Windows Was Counterfeited: Why Steve Ballmer Needs To Go

Lee Ainslie of Maverick Capital recently pitched Microsoft (MSFT) as a good investment at the Value Investing Congress.  Unless Whitney Tilson has changed the name of the conference to the Value Trap Congress, I can't imagine why you would be enamored with the stock right now.

Two-Red-Aces-Pocket-Aces-520x345In Texas Hold'em, when you have a leading hand on the flop but don't play your cards right you can often be "counterfeited."  For instance, if you hold 9-10 and the board flops 5-9-10 you will be leading against even a pair of A-A.  However, if you don't protect your hand and get your opponent to fold with a big bet, you might end up losing.  If a 5 falls on the turn, your winning hand will have turned into a losing one.  You will now be holding middle two pair vs top two pair. 

Microsoft let its winning hand, Windows, become counterfeited because of its poor management.  The only two business lessons Bill Gates preaches are 1) always hire the best lawyers you can afford (a reference to the contract which gave Microsoft control of the operating system it wrote for IBM personal computers in the 1980s) and 2) always control the 'choke' point of a system.  The choke point in the computing world is the operating system.  Hardware is a commodity because it is worthless without an operating system to run it.  

When Bill Gates ran Microsoft, the company owned the choke point of the computing world with Windows.  Gates was ruthless in defending his turf.  When Netscape threatened to own the internet access choke point with its browser, Microsoft dropped everything to destroy its upstart competitor.  When PDAs became all the rage in the late 1990s, Gates created an operating system for PDAs to combat Palm OS.  Palm never recovered after Microsoft entered the PDA market because Microsoft always had the best hand – the company owned the PC and the PDA had to integrate with the PC to be useful.  When Sony threatened to invade people's living rooms with Playstation and control their entertainment flow, Microsoft backed the Xbox.

But now, under the leadership of Steve Ballmer, Microsoft has lost the choke point.  The choke point has moved from the PC to mobile devices.  Microsoft's winning hand has been counterfeited by both Apple (AAPL) and Google (GOOG).  

Apple has been a thorn in Microsoft's side for the better part of the past decade but never a huge threat because most businesses and many consumers would never dump their PCs to buy slower, more expensive Apple computers, no matter how good the user interface.  Steve Jobs was selling Lexus compared to Microsoft's Camry.  It was basically two different markets.

The iPhone, however, was a direct threat to Microsoft's control of the 'choke' point.  The iPhone was revolutionary not because of it's interface, which was brilliantly designed, but because Apple opened up the code to allow third party developers to create new applications outside of the traditional Windows platform. Microsoft should have seen the threat immediately because it was a direct copy of the threat Palm posed with its operating system.  Yet Microsoft's response was slow and disorganized.  It didn't introduce a phone until 2010 and the KIN was a weak response to Palm's phone, not to the threat Apple was posing. 

So weak, in fact, that it allowed the unimaginable to happen.  It allowed another dominant competitor into the market: Google (GOOG).  The Android operating system, which was introduced in late 2007, should never have gained as much traction as it has.  Android was open design developed by a consortium of companies  specifically aimed at combating both the iPhone and any future Microsoft entry.  However, Microsoft should have been able to use its clout, cash war-chest and expertise to muscle into the market, just as it had with its PDA operating system. 

Both the iPhone OS 4.0 and the Android are now working themselves backward to the PC from the newly introduced tablet computers.  Both allow third party developers to create applications that basically mimic the dominant Windows Office environment. Not only that, but in many cases, the targeted applications are easier to use than Microsoft's increasingly bloated software. 

Microsoft is now running behind with the introduction of Windows Mobile 7.0.  To continue the poker analogy, while Ballmer was trying to beat Google's hand in search with his pursuite of Yahoo, Google hit an set on the turn with Android.  Microsoft didn't bet big enough and fast enough on Mobile and Google stole the pot from under its nose. 

This is clearly management's fault.  Allocating resources and putting in place the correct division managers are strategic decisions that need to come from the CEO.  While KIN management was clearly incompetent, Ballmer should have realized this much earlier than 2008, when work on Windows Mobile 7.0 began. 

