Let’s begin the analysis of Avnet by explaining exactly how a technology industry distributor functions by using Intel products as an example.
Copyright by Bill Durrenberger October
24, 2008. All rights reserved.
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities. Before
purchase of any investment, the buyer should consult a financial adviser.
Posted at 03:46 PM in Avnet | Permalink | Comments (0) | TrackBack (0)
Since you don’t own the software, you do not have to maintain it or fix it when it fails. You never have to download updates or the latest version. The company offering the use of the software application performs all of the maintenance, repairs and updates. And unknown to you, they will replace the existing version with the latest, newer version of the application. This is less costly for you than purchasing and maintaining software in the traditional way.
Copyright by Bill
Durrenberger
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities. Before purchase of any investment, the buyer should consult a financial adviser.
Posted at 04:06 PM in Cloud Computing | Permalink | Comments (2) | TrackBack (0)
Excellent question, for the answer will dictate whether the company’s stock will be a sound investment. The stock price has risen since Michael Dell resumed the CEO position, but I consider that event a result of the Wall Street opinion that Michael Dell will automatically and quickly return the company he founded some 20 ago to its previous glory. The formidable tasks to be faced will not make this easy for Mr. Dell and his corporation.
Not only must Dell regain the trust of those who fell away because of years of poor customer service, but the company must change its business model to address tremendous industry changes as well as those looming in the future—all daunting challenges. Regaining customer trust takes time—even years—and requires flawless execution of customer satisfaction.
Dell, since its inception, has been a marketing and sales company for personal computers and laptops—with emphasis on business accounts with IT Departments. Dell did no design and development, choosing to purchase sub-assemblies and assembling them according to customer requirements. But the PC business changed to a consumer-driven business, and Dell had to accommodate the change in their customer base.
To reach the consumer, Dell tried kiosks in places where consumers congregate. The strategy failed. Consumers wanted to be hand-held prior to purchasing a computer. Most of the kiosks were unattended or manned by poorly trained personnel from rep sales firms. Dell has since dropped this channel strategy in favor of selling computers through Wal-Mart and Best Buy. Best Buy already enjoys a very successful relationship with Hewlet-Packard. Once again, time and outstanding execution is a must for success. As long as H-P retains their status with Best Buy, Dell will be waging an uphill battle.
Dell also wants to attack the Small to Medium Business (SMB) market. This market is served by Value Added Resellers (VARS), so the Dell direct sales force must keep hands off. Once a VAR invested time and effort to prime an SMB customer, Dell direct sales has had a habit of snatching that customer away from the VAR. The result: many VARS do not trust Dell—another confidence hurdle for Dell to resolve. Meanwhile, IBM and H-P are capturing more and more small and medium customers at Dell’s expense.
Dell is beefing up its activities as a solutions and services provider. Sounds great, but they are late in this effort, being a distant third behind H-P, which is a very distant second behind leader IBM. Both H-P and IBM have been in the solutions provider business for a long time with well-trained staff and a host of products.
The competition is already well ahead of Dell in critical new areas such as cloud computing, Software as a Service (SaaS), and virtualization. Dell must address these changes that have already occurred in the industry.
And what about desktop/laptop virtualization, a disruptive technology that will cause the current offerings in this market to radically change. The PC as we know it now will change dramatically, driving a drop in the market number of systems sold. To paraphrase an Information Week columnist “The only thing certain about personal computers of the future is no single dominant computing approach will emerge over the next few years. The idea of a standard computing platform will vary based on organizational, departmental, and user requirements.”
Dell has always been a marketing and assembly company spending effort driving down supply-chain costs. They did little or no design and are not known for innovation, yet innovation is necessary to bring them back to their former leadership position.
Their current activities seem to be concentrated in the cost-cutting area with very little effort to adjust for the future. Dell has a long way to go.
To those who want to invest in a “computer company,” I would recommend either Hewlett-Packard or IBM.
Copyright by Bill Durrenberger September
12, 2008
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities. Before
purchase of any investment, the buyer should consult a financial adviser
Posted at 02:33 PM in Dell | Permalink | Comments (0) | TrackBack (0)
Last week, Motorola announced 2nd quarter results and they were atrocious. Though not as much as in the past, the cell phone division lost money again and Wall Street cheered! Several analysts called last quarter’s efforts a step in the right direction and the company’s stock jumped 11 percent after the quarter’s results were made public. I suppose one could say losing less money compared to last year in the handset division, responsible for 40-50 percent of the company’s revenues, is a step forward and a positive. I wouldn’t.
