Microsoft's Economic Miracle
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News Analysis. Those pesky analysts are spitting out OS and PC predictions, and some of them affect Vista. Maybe the economy is right for a Vista comeback, eh? |
Today, we've got 2008 PC forecast revisions from Gartner, and yesterday from IDC, for stronger-than-expected worldwide shipments. On June 10, Sanford C. Bernstein & Co. lowered Microsoft fiscal 2009 earnings-per-share estimates to $2.17 from $2.20—based on a survey indicating enterprise resistance to Windows Vista.
Bernstein is wrong about Vista's bottom-line impact, and the trade analysts just signaled a big boom for Microsoft sales outside the United States.
Not a week goes by that someone doesn't ask about the weak U.S. economy's impact on Microsoft. I should have blogged sooner about it, and the answer relates to the Bernstein and Gartner studies.
The weak dollar, high fuel prices and the credit crunch are cause for broader U.S. economic concern, but troubles in some places in the economy shift benefits elsewhere. For example, according to U.S. economic data for February and March, imports are down and exports, supported by strong demand for heavily manufactured goods, are up. The weak dollar is creating more demand for American-made goods and reducing demand for foreign products.
Companies that manufacture specialized products like airplanes or machinery are experiencing sales booms. Related: Companies with broad economic reach also are doing nicely. First-quarter calendar earnings results from public companies such as Apple, Boeing, Hewlett-Packard, IBM and even Microsoft were strong. This morning, Qualcomm raised its fiscal third-quarter and full-year results. In earnings announcements, these companies acknowledged international sales as driving revenue results.
Increased overseas demand and strong mobile growth are driving PC shipments upward. In March, Gartner forecast that worldwide PC shipments would grow 10.9 percent in 2008 compared with the previous year. The analyst company now expects a 12.5 percent increase, or 297 million units shipped. Gartner said emerging market growth would be 17.1 percent, compared with an anemic 6.3 percent for mature markets. The mobile PC forecast was 39.4 percent in emerging markets and 19.1 percent in mature ones.
IDC forecast stronger growth—15.2 percent, up from 12.8 percent in March—and shipments of 310 million units. In 2007, Asia-Pacific passed the United States as the largest market for PC shipments, according to IDC. The analyst company predicts that by 2010 the rest of the world—Canada, Latin America, Central and Eastern Europe, the Middle East, and Africa—would account for 59 percent of PC volumes.
The export surge, weak dollar and increased PC demand are related, and they're sure to benefit Microsoft. Then there is the good timing—increasing technology infrastructure deployments in emerging markets. A weak dollar means cheaper software in many local currencies.
Microsoft's benefits will be much broader than for Windows on PCs. The weak dollar and infrastructure upgrades should drive software sales across all categories. Before the release of Windows 2008 Server, some analysts espoused the "Big Bang" theory—the idea that enterprise infrastructure upgrades would follow and pull sales of other Microsoft software, such as Office 2007 and Windows Vista. The weak U.S. economy and enterprise Vista resistance may break the theory here. My prediction: The Big Bang is coming, but to international markets where there is surging technology investment. There, the aforementioned weak dollar will soften the cost of buying products from U.S. companies like HP and Microsoft.
This buying surge is one reason why I dismiss Bernstein's analysis about weak enterprise demand for Vista. Whatever Microsoft might lose from Vista it will make up elsewhere. Already, Microsoft's Business division generates more cash than does its Windows division. As with the U.S. economy, where woes in one place create a boon somewhere else, Microsoft sales will shift among divisions but not necessarily diminish.
Something else: A software license is a license to Microsoft, whether it's Windows XP or Vista. There is no indication that businesses are curtailing PC upgrades because of Vista. Whether that license is XP or Vista, it's still a sale to Microsoft. Vista may not be pulling PC sales, but there's no indication in the major analyst numbers that the operating system is hurting PC demand, either. XP will continue to sell. Gartner expects increased demands for smaller portables like the Asus Eee PC, for which Microsoft will license Windows XP Home.
In many markets where PCs are deployed for the first time, Vista is as likely, or more likely, to be chosen than Windows XP, particularly for infrastructure deployments involving Windows Server 2008, Exchange Server 2007, SharePoint Server 2007 or Office 2007.
Something more: The aforementioned combination—export surge, weak dollar and increased PC demand—is like an economic miracle for Microsoft. The company's U.S. desktop market is saturated. There are only so many more first-time customer sales for Office and Windows. Microsoft needs increasing overseas demand for high-tech products, particularly on the server and in markets where antipiracy strategies are paying off in sales increases. (After Microsoft announces its fiscal 2008 earnings in July, I'll put together some hard numbers to show where the economic miracle is occurring.)