Unless the Board replaces Ballmer with more competent management, I believe Microsoft's stock will always trade at a discount to its competitors.  On paper, Microsoft looks like a value investors dream.  The company trades at a steep discount to Google and Apple, even though Microsoft's margins and growth stack up equally or better.

MSFT Comps 101510         Click image to enlargen
 

In addition, Microsoft's earnings have been growing steadily over the past two years.  In the chart below, you can see that the forward estimates indicated by the dotted line have been rising even though the stock has been stuck in the mud.

MSFT Est 
            Source: Baseline

And the stock's Price/Earnings ratio is basically at the lowest level ever.

MSFT PE 
             Source: Baseline

Since the introduction of Windows 7.0 and the resultant earnings boost from it the stock has basically gone nowhere.  I believe the market realizes that Microsoft has lost its dominant hand.  It no longer owns the choke point since that point has moved from the PC to mobile devices. 

If the introduction of the biggest software upgrade since Windows XP in 2001 can't move the stock higher, what will? Will it be Windows Mobile 7.0, a hopelessly late, fourth-place entry into the wireless market?  Will it be the rise of Bing, which costs Microsoft about $1 billion in losses every year to operate?  Will it be the Xbox which saw no growth and represents only 12% of Microsoft's revenues?  Will it be the corporate upgrade cycle in PCs, which is being cannibalized by the introduction of tablet computers? 

My answer is none of these will make the stock move higher.  Microsoft has relegated itself to a dying utility through its slow and inept management.  They have lost their dominating starting hand of pocket aces to a couple of upstart players that were playing a much weaker cards.  I believe much like IBM, which lost the operating system to Microsoft in the 1990s, Microsoft's stock will trade at a forward P/E of the mid to low teens for the foreseeable futures.  The stock is, in my opinion, a value trap.  There's no doubt the stock is cheap at 11x earnings and could move back to the high $20s.  And an increase in the dividend could make it more attractive to yield hungry investors.  However, I don't see a sustainable advance back to $30 or higher until the Board cuts its losses and replaces the CEO who played his cards so poorly.   

Disclosure: Contrahour is long Microsoft (MSFT) but for the life of it can't figure out why.

81 thoughts on “Windows Was Counterfeited: Why Steve Ballmer Needs To Go”

  1. Hmmm. No other comments. I, for one, agree with this post.

    bill’s theory of corporate management: How to tell if a company will be successful: Look at the CEO…

    Is he/she in charge?
    Is he/she about to go anywhere?
    Does he/she have a plan.

    Balmer’s prob. in charge (?); Certainly he is not going anywhere, except maybe to UW; But, he ain’t got no plan.

  2. Mauris ut dui vel plures us.there questio de viribus tuis, iam satis invenient post.I ut una nobiscum socius persevero vestri blog usquam ut placeas Skönt att vara besöka din blogg igen, har det varit månader för mig. Väl här artikeln som jag har väntat så länge. Jag behöver den här artikeln för att slutföra mitt uppdrag i kollegiet, och den har samma tema med din artikel. Tack, bra aktie.

  3. It appears that we have our leading lady for the Spider-Man reboot and her name is Emma Stone. Stone has been offered the role of Mary Jane and since she has a reputation with Sony chances are she is taking it. I honestly like Stone and she has that sort or sarcasm and cockiness I would expect from Mary Jane.

  4. It appears that we have our leading lady for the Spider-Man reboot and her name is Emma Stone. Stone has been offered the role of Mary Jane and since she has a reputation with Sony chances are she is taking it. I honestly like Stone and she has that sort or sarcasm and cockiness I would expect from Mary Jane.

