Time to Say Goodbye

April 26, 2015 by · Leave a Comment
Filed under: Business, Finances, Technology 

The need to say goodbye is one of the most basic emotions.  It is always hard, never comes intuitively, and we struggle to say the word and stick to it.  There are myriads of songs on the topic.  One of my favorites will have to be Can’t Let You Go by Rainbow.  It is probably the right time for Mr. Nadella to sing goodbye to Microsoft’s mobile operating system.

The industry reported that in 2014 Microsoft had a pathetic 2.7% market share in the Mobile OS, dominated by Google’s Android and Apple’s iOS.  The thing is, Mobile OS’s are successful if developers create apps for them.  Obviously all developers are focused on one of the two mentioned above or perhaps, both.  There is little room for a third.  But that is not really the issue.  Strategically, Microsoft has decided to give away Windows for any device smaller than 9″, or any tablet or phone.  But it collects a $10 royalty or more on most major android devices.  2014 estimates put the royalties at around $3B.  This cash goes directly to the bottom line.  Sure, software has great margins, but not 100%, royalties almost do.

But wait, there is more.  Microsoft has reported hundreds of millions of downloads of Office for iOS and Android.  Office, the defacto corporate suite is Microsoft’s money making machine. It is a mind boggling product. Last fiscal year it was responsible for 40% of Microsoft’s OE and 33% of its revenue.  It operates at an outstanding 56% OE.  So, my loyal reader (singular), who do you want to protect?  An OS franchise that is going the way of the dodo or your money printing machine.  Microsoft will be better served, and it actually is, but the downloads and product of Office 365 for Android and iOS.  And, of course, the insane royalties it is collecting for android devices.  And then focus on cloud and other services.

So, Mr. Nadella, it is time to say “goodbye” to the product that made Microsoft exist and dominate the PC industry, at least the mobile kind. In case you don’t know it, I’m taking the liberty to post the entire lyrics of Rainbow’s song on this piece since it seems that Master Richie Blackmore and Joe Lynn Turner had predicted the demise of Microsoft’s Mobile OS and wrote this song.

“Day after day I’m waking up
To find that you’re slipppin’ away
Night after night
I can’t fight the emptiness inside

There’s nothin’ I can say
Now I know you’re turning me away
It’s only you know disguise but you don’t have to hide
The truth is in your eyes tonight

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
And I can’t let you go, even though it’s over
I just can’t let you go
I know your love is growing colder

One look in my eyes and you’ll realize
You got my heart in your hands
Won’t you let me know somethin’ more
Where did we go wrong, girl?

I don’t wanna fight
All I wanna do is try and understand, yeah
I’m reaching out for you, babe, what can I do?
I’ve been holding on so long

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
I can’t let you go, even though it’s over
I just can’t let you go
I know your love is growing colder
And I can’t let you go, even though it’s over

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
I want you by my side
And I can’t let you go, even though it’s over
I just can’t let you go
I feel your love growing colder

And I can’t let you go, even though it’s over
I just can’t let you go
Feel your love is growing colder

Don’t go
Though I know it’s over
I just can’t let you go.”

Enjoy.

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A Falling Knife?

September 9, 2013 by · Leave a Comment
Filed under: Business, Finances, Technology 

It is widely known that two turkeys do not make an eagle.  I’m not sure what made me think of this, I’m not even a golfer. But it seems to me that Microsoft just handed a bunch of their cash to Nokia for what seems to be a desperate move.  Let me explain.

Nokia operates 3 businesses.  For the first half of 2013 none actually made any money.

  • Nokia-Siemens network (~ 50% of their revenue) which is 11% below last year’s revenue and operating at roughly break even.
  • HERE, formerly Navteq, which has imploded to EUR 233M in revenue and losing EUR 100M per quarter. (amazing what an $8B investment can turn into in a few years)
  • Devices and Service, which is what Microsoft made an offer to buy, is responsible for roughly the other 50% revenue, which for the first half of 2013 was EUR 5.6B vs 8.3B for the same period last year.

This business lost “only” EUR 75M for the first half vs EUR691M for the first half of 2012.  So it is improving.  What makes up this revenue, you may ask?  That’s where it gets interesting.  EUR 2.3B is made by the sell of 13.5 mostly Windows based smartphones.  EUR 2.9B from 109.5 million of what they call  “Mobile Phones”, which do not run Microsoft’s operating system.  The rest is services, whatever that really means.  So, a little over a half of their revenue is not only non-Microsoft products, but at an ASP (average sales price) of EUR 26 (yeah, not missing any zeroes, it is twenty six euro per phone).  This is just a small, very, very small fraction of what an Office or Windows license go for these days.  The other 40% is Smartphones, which are mostly Windows based.  Those sold at an alarming EUR 175 ( $232 US) average price.  Compared that to above $600 for an iPhone and above $500 for a Samsung Galaxy makes them one of the lowest in the industry.    They are actually great devices, but they have to almost give them away for the carriers to take them to their customers.  No wonder the division is not making any money!

