Tuesday, May 02, 2006

MSFT: the giant is officially awake

The now-public "Don't Panic" letter (allegedly) penned by Microsoft CEO Steve Ballmer is a sad testament to both the short-sightedness of Wall Street and the asymmetrical battle underway between Microsoft and Google. But most of all, it's the clearest sign yet that the Microsoft "sleeping giant" is now officially awake.

First reported on by Bloomberg News this morning, the full text of the letter made its way into the hands of Todd Bishop (beware of pop-ups at the link to the left) later on. Here it is in all its (alleged) glory:

Throughout our history, Microsoft has won by making big, bold bets. We've always taken a long-term approach, striving to solve the hardest problems in computing and working to realize huge new opportunities in vast new markets through investments in innovation across the broad spectrum of human endeavor.

I believe that now is not the time to scale back the scope of our ambition or the scale of our investment. While our opportunities are greater than ever, we also face new competitors, faster-moving markets and new customer demands.

So what accounts for the negative reaction that we've seen from analysts and investors?

To ensure that we win where we see opportunities and can respond with speed when the marketplace changes, we made the decision to ramp up investments during Q3 in a number of key areas. In addition, the cost of producing Xbox 360 consoles was higher than expected, while at the same time we decided to manufacture and sell as many consoles as possible to build on our lead in the race to be number one in the video game business.

These investments will continue. As a result, we also provided guidance for Q4 of this fiscal year and for FY07 that indicates our willingness to be aggressive when making investments where they are strategic for future growth.

The bottom-line result of these investments created a shift in our near-term profitability that was a surprise. The change in our stock price reflects this.

But I've never been more confident that we are making the right investments. In addition to adding a third manufacturing facility to enable us to meet market demand for Xbox 360, we are investing heavily in our services strategy; in our readiness programs for the launch of Windows Vista, Office 2007 and other products in the pipeline; and in a number of other areas where we see opportunities for rapid growth. We've accelerated the pace of our hiring and increased spending to ensure that we continue to bring the world's brightest minds to Microsoft.

When you look across the array of businesses we are building, it is clear that we are in a position that no other company can match. We have made and we continue to make the investments needed to ensure strong growth for our core businesses, while delivering the innovation that is essential to establishing a leadership position where we see opportunities in businesses such as entertainment, mobile devices, search and software-based Internet services.

I say "alleged" because I find it hard to believe that it would be necessary to explain to all of the smart people at Microsoft (and beyond) that investments mean "increased costs" which in the short-term translate into "less profit". Also because I didn't get a copy sent to me by Mr. Ballmer. One must be honest about the provenance of such things, after all.

The fact that Wall Street would punish Microsoft for making hard business decisions in the face of a competitor like Google is appalling to me. Especially when that competitor's entire business plan seems to be guided by a Brownian Motion producer.
Come on kids, let's be honest with each other - when the majority of recently "launched" products (if betas count as launches) come from unplanned, unstructured and unmanaged "20% time", it's pretty clear to me that Google is making this stuff up as it goes along. And it's being rewarded by the Street. Go figure. When the money machine runs out, they'll be left with lots of smart people writing widgets.

That Microsoft should be making investments to advance its franchises is no surprise. That the stock should take a hit based on the Street's fascination with "show me the money now" business practices is - unfortunately - no surprise either. But I'm surprised that the speculators who dumped MSFT didn't dump GOOG at the same time - since its clear that Google has woken the sleeping giant enough to make it want to piss off the Street.

Some random final thoughts:

  • If Mr. Ballmer was willing to take that sort of hit at the same time that he's under the gun for (alleged) continued Vista slippages, then dang, it's time for non-combatants to step back slowly and take cover.
  • And when/if Google starts to complain about so-called "anti-competitive practices" by Microsoft, they won't find Justice as sympathetic as they were towards Netscape. Oops, they're already complaining. Gosh.
  • I'm not quite ready to draw the Scut Farkus and Ralphie comparisons yet, but give me time. I also erased the "kudzu complaining about getting splashed with Roundup" analogy, which I think was especially mature and non-hyperbolic of me.

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