DISQUS

PlanMaestro · 5 months ago

Spoken like a true MSFT shareholder. Liked very much your driller of oil analogy.

So if Ballmer is so opposed to buybacks and dividends. What are the bonds for?

ericjackson · 5 months ago

M&A would be my guess

Bob · 4 months ago

@ Eric

Thought provoking. Isn't the takeaway of a 10-year -47 TSR that Microsoft management hasn't delivered? R&D is a resource like any other. Management is responsible for determining where and how much to spend, as well as ensuring an appropriate ROI. If a large part of the problem is "poor investment decisions", which I agree with, the same money spent on acquisitions would have been just as ineffective. The $6 billion aQuantive purchase comes to mind. And of course not all the $62 billion was wasted or available for buybacks. Some substantial part went into creating the products that have produced the cash flow this decade. But I agree the overall level of innovation and profits in new areas don't justify the aggregate R&D spending level. Shareholders should be asking "where's the beef?". I'd just extend that to all the resources management has squandered in pursuit of returns that still haven't materialized and don't appear likely to. Why do you think large shareholders haven't been more vocal?

@ PlanMaestro

"So if Ballmer is so opposed to buybacks and dividends. "

He isn't opposed to them. He benefited directly from them and still does. He's just misplacing his frustration, blaming the market when in fact the one-time provided no ongoing incentive to hold, the first buyback was too spread out to be effective, and the Vista cloud was hanging over everything (not to mention Xbox and Search).

"What are the bonds for?"

According to the CFO, it's to give them more flexibility in settling USD denominated obligations (e.g. dividends). An increasing amount of their cash is overseas in foreign $ and they can borrow USD very inexpensively given their credit rating.

ericjackson · 4 months ago

Thanks for the comments. Sure, they need to do better acquiring companies than they have, which might mean they need to add more senior people with that skill-set. However, I believe that the acquisition strategy is the right strategy. They just need to implement it. They have a lot of money to hire a lot of very skilled people to help -- and I don't mean the bankers.

Why haven't shareholders been more vocal -- good question. Some don't know how to be vocal; maybe, for some, the performance hasn't been bad enough; maybe for others, the recent run-up in the stock and the coming of the new product cycles is enough to appease them. However, in my view, this is a company trading at about 50% less than where it should be if it better demonstrated it was implementing a very cohesive and credible strategy, instead of wasting their considerable resources.

Bob · 4 months ago

That's interesting. I think an acquisition-centric strategy goes against their DNA. So it's going to be difficult to get that change unless recent setbacks have forced them to reassess what they once held sacrosanct. Either that or it will require new management.

Thank you for the thoughts on shareholders. Those make sense, especially for the retail crowd. I was thinking more about the large sophisticated institutions. -47 over ten years is difficult to ignore when you're being benchmarked on total return. The more logical choice seems to be either get vocal or get out.

Anyway, great thought provoking article. Thanks again.

ericjackson · 4 months ago

Some of the large ones are more comfortable being vocal. Most aren't. They tend to prefer to air their views in private. I think most expect better than what they've gotten.

DMB · 4 months ago

Except it's not "research". Microsoft R&D spending figures account for EVERYTHING, from development to program management, to QA. In a company with about 50000 engineers, testers, program managers and management types, the yearly figure boils down to something like $110K per head annually, which is not that much. Microsoft Research costs less than $700M a year altogether, and that includes all costs, not just R&D but things like facilities cost, hardware, travel, etc.

ericjackson · 4 months ago

My recollection is that IBM employs more people and yet spends 50% less on R&D than MSFT. That undercuts your "we employ more people" argument.

Plus, the other issue of it being difficult to point to new revenue streams directly attributable to MSFT's R&D efforts is also still valid.

icehawk · 4 months ago

His theory isn't that MS employs more people, it's that MS categorizes all normal engineering work as R&D. Every dev, test, and PM that worked on Win7 was technically R&D funded.

IBM is more and more a services company and not a software or hardware company. so they probably do have a much lower percentage of R&D than MS even if they do have more employees overall.

Basically R&D spend at MS is a red herring

ericjackson · 4 months ago

Where in the financial statements do they break this out?

How do you explain the difference in results compared to numerous smaller companies?

ericjackson · 4 months ago

I take it that you guys are MSFT employees and from R&D/Engineering.

Our interests are aligned in the sense that I'm an investor with a big percentage of my fund invested in the theory that this company is greatly undervalued (maybe by half) and should see its shares increase over time. I believe that, if management takes several new actions (beyond they currently stated ones), this increase in value could take place faster. If you're a MSFT employee -- especially one who's been there for 10 years or more -- you also want to see your share price increase so your stock and options would be worth more. If you've held stock for 10 years, it's basically worth half (even after dividends) today than it was back then.

I believe -- and I think many investors believe -- that MSFT's R&D spending has been enormous relative to other companies and has produced few tangible results. That doesn't mean you stop R&D. However, my belief is that the management of the R&D process has been sub-optimal, leading to 10 years of poor returns on the investment made. I wish that future investments of cash flow will go to new acquisitions (which must be properly paid for, have a strategic fit with the business, and properly integrated). I think this is a better use of funds than more more more R&D spending and more more more buybacks and dividends. In short, I'd like to see better R&D spending, better M&A, and some moderate level of spending on buybacks/dividends.

