Microsoft's Operating System Headaches

I read with great interest a recent Wall Street Journal article which noted that Microsoft's Windows' market share of devices, when tablets are included with PCs, has fallen to 82%- the lowest in its history. And this year's expected sales and profits from Windows are lower than last year's.

Now there's even concern about how many third-party software writers will pay much attention to Windows 8, with so many apps to write for Apple and Android devices.

Of course, had Microsoft followed my advice and broken up its empire into operating systems, applications software, gaming and online, as I suggested years ago, this may not have occurred.

Freed from each other, operating systems and applications businesses could have each developed software not intended for use with the other. A Windows division could have expanded into developing operating systems for other devices, perhaps as an outsourced vendor. The Office group could have been freed to develop apps for any platform in which it saw profit.

Instead, now even David Einhorn is echoing my years-old call for Ballmer's replacement.

This is how companies become fodder via Schumpeterian dynamics. The growth of Microsoft's main platform, the PC, has finally given way to other devices- smart phones and tablets. And so its fortunes are probably on a monotonic downward trend after treading water for the past decade.

David Einhorn Echoes My Position On Ballmer & Microsoft

I noticed that David Einhorn took time out from his purchase of a minority interest in the New York Mets to echo my long-held contentions, expressed in prior numerous posts (under labels Microsoft and/or Steve Ballmer), that Bill Gates' successor as CEO should be fired.


According to Bloomberg on Thursday, Einhorn's Greenlight Capital's 8th largest position is Microsoft.

What??


First things first. Does noted wealthy hedge fund investor Einhorn's agreement with my long-held call for Ballmer's departure mean I am now correct? Or was I correct all along? Does it matter that someone with billions to invest decides on publicly stating the same sentiments I've written for a few years?


In some ways, it does matter. For instance, I don't hold Microsoft, and, even if I did, I wouldn't own as much as Einhorn's fund probably does. So I wouldn't have the investor influence that Einhorn does.


But, then again, Einhorn's fund owns Microsoft. Wouldn't his statements be expected, in the days ahead, to drive the price of the firm's shares down? Does Einhorn want to accumulate more shares, at cheaper prices, the better to insinuate himself into the firm's management?


That is, after all, Einhorn's modus operandi, is it not? To invest in firms with challenges, hoping to affect a resolution, and thereby see gains from his pre-existing positions in the firm?

But by criticizing Ballmer and Microsoft, while owning the share, Einhorn would seem to be taking some risk, seeing the value of the firm's shares potentially drop for a while, before possibly rising again. Perhaps on Ballmer's exit or Einhorn's securing some role in influencing the firm's strategic direction.


But, in another way, it doesn't matter that Einhorn has now agreed with a position I've held for years. The facts of the case should be based on their merits, not simply on who is voicing them. In fact, sometimes you should assign more credibility to someone who is objective. Someone like me who doesn't own Microsoft shares, but simply observes real performance and comments thereon.

Of course, another reality is that I can write about Microsoft's, Ballmer's and Gates' failure over the past decade all I want, and I'm not going to get the coverage on CNBC, Bloomberg and in the Wall Street Journal that a wealthy hedge fund manager like Einhorn will receive for pithier comments at a much later date.

Is it gratifying for me to see business media embrace Einhorn's views on Microsoft and Ballmer, which are, essentially, my own for years? Yes.

Is it frustrating to know that I can write the same conclusions as Einhorn, for years, and garner no media attention? No. I'm sanguine about having one of millions of blogs. Mine is neither famous nor, on a traffic basis, very heavily read.

However, that said, a series of equally-candid posts about GE earned me an appearance on the most-watched cable news program, O'Reilly's Factor on Fox News, a little over three years ago. And that appearance got the attention of GE's headquarters staff.

Years ago, when the Wall Street Journal featured blogs which discussed topics appearing in the paper, I routinely saw my blog posts featured, driving readership of my blog up over 100 daily visits. Even now, I have about as many daily RSS feed readers as I average in direct readership. And it's fairly common for me to see IP addresses from companies like Goldman Sachs, Lehman and other well-known firms, as well as the US Senate, House and other government entities and universities visiting my blog.

The truth, however, is that I write the blog for two reasons that have nothing to do with other people. The first is to provide myself with ongoing anecdotal reinforcement of the key proprietary research findings which drive my equity strategy. The second is to compile a library of my own thoughts and observations, the better to use to build upon those prior recorded impressions and advance my own ideas about business, finance and economics.

Whether those thoughts and observations are widely-read or bring a significant revenue stream was never the primary purpose of the blog.

All that expressed, however, I do take some measure of satisfaction that someone like David Einhorn took years to arrive at the same conclusions I reached much earlier. And that, thanks to his obsessive attention to mentions of himself in online venues ( grist for another post based upon a brief email exchange he and I had a few years ago), he'll probably read this post and my observations about his being so late to an obvious story.

Ballmer & Kaminsky On Microsoft's Skype Acquisition

Yesterday afternoon, around 12:25PM, I happened to catch the latter part of a live interview on CNBC with Microsoft CEO Steve Ballmer and Skype's CEO. The two CEOs were, of course, talking up their just-announced deal.

