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Summary:

Even after Microsoft reported record earnings a few days ago, one of its former executives has effectively written the company’s obituary in a NYT op-ed piece. Is Microsoft not savable? Here are three surprise scenarios that could have a lot of upside for the company.

Even after Microsoft reported record earnings a few days ago, one of its former executives has effectively written the company’s obituary in a New York Times op-ed piece.  Is Microsoft not savable? Here are three surprise scenarios that could have a lot of upside for the company.

It Branches Out As An Investment Holding Company. People familiar with the way Warren Buffett has run Berkshire Hathaway over the years know it’s seen enormous contributions to its earnings come from ownership of stocks, bonds and various types of fixed-income investments. Sure, it owns businesses ranging from GEICO to See’s Candy, but Buffett has driven billions of dollars of profit through simply owning shares in companies such as The Washington Post and Coca-Cola. Over the long run, Microsoft may well move toward this kind of future as an investment holding company, too. It has nearly $35 billion in cash and equivalents, which is more than 10 percent of its entire $246 billion market capitalization.

In today’s New York Times op-ed piece, Dick Brass takes his former employer to task for desperately struggling to come up with new product innovations, but failing miserably. “It is failing, even as it reports record earnings,” he writes. Indeed, Microsoft just reported a record $6.66 billion in quarterly earnings, but that’s primarily due to operating system and Office application suite sales, not new product innovation. It won’t happen overnight, but over time, if Microsoft invests its cash wisely, investment returns could start to approach the returns it gets from its software business. If the idea seems far-fetched, consider the fact that Red Hat gets nearly half of its earnings from investment activities.

It Finally Gets the Web Right. Microsoft has a long history of downright boneheaded moves on the web. Indeed, ranging from its multiyear efforts to turn MSN into a meaningful web brand to its current efforts with Bing, it has primarily generated billions of dollars of losses with its web efforts. This could change, though, especially as the web and the cloud become more central to how people use applications. Microsoft employs some of the smartest software engineers on the planet and is showing signs of commitment to the cloud with its Azure rollout.

I’m definitely in agreement with Matt Asay that more Microsoft leadership on the web would be good from a competitive standpoint, and Google’s founders have made the point more than once that their company’s brand is only “one click away” from competitors. Additionally, it’s worth remembering that the commercial web just isn’t that old. If Microsoft can find a way to combine success online with success in its traditional software business, the combination could be powerful.

The Ray Ozzie Era. Ray Ozzie holds the title of Chief Software Architect at Microsoft, which Bill Gates held as well. This is not an accident. Going back to his days behind Lotus Notes, I remember Ozzie as a product guy and a smart guy. Under Steve Ballmer, Microsoft’s stock has dropped significantly over the last 10 years, and Newsweeek, among others, has predicted that he won’t continue to run the company much longer. If anyone at Microsoft can introduce new products and innovation, it’s probably Ozzie. If he takes the CEO spot, as some predict he will soon, Microsoft could head in new directions.

In general, it’s hard to argue with Brass that the software company he used to work for has crafted its own “creative destruction,” but the cash registers continue to ring in Redmond, and there are smart people there. Over the next decade, Microsoft could easily pull a few rabbits out of its hat, and become a very different kind of company.

Related research from GigOM Pro (sub. req’d):

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    1. I used to pay a lot of money for MS Office Suite products and relied on IE browser. Have switched to Thunderbird, Firefox, and Sunbird and can not complain. Gotta love the addons and apps.I think I did buy a $10.00 MS optical mouse last year from NewEgg and was very satisfied. Do not think I am the target market or what am I missing about the strategy.

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    2. A prediction market is now open setting odds on Ballmer’s tenure: http://tinyurl.com/yak664q

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      1. Not happening. It’s actually best that Ballmer stay at Microsoft, because:

        Decade of Apple Wins against Microsoft et al.:
        http://obamapacman.com/2010/01/2000-2009-decade-of-apple-conquests-even-against-microsoft/

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    3. @FHJ, yes I’ve seen a few of those prediction markets regarding Ballmer’s tenure.

      Sebastian

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    4. Unfortunately there is a culture issue at Microsoft which nothing can change.

      Unless someone is brought in to radically streamline operations, make large staff cuts, and eliminate non-core business units I can’t see anything bright for the future.

      Microsoft needs to understand that it’s Office + Windows. Everything else is just icing to push that combination.

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      1. And culture change is tough when Windows and Office are spinning off so much cash. By the time MS feels the pinch, it will probably be too late. No tears should be shed for this company or its culture.

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      2. If Microsoft thinks it is windows + office only, then it is a self fulling prophecy of doom. If you meant to defocus from Zune, XBox, WinMo etc.. that is something else. In any case, Microsoft needs to find a new game ..or grow the promising ones such as Bing, Azure …

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    5. @Adrian, I agree that cultural change is called for at the company. That’s not an easy thing, but some executives can make it happen.

      Sebastian

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    6. Interesting, last summer several commentators were writing about whether MS had gotten it’s mojo back. http://www.computerworld.com/s/article/9136620/Opinion_How_Microsoft_got_its_mojo_back

      I think it’s too early to write them off. Some recent wins/good products/potential good products:
      - Win7
      - Bing
      - Natale
      - Office 2010
      - ZuneHD (though not a market success)

      And of course Sharepoint, OneNote, etc that have been released over the last many years – post original Office and Windows franchises.

      I also don’t think the book is closed on mobile yet. As we saw with Apple and Google/Android, a well positioned new product has the potential to enter and disrupt quickly – given the 2-3 year device cycle. I’m not convinced that Android is a clear number two yet. The fragmentation issues are just beginning to reveal themselves and Google has to be making its partners nervous. MS, with a completely refreshed Win Mobile and/or Zune phone has an opportunity to take back ground.

      Time will tell…

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      1. Bing = always losing money, in the market for almost a decade under various names (MSN search, etc)
        Natale = vaporware
        Office = MS has injunction against office (for stealing technology)
        Zunehd = fail (I got an article on that too)

        Windows mobile? MS has been in the market for almost a decade with their “innovative” mobile innovations and has dropping behind iPhone.

        Google N1 sales fail:
        http://obamapacman.com/2010/02/nexus-one-sales-fail-comparing-iphone-droid-n1-first-month-demand/

        Doesn’t mean MS is going to win though.

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        1. Grrr automatically getting rid of line break is pretty annoying. I had some of those things on different lines. Maybe you guys need to add a comment preview function.

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    7. @Gary D–good points. Sharepoint, in particular, is becoming a remarkable success with 80 million users. It also is probably too early to write MS off in mobile. Android was being written off as of March of last year–only found on one handset. Look what’s happened since.

      Sebastian

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    8. They won’t be an investment holding company like Berkshire. They don’t have the manager in place to be that. Types like Buffet are pretty rare.

      Also they have been returning cash to shareholders. They did that in a form of a one-time dividend 3-5 years ago (if I remember the date right) otherwise they’d have had a $75 billion+ stockpile by now.

      As long as the Windows and Office money comes so easily you won’t see change. I mean they are never going to make as much money as they do with Windows and Office. So where’s the incentive?

      Just keep trying to protect the dual monopolies for as long as possible.

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    9. [...] “If Microsoft can find a way to combine success online with success in its traditional software business, the combination could be powerful.” – GigaOm 3 Surprise Scenarios for Microsoft’s Future [...]

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