Is Microsoft about to collapse?

That’s a pretty bold question when you ask it about a

company with $56 billion in cash, but just take a look at it from a business standpoint

– fortunately we have a solid example for comparison (that’s how Harvard

Business School

does this sort of thing.)

Take GM (Ford is similar but less dramatic) – GM makes cars

and trucks which fewer and fewer people want except for a few enormously

bloated, expensive, and resource-hungry SUVs.

What people want are comfortable, safe, low-cost, efficient,

well-designed and, above all, reliable products which are readily from other


GM needs a minimum of 3-5 years to produce a new product and

those are so similar to older products that most potential buyers don’t see any


>Product development is a weak component.

As a company General Motors had a relatively captive and

competition-free market (except for Ford) for decades but, once the market

turned against it and competition arrived, management failed to respond. Consider

how much worse shape GM would now be in if they had NO competition from Ford!

GM has far more employees than it needs to produce what people

actually want to buy and, compared to other workers with similar job skills, GM

pays them far too much.

A major problem at GM is the way they offer guaranteed

lifetime employment – not a recipe for encouraging innovative employees. GM

even has to continue paying workers who aren’t working, to the tune of about

$120,000/year in total costs.

Last week’s riots in France

(many of us know how wonderful it is to deal with French shop employees) were triggered

by a new law which would make it possible to fire a new employee within two

years without going to court. (Quick – name three highly successful French


It only takes a glance at a Chrysler dealership to see that
some companies can make both rapid and successful product design changes.

What does all this car talk have to do with Microsoft?

GM got where it is by having, a near monopoly – essentially being

able to print money – which lead to complacency in product design, quality

control, and even in the way employees are paid.

Microsoft – when you make billions of dollars by essentially

duplicating CDs, you can pay employees as much as you feel like and load on the

benefits, which is what they did.

But, how many people does it really take to develop a powerful,
relatively secure operating system?

I’m not certain, but I bet Linus Torvalds could make a good

guess and it would probably be about ten thousand fewer than Microsoft needs to

NOT turn out products on time.

Let’s say 10 people could develop a reasonably secure OS – according

to the latest annual report, Microsoft

spent $6 billion on research and development last year.

Now, how many people does it take to publish, pack, and ship


Well, we could ask the various groups which deliver multiple

CDs with multiple versions of Linux. They sell them for little more than the

cost of shipping. Certainly less than a double decaf late

Microsoft spends $12.8 billion on marketing it’s products (some
of which is the cost of publishing and shipping.)

I bet could handle Microsoft’s production volume
with a couple hundred people.

Are you beginning to see a trend developing here?

Now, you would be right to point out that Microsoft also

produces Office – true, but the situation is identical (see

Office XP has a lot more features than OpenOffice, but how many of them do you

actually USE?

Microsoft is still making a lot of money. But so was GM a

few years ago, so what clues are there that I might be right?

Well, Wall Street is often a lot smarter than people think,

so let’s check their opinion of Microsoft.

MSFT (Mr. Softie to the street) stock hit a split-adjusted peak

of about $60 a share early in 2000, since mid-2002 it has never gone above $30

and, in the last year has hovered between about $24 and $28 – not exactly a

screaming bull market.

I realize that Microsoft does a LOT more than just sell

Windows and Office – there are server, Internet, development software, and

enterprise products, but other companies also sell those things. The big

difference for Microsoft is Windows combined with the Office suite.

What brought this all to everyone’s attention was the way Steve

Ballmer and Jim Allchin totally failed to produce Vista AND Office 2007 by the deadline

that would have put them on computers and in stores for the gigantic Xmas 2006

buying season (which is the same as the end-of-the year capital investment tax

buying season for businesses.)

MSFT – signs of the time

Number of employees – 56,000

Canary in the mine clues:

>Stock benefits to employees being cut to save $60
million annually.

>Medical benefits to employees cut drastically (proposed
$40 drug co-payment will save another $20 million.

>Vacation time cut for new employees from three weeks to

>Paid parental leave restricted.

>Flagship product shipment delayed past peak selling

>Competitors selling equivalent products for far less –

actually many competitors are simply giving away equivalent (even superior) products

such as Firefox and FreeBSD.

>A stock value that has declined for five years in a row when

you factor in just the government’s claimed rate of inflation (that’s the one

which ignores the surge in cost for housing, food, and energy.)

Now I’m not saying Microsoft is on the verge of collapse; it

certainly isn’t. But, although people always fail to see it, water eventually

runs downhill and the trend isn’t promising.

Lots of once gigantic companies have lost their way and become
small players – some common factors involved include:

>Formerly highly innovative, new products have become predictable and cheaper generic
competitors appear.

>Management and employee payrolls become so bloated that
rapid changes to meet competitive challenges becomes impossible.

>Founders who build a company on one or two ideas become
less involved in the low-level product development.

>Market dominating complacency leads to massive waste and
lack of quality control.

Just my opinion of course but I can tell you that, even if

it weren’t unethical for me to own stock of a company I report on, I wouldn’t

be lining up to buy MSFT – I might think about shorting the stock but I have to

cover all my GM short positions first and the tax consequences of taking THAT profit

would be horrendous!

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