Wednesday, February 06, 2008

Peak Microsoft?

Steve Ballmer and his crew at Microsoft look like Indians (feather) getting ready for a last stand against the invading force of Google. It looks like the Indians are showing their weakness. They want help, a buffer, protection against the forces of the Manifest Destiny of Google. The Indians have sought help from Yahoo.

Like generals fighting the last war, corporate leaders are always ready to take down the old competitors. MSFT once dismissed the Internet as inconsequential and irrelevant to its corporate purpose. But the stunning success of Netscape changed all that. After MSFT's furious assault on Netscape with the Internet Explorer, it was clear an awakening had occurred. It worked. Next month Netscape shuts down for good.

But fighting the last war means fighting to advance the New World Business Model that is fading. The New World Business Model is now Old. Consumers don't pay for content these days. Not all of it, anyway. The online version of the New York Times is free. Most online versions of newspapers are free. Who's paying? The advertisers.

Google is free to the consumer. That includes its word processing software as well as its spreadsheet software. Imagine free Word and free Excel, free Microsoft Office -- with advertising. Is there a chance MSFT will give consumers online access to Word, Excel and the rest while charging advertisers for the opportunity of displaying their goods to billions of users?

Based on MSFT's willingness to pay almost $45 billion for Yahoo -- and taking the extra step of BORROWING to cover the expense -- the answer is NO.

Welcome to the last war. Microsoft's Last Stand. Peak Microsoft.

To protect its Office franchise, MSFT will buy Yahoo for $45 billion. That's a massive insurance premium. Worse for Ballmer and Gates, the payment is a premium on a term insurance policy. But the duration of the term is unknown and shrinking at an accelerating rate.

It's estimated that Internet advertising is likely to double by 2012, pushing the number of I-dollars to an annual figure of $80 billion by that time. How much of it will flow into MSFT? Enough to justify the purchase of Yahoo anytime soon? Probably not. With annual revenue around $7 billion and net income about $1 billion, it will take a while for this transaction to prove its value. However, it does protect Microsoft. That's worth a lot.

Meanwhile, one point is clear. MSFT is not willing to use one of its chief assets -- Office -- to fight Google. That shows the company's tolerance for risk is gone. These days MSFT wants Washington to referee. The bell is ringing. Microsoft has peaked.


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