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MS Too Big

Perhaps this isn't the best place for this, but I read an article in Money magazine about Microsoft hording money. They currently have $40 billion in cash lying around... That was as of the publication date, so it's probably more by now. They're taking their profits (around $1 billion / month) and just holding on to it...

Their plan? To expand into other industries, such as telephony. Microsoft wants to make the software that runs the phones. We've already seen the X-Box. Microsoft spends 17% of it's income ($4.4 billion) on R&D. Somehow I doubt open source can keep up with that.

Since they've basically reached the limit of what they can do in the desktop market - slowdown is inevitable - they've decided to branch out.

http://money.cnn.com/2002/04/12/pf/agenda_msft/index.htm

I realize this is likely to turn into a flame war, but I have confidence *some* intelligent conversation will pop up here.

MarkTAW
Tuesday, May 14, 2002

I seem to recall that the SEC forced MS to start carrying more cash, because of their huge exposure on stock options, all of which was backed up by -- wait for it -- stock!  This Enron-like approach to security had the SEC nervous, and they told MS that they needed more cash on hand.  I can't find a reference to this event now, however, and I'm wondering if I merely dreamed it.  ISTM it was in the Wall Street Journal, but I can't recall for sure.  Anyone remember?

Acowymous Nonerd
Tuesday, May 14, 2002

Bill Parish [ http://billparish.com/ ] has all the details and interesting analysis. I haven't read what he wrote lately, but back in mid '99, he gave proof that Microsoft is suffering from the (then unnamed) Enronitis disease.

Ori Berger
Tuesday, May 14, 2002

I spend about 17% of my income and save the rest (after taxes) too.  Maybe the government should come after me.  After all, I'm just a greedy capitalist.  Nobody would get hurt but me.

Joe Blandy
Tuesday, May 14, 2002

>> I spend about 17% of my income and save the rest...

This is waaaaaay off topic, but would you like help spending the rest?  Funny, I save around 17% and spend the rest.

Nat Ersoz
Tuesday, May 14, 2002

This is a more direct link to the MS info: http://billparish.com/msftfraudfacts.html. It is a worth a read. I am truly afraid that many large corps around the world are cooking things like this. Enron may be the first domino to fall.
It makes sense to hoard cash. That seems like the smartest thing MS is doing. They are facing the DOJ, states lawsuits, threats of breakups, and free alternatives to their products. I would be hiding money in my mattress if I had those problems.
MS is full of smart people. They have to know that there current business model is in trouble. People are not upgrading to get new features. MS has a reputation for low quality (deserved or not is a different debate); the reputation will follow them forever. The poor response to hailstorm and subscription licenses gave the company another black eye.
As I have said before, the sock price will fall off a cliff when investors perceive that open source can compete. The previous thread is not good news for MS. Wal-Mart is offering PC’s without an OS. The OEM’s want to break the MS agreements. All this is bad for MS.
What would your company do if a judge was going to tell you how you had to build your product?
When the sock falls, the house of cards described above will collapse. Now is the time to panic! Facing all these problems, MS is smart to build a war chest. They will need it and soon.

Doug Withau
Tuesday, May 14, 2002

The link to the Bill Parish article doesn't work...

MarkTAW
Tuesday, May 14, 2002

Try this one...

http://www.billparish.com/msftfraudfacts.html

zooey
Tuesday, May 14, 2002

I guess you guys need a lesson in economics.

With all this money and all the research Microsoft does only few things make it to the real world and they end up "taking" every innovation from other small companies. XBox is loosing around 60million a year. Microsoft tried for years to enter the Settop boxes and lost over a billion dollar and failed.
Open source have a lot of support from big companies such as HP, IBM, SUN. The number of developers working on open source projects outnumber by far the number of microsoft programmers and they sure are smarter. In the open source world many can contribute but only the brightesdt programmers are accepted.

open source programmer
Tuesday, May 14, 2002

And at Microsoft's, many can apply for jobs but only the brightest are accepted...

