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  • Despite Record Earnings, Microsoft is Shooting Itself in the Foot!

    April 27th, 2007

    All right, ladies and gentlemen, here’s the good stuff, at least if you’re a Microsoft employee or stockholder: For its fiscal third quarter, ending March 31st, earnings rose to $4.93 billion, or 50 cents a share, compared to $2.98 billion, or 29 cents per share last year. Total sales increased by 32 percent to $14.4 billion.

    Indeed, Microsoft earned a whole lot of cash, most likely because of the arrival of Windows Vista and Office 2007, which gave them something new to sell.

    So you’d think the company is in wonderful shape, and indeed their stock price jumped $1.05, to $30.15 per share, in after-hours trading. Clearly Wall Street likes the numbers, although not quite as enthusiastically as Apple’s.

    On the other hand, when you look past Windows and Office, things aren’t quite so rosy. Take the Xbox 360 game and the Zune music player, which, together, showed a 21 percent decrease in sales to $929 million. As a seasonal decline, maybe that’s not a whole lot. But the problem is that these products have yet to become profit centers. This is particularly true with the Xbox, which has cost Microsoft billions of dollars since it was released.

    Of course, with its huge hoard of money, Microsoft can afford to subsidize these products for years and not seriously suffer from the ongoing investments. Certainly, you have to admire their optimism, that they believe in these ventures and hope that some day, maybe not this year or the next, the Xbox will be a cash cow and the Zune will make a serious dent into the iPod’s market share.

    You can certainly understand that Microsoft realizes it can’t sustain itself until the end of time on Windows and Office, plus related products, and that they need to diversify. However, are they doing all they can to move beyond their core businesses?

    Well, the Xbox has surely gotten good reviews, and millions of gamers love them. The worst you can say, perhaps, is that Microsoft is taking the same tact as a printer maker. They sell the basic hardware for the lowest price possible, and depend on the sale of the things you need to use the product to make profits.

    With the Zune player, you have to wonder, though, just what Microsoft is thinking by selling the player at a loss. If you can believe what Apple says in its financial reports — and there’s certainly no reason not to — Apple makes a ton of money from the sale of every single iPod. They never lose a dime from anything they sell!

    So, other than being competitive, or mostly competitive, why would Microsoft take a loss on every single Zune it sells? Where are the profits coming from? Well, I suppose there’s the music, right? They’re taking the same approach as with the Xbox, hoping to make up the difference at the Zune Marketplace.

    That business plan, however, is questionable. The nasty truth is that the profits from iTunes are relatively small in the scheme of things. Surely they’re not enough to subsidize the sale of iPods, and, fortunately for Apple, it’s not necessary.

    So why can’t Microsoft, a much larger company than Apple, keep its expenses down so that it doesn’t take a loss on every Zune it sells? Well, there are those economies of scale, of course. Apple moves far more product. In addition, Microsoft has taken the bullet-point approach in creating products, which is to add features the competition doesn’t have. In this case, a built-in FM radio and Wi-Fi.

    These two subsystems clearly add to production costs, and it’s hardly certain that they have impacted sales all that much? I mean is Apple wrong not to have an FM tuner in the iPod? After all, they’re available from third parties as add-ons if you need them.

    Wi-Fi? Well, I suppose there might be a benefit in being able to send and receive content, but the feature is so crippled on the Zune, you have to wonder why it is even offered at all? In case you haven’t been following this — and why would you? — it’s because the tracks you squirt to a fellow Zune player, assuming one can be found, are overlaid with a time bomb. Three plays or three days, whichever comes first, and they’re useless.

    So, yes, Microsoft is doing well enough to keep its people happy. But on a long-term basis, there are troubling signs. They’ve yet to learn, for example, that you can’t create hot new products that people lust after with committees and marketing departments. Something has to change. The question is whether Microsoft’s emerging new leadership understands that, or whether they will continue on the long road to eventual irrelevance. Not this year, or the next, but five or ten years from now, things just won’t be the same.



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    11 Responses to “Despite Record Earnings, Microsoft is Shooting Itself in the Foot!”

    1. rwahrens says:

      You also might want to read this article:

      http://www.electronista.com/articles/07/04/02/microsoft.bleeding.cash/

      It seems in the last two years, Microsoft has bled its cash reserves down to half what they were. In two years, they have bled down to only $29 billion – from $60 billion.

      A famous Senator once said, “A billion here, a billion there and pretty soon you’re talking about real money.”

      Maybe they can’t keep subsidizing those products forever after all…

    2. Robert Pritchett says:

      Any real money comes from training MCSEs, their book press and the sale of mice and keyboards – oh, and selling MS Vista and MS Office to Mactel folks! 😉

    3. Tom B says:

      You also might want to read this article:

      http://www.electronista.com/articles/07/04/02/microsoft.bleeding.cash/

      It seems in the last two years, Microsoft has bled its cash reserves down to half what they were. In two years, they have bled down to only $29 billion – from $60 billion.

      A famous Senator once said, “A billion here, a billion there and pretty soon you’re talking about real money.”

      Maybe they can’t keep subsidizing those products forever after all…

      They have deliberately reduced cash, since most of their antitrust entanglements have fizzled due to weak and corrupt governments (our own DoJ had a CONVICTION and let things go with a wrist-slap). MSFT has ironically done ITSELF more damage with cra**y products than an army of lawyers has been able to do! Also, cash sucks. The dollar is depreciating against foreign currency at an alarming rate. And they have bought back lots of their own stock, to shore up the stock price. (For fun, go to Google Finance and plot AAPL vs MSFT a 5 or ten year range. For extra fun, throw in Dell).