Microsoft isn't giving up on mature markets. Its approach to reinvigorating sales is quite novel. Many businesses sit on software for three, four or five years before upgrading, all while paying Microsoft volume-licensing fees that often include upgrade rights. Well, if customers want to pay Microsoft, but don't want the burden of upgrading all that infrastructure, the company will do the work for them.
What? You thought Microsoft's push into hosted services was only about competition from Web 2.0 platform companies like Google and Salesforce.com? Not so. Microsoft will host the software, collect the money like it was doing anyway and give the customer the newest technology—and always up-to-date. It's a promising strategy for fixing what's wrong with mature market sales and one reason I'm bullish on Microsoft's hosted software/services strategy.
Comments (13)
Yes we all know that the cash cows are still coming through for MS. The world's businesses need more computers and there's no other game in town besides Microsoft. But what have they done with all that money for the past ten years. They've blown more money than any other company in history. Their complete lack of success in anything not tied to the legacy desktop makes it silly to think they'll be able to pull a Mesh rabbit out of their hats. The technical talent is there but the management talent is not.
Posted by Phil | June 12, 2008 3:51 PM
Phil - I believe Microsoft still has more cash on hand than any other company on the planet (or, at least, any other software company, maybe any other computer tech company). To say they've "blown more money than any other company in history" should be justified better, as is the claim that they've had a "complete lack of success in anything not tied to the legacy desktop..."
I think you'll find that Microsoft still owns the corporate computing environment, and that Windows Server, Exchange, (more recently) SharePoint, and other products are going strong. Indeed, I'd say it speaks volumes that one of the most significant announcements regarding the new iPhone was that it will intimately support Exchange 2007.
So, I guess my point is: what's your point?
Posted by Mark | June 12, 2008 4:33 PM
Mark - In regards to "blown more money ..." and "complete lack of success..."; what is there to justify? They are statements of fact not opinion. They stand on their own. The fact that they still have enough cash on hand to consider blowing $40 billion on Yahoo is a testament to the power of their desktop monopoly (won years ago) and nothing more.
My point is that the article's position that Microsoft will deliver a move from desktop bound computing to the Mesh ignores the complete lack of success the company has had in all venues other than Windows and Office. They haven't developed a single internet property that could be labeled a success.
Posted by Phil | June 12, 2008 5:12 PM
Phil,
Are you a CFO or a bean counter?
Have you ever given some thought that some people may call "investment" or "diversification" while you might be thinking of it as "blowing money"
Let's say that you have all the details of how Microsoft is blowing money. My simple question is how does that bother you and why should it matter to others?
You also state that "wha have they done with all that money". Why makes you or I worthy of demanding an organization to share all the things they did with their money?
You also come across as a basher, and really don't understand the things they are doing nor are interested in learning what LiveMesh is all about. Are you simply trolling to spew jealousy and making decision for other people (as to what they should buy or use)?
Just because you say "something is a fact" doesn't make it.
Check out what Sharepoint, Dynamics and Hosted Online Services is planning to do in the next 10 years (You don't even need to focus on Windows, Office, Exchange and you will go crazy).
Here is a simple and deep point - All hardware companies rely on Microsoft to sell their hardware. If you figure out the secret, then you will know that even your great great grandkids will be using Microsoft software no matter how much you dislike them.
Posted by Godknowsit | June 12, 2008 10:25 PM
I have to agree with Phil, and I think Godknowsit either works for Microsoft or is on drugs or something. He just makes no sense at all with his Microsoft will dominate the world forever non-sense.
Posted by The Hand | June 13, 2008 12:25 AM
Joe, I am not sure how you came up with a story called "Microsoft's Economic Miracle" based on data from Sanford C. Bernstein & Co., who "lowered Microsoft fiscal 2009 earnings-per-share estimates to $2.17 from $2.20—based on a survey indicating enterprise resistance to Windows Vista."
The fact that more computers will sell overseas, is not such a reason to get all enthused for your heroes at MS. After all, most of these overseas computers, sell without a legal version of Windows installed, many even with Linux. People in a lot of these 3rd world countries, cannot afford Vi$ta, no matter how much you talk it up.
Joe, you would just do a lot better inside of trying to be the devils advocate for Microsoft, to be the Microsoft Watcher, and actually try to tell it like it is. But then, maybe, the money of MS seems to touch and corrupt everything in its path, but I hope not. I read your articles because sometimes you seem to be that neutral person, but other times you seem to be Andre.