Frederik Slijkerman
Tuesday, May 14, 2002

"And at Microsoft's, many can apply for jobs but only the brightest are accepted..."

They hired me.  That oughta categorically disprove that theory.  Former micrserf #9396.  I've met much birghter bulbs from the pack during my travels.

Nat Ersoz
Tuesday, May 14, 2002


I want to work for microsoft. What do I need?

Anon when dumb
Tuesday, May 14, 2002

I'm not entirely sure what that post had to do with economics. It sounded like another open source advocate ego tripping again.

The real reason for this post is a link to the Economist article mentioned on the aforementioned Bill Parish website:

http://www-personal.umich.edu/~kathrynd/share.pdf

Microsoft is mentioned in the middle of page 3. This infinite floating of stocks reminds me of something my macroeconomics teacher said to me while I was in college. With regards to the national debt and defecit, he posed the question "why can't the government just continue to float bonds to cover the cost of paying off the previous bonds?" I couldn't think of a real answer. I just wished I could float an infinite number of bonds in Sim City.

I'm not sure of the legalities, but if you could float an infinite number of stocks, to the point where you have 500 billion stocks worth around $.75 each, why not reward your employees with stock options?

MarkTAW
Tuesday, May 14, 2002

...a lack of moral integrity.

Microserf (still there).
Tuesday, May 14, 2002

"why can't the government just continue to float bonds to cover the cost of paying off the previous bonds?"

The reason is supply and demand.  As a government borrows more to pay for its previous borrowing, demand for its bonds decreases.  This is because of the risk of default.

The U.S. might be able to do it, as long as everyone continued to trade in U.S. dollars.  But if the U.S. dollar fluctuates against other currencies too much, the tendency of people to trade in U.S. dollars declines, and the same problem facing other governments is faced by the U.S> government.

(An argument might be made that you could do only domestic bond issues.  But that's constrained by current GDP, and the real question then is why do it this way at all.)

Really, the problem is that if you owe too much, people don't trust you.  It maybe ought to be different for governments (who, unlike corporations, can just print more devalued money, if need be), but it's not.

Still, no-one has mentioned something that indicates the SEC was ever involved in actually telling MS to clean up its act.  So maybe I misremembered.

Acowymous Nonerd
Tuesday, May 14, 2002

Money has been a known problem.  The best rate of return has been from internal projects.  Next is by investing in outside companies.  Last is just having money in the form of money.

But when it becomes hard to do #1 and #2, your only position is to accumulate money.  Paying dividends is out of the question, since what does MSFT gain from it?  Nothing, and they won't do it until investors really pressure them.

The important thing to see is that large companies desire to dominate capital-intensive businesses.  This is in fact GE's strategy in a nutshell, and applies to others like Wal-mart.  Software's barrier to entry is incredibly low, which multiplies competition.  If a requirement for entry is high amounts of capital, that deeply limits the possible competition.

I think MSFT is mainly fishing, waiting.  They basically would enjoy something as extreme as the PC revolution of the 80's.  And maybe there's little pressure to find it immediately, since Gates likely won't be hanging on for very long.

Anyway, why are we discussing this here? ;-)

anon
Tuesday, May 14, 2002

I dunno, there's a lot of MS related discussion here, so I thought this would be a good place to talk about this. I also find intelligent conversation here. It seems to be holding true.

I had thought about the infinite supply problem of floating more and more bonds. I think my teacher may have shot it down but I forget the reasoning. Perhaps he asked me for a proof that it would fail and I couldn't. Or perhaps I didn't say anything about it.

Isn't it normally a good thing when a company has a large liquid position? If they're carrying no debts and can handle a bad turn of events they'll survive even if their product doesn't do so well. Why is it so bad that Microsoft has a large liquid position? Why is Money Magazine writing that it may be a bad sign for investors?

And if the Bill Parish stuff is true, then wouldn't a large liquid position help that as well? What would happen if every employee with stock options demanded them right now?