      I have one question: How much of the Vista sales is propped up by sales to the channel (sitting on shelves in CC and CompUSA) vs. units in people’s homes or offices? It is already known that they prop up their XBox numbers by simply selling lots of units to box stores, where they may sit, unpurchased for a long time.

    4. mark says:

      To be fair, a portion of the decrease was used by Microsoft to buy back stock and pay a dividend.

      All in all, though, they are throwing a lot of money down the drain. With their riches and hemmed in a bit by regulators, they’ve grown fat and complacent.

    5. Peter says:

      “why can’t Microsoft […] keep its expenses down so that it doesn’t take a loss on every Zune it sells?”

      I’m not doubting, but I am curious…

      It was my understanding that Microsoft is not losing money on the Zune (though they are not making as much as planned, as they were forced to cut the price to $249.99 to compete with the iPod’s $249 price). But I could be wrong and I can’t seem to find an iSupply breakdown of the costs.

      Anybody have a link to where it says Microsoft is losing money on each Zune?

    6. “why can’t Microsoft […] keep its expenses down so that it doesn’t take a loss on every Zune it sells?”

      I’m not doubting, but I am curious…

      It was my understanding that Microsoft is not losing money on the Zune (though they are not making as much as planned, as they were forced to cut the price to $249.99 to compete with the iPod’s $249 price). But I could be wrong and I can’t seem to find an iSupply breakdown of the costs.

      Anybody have a link to where it says Microsoft is losing money on each Zune?

      Let’s start with this one:

      http://www.nytimes.com/2007/01/26/technology/26soft.html?ex=1177819200&en=5339e2f7f6ba6a6f&ei=5070

      There is no story that I’ve seen showing that Microsoft makes ANY profit on the Zune. Care to share one that we can link here?

      Peace,
      Gene

    7. Peter says:

      I haven’t seen one either, showing either a loss or a profit on every Zune it sells.

      In the article you linked, it said:

      The company is betting heavily on the consumer electronics business for future growth, and late last year it introduced a digital media player, Zune, which competes with Apple’s iPod. But Microsoft’s consumer entertainment and devices unit contributes no profits yet, losing $289 million in the quarter.

      So that tells me that the consumer entertainment and devices unit, which consists of Xbox360, MacBU, Zune, WebTV/MSNTV, keyboards, and mice lost $289 million. It doesn’t say anything about whether Microsoft sells Zunes at a loss.

      Microsoft may not be making enough money to cover expenses with the Zune. I could believe that. But that’s different from saying that Microsoft is selling Zunes at a loss.

      Like I said, I haven’t heard that Microsoft is selling Zunes at a loss. That’s the link I’m looking for. I know the division is losing money–heck, part of the reason MacBU is there is to make things look a little brighter.

    8. OK, let’s not belabor the point. If you have some documentation to show that Microsoft makes a profit from the Zune (or even the Xbox for that matter), I’m happy to examine the link. OK?

      Peace,
      Gene

    9. Peter says:

      I haven’t been able to find one for the Zune, which is why I asked.

      But according to iSuppli, the Xbox 360 costs $323 to make. From a BusinessWeek article dated November 16, 2006:

      A new iSuppli analysis of the Xbox 360 and the price of the components used in it reveals that Microsoft may be close to hitting the breakeven point on the Xbox 360. The console now costs Microsoft $323 to manufacture, leaving a gross profit of $76 per unit.

      So there’s a link showing that Microsoft makes a profit selling the Xbox 360.

      So why can’t the Xbox 360 turn a profit? It could be related to expenses. I think I read somewhere that Microsoft shipped 500,000 Xbox 360s last quarter. So that would be $38 million. But if they spent $50 million on advertising, etc., they’re running at a loss.

      Another possibility is that Microsoft still loses money on an Xbox 360 sale because Microsoft doesn’t get the whole $399 MSRP that you gave the person you bought it from. Usually, you have a wholesale price and I have no idea what that is. So Microsoft might still losing money because they sell it to GameStop or WalMart for less than $323.

      By the way, here’s a disclaimer. While looking around for this, I also ran into this BusinessWeek article from about a year earlier which claimed that the original Xbox cost about $323 to make, whereas the Xbox 360 cost $470. Of course, BusinessWeek now tells us that the Xbox 360 costs $323 to make. It could be a coincidence, or it could be that BusinessWeek screwed up.

    10. OK, that’s half the story. What it costs to manufacture doesn’t include advertising costs, overhead, etc. It’s not just the cost to build the device, and if that’s so close to the selling price, they have to be dropping a bundle on each unit sold.

      Peace,
      Gene

    11. See the following:

      Making Sense of Microsoft’s Third Quarter Financial Results

      “Firstly, they deferred $1.2 billion of XP sales from Q1 and Q2 2007 — sales that qualified for the upgrade coupon — rolling it into this result.”

      http://www.yafla.com/dforbes/2007/04/27.html

      “Don’t believe the hype”

      http://kaiwai.blogspot.com/2007/04/dont-believe-hype-ive-read-through.html

      It’s simple really. Over the years, Microsoft has been very profitable. It accumulated mounds of cash. Now that it struggles to keep up with technology it has tried to suppress for over a decade (Free software and Web-based software), the company uses that cash to make it seem as though it’s very much alive.

      The WinTrolls seem to have missed the fact that Microsoft fools many people here. The company has lost over half of its hidden cash reserves in just two years.

      Software Notebook: Microsoft’s cash pile isn’t what it used to be

      ,—-[ Quote ]
      | But Microsoft has taken a series of steps to reduce its cash
      | balance. Specifically, by Microsoft’s count, the company has
      | paid out nearly $100 billion through dividends and repurchasing
      | its own stock in the past five years.
      `—-

      http://seattlepi.nwsource.com/business/309852_software02.html

      The XBox division alone has lost over $5 billion and still loses hundreds of millions per quarter.

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