So, what is your view? Do you think investors are just wrong and MSFT's R&D spending and results are as good or as bad as anyone else and the process has been properly managed? Do you blame poor investor relations for the low stock price relative to where most think it should be trading? Do you blame senior management? Clearly there's a disconnect somewhere in this chain.

DMB · 4 months ago

Full disclosure - I'm a former MSFT employee with no axe to grind (like the company, left voluntarily).

I think Microsoft could get a lot of mileage from _increasing_ R&D spending or maintaining it at the level it is right now, IF they address the horrible inefficiencies they have in upper and middle management, and let people who know their stuff run things. The reason why I think this is because Microsoft has the set of engineering talent that's second to none in the industry. If that engineering talent is put in a position where doing great work doesn't feel like pissing into the wind (which it currently does, most of the time), you will see great innovation and ROI. Until then, reducing R&D spend is pointless because engineers, not managers, are the first to go when people are laid off. And I don't need to remind you who actually creates that "return on investment" in the end.

ericjackson · 4 months ago

So name some names in upper and middle management who need to go/be replaced?

By the way, this issue is not all that dissimilar to Yahoo! a couple of years ago: lots of fat and in-over-their-heads upper and middle managers clogging up the system. It clogged up the whole organization to the point of almost killing it.

DMB · 4 months ago

I won't name any names - that's a matter internal to the company and everyone inside MSFT knows who those people are. It's not so much about replacing them, even. There's just too much management, from frontline leads all the way up to VPs. Did you know Microsoft has over 150 vice presidents? Did you also know that in some groups you have general managers reporting to general managers, several architects per product (talk about "too many cooks"), half a dozen development managers where one or two would do just fine (they'd have to bust their ass like everyone else, though), leads with zero or one reports. It's not uncommon to see 7-9 levels of reporting hierarchy from a frontline dev or tester to the CEO. All of that needs drastic flattening.

Did you know that nearly a billion dollars in compensation budget is allocated to so-called "partners" - folks who have been with the company for so long, they've achieved career immortality (and $750K-1M in combined yearly compensation that goes with that). I could go on and on about this. Microsoft is just too bloated for its own good, and the bloat is not in its engineering staff.

ericjackson · 4 months ago

For any current or former MSFT employees out there, may I encourage you to name names. Register anonymously so you feel comfortable doing this. Think about it this way: If Bill Gates appointed you CEO tomorrow, what would you do? Let's hear it. Unless we discuss and debate specific actions (instead of just complaining or referring to fat management vaguely), nothing will change. Thanks.

ericjackson · 4 months ago

Think about this also. If I, as a shareholder, was to bring forward these kinds of complaints, MSFT would rightly say "what's your proof?" I would say: "well, a guy who used to work for you anonymously commented on my blog about it." They'd inevitably say, "well, we probably fired him for good reason and now he's just talking sour grapes. Besides, he's giving you no proof. We disagree with his claims." I need verifiable proof of what's wrong and what needs fixing.

icehawk · 4 months ago

I'm not sure pointing fingers and naming names will help you. It normally just ends up in a never ending circle of finger pointing. Do a search for "mini microsoft" if you'd like to see internal MS employees point fingers at each other.

As far as my opinion on Microsoft and it's stock price, I think the company has tried to do too many things at once without a clear direction of how they tie together or what our core strategic value-adds should be.

Microsofts success in the past was generally around taking existing good ideas and re-working them at a lower price point for mass adoption (developer adoption, consumer adoption, and eventually business adoption) and creating an overall ecosystem that gave opportunities to many groups.

Example: Windows 3.1 provided a common API and framework so that companies across the world could create software on it and sell their solutions to make a profit. MS Word and Excel did the same - look at all the companies that built solutions on top of Excel or Word.

Windows and Office continue to do well, but to maintain the type of growth the shareholders had come to expect Microsoft needed to continue to find other revenue streams. They have had success in some areas using the old formula - specifically in the Enterprise space (Active Directory, SQL Server, SharePoint) and minus some execution problems in the Xbox space.

Where Microsoft has lost its way is with the internet. The internet itself is already a platform where people can build their own solutions and make a profit. So Microsoft has tried to put services on top of the internet but in most cases other companies are already offering those same services for free with a large user base. So MS couldn't use it's standard plan of taking existing ideas and making them inexpensive - instead it has to compete in a whole new space where the old formula doesn't work.

I do think the path to success continues to be enabling others to be profitable. Google, Ebay and others that actually make a healthy profit on the internet do so because they built a platform which companies and individuals can use to benefit themselves.

I'd like to see MS management start to identify new "platform plays" where MS can enable others and can get into the game early (maybe cloud computing will be one of those areas). I'd also like to see them make the hard decisions to cut products that aren't making money and show no signs of being able to.

so with all that said, I guess in general I agree with you that MS isn't getting the return it should on the products that it invests in. I don't know if that means there should be more M&A spend, or possibly just reduce R&D spend in unprofitable areas sooner and instead invest more in prototyping and testing new product types for new revenue streams.

ericjackson · 4 months ago

Thanks for those comments. Interesting.

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DMB · 4 months ago

Yes, IBM employs more people in India, and more contractors. It is possible that they calculate their R&D expense differently, too.