I wrote some initial remarks here mid-morning. What I saw that afternoon only reinforced my initial impressions.

First, Ballmer was dancing like crazy to paint all sorts of nebulous introductions of various Microsoft product and service user bases to Skype. That both are all about communications.

Funny- I thought Microsoft was mostly about operating systems, tools like Office, and some hanger-on internet services like XBox, Explorer and Messenger. The latter two of which are free.

Since Windows Messenger already provides video chatting, why would I pay to use Skype now?

Ballmer mentioned Office products and Skype, but, again, every free chat facility with which I am acquainted also allows file transfers and sharing. So, nothing new there, either. And it's already free.

Basically, as I watched Ballmer bluster about how great the deal is, it occurred to me that Microsoft has been a gigantic disappointment under his reign. As it was under his predecessor and buddy, Bill Gates, since 2000.

But there was more. Being CNBC, they didn't allow any tough questions from David Faber, on whose program the interview was hosted, or his colleague, Gary Kaminsky.

Instead, after they cut away from Ballmer's interview, Faber asked Kaminsky for his reaction. It was scathing. Actually along the lines of, but far more blistering than my post yesterday.

Kaminsky ticked off three things he felt made the deal pointless. First, it's small relative to Microsoft's total assets.

Second, He noted that the firm's stock price has fallen roughly 50% under Ballmer's stewardship. And that, during the time, the CEO had cashed in about a billion dollars worth of his own Microsoft shares.

To Kaminsky, the first point meant that, even if it helps Microsoft, the Skype deal won't "move the needle."

The last two points were his way of saying, essentially,

'Hey, we're talking about Ballmer, who hasn't performed  for shareholders yet, and sold a lot of his own stock in the company.'

Personally, I think I would have paid money to see 5 minutes of Kaminskly on air with Ballmer. But, to preserve their access to the Microsoft's burly, combative CEO, you know that CNBC's producers would never allow that to happen.

Microsoft's Refusal To Consider Splitting Itself Into Separate Units

Imagine my surprise in finding yesterday's Wall Street Journal's Marketplace section's lead headline to be Microsoft Breakup Not in Cards.

Back in August of 2007, I wrote this post, in which I explicitly suggested,

"As I wrote nearly two years ago, what Microsoft needs to do is think and behave like a venture capitalist, and spin out various smaller entities to work on the areas in which it wishes to lead. By retaining a stake in the firms, seats on their boards, Microsoft, the parent, will share in the innovation-based value that these startups will create. In time, these startups could become the next Googles, etc.



But so long as senior Microsoft executives respond to Mundie's efforts with comments like Tom Gibbons, VP for various non-computer software efforts,


"I need to think of this as a completely new effort,"


in response to Mundie's stimuli involving mulicore processors, I think Microsoft is doomed to remain a large, hulking, mediocre giant whose best days of consistently superior total return performance are way, way behind it."

Another posts discussing this may be found here. Suffice to say, others have publicly echoed my thoughts in the last few years.

For Ballmer and Gates to audaciously dismiss shareholder questions about this is really over the top, isn't it?

Last time I looked, neither of those two Microsoft board members and billionaires are valuation experts. Gates didn't even finish college.

That's not to take anything away from how Gates originally built Microsoft. I wouldn't go so far as Julian Robertson did, calling Gates the most important innovator or inventor, or whatever he called him, of last or this century. But I do acknowledge his early success in providing consumers with powerful, inexpensive, fairly useful, if not elegant and bulletproof applications and operating system software.

Ballmer's only stock in trade, of which I am aware, was bullying customers like Dell and HP to pre-load Windows and, at one point, Explorer, on PCs, or else.

Neither earned his spurs as either an investment banker or valuation consultant. So wouldn't it have been a reasonable, even defensible response to the investor's question for Ballmer to agree to have the board consider retaining one or two outside, objective experts to opine on the answer to his question? The Journal article even references a Goldman analyst's public suggestion that spinning off the businesses "could potentially unlock hidden value."

Sure it would. But the wrong way to answer was what Ballmer and Gates did, which was to simply dismiss the question out of hand, citing their own personal beliefs in a preference for a monolithic Microsoft.
I don't care what Gates or Ballmer babble about imagined "synergies." Ballmer's public acknowledgement of the company's dismal share price performance over the past decade, combined with a refusal to think broadly about how to remedy that failing, tells you all you need to know about the firm's closed-minded management.
 
A few weeks ago, I heard one of those inane pro-con CNBC debates on the occasion of Gates' birthday. In that post, I wrote,
 
"In the CNBC discussion, two fund managers with opposing views were pitted against one another on the occasion of Bill Gates' birthday.



What amazed me is that, despite the admission of a decade of non-performance, the CNBC anchors refrained from criticism of the company. Instead, they seemed to want to favor the opinions of a fund manager who claims that the firm's cashflow will now rise, and the XBox proves the company is still innovative.


I can't think of many companies with a flat ten-year equity price performance that roughly apes the S&P which would enjoy this sort of media treatment."