  5. “As a zombie, its soul long ago to leave its body, it will be called dead, you are facing a dead body without a soul, even called on the day, it will not know are you talking about. ” . .
    d

  6. 、 Fascinating. Thank you. I have spent a couple of hours trying to find .edu and .gov links relevant to my legal keywords for my law review site. Your search phrase was extremely helpful thank you. Ash

  7. The nomination of the winner depends on the capability and spirit of the personality to finish the race.I like the post very much as it contain informative in knowledge.I like pics of Chelsea shares of the beauty of running in Madison, Wisconsin.I want to congratulate the winner for the nomination race.I want to know suggestion from others.!!!!!

  8. pig has only to make the request of the disciples of God, God is pleased to agree, just have a calf by the quagmire in climb out of the mud is all that God said to the pig: “to help him wash it down!” Small the Pig replied, surprised: “I am a disciple of God, how can it go wait on the calf so dirty!” God said: “You do not wait on others, how others know you are my disciples do ! “was very easy to become a god, as long as you can really pay.

  9. I am very much pleased with the contents you have mentioned.I wanted to thank you for this great article. I enjoyed every little bit part of it and I will be waiting for the new updates.

  10. Very good, this is a very great thing, I want to express my support for your ideas in the area who need help appreciated.Our personal sacrifice, has passed around the news is particularly insightful, really helps most of the people like my own goals. Your valuable facts may mean that people like me, much to my office colleagues.

  11. I just read articles of other’s before, and this time I am pondering your words seriously. I like your writing style, great information, appreciate it for putting up. This time I am deeply stricked by your article.

  12. Fascinating. Thank you. I have spent a couple of hours trying to find .edu and .gov links relevant to my legal keywords for my law review site. Your search phrase was extremely helpful thank you. Ash

  13. I think your artical is very useful in work and life, I will pay more attention to your blog. Hope that you could post new artical in future.
    Excellent post.thanks for the sharing, that greatly helped me

  14. .I think your artical is very useful in work and life, I will pay more attention to your blog. Hope that you could post new artical in future.
    . I am totally agree with your oppinion.this post is very encouraging to people who want to know these topics.

  15. http://www.okfake-oakleys.com/
    i motori di ricerca come google guadagnano i loro soldi inserendo annunci pubblicitari accanto ai risultati della ricerca nei loro motori. se questi risultati diventano facili da modificare, l’efficienza del motore di ricerca diminuirà, e la gente inizierà a utilizzare altri motori di ricerca per trovare dati importanti. in questo caso Oakleys Asian Fit,

  16. Doctor. E: “We’ll uncover you a pair glasses] louis vuitton bags giving an individual which Williamsburg look.Inches
    Ethan: *scoff* “Yeah, because that is what I am searching for!Inch /sarcasm
    Medical professional. E: …
    Ethan: “Actually, do you know what, that would be kind of wonderful.Inches
    Chose to give this specific spot a shot seeing all the reviews that are positive. I’d love to appreciate everyone that put up a new reveiw when you are proper.

    Dr louis vuitton wallet
    . Nited kingdom is awesome. He performed my attention assessment and taught me to be pick out a couple of glasses. Extremely honest. Gave his view on which support frames might go with my own skin composition. He has not been attempting to pitch the most expensive structures to create an extra dollar.

    This kind of louis vuitton sunglasses spot posseses an wide-ranging regarding glasses. After picking the pair We appreciated, he explained that they can call me personally if it’s all set. They known as the overnight!

    I’d most definately advise this particular spot to every person. I don’t have any doubt that I will be finding its way back in charge of lv shoes all of my long term vision wants.
    We’ve acquired a number of eye more than 20 years, along with Westside Eyesight Colleagues is the best optometrist knowledge that will I’ve ever got. My partner and i received excellent support in the minute My spouse and i referred to as to produce my own appointment reschedule mentioned session two times] all the way to the minute I walked out the door along with my sexy brand-new specifications.
    A+ pertaining to customer support. My insurance policies are over and above challenging, however louis vuitton sneakers was totally fantastic about forcing phone calls and also searching upward how you can finest let me. I was actually gonna possess my test and have my cups the following, nonetheless it proved which our insurance coverage wouldn’t cover quality as of this spot. Westside was outside of knowing concerning the circumstance, which usually urged me personally to go back to acquire the actual match right after an assessment elsewhere.