As an investor who is considering putting money in this long-suffering company, I want to see substantial progress in boosting revenues and profits on a consistent basis. And I want to see progress that is not the result of cost cutting and job elimination. Motorola has been losing engineering and design people for months, people who are needed to develop new products for the fast-moving cell phone market.
Morale is down, the leadership team takes too long to make decisions, and the brain drain continues.
Recently, the company announced that Sanjay Jha from Qualcom will be the new Co-CEO of Motorola and will head up the cell phone division. Next year, when the cell phone unit is due to be spun off into an independent company, Mr. Jha will be its CEO. Qualcom is a chip company that develops chips for cell phone companies. I foresee problems.
Mr. Jha, as the former COO of Qualcom and president of the Qualcom CDMA Technologies unit, is an engineer coming from a chip manufacturing environment. He is too much of a technologist to occupy the CEO’s office of an ailing company that has to change direction in a market driven by consumer needs. He must know what features are necessary in new handsets, and he must compete with the likes of Apple’s Steve Jobs, as well as the heads of Nokia, RIM and Samsung, all of which have grown extremely strong in the next-generation handsets and smart phones. Not an easy task for a non-marketing, engineering individual.
Admittedly, I don’t know much about Mr. Jha. Still, I would rather see Motorola hire an individual who had previous responsibility in devising a strategy in the cell phone market and had shown success in the handset business instead of one who worked for a company that makes the chips that go inside the phones.
Moreover, the next year or so will not bring banner revenues for any of the cell phone makers due to a slowing global economy.
And that doesn't even cover the Carl Ichan factor. Labeled an "activist" by the investment industry, he now has three seats on Motorola’s board and will seek to increase shareholder equity. By that he means his share value. This is the guy who, during his initial foray into Motorola’s business, wanted to cut R&D costs to zero. Can anyone imagine cutting R&D costs of a company in a very competitive technology market to zero?
Mr. Jha faces an extremely difficult task to right this sinking ship.
And to those investors that put money into Motorola upon the company’s recent quarterly results, I would advise cashing in your gains. If you still want to invest in a cell phone business, look at Nokia or RIM. You can eliminate Apple, Samsung, LG, and the others as they are not pure plays in cellular telephony.
Then take a "wait and see" attitude until the new plan and strategy take hold, as well as the introduction of any new products from the spun-off Motorola handset division next year.
Copyright by Bill Durrenberger August
15, 2008. All rights reserved.
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities. Before
purchase of any investment, the buyer should consult a financial adviser.
Posted at 09:16 AM in Motorola | Permalink | Comments (0) | TrackBack (0)
In June 27, Bill Gates relinquished the daily activities he retained after handing his CEO position to Steve Ballmer some seven or eight years ago. While he still has the role of chairman, he will no longer be intimately involved with the operations of his company nor will he carry the title of chief visionary for Microsoft.
Many in the industry have referred to Microsoft’s success as the result of his leadership, his great intellectual and technological capabilities, and his ability to see a vision and execute to that vision. His goal was to put a PC on every desk in the world, which he did in a most brilliant fashion. He was savvy enough to understand Microsoft’s monopoly position in the IBM compatible market and exploit it with monumental success. And yes, he possesses a great intellect and is technologically brilliant in the world of operating systems. One pundit noted that “Gates changed computing, changed business, and changed our lives.”
That last comment is an overstatement.
Actually, it was IBM’s entry into the desktop personal computer market that changed the way the world looked at personal computers. Prior to IBM’s introduction of its personal computers, the market was fractured between several small companies. There was Apple of course, along with Tandy through their Radio Shack distribution channel, Amiga, Commodore and others. The market was not substantial, as the masses wondered what to do with a personal computer. Without a practical use for these computers, the only users were the geeks that liked to play with them.