So, Microsoft handed $7.2B (which is actually less than 10% of their cash at the close of last quarter) for a shrinking business with the lowest sales prices in the industry, 60% of which they have no interest in.  Not surprisingly, Microsoft investors did not like the idea and drove the stock down around 10% in the first couple of days.  One has to imagine that Microsoft thought this was their only chance to get into the fast growing mobility business.  On the other hand, Nokia investors loved the deal.  The stock shot up 50% in the first couple of days!

So what can the deal do for Microsoft?

In their fiscal year 2013, which ended June 30th, Microsoft ran 5 business that produced $77.6B in  revenue with mind-blowing operating earnings of $33.4B.  Every one of these businesses grew from a year ago, except for Windows, which was roughly flat.

  • Business Division, whose main product is the ubiquitous “productivity” suite Office, was 31% of their revenue and 48% of their OE (operating earnings)
  • Servers and Tools, which sells servers, had around 24% of the total revenue and 24% of their O.E.
  • Windows, which was 25% of revenue and 28% of O.E.
  • Online services, which manages Bing among other online offerings, was 4% of revenue and operated at a loss that represented -3% of O.E.
  • Entertainment, which sells Xbox, Surface PCs, and Windows phone was 13% of revenue and produced a modest 2.5% of Microsoft’s yearly earnings.

The latter is where they will probably merge Nokia’s business if the acquisition goes through and probably spin Xbox out as it has been rumored for a long time.  Assuming the revenue stays flat (a big if), it will represent around 20% of Microsoft’s total revenue, but no earnings to speak of.  Their only hope is to drive ASP (average sell prices) up.  And, my fellow reader (singular), there is only one way to do that:  with unique products that customers value their differentiation.

Consumers don’t particularly like Microsoft, but there is a group that has had a long lived love affair with them: I.T.  Most corporate I.T organizations in the world prefer Microsoft to any other operating system.  They trust them and have been supporting them for years.  Microsoft’s only hope is to leverage that.  They will have to relentlessly push for Windows based phones to become the Blackberry of Christmas past.  Focus on professional users by making email, calendar, office, and corporate apps a seamless experience.

That’s all they’ve got.

However, the world of mobility is that of 99 cents apps and free OS.  Clearly not where you want to take a $43.5B business that throws $24.7B in earnings per year selling operating systems and corporate applications. That is a boat load of 99 cent apps.  Apple and Samsung have shown that making significant amounts of money with differentiated hardware in the mobility industry is possible.

The question is, is there room for a third one …

Enjoy.

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Microsoft Getting Smart about Smartphones

February 3, 2010 by · Leave a Comment
Filed under: Technology 

Well, it was just a matter of time.  PC World reported that Microsoft will announce its own smartphone in the World Mobile Congress in Barcelona this month.  I guess the pandemic of iPhone envy is hitting everyone hard.  This one promises to be interesting since it will allegedly be based on the Zune music player and the Windows 7 Phone platform.  All good.  Until now Microsoft’s strategy was OEM friendly.  LG, Samsung, HTC, Motorola and others have introduced Microsoft based smartphones of varying success positioning Microsoft’s mobile OS as the 4th player (soon to be 5th thanks to Android) in the smartphone category (after RIM, Apple, and Symbian).

This strategy represents a hardware/software branded device from Microsoft in a sense competing with its own OEMs.  All those companies however have not shown any loyalty to the Redmond folks since they have diversified or totally migrated to the Android platform.  So I guess Balmer decided: Screw them I will go Google … sorry I will do like Apple … not really, I will do my own hardware and control my own destiny.   Good move?  We’ll see.  But definitely not a bad one or a move that will damage any OEM relationships.  The world is ready for a diversity in OSs and the smartphone category is the fastest growing category in the industry.  Microsoft cannot afford to be the fifth.

The question is:  Will this make a difference?  Not likely.

Microsoft has by far the largest market share in the enterprise – with “big Windows”, not smartphones, that privilege belongs to RIM.  It boasts millions upon millions of applications and it is the “standard” enterprise Operating System.  These are not 99 cent apps, no! These represent real money for enterprises and Microsoft.  A simple copy of Office may go for hundreds of dollars.  Why? because it is the defacto standard (for now).  The smartphone world behaves very different.  With the exception of email and a couple of minor “connectors” to ERP systems there are very few apps for the enterprise.  In fact Windows Mobile today has the largest number of  enterprise ISVs (Independent Software Vendors) but they specialize in niche applications like inventory, supply chain, delivery, fleet management, etc.  The devices these apps run on are not your typical HTC smartphone Fender edition but very specialized hardware made by Motorola and others.

The thing is:  The Microsoft name, which carries a lot of weight in the enterprise, does not represent a mayority choice for the consumers as it does in PCs or in those niche applications.  The perception of a “standard” OS with millions of applications does not exist in the Smarthphone world.  There are millions of apps for several OSs, in fact lots of apps are available for most smartphone OSs (paradoxically Windows Phone is typically the last one to be developed).  So my contention is that even if Microsoft comes up with a killer device it is an uphill battle to go after RIM, iPhone, Symbian, and Android.  It may much better than OEM versions since Microsoft has intimate knowledge of hardware and software to make it so, but it will hardly take the world by storm as its competitors have.

Good luck Microsoft and thanks for giving us all something to write about and for another great opportunity for a clever Apple commercial.  I’m sure there’s a map for that somewhere.

Enjoy.

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