Microsoft vs. Google- Again

Yesterday afternoon, CNBC featured a brief debate between two analysts concerning Microsoft's current attempts to "catch" Google in the online advertising business.

One analyst echoed my own feelings and analysis. He said, nearly verbatim, what I discovered and wrote about in a post last fall; that once a technology firm has peaked, it's unlikely to have a successful second act in a new technology.

The other analyst's defense was that Microsoft has large margins in desktop software products, and rakes in huge revenue streams each quarter.

Actually, the two views are not at all mutually exclusive. Consider IBM. When it began to create the desktop PC market, it had large revenue streams and dominated the mainframe market. Yet, those attributes could not save it from a failure to dominate any part of the ensuing PC market in later years.

However, I think there is another reason Microsoft will no longer reward its shareholders with consistently superior total returns. Simply put, Bill Gates is too wealthy. He has no need to worry about financial performance of Microsoft anymore. Ironically, Microsoft now suffers, not from a CEO who owns to little of his firm's stock, but one who owns far too much of it.

Think about this. Gates has, by general estimation, somewhere between $24B and $25B. Let's suppose, for argument's sake, that all of it is in Microsoft stock. Even if Gates' strategy missteps were to cause a 90% drop in the value of the stock, which is far more than would be tolerated before his ouster, he would still be worth about $2.5B. Hardly poverty. I'm not even sure any human can behave differently, once his net worth is north of, say, $500MM.

The risk, then, to Microsoft, is that it now pursues blood feuds at the behest of Gates and Ballmer. Not really feeling the cost of failure, the two leaders of the firm seem to be going after Google "just because."

In contrast to this focus, CNBC aired an interview last week with another analyst who possessed a decidedly contrarian view. He instantly caught my attention.

This analyst maintains that Microsoft made a serious blunder in entering browsers to begin with, and has doubled up on the mistake by now pursuing online advertising. He pointed out that it has had a virtually monopoly in desktop operating systems, but has left that product class poorly served. An example of his contention was the one I mentioned recently here, of my partner failing to get IE7.0 to install on his XP-run laptop. Thus, fissures have opened within the desktop world for all sorts of products that fix Microsoft operating system failings and omissions. Surely, Microsoft could have been creating smaller, additional revenue streams with subsequent version enhancements all these years, while building an ever more solid position in the desktop OS world.

Well, that ship has sailed. And, instead, Microsoft shareholders are buckled in for a wild ride, as the firm's leading billionaire, and his henchman, go tilting after the Google windmills.

As SpongeBob would say, "Good luck with that!"