In those days CP/M was the dominate operating system from a company called Digital River. When IBM decided to enter the personal computer market around 1977, the decision was made to use outside vendors for all parts, including software and semiconductor processors, as opposed to using internally developed and manufactured components. IBM started discussions with Gary Kindal, the head of Digital River, on the use of the CP/M operating system for its new IBM Personal Computer. But Kindal was too difficult to work with and IBM looked to a small struggling software company, in Redmond, Washington near Seattle that was founded in 1975 by Paul Allen and a bookish looking kid by the name of William Gates III. Today, Microsoft is a household word.
When IBM came calling, Gates quickly bought an operating system called QDOS (quick and dirty operating system) and renamed it MSDOS (Microsoft Disk Operating System). Over time, MSDOS morphed into the Windows operating system. That is not innovation. That is a technology purchase that Microsoft evolved many times into what we see today as Windows Vista.
This was all happening in 1977-78 when the IBM effort was getting underway. In 1983 the IBM Personal Computer was introduced to the world with such success that the sales numbers took even IBM by surprise. A huge reason for that success was a spreadsheet program called VisaCalc. In an instant, the public and particularly those in businesses now had a reason to use a personal computer. We were all freed from the drudgery of calculating budgets or forecasts by hand and calculator.
Eventually Microsoft developed its own spreadsheet version, calling it Excel. It's easy to develop an application program when you can follow a great template such as VisaCalc. It was a smart business decision on the part of Bill Gates, but not innovative.
Microsoft went on to purchase an application program that allows users to prepare presentations on either paper or clear transparencies. That program today is called Power Point. Thus the package now referred to as Microsoft Office was born. This is certainly not innovation.
Mr. Gates’ vision was limited by his inability to see past an operating system and a suite of office software—Excel, Word, and Power Point. After all, he and his company missed the Internet and what it meant for the software industry. And when he finally saw the threat of the Internet to Microsoft, he issued a memo that was supposed to turn the company’s focus onto the Internet. That never happened until it was way too late, which doesn’t say much for his visionary or his leadership skills. Microsoft got into Internet search with advertising after both Google and Yahoo built up tremendous leads in these markets.
How about Software as a Service (SaaS) where an application is hosted on the web rather than actually in the PC on your desk? Not recognized by Microsoft until a small, nimble start-up company called Salesforce.com developed customer relationship management software and put it on the web with a pay-as-you-use business model.
Mr. Gates was rightly vilified by the industry for lack of quality control: Microsoft software was and is continually released with bugs or with announced features left out of a release.
Under his leadership, Microsoft put an entrepreneurial company, Netscape, out of business. When Netscape and Marc Andresen developed the first successful web browser called Navigator, Microsoft used their monopoly status to decree to PC hardware companies, such as Dell and Hewlett Packard, that only Microsoft’s less effective Internet Explorer browser be allowed on their PC’s at time of sale. Netscape sued Microsoft for anti-trust violations and the Justice Department ruled in favor of Netscape. But it was too late. Navigator was sold to AOL, Netscape as a company was gone and Marc Andresen started a new company.
The personal computer, popularized by IBM and a useful spreadsheet program, changed computing, changed business, and changed our lives—not Bill Gates and Microsoft. Mr. Gates was handed a monopoly that he skillfully grew to create one of the most profitable companies in the world. Now that is the work of a smart business man.
With all of that being said, I can only admire Bill Gates for his philanthropic activities.
Realizing that he could immensely aid those less fortunate and actually giving up his passion—the daily interface with the company he loved and co-founded—to implement that realization, is the mark of a great human being.
I wish you only good luck in your new endeavor, Bill Gates.
Copyright by Bill Durrenberger August 1, 2008.
All rights reserved.
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities. Before
purchase of any investment, the buyer should consult a financial adviser.
Posted at 02:13 PM in Bill Gates | Permalink | Comments (0) | TrackBack (0)
Two days ago Hector Ruiz stepped down as CEO of AMD, while
Dirk Meyer—the existing president and COO—is moving up to take his place.
Will this change of leadership ease AMD’s woes? More specifically, can it turn the tide on
bringing products late to market, losing market share, and losing millions of
dollars.
Not likely, in my opinion.
And this is not a matter of waiting to see what the new regime will
do. Meyer is an engineer and was already
responsible for the day-to day operations of AMD. As such, he shares the blame for AMD’s
problems.
