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Microsoft analyzed
Introduction:
Microsoft, the tech giant had a dream run any company could have had from 1985 to 2000. The stock soared from 9 cents to 58 dollars at the zenith of the 2001 technology bubble. Bill Gates was the king of the technology world. Microsoft entering a market segment struck fear in the hearts of the incumbents. Microsoft, arguably, almost killed IBM and Yahoo at different points. And yet ten years later, the stock price has gone down to 26 dollars, the company seems to be desperately trying to bolster a weak entry into the growing mobile technologies segment, and reposition itself in the new technology world. The internet is filled with stories of its impending demise. So, is the software giant really dying? Clearly something went wrong - what was it? The following analysis seeks to find an answer to these questions.
So what does Microsoft really do?
Microsoft seems to have its tentacles in every technology business there is - it develops client operating systems, servers, productivity software like MS office & project, application development tools, package solutions like ERP &CRM, web browsers, internet websites such as MSN and Bing, gaming consoles (Xbox) video games and many more. One looks at the portfolio and one wonders what is the company really trying to achieve? What is the underlying vision - if there is one? But the portfolio of the plethora of products starts making sense when one thinks of Microsoft as a software platform company. From its early days, Microsoft has strived to develop the underlying platform on top of which other developers can develop their products. The idea is to create a huge ecosystem defined by applications, peripherals, and accessories around the platform and monetize the platform. By nature, it's a business with high operating leverage, marginal variable costs and where money comes hand-over fist once you have scale.
The five operating divisions of Microsoft are:

Division

How to think about the division

Windows & Windows Live Division

Your PC/Laptop and Browser Platforms

Servers & Tools Division

Big Computers that organizations like Darden or your workplace care for but you probably don't

Business Division

Your Word, Excel, PowerPoint, Project, Visio etc.

Entertainment Devices

X-Box and Windows Phone

Online Services Division

Websites like Bing & MSN


Let's do a quick SWOT on each division to see how Microsoft fares:
Windows & Windows Live Division:

Strengths:

  • USD 18.5 Bill Business / ~ 70% Operating Margin / 85%+ Market Share
  • Deeply Entrenched into business infrastructures
  • Good Consumer mind/market share

Opportunities:

  • Software Piracy has been the biggest traditional rival. Depending on tablet execution strategy, might be able to circumvent piracy after all

Weaknesses:

  • Long product development life-cycle of ~ 3 yrs.
  • Complacency & risk aversion. Mgmt is too secured about the cash-cow. No radical design changes in years.

Threats:

  • TABLET market! One year old tablet market has clearly started cannibalizing sales of PCs. Microsoft's tablet strategy is unclear as of yet and might face significant late-mover disadvantage


Servers & Tools Division:

Strengths:

  • USD 15 Bill Business/ 30% Operating Margin / High Market Share
  • Deeply Entrenched into business/enterprise infrastructures

Opportunities:

  • Development of Cloud Services (IAAS, PAAS, SAAS) represent new growth areas.

Weaknesses:

  • Typically operates on the lower end of the segment catering to smaller & medium businesses. Juicier large business segments have been captured by competitors like Oracle and Vmware

Threats:

  • Competitors are trying to move into lower end of the market via acquisitions and cloud strategy


Microsoft Business Division:

Strengths:

  • USD 18 Bill Business/ 60% Operating Margins/ Ridiculous Market Share
  • Deeply Entrenched into business/enterprise infrastructures
  • High Consumer mind/market share

Opportunities:

  • Development of cloud services and products such as BPOS

Weaknesses:

  • None come to mind

Threats:

  • Google and Apple have been trying to develop/sell competitive products for some time now



Online Services Division:

Strengths:

  • Talented Development Team

Opportunities:

  • Eating into Google's Search Market Share but at a slow rate.

Weaknesses:

  • Like any technology business, this is a high operating leverage business which needs scale to become self-sufficient and grow. It doesn't have scale at this time and losses money

Threats:

  • Brain Drain to competitors


Entertainment Devices Division:

Strengths:

  • Talented Development Team
  • Gained significant mind/market share and revenues from the recent block-buster product "Kinect"

Opportunities:

  • Kinect is a camera based gesture recognition technology. Extending the technology to other software divisions could prove to be huge!

Weaknesses:

  • None come to mind.

Threats:

  • Industry has been subject to wild swings amongst competitors with Sony, Nintendo and Microsoft being at the top at different times.


Analysis Summary:
Right off the bat, the business doesn't look like it is planning to die tomorrow, day after or the day after that. Four out of five business divisions are clearly hugely profitable on a phenomenal revenue base and Online Services Division is also gradually gaining market share from competitors. The question becomes, why is there a distinct market pessimism around the company? I think the answer lies in not what the company is but what it was positioned to become ten years back, failure to identify disruptive technologies in time and execute on them over the years and retaining long product cycles in what seems to be an industry that changes every month.
Company products like Windows Vista, phone Kin and Zune were subpar to what was available in the market and were duly received as such. Today, the market consensus seems to be that the future of computing is mobile. Microsoft acknowledges this but failed to come up with a credible competitor to the iPhone and the Android products till 2010 (three years late). Even after release, the software update process has fumbled irking the early adopters of the platform. From market sources, it looks like a credible competitor to the iPad and Android tablets will not hit the market till late 2012. The company has received similar knocks for lagging in execution in its cloud strategy.
My sense is that the above p

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roblems are not the cause but the effect of the company's real problem - the sense of security and complacency that the company management got into sitting, on the ivory towers of Windows and Business divisions. They downplayed the threats from their competitors and were slow to react with subpar products. Of course, they see it now and the CEO, Mr. Steve Ballmer has commenced a major re-organization of the company from the top-down, replacing and even firing a large number of very senior executives over the past two years. The company has started taking big bets again. 2012 promises to be a big year for Microsoft as the company prepares to launch major new products in all core divisions - Windows, Business Division, Phone and Servers. As a devout follower of the technology business, I personally, would be looking at the year closely as it would largely speak to whether the company has been able to get over its internal execution and complacency problems, trimmed down the fat and prepared itself to go head to head with some very worthy competitors.temp etmp etmp