Jonathan Yarmis is Doctor Disruptive

It has been more than a year since I’ve posted, and it’s nice to be back.  I’ll talk about my absence in another post but let’s just say that being the “disruptive technologies” guy at a company that doesn’t embrace disruptive technologies is an interesting challenge.  Anyhow, I thought I’d being my return to active blogging with a discussion about my long-time favorite vendor, Microsoft.

Goldman Sachs just downgraded Microsoft’s stock to neutral, saying Microsoft needs to do three things to get back into Goldman’s graces:

1. Increase its dividend
2. Rationalize its consumer strategy
3. Lead in cloud computing.

I’ll touch on each of those in turn but while I haven’t read the Goldman report, it seems to me that they’re missing the two critical places Microsoft needs to succeed at as well:  mobile and social.  Maybe those are covered under “consumer” but (a) I don’t think they fully belong there and (b) I think they’re so critical to Microsoft’s success that they bear separate mention.

As for mobile, it’s clear that the imminent Windows Phone 7 launch is Microsoft’s last chance to get this right.  There are too many platforms fighting for too few developers and while Apple has caved a little on the use of cross-platform tools, developers will still prioritize and exploit platforms in different orders.  I’ll give Microsoft credit for the realization that another iPhone clone (after Android) is not what the market is waiting for.  Whether Windows Phone 7 is different enough, and better at all, is an open question.  I have my considerable doubts but at least Microsoft is pursuing a high risk/high reward strategy instead of a low risk/guaranteed failure one.  We can lament all we want about Microsoft’s litany of failures in this space, and they are considerable, but in a charitable moment I may actually allow that Microsoft’s failures are actually what enabled Apple’s and Google’s successes.  They tried to do the impossible — get the carriers to see the light — well before the carriers were remotely interested in conceding anything.  (The carriers still don’t see the light, but that’s a discussion for another day.)

In social, I think Microsoft needs to get much more aggressive but not in building a competitor to Facebook.  They’ve already lost that battle, even while their equity investment in Facebook will produce a nice financial windfall in the next year or two.  Rather, I think the wide open market remains creating the “Facebook for the enterprise.”  This is still an underdeveloped space and the market leaders remain small companies with uncertain futures.  I think we’ll start to see these companies acquired by the bigger players within the next year so Microsoft’s window, if you will, of opportunity is small.  And please don’t tell me that SharePoint is that strategy.  SharePoint is certainly a beachhead Microsoft can exploit but as a user-driven total Facebook-like solution, it’s not even close.  If Microsoft doesn’t act soon, their old nemesis IBM is actually well-positioned here.  I observed to an IBM executive over a year ago that if some company not named IBM had IBM’s product suite, the world would be wild over what they’ve put together.  However, being buried within IBM has cost it broad market awareness.  But as customers start to understand the power of enterprise-grade social networking, IBM is very well positioned to capitalize on that demand.  Microsoft has an even stronger opportunity but is much further away from being able to exploit it.

Now, briefly, to Goldman’s points.

As for the dividend, I’m not a financial analyst but it’s clear that Microsoft has to do something with its amazing cash hoard of over $36.5 billion.  As an analyst, I’d always prefer to see Microsoft come up with interesting internal ways to invest it first, then also to pursue acquisitions, but given its track record and the sheer volume of that cash balance, I can understand demands to return it to shareholders in the form of dividends, especially when the 11 year chart of the stock price is basically flat.

As for the consumer strategy, I think it would be a huge mistake to divest itself of the portfolio.  I think, however, Microsoft needs to better integrate its consumer and enterprise strategies in a coherent whole, exploiting synergies between the two.  From a user perspective, I think the two experiences are totally blurred.  We do consumer things at work and enterprise things at home.  (If you doubt users are doing consumer things at work, see how much time they spend on fantasy football in the office.)  If the user perspective is blurred, there’s an opportunity for someone to provide a blended experience and who better than Microsoft?  In fact, I would argue that this is Microsoft’s opportunity alone.  Do I think they get it?  Nah.  But is it a huge opportunity?  Oh yeah.

Finally with cloud, I would agree with Goldman.  Microsoft has a huge opportunity, and a long-term imperative to be a clear leader here.  However, Christiansen’s “innovator’s dilemma” rears its ugly head here.  While Microsoft has actually been surprisingly aggressive on the server side, their stance with Office continues to lag the market opportunity and other market entrants precisely because the self-impact is greater than the market opportunity.  On the server side, the self-impact is less clear and thus Microsoft can afford to be more aggressive.  However, when it comes to allocation of resources, marketing and development, their packaged offerings certainly get more attention precisely because they get more current revenue.  It’s hard for any CEO of an established company to put weight behind the oft-stated position “we need to attack our own business before someone else does.”  And Steve Ballmer, given his historical background and predilection for sales and marketing would have a harder time than most to actually implement that.  But if he doesn’t…well, the technology industry has always been very unforgiving of market leaders during times of market transition.  With the emergence of new platforms — social, mobile and cloud — unless Microsoft gets more competitive and more aggressive in all three of these areas, it is not out of the realm of possibility to think that Microsoft becomes the CA of this decade, exploiting a captive installed base but doing little else of fundamental interest.

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