The real problem is Intel’s prowess in low-cost
semiconductor manufacturing and the Intel ability to outspend AMD by billions
of dollars. The other culprit is Jerry
Saunders, the feisty founder of AMD and the one who years ago decided to take Intel
head-on by copying the line of Intel processors that power the PC market. That stubborn decision led to the demise of Ruiz. AMD is too undercapitalized to best Intel in
a processor development race or win a fight for lasting manufacturing
supremacy.
AMD’s recent success was not about its own muscle; they
caught a sleeping giant off guard.
Intel failed to sense the change in the PC market’s changing
requirements away from constantly improving performance and the attendant
increased consumption of power. Data
centers were experiencing increased costs in electricity to power the
electronics as well as the cooling systems required to keep the electronics
from burning up. Cries to Intel to
concentrate on lower-power devices as well as increasing performance fell on
deaf ears. Hector Ruiz was listening, and AMD responded with a
line of processor chips that met performance requirements but consumed much
less power.
When Intel realized what was happening, their new CEO, Paul
Ottillini, turned on the afterburners to develop processors that did more than
equal the AMD product line. The Intel
processor development teams and their manufacturing arm introduced devices that
surpassed the AMD offering. No one in the semiconductor industry can
compete with Intel in the PC market.
The semiconductor units of both Motorola and IBM, working in
partnership, tried it in the late 1980s with the Power PC processor line. They also caught Intel in a deep sleep. The Power PC was a generation ahead in
manufacturing technology compared to what Intel was bringing to the PC
marketplace. Within 18 months, Intel had
introduced a line of processors that was a generation ahead of the two
intruders. Keep in mind that Motorola
and IBM were no slouches in the semiconductor world at that time and both had
deep pockets.
What is AMD’s solution?
The company is basically a one-trick pony in regard to the markets served. Years ago, AMD abandoned their embedded
systems business to concentrate on the PC market. Today, they need to reverse that move. They lack the capitalization to effectively
complete with Intel. AMD will only be
minimally profitable if it does nothing but pick up the market crumbs that
Intel leaves behind.
AMD must become a “fabless” company, meaning they outsource all manufacturing to another company, called a foundry, which focuses solely on semiconductor manufacturing. Two such companies exist in Taiwan, Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Company (UMC). AMD would then be free to sell its existing manufacturing plants and stop building new ones.
Next, AMD would have to enter new markets such as the
embedded systems business they once pursued.
Marketing influence—something missing from AMD the past few years—would
need to take hold in order for new-market penetration to succeed. This would be a formidable task, since the AMD
culture is accustomed to an engineering and manufacturing orientation. And prospects for a dramatic culture change
are improbable given the company’s new management.
Lastly, AMD needs to recognize that the acquisition of ATI was
a huge mistake. The price was too high,
but it’s time to stop throwing good money after bad. To continue to compete in the PC market
against Intel, who also makes graphics processors, is as futile as competing
against Intel with the Pentium class processors. The day will come when Intel will offer a
central processor and the graphics processor all on one integrated chip that
will achieve a more cost-effective solution.
One of the first things Meyer needs to do is sell ATI. Yeah, a move that that would take two big
brass ones, but he can’t stop the hemorrhaging while AMD is still in the PC market.
Will all this happen?
Who knows? Only time will tell us
what recovery plan the new AMD management will devise.
AMD is not undervalued; rather it is fairly valued for now
but the upside reward is minimal while the downside risk is great. Given its weak competitive stance and lack of
capital, there’s even a chance the company could go under.
Smart investors will wait to see what happens.
Copyright by Bill
Durrenberger July 18, 2008 All rights reserved.
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities. Before
purchase of any investment, the buyer should consult a financial adviser.
Posted at 10:55 AM | Permalink | Comments (0) | TrackBack (0)
A friend asked me this question several days ago and my response was "Yes, but you must be aware of the changing virtualization market relative to the competitive situation that VMware will face in the next one to two years."
I'll explain that statement in greater detail, but first a short primer on what VMware offers as a product (for a more in depth description, see my November, 2007 blog on VMware in the archives.)
VMware provides virtualization software that allows a business to reduce the number of computers it needs in its data center by switching users, on the fly, away from heavily used computers to underused computers. As a result of this load balancing, the data center needs fewer computers. Prior to virtualization software, the number of installed computers in a data center was based on an average usage and all users were assigned to a specific computer. The reduction in the number of computers for the same number of users translates into the installation of fewer computer units. The result: Lower capital expenditures, lower system maintenance costs, and less total electrical energy needed to power and cool each computer.
