October 25, 2012

What is Microsoft's worst case scenario for the next five years ?

Here are Microsoft's third quarter revenue and income.

Quarterly Operating income (loss) 2012        2011 (comparing 3rd quarters) 

Windows & Windows Live Division  $   1,646   $3,270
Server and Tools                     1,748    1,565
Online Services Division             (364)     (514)
Microsoft Business Division          3,646    3,717
Entertainment and Devices Division      19      340
Corporate-level activity            (1,387)  (1,175)
Consolidated                        $ 5,308  $7,203


Windows & Windows Live Division  $   3,244  $ 4,874
Server and Tools                     4,552    4,216
Online Services Division               697      641
Microsoft Business Division          5,502    5,635
Entertainment and Devices Division   1,946    1,961
Unallocated and other                  67       45
Consolidated                       $16,008  $17,372

Windows 8 is launching now and could likely be a relative flop for consumers.

Microsoft upside case -

* Microsoft is really an enterprise company, making most of its money from business customers with products like Windows Server, management software, Microsoft Office, SQL databases, development tools. Those businesses are doing well.

As seen above Microsoft Business and server tools profits would be about equal to the total profits of the company. This would be about $5 billion per quarter. However, if Windows profits evaporated, that would take out $1.6 billion or more in some quarters which is used to fund money losing divisions like Bing (which lost about $400-500 million per quarter)

* Enterprises are busy buying Windows 7, in droves. Microsoft will have most them locked up with enterprise agreements for three to five more years. That's plenty of time to fix Windows 8 [or do something else] if it bombs.

* Microsoft is sitting on $60 billion in cash.

On the downside -
Microsoft has had 10-20 years to work on making profitable internet and other businesses. Bing still loses a lot of money and XBox and the entertainment division is barely profitable.

Vanity Fair had a lengthy piece about how much Steve Ballmer sucks back in August, 2012.

If Microsoft is decimated on the consumer side profitability, then they could still have products in laptops, tablets and smartphones but those products could just lose money at the 5% or less level of total marketshare. As Jack Welch of GE noted, if you are not number one or number two in a sector then you are making very little money or losing money.

Microsoft is not invulnerable on the business side. Apple and Google are making advances there. If everyone is using Google Android and iPads and iPhones and Google docs, that will erode Microsoft office on the business side over 5-10 years.

IBM was able to use the cash cow of mainframe revenue and profits to relaunch itself in services. Microsoft needs to figure out a long term growth play. They need to use the $60 billion and the 5-10 years that they have before things get really bad for them.

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