Opinion

Felix Salmon

Chart of the day, Microsoft edition

By Felix Salmon
September 3, 2013

Many thanks to Ben Walsh for pulling together the data for this chart. The numbers speak for themselves, really: over the course of Steve Ballmer’s tenure as Microsoft CEO, the company’s stock price has gone nowhere, its market share has plunged — but its headcount has more than trebled. And that’s before adding another 32,000 employees as part of the Nokia acquisition.

Ben Thompson has a very smart analysis of Microsoft’s move here:

Guy English has already characterized Ballmer’s disastrous reorganization as a straitjacket for the next CEO; adding on a mobile phone business that Microsoft probably should abandon is like attaching an anchor to said straitjacket and tossing the patient into the ocean. It will be that much more difficult for the next CEO to look at Windows Phone rationally.

As Henry Blodget notes, Windows Phone is now going to account for a good quarter of Microsoft’s employees; integrating those two huge and very different cultures is going to take an enormous amount of effort, with no guarantee of success. And as Thompson notes, this acquisition essentially forces Microsoft to double down on its strategy (which has signally failed to date) of competing head-to-head with Android and iOS.

There is really zero consumer demand for an alternative smartphone OS: even the ultrageeks fell well short of raising the $32 million they needed to develop a version of Ubuntu for phones. Microsoft is pretty good at giving big organizations what they want — Windows and Office, the two great powerhouses which have between them accounted for all of Microsoft’s profits over the years. And somewhere, deep inside its institutional memory, it knows that once upon a time it came late to the browser game, entered with a big splash, and ended up demolishing Netscape.

The problem is that this second-mover strategy doesn’t work against Google and Apple. It doesn’t work in search, it doesn’t work in tablets, it doesn’t work in phones. (It has arguably worked in gaming systems, which is something of a Pyrrhic victory, given the way in which games are going mobile.) Nokia is a failing company — if Microsoft hadn’t swept in to save it, it would probably have gone bust pretty quickly — and one of the reasons that it’s failing is that no one wants to buy a Windows phone. And that’s especially true in the fastest-growing market of all.

Nokia’s fall has been most spectacular in Asia, a region that its phones once dominated. As recently as 2010, the company had a 64 percent share of the smartphone market in China, according to Canalys, a research firm. By the first half of this year, that had plunged to 1 percent.

With this acquisition, Nokia chief Stephen Elop becomes heir apparent to Ballmer. Elop knows how to navigate Microsoft’s poisonous bureaucracy, having worked there for many years, but he also counts as an outsider, able to bring in fresh ideas. He also — obviously — knows mobile, which is the single factor determining Microsoft’s future: if the company can navigate the move from the desktop to mobile, it will succeed; if it can’t, it will fail.

But the chart foretells how this game is going to play out: Microsoft is now simply too big to turn around. Elop saved Nokia in much the same way as John Thain saved Merrill Lynch, by selling a fundamentally worthless company to a much larger strategic buyer for billions of dollars. That strategy isn’t going to work for Microsoft. Probably, there is no strategy which would work out for Microsoft. The company’s heyday is far in the past, now; all that the new CEO can hope for is to maximize profits as it slowly, inexorably, declines.

Comments
10 comments so far | RSS Comments RSS

It is worth remembering that Microsoft’s entire history can be summarized as a mix between “cling to safety” and “swing for the fences”, and that size now means that any new project must be “go big or go home.”

When it’s office, or windows, and they don’t wiff (win8) they get a grand slam for the ages.

They have some quiet businesses that make real money, but it’s about impossible for anything other than really spectacularly large wins to change the share price in any useful way. That’s the problem – they need giant dollars to raise EPS even a little bit.

Given that smartphones will at some point level off just as PCs have, the entire industry will have to learn to live with saturation and not being ultra hot ultra growth anymore. It will be painful for all.

Posted by BryanWillman | Report as abusive
 

I don’t think it’s possible to defend Ballmer’s tenure as Microsoft CEO. That said, the head-count/stock-price measure in wankerish nonsense. The fact that fools were willing to pay high multiples for stocks in the tech-bubble is not Ballmer’s fault. Head count is up ~2.6X, while revenue is up 3.4X and net income is up 2.7X. Still glad he’s on the way out. I think the press likes the Elop as heir apparent story more than the facts warrant.

