A week after unveiling very disappointing fourth quarter profits, and a day after pulling off a search alliance with Yahoo, Microsoft’s top executives faced analysts and investors at company headquarters in Redmond to discuss the state of the world. These were the highlights:
Yahoo. Some of CEO Steve Ballmer’s strongest words were reserved for defending someone else’s strategy rather than his own. He claimed Wall Street was dead wrong to have laid waste to Yahoo’s share price over the last two days. That’s a mark of how important it has become for Ballmer that Yahoo CEO Carol Bartz succeeds: a wounded Yahoo is the last thing he needs as he takes aim at Google. He now has a large vested interest in its success.
Bing. Ballmer ducked a question about his market share goal for Bing in its first year, but then gave the game away by saying that a “three point, four point” market share gain would amount to real momentum (the current US share is 8.4 per cent). Qi Lu, the former Yahoo exec who is now head of Microsoft’s online division, made a strong case for a “pure search brand” – which only emphasised even more how badly the MSN/Windows Live branding around search had been handled for years. Market research already shows 33 per cent awareness of the Bing brand, said Lu, adding: “We are already seeing initial anecdotal evidence that people are using it as a verb.”
Profit Margins. With new Windows, Office and server product cycles about to kick in, analysts didn’t waste much time worrying over the cyclically-depressed bad results from the latest quarter. But Ballmer and Chris Liddell, chief financial officer, once again had trouble persuading them not to get fixated on the company’s profit margins. The Microsoft argument: that its wide range of businesses, and the growth of lower-margin online services, made a simple company-wide margin figure meaningless. However, the analyst concern points to a deeper worry about the risk of cannibalisation to the company’s traditional software business as it moves into new markets, and it won’t easily be assuaged.
Windows. The PC market grew by 1 per cent over the past 12 months, but Microsoft’s revenues from Windows fell by 12 per cent. To make up for that, Ballmer promised some adjustments. For instance, he conceded that the PC industry at large had given away too much with low-priced netbooks: ”What we all did is we created something that was cheaper but in some ways a little better than the expensive thing.” To make up for that, the Windows 7 value proposition has been tailored to encourage more users to upgrade to more expensive versions. Also, the price of Windows in emerging markets (which now account for much of the growth) is about to go up: Microsoft made the mistake of keeping prices low in the hope that it would encourage more PC buyers to pay for Windows, but that assumption proved wrong, said Ballmer.
Cloud computing. Discussion of the Ray Ozzie “software plus services” strategy that has so dominated the agenda in recent years was almost completely absent (and Ozzie himself was almost invisible during the day). That is a good sign for shareholders: with the strategy starting to pan out, and with a wide range of services now starting to hit the market, Microsoft no longer feels the need to talk it up. The Ozzie agenda has finally taken root.
