Thursday, June 01, 2006
Google is Microsoft's new open source
Microsoft Corp's biggest challenge is embracing software-as-a-service business models, as embodied by rival Google Inc, chief executive Steve Ballmer told investors yesterday.
Investing in software as a service and advertising-supported businesses is a challenge like that which the company faced at the dawn of the open-source movement, he said.Ballmer spent an hour at the Sanford C Bernstein & Co Strategic Decisions Conference in New York seeking to reassure Wall Street that Microsoft's surprise $2bn increase in R&D spending, revealed a month ago, is justified.
To paraphrase him heavily, the takeaway was: Yes, we're investing a lot, but it's riskier, long-term, not to do so. We have a lot of cool stuff coming up and, yes, we are also playing catch-up on a couple of fronts.
"We've got to make this transition, which our industry is making, from software as a product to software as a service," he said. "If you want to be a leading software company, you've got to be a leading software-as-a-service company,"
This transition is "not optional", he said, which could indicate enthusiasm or reluctance, depending on your point of view.
His speech came a month after Microsoft revealed that its R&D budget for fiscal 2007, which ends mid-2007, would rise to $6.2bn.
That was about $2bn more than analysts were expecting, and the predicted drop in earnings that would result sent Microsoft's share price into a deep spiral, the likes of which it had not seen in five years.
Ballmer sought to justify this investment yesterday not just by pitching Microsoft's opportunities, but also by presenting some financial statistics.
He said that in its last fiscal year, Microsoft's R&D spend was about 14% of the total R&D spend of the top 25 companies in the industry, but that Microsoft's share of the total profit made was 23%. That was up from 18% in 2000, he said.
"What will that look like 2010?" he said. "That's a question based on the investment we put forth today and the innovations we put forth today."
While Ballmer was bullish on Microsoft's product pipeline, talking up areas such as voice, business intelligence, document management, information rights management and workflow, he acknowledged the company had been slow in one important market.
"There was one big opportunity - advertising as a software business - where we weren't first," he said, with a nod to Google. "Being a little bit more generous on R&D, rather than a little less, I think is a smart thing."
The largest portion of the increase in R&D spending will be pumped into the MSN online business, Ballmer said. The cost of acquiring new online customers is increasing, he said, but indicated there was a line to be drawn on customer acquisition costs.
Last week, for example, Dell Inc agreed to put Google software on its new PCs, and to make Google the default search engine. Ballmer acknowledged Google's win, but suggested that the company paid a heavy price.
"Everybody's going to have to decide at what level they want to pay," he said. "The return to our shareholders was not there in terms of the business deal [between Microsoft and Dell] that could be done."
He added that, contrary to some statements in the past, that it is not so much Google that is Microsoft's chief competitor nowadays, rather it is the new type of software business model that Google represents.
"If you look at it competitively... the issue really isn't any one company, Google or anyone else," he said. "The question is, how do we get on top of and really drive business model transformations."
"Open source was a new business model," he said. "It took us a few years to really understand what it takes to compete."
While several analysts at yesterday's event were keen to pursue questions about R&D and the Google threat, others were just as interested in finding out whether Microsoft plans to release any more cash back to shareholders.
Ballmer noted that Microsoft has returned $87bn to shareholders through buybacks and dividends since 2001, and that almost all of that has been replenished on the balance sheet. The company has about $35bn in cash.
He also addressed the problem of emerging markets, particular Brazil and China, where he noted that while Microsoft hardly makes any money, there are as many people financially able to pay for software as there are in the US.
Piracy is the primary issue, and local government support in those nations will be important, he said. To address the "emerging middle class" in these nations, Microsoft has launched its FlexGo rent-to-own PC services, he said.
Overall, Ballmer pleaded for analysts and investors to appreciate the long view. He said that Windows, which launched in 1983, didn't start to see serious revenue until 1993.
"I don't think any investor should complain about the payback on that," he said.
source:http://www.cbronline.com/article_news.asp?guid=3B2DEBC6-08A9-44C6-A1D7-359226EB5AE7
# posted by dark master : 6/01/2006 09:46:00 AM