Perhaps they plan on buying someone... Sun perhaps, or Apple (ha ha). I wonder what the DOJ would say about that. Or maybe they plan on buying the DOJ. Starting their own nation "Micorosoftia" located in the Pacific Northwest. Or maybe they plan on buying an X-Box for every home in America to compete with Sony, who's kicking their console making ass.

Ah well. Maybe the author of the Money Magazine article is short sighted and a sensationalist to boot. Maybe it was intervention by the SEC. Maybe it was a fear that they'd be perceived as another Enron. Maybe they are just ensuring that Bill Gates will have enough money to retire in style... he has enough money right now for all of New Jersey to retire in style. At least as long as Microsoft's stock doesn't tank.

Anyway... enough economics.

MarkTAW
Wednesday, May 15, 2002

>The number of developers working on open source projects outnumber by far the number of microsoft programmers and they sure are smarter. In the open source world many can contribute but only the brightesdt programmers are accepted

open source programmer:
ok, I'll bite. Are we using the same open source software? I am also a (albeit part time) open source advocate/developer but to say that the open source programmers are smarter is pretty subjective. Only the best and brightest? It's more like anyone who wants to help, no one is excluded. I see nothing wrong with that. There are some MS teams that are pretty advanced and solid, like the SQL team. But there are other teams that could probably do a little better *cough* exchange *cough* (I know, thats just as subjective).  Just like there are open surce teams that are very far ahead such as the apache team, the linux kernel hackers, or the jboss team. But there are also others that are not as good. Its just a fact that all software will not be the same.  I personally don't care who built it if the tool/app works well.

>XBox is loosing around 60million a year

MS also has about 38 billion in Liquid as I type this with another 5 billion in booked revenue (subscription model) on the books. More than any other company. I think they are using this cash for a number of reasons. The main one being to be prepared for a quite posible split up and also to prepare for potential lawsuit liability that amounts in the billions (EU) without passing on that debt to the share holders. When you are driving a company at 30% avg. growth for 20+ years you are going to reach a peak. But investors want growth not excuses so you try to tap into other growing and existing markets such as Interactive entertainment, telephony, and embeded spaces. They simply must continue to take risks inorder to achieve the same growth rates. Part of that risk is losing 60 million a year in hopes that you will gain a customer base. A typical MS maneuver that they can maintain because of their massive cash flow. But the long run is where they are shooting for (10+ years), not next quarter.

Ian Stallings
Wednesday, May 15, 2002

<But the long run is where they are shooting for (10+ years), not next quarter. >

And ain't THAT refreshin'.

Chris Dunford
Wednesday, May 15, 2002

PS2 has 10 times more users than X-Box. PS2 is now $200 and X-Box $270. I just bought a PS2 (the day of the price drop I was going to buy a DVD player, but hey PS2 for the less AND it plays DVD's...). I won't be buying an X-Box in the near future.

I wish they'd use some of that 40 billion to give the X-Box away for free. =) They could then charge for online services related to games on the X-Box, which I won't be using anyway, cheapskate that I am.

Yeah.. we'll give you the hardware because we know it's useless without the software, and that's where we'll make our money. Sounds like a good business model to me. At least, from where I stand...

MarkTAW
Wednesday, May 15, 2002

The Amiga overtook the Atari ST back in the 80/90s.  The ST had a much bigger base initially and was £100 cheaper.  In the end, however, the Amiga was a better machine.  So the PS2 two advantages aren't concrete.

If the XBox is a better machine (Is it) with significantly better games (again if) then the extra price can give the look of the superior choice.  It worked for Commodore.

Ged Byrne
Thursday, May 16, 2002

If Xbox is "better", then it would have better games sales because the games would be better.  Actually, I have that kinda turned around, right?  The best console is the one with the best games - because that is what you play: games.

Given that,

http://biz.yahoo.com/rb/020424/tech_videogames_sales_1.html

"After registering six top-20 titles in the NPDFunworld report for March 3-16, the Xbox ended up with only two top-20 games for the full month, at Nos. 19 and 20."

