Microsoft is worth more than the sum of its parts.
Yeah, Microsoftâ€™s growth is not Web 3.0-based yet and itâ€™s not virtualization-based yet and itâ€™s not cloud-computing-based yet and itâ€™s not open-source-software (OSS)-based yet. But thatâ€™s a good thing. The fact that Microsoft (MSFT) does not yet depend on Web 3.0 or virtualization or cloud computing or OSS (or pick your favorite buzzword du jour) is a plus. If you are one of those that love to hate Microsoft and are therefore betting that Microsoft has missed the waves tied to all these concepts, you have to bet that Microsoft is going to miss out on all of them. Not likely.
That Microsoft has grown revenue and profits the way it has, quarter after quarter, is much more meaningful from an analytical point of view than buzzword-based analysis. The software market size is about $250 billion a year worldwide according to IDC (according to published documents), growing around 7% per annum. Owning about 20% of a dynamic market, while growing faster than that market (15-20% on a trailing 12-month basis), also has to count for something. Especially when Microsoft is also growing faster than the next three largest software suppliers, IBM (IBM) Software Group, Oracle (ORCL) and SAP (SAP). And is also larger than those three combined.
I havenâ€™t run the Google quarter-three 2007 numbers yet but I assume Google (GOOG) has cracked into that software market leadership group as well. And Google is still growing faster than Microsoft. So, in my analysis, I am conceding one loss. Monetizing software revenue via advertising is a trend that Microsoft will not win at. (But looking at it the other way, it would really count for something if Microsoft is able to crack that â€œadvertising revenue as license feeâ€ nut as well; it certainly does not appear that Microsoft will stop trying.)
Look at any other of a dozen trends important to the software market and Microsoft is strong or gaining ground quickly. Microsoft is settling up with OSS world (which accounts for less than 1% of the software market anyway). It is settling up with governments that have tried to change Microsoftâ€™s business model (in favor of OSS and nationalized software firms or just because the governments are socialistic). Microsoft is acquiring its way into Web 3.0. Microsoft promises integrated virtualization 6 months after Longhorn rolls out (and I bet it will be more than simplistic server virtualization).
Name your buzzword: Microsoft has it covered. Microsoft needs to be working on all these fronts. The client software cash cow has another year or two left in it; server and tools has maybe five. Paul Kedrosky and others are talking about a break-up to increase shareholder value before the cows dry up. But I look at Microsoft as most valuable viewed as a single value proposition, rather than a group of business units. If it chooses to, Microsoft is able to change the userâ€™s total information technology (IT) experience in a way no other software supplier can. Microsoft can combine the role of the user who is at once a consumer, an information worker, an individual looking for entertainment or personal information, and so forth.
This is true however only if you assume, as I do, that Microsoftâ€™s still unspoken strategy is to become a services company. If that is not the case, if Microsoft prefers to be a strong software technology provider equivalent to Cisco in communications, Intel in chips or Adobe in document management, then split it up so its pieces can better compete with the others. But life for us analysts would become so boring.