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What’s Wrong with Microsoft? May 28, 2010

Posted by Peter Varhol in Strategy, Uncategorized.
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That’s a loaded question.  On the one hand, it’s difficult to say that anything is wrong.  The company continues to increase sales year over year almost like clockwork (until last year).  It has had a successful launch and good reviews of both Windows 7 and Office 2010 (now if they can only get come consistency in their product numbering schemes).

Yet Apple, a smaller company is sales, now has a bigger market capitalization than Microsoft (market capitalization refers to the stock price times the number of shares outstanding).  I noted a few weeks ago that this seemed likely to happen in the near future.

Note that market capitalization doesn’t directly reflect revenue or profits.  Microsoft had $58.44 billion in revenue in its last fiscal year, with $14.57 billion profit.  Apple had $36.54 billion in revenue, with $5.07 billion profit (both figures are for fiscal year 2009, but the fiscal years are different).  Instead, it better reflects the collective belief of the stock market participants on the health and future prospects of the respective businesses.

As of May 26th, Apple’s market capitalization was $221.36 billion, and Microsoft’s about $219 billion, according to the Wall Street Journal, CNN Money, and others.

Both are enviable numbers.  But the fact that Apple is now worth more than Microsoft says something about how they are perceived.  To wear the mantle of a growth company, it’s important to be able to show that your prospects for strong revenue (and profit) growth will continue into the future.  You do that through product introductions and new features that make your intended audience (both buyers and investors) believe you can keep it up for a long time.

As I pointed out above, Microsoft has also had reasonable successful major product introductions over the last year.  While these products have been successful, Microsoft has failed to excite customers with them.  A large part of that is because they tend to be new versions of longtime products, rather than innovations with new market possibilities.  Microsoft will get the vast majority of Office users to eventually pony up, but there are no significant new market possibilities for the next iteration of a spreadsheet application.

And that pretty much sums up what’s wrong with Microsoft.  It has a lucrative market core and serves it well, but focuses so much on that core that it is unable to open big new markets.  It’s important to realize that Microsoft also sees the value in the consumer market, but with the limited exception of the Xbox, it has failed to excite that market.  It tried to sell a phone operating system the same way it sells Windows, and the results seem to be getting worse every year.  It tried to build a music player to compete with the iPod, and offered users no compelling feature reason to consider it.

So to continue its growth as a business, Microsoft needs to come up with new products, or enhancements to existing products that open large new markets.  Easier said than done, but Microsoft will remain stagnant until it can define new markets with its products.

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