Those numbers are for the US where Xbox has its stronghold.  Game sales are considerably worse elsewhere.

Additionally, we have a new price war unfolding.  A complete blood and guts thing - totally unglued (very exciting to watch the titans battle!).

http://story.news.yahoo.com/news?tmpl=story&u=/cn/20020515/tc_cn/microsoft_trims_xbox_price

"Doherty estimated that without the production switch, the price cuts would have Microsoft selling each Xbox for almost $200 less than it costs to manufacturer."

Dontcha love it?  MSFT is taking some of that $40B, rolling up two Ben Franklins, and redistributing them with every box "sold".

Sony is in a better position to sustain this price war.  They're a verically integrate hardware manufacturer.  The PS/2 uses a custom MIPS core wth built in 3D accelerator.  That device likely has fewer transistors than the Pentium 3 alone.

The PS/2 is a consumer device built by agruably the leader in consumer electronics.  It was designed for high volume manufacturing by a company accustomed to thriving on thin margins.

I'm also convinced that the "hardcore" gamers play games on computers, not game consoles.  Meaning that MSFT's target audience enjoys the computer more than a "Nintendo" style box.  This is certainly true for my 15 year old and 8 year old sons.  You can vastly customize the keyboard and add "mods" to games.  Not so on XBox or PS/2.  The game console crowd is into role playing games.  Especially outside the US.

fwiw,

Nat Ersoz
Thursday, May 16, 2002

I'm not an economist, and so I tend to get lost with all of the inside jargon that makes it sound more important and somewhat real.

But... I have always been under the impression that "cashflow" was the big thing... I guess what has been called "liquid".  I can't see where hoarding cash or locking it away would be beneficial for any company.

As for floating... isn't it just a gamble?  Betting you can use the money and be long gone before it has to be paid back?  Sort of a mortgage on the hopes of the future generations to make more?

Joe AA.
Friday, May 17, 2002

'But when it becomes hard to do #1 and #2, your only position is to accumulate money. Paying dividends is out of the question, since what does MSFT gain from it? Nothing, and they won't do it until investors really pressure them.'

MSFT just needs to bite the bullet and declare a dividend; they're not a high-growth company anymore. They do a lot of hand-waving about how they may need the cash for some unspecified DOJ decisions, but I think that's a line of bull; the real reason is a institutional refusal to face the fact that they're not the same kind of company they used to be. Stocks and options play a very large part in their employment strategies, though, so admitting there's not going to be any fabled MSFT millionaries anymore could be a big, big problem in keeping the talent they need. Now that a think about it that's a gigantic problem; maybe they think they can trick the employees for a while.

This is why I think MSFT probably isn't going to outperform the market, long-term; there just isn't enough left for them to conquer in their core business. Also, enormous, entirely expected dividends get priced into the stock easily, so there's not going to be any more gigantic runups. The financial press only fawns over companies that unexpectedly make their investors filthy rich, though, so they're going to lose their golden-boy image, which is ironically, a big component of short-term, draw-in-the-employees-to-make-a-killing thinking that keeps the stock propped up. But hey, what do I know? Someone must think it's a good idea to drive a moving van like a ferrari.

Jason McCullough
Friday, May 31, 2002

The ST wasn't "overtaken" by the Amiga and it wasn't a "better" machine.  The Amiga had its last gasp in 1992 -- released the 1200 and 4000, and piddled by until the Atari Falcon (updated ST) came out.  Falcon outpointed Amiga on every front, and by 1994, Commodore was out of business, crushed by Atari.  Atari kept going for another two years before succumbing itself to PC clone companies and the failure of its Jaguar game system.

Sorry, just had to deal with the Amiga misinfo, old flame wars you know.  ;-)

On the MSFT front, the stock option stuff is interesting.  What I don't yet know is how "liquid" the liability created is -- in other words, if $44 billion in options liability is created, could that suddenly be payable out of cash at once?

Anonymous Atari Guy
Sunday, January 05, 2003

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