Can we forget about Microsoft?

Someone mentioned Microsoft to me yesterday and I suddenly realized this is a company I almost never think about. And neither do any of my immediate colleagues. They only come up in conversation when attending the annual Convergence conference and even then it is very much a fleeting affair. It is an odd situation for a company that was a large part of my thinking 15 years ago. So why talk about them now?

I can think of 40 billion reasons - that's the amount they plan to spend over the next five years buying back shares in the hope of delivering value back to shareholders. Then there's the recent proposed increase in dividend that will se the company spend some $10 billion in dividends.

By and large, the market seems to be content that at least in the short term, Microsoft will deliver market equivalent returns of some 7 percent. So far so good. But as a buyer of technology would I feel the same way?

In a recent analyst presentation, Microsoft demonstrated how it plans to improves reporting transparency, making clear the distinctions between consumer and enterprise revenue streams. On its face that's a good thing although any casual observer cannot fail to notice that the bulk of earnings comes from the enterprise division. But there are plenty of headwinds to consider.

PC fading away?

The hardware piece of the consumer play is being squeezed hard by aggressive competition. Once Apple showed the way with its iPhone and iPad, it didn't take long for others like Samsung to pile in. Windows devices have become a minor play when contextualized to the whole market. Add in burgeoning growth in 'bring your own device' (BYOD) and it is easy to see how this division, while profitable, could easily fall off a cliff. That's despite laying a large bet on Nokia.

Recent reports point to seismic shifts in the buying patterns of computing device. Louis Columbus points to an IDC report entitled: Tablet Shipments Forecast to Top Total PC Shipments in the Fourth Quarter of 2013 and Annually by 2015. The bulk of Microsoft's earnings come from its highly lucrative Windows and Office franchises and while PC sales have not died, they're not growing either.

Office domination

The cognoscenti might luxuriate in their MacBookAir/Pro, iPhone, Pad or Samsung smartphones, the business world still runs a considerable amount of  Microsoft related solutions.

Almost every attachment I receive will be a Microsoft Word, Excel or PowerPoint artefact. Despite the seriousness with which Google is rumored to be taking its office productivity solutions, Office 365 is preferred as a cloud alternative to the desktop, even by those who claim to have sworn off Microsoft.

The enterprise stack

Much of the world's commercial software, even that aimed at webscale, is still developed using Microsoft tools and technology. Even the mighty SAP, while demonstrating coolness with plenty of Apple devices and one of the world's largest iPad deployments knows that its customer base is largely sticking with Microsoft and Intel as the foundation for their technology landscapes.

In the applications arena, informal discussions with other analysts suggests that Microsoft Dynamics remains a formidable market competitor with revenue estimated in the $1.6 billion area for the last year. Note: Microsoft doesn't break out Dynamics revenues separately so these are semi-educated guesses. Only last week, Workday said that in its engagements among mid-market buyers, it sees a lot of Dynamics. In a conversation with one CIO at the Box event, we talked about the pros and cons of Dynamics in distribution environments. He was highly complementary about Dynamics capabilities. I've seen many good case studies that talk to solving practical problems in user friendly ways. The Lotus F1 case stands out. As does New Belgium Brewery. So what's the problem?

Cloud

Microsoft's cloud platform Azure is almost invisible to me. Despite huge investment, it never comes up in conversations yet I see many vendors talking about using Amazon as their initially preferred cloud platform. Maybe it is because of sluggish deployment times. Phil Wainewright says it is a billion dollar business but cautions that we may not have a clear line of sight into how that number is arrived at. I sense that broader headwinds in the form of Microsoft's fuzzy position over NSA disclosures doesn't help. Despite Dynamics success, Microsoft's talk about deployment options has never sounded convincing. Yet I notice NetSuite zooming past $100 million in revenue in its last earnings report. (PDF) As mentioned above, Workday has spotted a mid-market opportunity.

Or maybe it is far simpler than any of the above.

Verdict

The way in which Microsoft is representing its earnings and the moves it is making on stock buy back and dividends suggests a company in 'steady  state.' No big innovation in sight and a reliance on a very long tail of embedded technology for maintenance and renewal streams. Of course it is making cloud plays but these are not going to capture the imagination of sufficient a market to keep Microsoft as top of mind. You can argue the Office franchise goes on forever as does the tooling and downstream PC requirements for enterprise applications. But that ignores huge chunks of the market that are moving in a different direction and at a different tempo.

My sense is that much will depend on who Microsoft chooses to select as its next CEO when the much maligned Steve Ballmer steps down. In the meantime, it would a be a fool who totally ignores Microsoft...but then innovation is often undertaken by the foolish and delusional.

Featured image: © IHS

Disclosure: SAP and Workday are premier partners