Microsoft: Time for Big, Bold Bets

When Microsoft released its quarterly earnings last week, financial analysts cried foul when the company revealed that it would be spending an additional $2 billion or more over the next year to accelerate market growth. The extra spending will occur during the launches of Windows Vista and Microsoft Office 2007 and will lower revenues and earnings during that time period, which will result in lower than expected returns for investors. Since the announcement, Microsoft has been hammered by complaints, and its stock price has dropped 11 percent. Last week, the company lost $32 billion in market value alone.

On Friday, Microsoft CEO Steve Ballmer addressed the complaints in an internal memo to employees. "Throughout our history, Microsoft has won by making big, bold bets," he wrote. "Now isn't the time to scale back the scope of our ambition or the scale of our investment. While our opportunities are greater than ever, we also face new competitors, faster-moving markets and new customer demands ... We provided guidance \[for fiscal year 2007, which begins in July\] that indicates our willingness to be aggressive when making investments where they are strategic for future growth."

"The bottom-line result of these investments created a shift in our near-term profitability that was a surprise," he continues. "The change in our stock price reflects this. But I've never been more confident that we are making the right investments. In addition to adding a third manufacturing facility to enable us to meet market demand for Xbox 360, we are investing heavily in our services strategy; in our readiness programs for the launch of Windows Vista, Office 2007 and other products in the pipeline; and in a number of other areas where we see opportunities for rapid growth. We've accelerated the pace of our hiring and increased spending to ensure that we continue to bring the world's brightest minds to Microsoft."

Microsoft has made several "bet the company" promises in the past. Whether Ballmer's "big, bold" characterization holds water is debatable--$2 billion is, in many ways, a drop in the bucket for a company the size of Microsoft. Meanwhile, traditional software products like Windows and Office remain the company's biggest money earners, but those products are mature and have arguably peaked from profitability and market saturation standpoints. Not coincidentally, a lot of Microsoft's focus these days seems to be on software services, such as Windows Live, Office Live, and Xbox Live. These services compete directly with similar services offered or planned by industry heavyweights such as Google and Yahoo!.

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