Now to answer my friend’s question.
VMware is still the leading virtualization software provider with about 90 percent market share. Keep in mind this figure only represents VMware’s share of the number of computers and servers currently virtualized. It is estimated that only 5 to 10 percent of the world’s computers and servers are virtualized, leaving a huge market for future virtualization software. And more data centers are being built every day.
As with all huge market opportunities, competitors are drawn into the market. Last week Microsoft announced that virtualization software will be offered as part of its soon-to-be-introduced Server 2008 software. That announcement alone drove VMware’s stock price down ten percent.
Other software companies are planning to provide virtualization software, including IBM, Hewlett Packard, Oracle, Dell, Red Hat, and others. And we can’t forget the existing competition: Citrix Systems and Virtual Iron.
Vmware has a reputation of providing an excellent product line, but also being the high priced kid on the block. Growing competition will take a toll on profit margins and present a challenge to VMware’s ability to maintain its high rate of revenue and profit growth.
An investor must be prepared for volatility in the company’s stock price and possibly somewhat slower growth rates. For example, 4th quarter 2007 results did not meet analyst’s expectations (really just guesses) and the stock price fell $22.25 or nearly 30 percent. Another example: Dell Computer, a VMware customer, announced the purchase of a small privately held virtualization software company and VMware’s stock price took another large tumble.
At the close of today's stock market activity, VMware’s stock price stood at $55.01 and the 52-week range is $41.41 to $125.25. Granted some of the loss is due to the general malaise of the economy, but much is due to announcements of impending competition, missed growth expectations, and somewhat slower future growth projections by VMware management.
VMware has a PEG (price to earnings to growth ratio) of 1.11 that indicates only a slight over-valuation, and a price to earnings ratio of 37.17, both in line for a growth company in this emerging technology market space. Its debt is a low $450 million that gives a very low debt to equity ratio of 0.31, with revenue growth from $521,000 million to $1.325 billion in three years. Finally, the management team, a combination of EMC and VMware executives, is top notch.
I still think VMware is in a position to maintain good growth and its leadership position in virtualization software, but the journey is not for the faint of heart.
Copyright by Bill Durrenberger, July 2, 2008. All rights reserved.
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities. Before purchase of any investment, the buyer should consult a financial adviser.
Posted at 03:39 PM in VMWare | Permalink | Comments (0) | TrackBack (0)
Seagate Technology is the world's largest hard drive developer and manufacturer. You know what a hard drive is. C'mon, sure you do. It's the mechanical storage device that we all have in our personal computers and laptops. It's the thing that makes all the mysterious noises when Windows boots up and stores all the programs that are held in our computers. It's that damnable device that makes us swear when it crashes and we forgot to back up our data and other sensitive information.
Is Seagate a good company in which to invest? In view of the huge growth of digital data for the foreseeable future and Seagate’s market position, the answer is yes.
Let's see where they stand in terms of products, markets, competition,
future, and its key fundamentals.
First, products and markets:
Seagate Technology participates in the computer and home entertainment markets with 3.5 disk systems that include the personal computers, both desk top and laptop units, and higher performing systems.
Seagate sells to consumer electronics manufacturers with drives containing 1 inch and 2.5 inch disks meant for systems in small enclosures such as games and cameras.
Another market for Seagate is the large business or enterprise systems area. These hard drive systems are in the large gigabyte range and are optimized for low cost and lower power consumption.
Finally, Seagate sells hard drive assemblies to external developers and manufacturers of back-up storage systems for desk top and laptop computers.
The storage market, as mentioned above, will grow swiftly as more gadgets
are developed, particularly in the consumer and home markets. Web sites and software hosted on the Web are
expanding, and all are downloaded to game boxes or personal computers in
digital form. Seagate recently delivered its one billionth hard drive and
forecasted they would ship in excess of 5 million drives within five years.
Now their competition:
Seagate is 50 percent larger in sales than their nearest competitor, Western
Digital, and has a larger portion of its sales coming from overseas than does
Western Digital. This increases profit levels as a result of the weaker
dollar relative to foreign currencies.
Seagate's future:
As with all successful technology companies, once market superiority is achieved, product development and technology enhancements never stop. And so it is with Seagate Technology.