Posted by markclose | Report as abusive
 

You get a little too “grand” there at the end, certainly don’t see that Microsoft’s entire future is dependent on mobile. If so, then the stock should have a “panic sell” rating on it. They’re already lost mobile, but Balmer couldn’t stand to see it die on his watch so he’s rescued Nokia essentially saving the last Windows Phone maker. But the enterprise is still alive and thriving, and there’s a lot of money to be made in that space without any mobile offerings. Maybe it’s not a glitzy as the consumer market, but still a lot of money to be made there. And we’ll see how the new XBox does, I’m skeptical that there’s a huge market for big boxes like that in home entertainment going forward.

Posted by Harpstein1 | Report as abusive
 

Given that they will own the desktop until the day that desktops become irrelevant (in much the same way IBM owns the big iron market), it would seem smart for Microsoft to go the Income Trust route.

Reduce costs (including R&D) down to as little as possible, return almost all the profit as dividends and continue to make huge amounts of money for the next 20 years for any investor who’s not entirely obsessed with growth (if there are any).

Could be the darling of seniors and anyone else who wants a steady income. The company would probably last longer than any existing tech company, given most spend themselves into the grave in a desperate attempt to find the next “big thing” once their initial “big thing” stops growing.

Posted by TomWest | Report as abusive
 

I’m wondering how many graphics, video, and audio professionals will come back to the Mac over the next few years/months? Adobe actually made it easier for them to swap platforms with their cloud services….it’s just a matter of relearning some keyboard shortcuts.

The big 3D software makers are going to have to move more resources into the Mac platform too.

Posted by bpondo | Report as abusive
 

Felix, you should know that comparing employee count to share price makes very little sense. It does make sense to compare headcount to revenue and net income, both of which increased substantially during this time frame. (In fact, revenue per employee may have increased over that time period.) That’s not to say that I’m a fan of Ballmer’s time in charge at Microsoft, merely that your comparison is unfair to the point of misleading.

The logical endpoint of your argument – which you hint at but don’t say explicitly – is that Microsoft should pay huge dividends to shareholders because in its own hands Microsoft will waste the cash pursuing markets where it will fail. I take your argument to be that Microsoft should close down Bing, probably spin off Xbox as its own company, and define Microsoft as a largely enterprise focused company, which happens also to offer compatible Windows and Office products for use at home.

Posted by realist50 | Report as abusive
 

Not quite sure it was Elop who ‘rescued’ Nokia as it was his strategy that put Nokia where it is today, losing 85% of its share price with a move to Windows – but only after getting rid of what was selling and effectively having nothing to sell for about a year apart from low end phones.

As for him making a good CEO of MS, do you really think that?

Posted by FifthDecade | Report as abusive
 

@realist50 “Microsoft should pay huge dividends to shareholders because in its own hands Microsoft will waste the cash pursuing markets where it will fail.”

I wish I had enough shares to vote you onto the board of MSFT! The cumulative value destroyed by generated by Hotmail/outlook/skype/bing/zune/nokia easily exceed 25,000,000,000. I can’t fault MSFT too much though because if Yahoo had not refused to sell themselves for what was at the time a 50% premium than MSFT would probably be a strong second in search and actually have a 3rd profitable business line.

Posted by y2kurtus | Report as abusive
 

No offense Felix, but the board never wanted to move away from Ballmer’s strategy. They’ve made considerable number of signals including an outright message to employees that the company is focused on transitioning to a devices and services company.

When Ballmer announced the reorg, you can’t possibly think that it was mere coincidence that he referred to Microsoft’s future as a devices and services company — that’s at least as long as he and the board have been considering the buyout.

The market got the wrong signal when Ballmer announced his impending resignation. They (and most everyone else) thought that this was an opportunity for the company to move in a new direction. With the announcement of the purchase of Nokia, that Elop would be installed as the new head of the devices and services division, and that he was under consideration as the next CEO, the markets seem to have finally understood that Microsoft is NOT changing directions.

Therefore, Ballmer is NOT placing the next CEO in a straitjacket.

Posted by GRRR | Report as abusive
 

“over the course of Steve Ballmer’s tenure as Microsoft CEO… its market share has plunged.” Oh yes, its market share for operating systems worldwide is now down to a dismal 91% for Windows. Pathetic. For Office type products, it’s even higher. MSFT will have about $2 billion in cash flow this month, just like it does every month. Mr. Ballmer has been an unqualified disaster.

Posted by Ditman | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •