Microsoft in the Post-Gates Era
William H. Gates III might still be chairman, but Microsoft's post-Gates epoch is underway. July 27 marked the first annual Microsoft (MSFT) analyst meeting without Gates, the man who for three decades has been the public face of the company he co-founded in 1975. Indeed, Gates was nowhere near Microsoft headquarters in Redmond, Wash., where the meeting took place. He's in the midst of a seven-week vacation in Africa, a sign of the executive's shift away from Microsoft. Said Microsoft CEO Steven A. Ballmer, it's "the beginning of a new era for Microsoft."
Ballmer wasn't just talking about Gates's absence. Microsoft, whose sales growth has tapered off since the 1990s, has pushed into new markets. And executives used the meeting to tout efforts to build new business and eke out new growth in the coming years.
That's important since Microsoft stock got pounded in April after the company dropped a bombshell on investors while reporting fiscal third-quarter results. The company said at the time it would ramp up investment to tackle new initiatives, spending an additional $2.7 billion (see BusinessWeek.com, 4/28/06, "Microsoft's Strange Spending Splurge"). Indeed, much of the analyst meeting was spent outlining the long-term opportunities that the new spending will generate, and assuaging Wall Street's trepidation.
What's more, Chief Financial Officer Chris Liddell offered investors an olive branch. "We had a disconnect in the third quarter from the way we think about the company and the way you think about the company," Liddell told analysts. He vowed to increase communication with investors, including more opportunities to hear from Ballmer and other top execs.
The promise played well with analysts who fret investors are shunning Microsoft shares on concern management is indifferent to shareholders. "They're not going to change the way they're doing business," says Sanford Bernstein analyst Charles DiBona. "But they're going to be more receptive to the Street. If you can overcome that objection, there's a lot of value that you can unlock."
TAKING ON THE IPOD.
One of the newest bets Microsoft is making is in digital music devices. On July 21, Microsoft acknowledged after months of speculation that it would make its own device, dubbed Zune, to compete with Apple's (AAPL) iPod. Robert J. Bach, president of Microsoft's entertainment and devices division, says the company plans to invest "hundreds of millions" of dollars over the next few years to develop and market the device. The company will start by selling one device in the U.S. in the autumn, then add to the product line and expand geographically. It will take the company from three to five years to turn a profit on the device. "It's something that's going to take time," Bach says.
It's clear that Microsoft also intends to change the economics of the music player business. Apple makes the bulk of its MP3-related money by selling iPods—not from selling songs or software. "I think there are opportunities for that to change over time," Bach says.
And Ballmer says the company may push further into the hardware business. The company has made mice and keyboards for years, and it jumped into the video-game console business with its Xbox in 2001. Zune may not be the last gadget Microsoft makes. "Where it's smart and where we need to … we'll consider it," Ballmer says. But he adds that no one should expect the company to make PCs.
Microsoft also disclosed that the Xbox will continue to lose money though the current fiscal year that ends next June. But in fiscal 2008, the console will reach profitability and push the entire entertainment and device division into the black.
Separately, Ballmer seemed to throw cold water on speculation that the company might acquire Yahoo! (YHOO) to boost its online prospects. "There is no acquisition path out," he said in response to a question about what Microsoft might do if it can't catch up with Yahoo and Google. "We'll work hard until we do well," Ballmer says. "Failure is not an option."
The company also worked to quell another rumor—that the next version of its monopoly operating system, Windows Vista, would be delayed yet again. The software, five years in the making, is now expected to be available to business customers in November and consumers in January. Kevin Johnson, co-president of Microsoft's Platform & Services Division, says he wouldn't hesitate to delay the product again if it's not ready. "And at this point in time, there is no data or information that says we are not going to make the November business availability or the January consumer availability," Johnson said.
After the product delays that marked the latter years of Gates's tenure, keeping to timetables would be the surest proof yet that Microsoft's new era has begun.