A hard disk (the memory storage element inside a hard drive assembly) contains circular tracks on its surface. The tracks contain tiny magnetic bubbles that are polarized into the digital format of either ones or zeros. The bubbles are flat and sit side by side on the tracks, hence their size determines how many bits of information can be stored on a track. Smaller bubbles equate to more bubbles on a given length of track. The more bubbles, the more bits of digital information that can be crammed on a track resulting in a lower cost-per-bit of stored information.
Seagate recently announced that they have developed a process that places the bubbles on their side. Now bubbles can be placed closer to one another on a track, greatly increasing the number of bubbles on a track as well as the capacity of a disk manufactured with this new technology. Seagate will be able to offer a hard drive with more capacity and a lower cost per stored byte than their competition. Western Digital is developing a similar technology but is behind Seagate in bringing this new manufacturing technology to market.
With the manufacturing technology advances addressed in the above paragraph,
Seagate is in a position to grow both market share and profits in future
years. Their technology improvements, implemented ahead of their nearest
competitor, are also an indicator of higher profits in coming years as Western
Digital tries to catch up with a similar cost effective technology.
Key fundamentals:
Seagate's stock closed today at $20.29, which is at the lower end of its 52-week range, reflecting the slowing of the economy and the computer and gaming markets. The dividend yield is 2.3 percent, which for a technology company is decent. Seagate also has a stock repurchase program in place.
With a forward P/E ratio of 8.01 (low for a technology company) and a PEG
(P/E ratio divided by the forecasted yearly growth rate) of 0.56 (less than one
indicates a stock is undervalued), the company could be a good long term
investment. One caveat: The numbers reflect a fiscal year-end of June of
2007, so it would be wise to see what the numbers reflect at the end of the
current fiscal year, ending this month on
June 30, 2008.
None the less, with the movement toward more and more digital content in much of what we do, the demand for storage in the form of hard drives places Seagate in a great position to take advantage of this growth market.
Copyright by Bill
Durrenberger June 20, 20, 2008. All rights reserved.
Disclaimer: The statements and information presented in this article reflect
the opinions of the author and do not constitute a recommendation to buy or
sell specific securities .Before purchase of any investment, the buyer should
consult a financial adviser.
Posted at 03:13 PM in Seagate Technology | Permalink | Comments (0) | TrackBack (0)
As most everyone knows by now, Yahoo! rejected Microsoft's increased share price offer of $33 per share. Microsoft promptly stepped away from its proposed Yahoo! acquisition with both Steve Ballmer and Bill Gates stating publicly that the pursuit of Yahoo! was over. This news has been all over the media including websites with financial pages, so I won't bore you with the details.
Microsoft was wise to back away, because one sick business unit acquiring another sick business unit simply makes a bigger sick business unit. Rumors abound that Microsoft will make a later play for Yahoo! at a more favorable share price.
Microsoft should stay away from Yahoo! and pay attention to the business conditions they face and the threats to their existing businesses.
The Yahoo! acquisition would have distracted Microsoft from going into new markets, and the process of integrating the Silicon Valley based Yahoo! with its wide, open culture into the laid-back Microsoft culture would have been painful and time consuming. Many engineers would have left Yahoo! rather than enter Microsoft's somewhat stodgy atmosphere, engineers that Microsoft sorely needs.
The search wars are over and Google is the big winner. As I stated in a previous post about Google, no one in North America is going to catch the Internet behemoth. In China, a huge growth area, the Chinese search company Baidu.com is now ahead of even Google in the number of searchers on the web and holds a commanding market share in China of more than 50%. Microsoft is nowhere in our own country, which represents the world's largest market in Internet search and advertising.
Microsoft must now pursue new markets involving the Internet and the Worldwide Web. They have to modify their current business model dependence on operating systems and office software to implement new, profitable technologies that work well with the Internet. They have major threats to their existing business as software and computing moves onto the Web.
Microsoft is under fire from threats like SaaS (software-as-a-service), where software applications like Excel or CRM (customer relationship management) are stored on a website, downloaded by demand, used, and then all results are stored back on the website. Several companies, including Google with its own office suite and Salesforce.com with its CRM package have already entered this market. The revenues from these efforts are not yet comparable to those from Microsoft's Office, but the volume will grow. Eventually, the trickle of revenues from web-hosted software will turn into a flood, all at the expense of Microsoft profits.