Microsoft: What Cost the Vista Fiasco?
http://www.businessweek.com/technology/content/jun2008/tc20080610_435192.htm
Quotes from the link; "According to a Bernstein Web survey of 372 information technology professionals fielded in May, companies expect just 26% of their PCs to be running Vista by the beginning of 2011, down from an estimate of nearly 68% of computers by respondents to a similar survey a year ago.
No Surge in Sales Expected
To be sure, Di Bona's assertion that slow Vista uptake will remove $395 million from his estimates of Microsoft's fiscal 2009 sales, and $49 million in sales from the remainder of fiscal '08, amount to a drop in the bucket for the world's largest software company."
Posted by chips | June 13, 2008 1:07 AM
@Godknowsit: God may know the basis for your claim that all hardware vendors depend upon MSFT to sell their wares, but I would appreciate the favor of some explanation and evidence for your claim. From where I sit, it looks like the relationship is the other way around--MSFT depends upon the hardware vendors to sell its products. Wasn't that even the basis for Joe's prediction that non US sales of XP/Vista will increase? I certainly have seen no evidence that MSFT is driving hardware sales in, say, the EU or the Third World. In fact, there is plenty of evidence that MSFT been losing market share (although not market volume) in much of the rest of the world. As far as your insulting question to Phil, asking him whether he was a "a CFO or a bean counter" and your attempt to educate him about investing with your claim that MSFT's finances are no one else's business it is clear that you are neither a CFO nor a bean counter nor an informed investor. MSFT is a public company, and any interested individual is entitled to know the things that it does with its SHAREHOLDER's money.
Posted by Pinball | June 13, 2008 9:45 PM
As pinball points out "SHAREHOLDER's money".
Ah, yes. There's the rub. $20billion spent in an R&D campaign to see if there was some way to pull Longhorn out of the tarpit. Longhorn has been in the tarpit ever since and Microsoft has been paying the price for failing to find a workaround allowing them to build on the internet.
Now Sharepoint is in Raymond Niro's sights and I don't think Niro shoots blanks.
I would bet the whole conundrum centers around Ballmer being caught in a horrifying dilemma: Admit you were stupid for wasting so much time and money or continue to waste time and money in hopes nobody finds out you wasted so much time and money.
Uhhh... Mister Ballmer. This is your wakeup call.
Posted by portuno | June 14, 2008 12:54 AM
Speaking of SharePoint. Did you know SharePoint was once called a set of "collaboration" applications but is now being called an "application development platform"?
That's odd. Microsoft had very little evidence of being able to do such work back in 2005. But now?
We'll see why Raymond Niro has gone after SharePoint but just poking at a few articles makes things fairly easy to see.
I just wonder why people like Joe Wilcox can't see these easy to pare the double-talk and smoke blowing to see beyond Microsoft's deceitful tendencies.
Is all this relevant to Joe's post? Yes. Especially if all the money Microsoft has been pulling in on Sharepoint doesn't really belong to them.
Posted by portuno | June 14, 2008 2:48 AM
I'm just wondering why Joe keeps ignoring Portuno, is someone keeping Joe from educating "his" readers?
Posted by I-Man | June 14, 2008 2:49 PM
Joe's waiting for "proof". By that time he'll be just another common tater.
Posted by portuno | June 14, 2008 6:41 PM
Ohh. Economic downturn means Vista's finally accepted ? Ah. No.
Economic downturn means OpenOffice, Lotus Symphony licenses instead of Office 2007. Cos they look more like Office XP/2003 than 2007 does. And dont use 2007 file formats. And dont cost money.
And now perhaps CIO's will start considering Linux instead of Windows 2003 for file servers, web servers, DHCP, etc, etc..
And google apps for mobile workers. Thats free.
No reason NOT to use the marketet leading RIM/BlackBerry or the new whizzy iPhone.
This is of course where a strong CEO does something inventive. MS, of course, has Ballmer, who bids for Yahoo.
My assessment is that its going to get very bleak for MS in the next few years, as they get over the Vista 'Jumping the Shark' disaster.
---* Bill
Posted by Bill | June 17, 2008 4:02 PM
@Bill: on the face of it your argument makes some sense, when people have less money they will spend less money. However, you also have to take into account a huge amount of evidence that supports the idea that in time of recession folks will also take less risk, in particular when it comes to running their business.
The need to innovate and move forwards still exists as it always has but investments, in economic times like this, are often made with incumbent suppliers because of the perceived lower risk.
Given the evidence that is out there I have to fall with those who believe that this economic downturn will be good for Vista and for Office 2007.
Whichever way, I’m sure it will be an excellent adventure.
Posted by Ted | June 18, 2008 12:12 AM