Tuesday, December 30, 2003

Microsoft 2004

Directions on Microsoft has its list of what the challenges will be for the company in the coming year. It's clear headed and well worth reading.

In my mind Microsoft's issue boils down to this -- the PC market has matured, so new computers are only being bought to replace old ones. This means that the volume of PCs sold will dramatically shrink as the basic capital stock is now in place and only the "flow" (or replacement) market remains. To make matters worse, the PC has become good enough and no longer depreciates at the rate it did. This means that the depreciation rate of the capital stock has also become lower, reducing the flow even more. Finally, even as the volume of the PC business shrinks, the market has also entered the inelastic part of the demand curve, which means that people are responding to cheaper PCs by saving money on the computer and buying other things instead, not fancier computers.

Windows and Office make up 90% of MSFT's revenues and 110% of its profits (everything else loses money). Windows is driven primarily by OEM sales, and I guess Office is driven by corporate upgrades. Just as OEM sales have matured, Office has matured as well, with the current application suite doing what it does very well, and new functionality being a burden more than a feature.

Many companies waste perfectly good money on trying to grow instead of accepting the fact that they are now cash cows, operating conservatively, and returning money to shareholders. The people who run companies like to think they are dynamic visionaries doing exciting things, and I understand how it's hard to acknowledge that your role in life is to manage a slow, inevitable, but fantastically profitable stagnation, especially for a company that was once as revolutionary as Microsoft. I think 2004 will show them working to consolidate Windows and Office, beef up security, and struggle with licensing as 6.0 was a well deserved flop. I'm also interested to see how they will try to integrate the client to the server, perhaps via MSN or DRM, and I look to see some tight coupling between Windows Media Player, NT, and MSFT Media Server in whatever online music system they launch next year.

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