Virtualization software will cut into Microsoft's Windows business. Vmware and Citrix Systems typify the competition that Microsoft already faces with this technology. Virtualization means fewer computers needed in back room computing and fewer Windows operating systems sold. Worse for Microsoft is that a full-blown operating system such as Windows Vista is not needed in the virtual world. A small operating system called a "kernel' is sufficient. Microsoft must address this threat quickly.
"Cloud computing" is unique to the Internet but still a concept starting to materialize without Microsoft. IBM was an early implementer of cloud computing when the company sold computing time on its own corporate computers when they were not in use. Amazon.com is another seller of compute time on their unused or lightly used computer systems to companies that would rather lease computer time than purchase, install, and maintain more computers into their already too-expensive IT departments. After all, who buys books at two o'clock in the morning? In the future, a company or even we consumers need only use our browsers to locate an unused or lightly loaded computer to do our computational work. We won't know the location of the computer or who owns it, but we won't care. This situation, too, will result in a loss of revenue for Microsoft, as fewer computers are needed along with fewer Windows operating systems and Office software. Microsoft must address this, as most of their quarterly revenues and profits come from operating systems and office software.
The Internet is still very young with many unknown opportunities waiting to be discovered. Microsoft should go looking for such opportunities and exploit them before they are a shell of their former self.
Microsoft nor their shareholders need the Yahoo! distraction.
Copyright by Bill Durrenberger May 12, 2008 All rights reserved.
Disclaimer:
The statements and information presented in
this article reflect the opinions of the author and do not constitute a
recommendation to buy or sell specific securities.Before purchase of
any investment, the buyer should consult a financial adviser.
Posted at 05:28 PM in Microsoft | Permalink | Comments (1) | TrackBack (0)
Will Microsoft ever again be a dynamite investment? Don't bet on it.
There are very viable competitors at the gates of the Microsoft's fortress. Some are already inside the walls. Microsoft, once invincible, had a stock price that continuously climbed higher and higher. They had a hammerlock on the personal computer market, which includes desktop units, laptops, and high-end server computers. Five years ago, the stock value was $24. Now the price sits slightly above $29. In mid 2006, the price was at $22.50 and the 52-week high was $37.50, reached in November of 2007 when the overall market reached all-time highs. With the exception of last November's high, the stock has been nearly flat.
Microsoft is losing its status as the largest technology company in terms of market capitalization and is in danger of becoming an "also ran" competitor, even though they dominate the computer market with their Windows operating system and their Office Suite consisting of Excel, Word and Power Point.
Yes, they still report huge quarter profits as well as growing revenues. And yes, Microsoft's Windows operating system still controls the computer market. And they still sell a huge majority of the office software in use with their Excel, Word, and Power Point products. In spite of this market dominance, Microsoft is on the verge of becoming just another large company whose time has come and gone.
Microsoft is on the defense, with several leading companies in new markets and/or new technologies eating away at the aging giant.
They have been slow to recognize disruptive technologies such as the Internet, virtualization, and the mobile market. Even when the magnitude of their mistakes become clear, they have been exceptionally slow in reacting to the reality of the market forces that are leaving them in the dust. Microsoft seems to be repeating many of the mistakes that IBM made in the late 1980s. When mainframe sales growth started to slow, IBM refused to recognize the industry move toward distributed processing. This attitude was particular short-sighted when you consider that the IBM Personal Computer, a disruptive technology. played a key role in that industry shift.
Many of us remember the famous memo issued by none other than Bill Gates in the mid-'90s that stated that Microsoft was to focus all developing ideas on achieving great gains in the Internet market with new, innovative products. The effort produced a browser called Internet Explorer and not much else. So much for innovation. Microsoft has the Xbox, a big seller competing effectively with Sony's Play Station; but ironically, this product consistently loses money.
Google has become the premier Internet behemoth, with a huge market share in Internet search and advertising, as well as great sales, profit and market-share growth. The Google march continues with office applications hosted on the Web that compete with the Microsoft Office offering. Users can access and use Web-hosted software such as Excel and pay only for package use time. Google has developed a cell phone operating system called Android, which is free to any cell-phone manufacturer. For the right to use Microsoft's Windows Mobile, cell-phone users pay a fee.
