This is what happens when a software company messes around in the most competitive consumer hardware market on earth: a $900M mistake. Microsoft announced its earnings today and said it will have to take a $900M charge against unsold RT Surface inventory.
Welcome to the hardware world, Microsoft! But even with the colossal charge, Microsoft makes ridiculous amounts of money, while “missing the estimates.” Revenue rose 10% to $19.9 billion and profit of 59 cents per share. The company will generate about $5 billion in cash in the quarter! What a nice way to screw up.
Microsoft’s Surface escapes confirmed my suspicions: You can’t copy your way to success, and you shouldn’t go into hardware if you are a software company (even though, for some reason, all technology companies are eventually tempted to). Microsoft’s Surface tablets and Windows 8 are half-baked concessions to Apple. This is probably why I am switching back to Apple after 20 years in the Windows world.
Microsoft’s move to hardware was ill-fated to begin with. It cracks me up to see a company with the world’s most profitable software franchise bust a move into the hardware business, where the margins are slimmer and the risks much larger. It’s like being a real-estate mogul in Beverly Hills and deciding you want to expand into Compton.
Clearly, Microsoft management knew things were shaky when it planned its massive reorg. They’ve got some work to do. The Surface RT may embody everything that is wrong with Microsoft and what they need to fix:
- They need to stop blatantly copying other ideas — i.e. tablets after iPad. Come up with something new.
- Microsoft should focus on areas that they are really leading — Xbox, for example. It’s a good product. Or how about Azure? Pretty decent cloud computing platform.
- The company should give up on PC, phone, and tech hardware, other than the Xbox. It’s hardware efforts have mostly been disasters.
- Can we get a completely new operating system? Not some spaghetti-coded Western?
Microsoft is on the cusp of one of the most important moments in its history. It’s like IBM in the 1980s — time to reinvent itself. It couldn’t be in a better place for it. Despite a $900M blunder, the company has cash and short-term equivalents of $77 billion! It can pretty much do anything it wants. Even when it screws up, it makes $5 billion a quarter.
I like this company. It’s a great company. Even when it screws up, money piles up in the bank. But it is squandering so many opportunities. For example, how can you have the largest Internet franchises in the world and not make any money on it? That’s just ridiculous. Or, why does each successive iteration of your flagship operating system get more convoluted and disappointing? Why can’t you come up with a cool interface, instead of copying Apple like you have done since 1995?
I’ve got the solution: Become the world’s best software platform or the world’s best living-room computing system. Or figure out a really new enterprise strategy going forward. You already own the enterprise software market and behind the scenes you’ve been quietly turning Azure into a cloud platform to be reckoned with, but Oracle is out there stealing the show gobbling up every cloud application business in the world. Sometimes it pays to be focused.
Xbox is great, but why can’t you turn it into more? My family likes it and we use it to stream movies, play Kinect games and Rock Band. I could see Xbox becoming the server for the home in the future where there as many of those devices as PCs.
I know, it sounds easy, and I have no idea how to do it. But pick your spots and blow the doors off something.
In the meantime, yes, I would still own the stock. It almost got to $40, as I said a few years ago that it would. I would own the stock forever because it is a cheap way to wait for this company to finally stumble onto something knew, all the while banking $5 billion a quarter and paying a 2.6% dividend. What a life. It’s a nice luxury to have — throwing off too much cash.
Stay in Beverly Hills, Microsoft. Don’t mess down there in Compton, or even Des Moines, Iowa. Time to figure out where your roots are.