nypost.com/p/news/business/aol_bankers_huddle_sRJS5YKuftaOfVRNm582GP

August 31 2011 at 5:30 PM Report abuse rate up rate down Reply
mac2jr

IBM is now laughing ....

August 31 2011 at 4:34 PM Report abuse rate up rate down Reply