    The choice is nice and the sales rep is excellent regarding figuring out your lifestyle, handing an individual just what this individual believes fits finest, and also being aware what casings will match your prescription best. I additionally experienced a number of peculiar needs chucked inside (favored breeze upon sunglasses) anf the husband observed me personally the right couple for our tiny face.

    Your physician also reduced making guaranteed to assessment our prescription making certain this suited me personally. The sales person and the physician furthermore dealt with myself to determine what has been the most affordable utilizing my insurance coverage along with just what further add-ons were actually essential or otherwise.
    Theres’s grounds precisely why 100% of the surveys are Your five superstars. This specific spot is extremely good. I needed quickly reserved a meeting from Union Rectangular Eye due to the capability of the positioning. However once i look at absolutely damaging testimonials, I cancelled my personal appt. and also reserved at Westside.

    Considerate, warm and friendly personnel, as well as a great collection of structures (although We ordered mine since couple I’d earlier seen anywhere else was not in store, so they bought these for me AND at a much better value). Dr. K has been very great, and also was really detailed in the test along with justification associated with my own prescription. There isn’t any pressure in up-charges possibly. Generate. Nited kingdom recommended the particular anti-glare coating (which I needed at any rate) understanding that ended up being in which. I am so delighted I made a decision to visit here.
    My partner and i went back 5 days after to get (excellent turnaround contemplating they had to buy the actual sun glasses on their own) along with the spectacles were in shape professionally. Completely encouraged!
    Generate. K notifys you anything that he’s performing AS he is doing it. Like a doctor-visit-hater, I really can see this. We have never had an eye fixed doctor that’s as communicative while Medical professional. Nited kingdom. This kind of gentleman must facilitate courses to be able to optomawhatevers regarding how to provide top-notch plan manner. He’s so good.

    Right after my quite detailed eyesight assessment, Dr. K. talked about several questions on some tips i wanted inside my brand new spectacles, after which hand-picked 4 frames that will met my conditions. Us, getting the particular jackass that I am, ended up being like “pffft I’m likely to wander all around and look at most of these various other glasses because there’s no chance which anyone could understand what I want based on just wondering us a handful of questions”. Accomplish your hair a like in addition escape with regards to a 50 percent hour] and Believe in This specific Gentleman. My partner and i finished up choosing the first pair which he chosen for me personally. Of course. We have never during my living got a close look medical professional spend some time to assist me find my own spectacles. And also, as he had to abandon the actual sales floor in order to do an test in one more individual, the other employee who proved helpful the entrance hall ended up being useful and also warm and friendly.

    We’ve previously referenced about three associated with my personal colleagues to Doctor. Okay at WVA, and can keep doing thus. There are hardly any healthcare vendors in Howl who have a perfect ranking, and also this dude is among ’em.

  17. Where can you find classic arcdae games online for free?I recently was bored enough that I decided to play root beer tapper. Surprisingly, the game is no longer on any of the sites I know. I searched for several other 80s arcdae games (Defender, Robotron, ect) and none of them are on the internet anymore, you have to buy them. Does anyone know a site that still has these games for free?classicarcadegamesonline.com does not exist anymore (at least not in Canada) and the other sites do not have anything made before 1990

  18. Mac is a rip off because they want 2000 dollras for a Laptop than is no more better than a 600 Dollar laptop. Mac can do nothing that a PC cant. Its not like they are trying to sell us High End Gaming Machines. There is nothing Special about the Macintosh’s OS, Linux, and Windows 7 operating system is Much cheaper and in my Opinion the same as Mac. The Tablet and Ipad is made by Apple Not by Mac. Apple Made Mac, Mac didnt make Ipad or Tablet.

  19. Jag var mycket glad över att upptäcka denna webbplats på bing.I ville säga tack till er när det gäller denna fantastiska inlägg! Jag surelyenjoyed varje liten bit av det och jag har du bokmärkt att ta en titt på nya saker du postar.

Leave a Reply

Your email address will not be published. Required fields are marked *