And now there is Saas, or "software as a service" as the technology is defined. Started by an immensely successful young, nimble company called Salesforce.com, such software resides on the Salesforce Web site and is available 24/7 for customer use. All updates are performed by Salesforce, unknown to the user, eliminating the need to periodically install a new version of the software application package. All bugs and viruses are removed immediately by Salesforce, so the user incurs no maintenance costs. Microsoft is still in the development stage with regard to this technology.
Vista, Microsoft's new operating system, has not been well accepted. It is slow, and to use all its new features requires hardware not yet available. Users would rather keep Windows XP. Vista took five years to develop but still needed a Special Service Pack to remove problems at the time of release. The file management features that were intended to turn on the corporate Information Technology Departments were eliminated under "time to market" pressures. Apple took only 18-20 months to develop and release its new operating system, OS/X, which worked very well out of the box.
Now that Apple is using Intel processors in its personnel computer line, the legions of Windows-independent software vendors are more apt to write Windows applications for the Mac. Mac sales are climbing, taking market share from you-know-who. Apple is beginning to make moves to enter aggressively into the corporate world with higher-performing machines. To be successful in this Microsoft stronghold may take Apple several years of building sales infrastructure and forging the corporate relationships necessary to compete successfully. Do you have any doubt that Apple can make that happen? I don't. And all along the way, Apple will be chipping away at the Microsoft market share.
Now consider virtualization, the new software technology that allows corporate IT departments to more efficiently balance computer loading by spreading user tasks across several computers. The result: fewer computer needed, less cooling and less maintenance required. All of which translates to less costs for any business that depends on back-room computing, whether a bank, a manufacturer, or any other medium-to-large company. VMWare has already developed the virtualization technology and has a commanding market share in that growing new market. And the kicker? Virtualization needs only a small operating system, called a kernel, to do its job. It doesn't require a huge, all featured, general operating system like Vista. Over time, virtualization is sure to further slow Vista sales. Microsoft's answer to this threat is to debut its own virtualization software later this year. Other companies are either already in the virtualization market or developing their own virtualization software, including Hewlett-Packard, IBM, RedHat, and Oracle.
As the entire world knows by now, Microsoft has made an offer to buy Yahoo! in an attempt to compete with the new king of the Internet hill, Google. So far, the effort has resulted in a standoff as Yahoo does not wish to be acquired, at least by Microsoft. Historically, large technology companies have not easily integrated their acquisitions into one smoothly running operation, and I do not expect this one to be any different. Yahoo is located in the bustling entrepreneurial energy of Silicon Valley, California, while Microsoft resides in laid-back Redmond, Washington. These vastly different corporate cultures will be very difficult to merge effectively. Engineers are already leaving Yahoo, and it's the engineering brain power that Microsoft needs so badly. Yahoo has the better products, some of which overlap with those from Microsoft. Which products will go or stay when these two companies combine under a Microsoft executive? No one knows, but the infighting over eliminations will be intense. If a merger does occur, many industry observers are estimating that integration may take as long as two years. Microsoft does not have a stellar record in being able to bring acquisitions into profitability. Meanwhile Google just keeps rolling along.
None of the above, with the exception of Google, seems to be causing Microsoft any significant heartburn at the moment. But as long as Microsoft stays in denial mode, the competitive pressures will keep building: more chunks of market share will be lost and more disruptive technologies will emerge. The Microsoft cookie that was once so huge, will be nibbled away, and one day the cookie's size will be insignificant.
One axiom in industry the world over is "change before you need to." This simple advice applies in spades to the rapidly evolving technology industry, but Microsoft has refused to follow it.
In the Marines, we had a saying whenever indecision was the order of the day. Someone would invariably point out that "the brass is off playing switch," defined as having one thumb in your mouth and the other in your...well, it was the Marines...and then switching indefinitely.
This appears to be Microsoft's order of the day, and the reason for my original statement: Will Microsoft ever be a dynamite investment again? Don't bet on it.
Copyright by Bill Durrenberger April 28, 2008 All rights reserved.
Disclaimer: The statements and information presented in
this article reflect the opinions of the author and do not constitute a
recommendation to buy or sell specific securities.Before purchase of any investment, the buyer should consult a financial adviser.
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