For some reason, Microsoft, and Gates, seem to provoke irrational responses by analysts, fund managers and the media. They get a pass for poor performance, where other firms would be flayed for the same failures.

It's probably another example of a corporate failure having too much influence and spending power to warrant being treated honestly in the media, fund management and brokerage communities. Heaven forbid one of them should lose their place at Microsoft's spending or information trough for being candid about the firm's lackluster performance and mistreatment of its non-billionaire or -millionaire outside shareholders.

Ray Ozzie's Parting Shot At Microsoft

I haven't yet written about Ray Ozzie's departure from Microsoft. Somehow, I missed the October 19 article in the Wall Street Journal. However, I think it's a watershed event for Microsoft, and not a good one.


The end of the piece states something I think needs to be clear upfront,


"Mr. Ozzie is a legendary technologist in the computer industry, whom Mr. Gates once called "one of the top five programmers in the universe." "


I can't recall all of Ozzie's successes, and don't feel like Googling his bio right now. Suffice to say, he's legendary, and for good reason. Thus, his role as Chief Software Architect should have made a huge difference, in a good way, for Microsoft. Instead, here are added passages from the Journal article,
 
"According to one person familiar with the situation, Mr. Ozzie decided to quit Microsoft because "he has accomplished what he wanted to accomplish" at the company. His major contribution to Microsoft was in helping it shift the company to focus on cloud computing, in which more computing chores move into data centers rather than being executed on PCs operated by users.


But several current and former Microsoft executives say Mr. Ozzie failed to exert the kind of leadership many of them hoped for after he took over the title of chief software architect from Mr. Gates in 2008. These people noted that Mr. Ozzie did far less public speaking and other similar high-profile duties than Mr. Gates did, especially in his latter years at the company. Those kind of public ambassadorial duties have long played an important role at influencing employees within Microsoft itself, these people said.


Mr. Ozzie also clashed with other executives at the company, particularly Steven Sinofsky, now the president of Microsoft's Windows division, these people added. Mr. Ozzie appeared to lose a key battle with Mr. Sinofsky two years ago when control of Live Mesh, a data synchronization technology developed by Mr. Ozzie's team, shifted to the Windows organization at the company.


About a year ago, oversight of another initiative Mr. Ozzie was involved in, its Windows Azure cloud computing technology, moved to the server and tools business run by the division's president, Bob Muglia.


Mr. Ballmer in his email said that the role of chief software architect was "unique" at Microsoft and he won't fill the position after Mr. Ozzie's departure. A Microsoft spokeswoman declined to make Mr. Ozzie available for an interview or comment beyond the email."


Given Microsoft's lost decade of total return performance, as contrasted with Ozzie's accomplishments, I think one would tend to discount Microsoft's version and give Ozzie the benefit of the doubt for what went wrong at Microsoft.

It sounds believable that the internal squabbles at the firm derailed much of what Ozzie had hoped to do. One can only guess at what was lost by giving Live Mesh and Azure to company functionaries. After all, you have to recall that the crew that Ozzie found at Microsoft when he arrived in 2005 is responsible for the firm's total return performance since then. The first nearby chart shows that, when compared to the S&P500 Index, the technology giant comes up, at  best, about the same.

The next chart shows the same two series for a much longer timeframe. In that chart, you can discern that Microsoft has actually lost value over the past decade. More so than the index.

So I wouldn't put a lot of blame for what didn't work on Ozzie. I suspect it's more like a software wizard being sucked into the large, slow-moving blob that has become Microsoft.

His warnings to the firm, as he left, sound on target to me. What I heard on CNBC the other day was that Ozzie predicted that millions of new future users will access the internet and software via cell phones and tablets, while Microsoft, clinging to PC and server operating systems, will lose out on controlling and profiting from that future growth.

Reviewing Ozzie's track record, versus Ballmer's, this isn't a very hard call to make in favor of the former.

Microsoft, Ballmer & Holman Jenkins, Jr.

Yesterday's editorial in the Wall Street Journal by Holman Jenkins, Jr., finally echoed my series of posts castigating Bill Gates, Steve Ballmer and the overall management of Microsoft.

I won't bother to provide all the links. Just search under any of three labels- Microsoft, Steve Ballmer or Bill Gates.

While Jenkins didn't touch the topic of self-breakup, he did note that Ballmer had held himself to the task of creating a third major business, besides operating systems and applications, at which he has notably and miserably failed.

Like me, Jenkins noted,

"At bottom, this is a corporate governance problem."

I've also discussed the retreads and nobodys on the firm's board, the better to kowtow to the CEO.

His solution is one I can second, if the firm won't break itself up. Jenkins suggests they raise the ordinary dividend so high as to require the creation of a successful new business, in order to fund it.

Forced repatriation of shareholder wealth via cash dividends- I like it.

Electronic Trucks Or Cars? Jobs vs. Ballmer On PCs et.al.

The Wall Street Journal's All Things Digital conference played host to an arm's length spat between Steve Jobs and Steve Ballmer concerning the future of personal computers.

Jobs likened PCs to trucks, capable of doing heavy duty tasks, but not as well-suited to single, evolving applications as various newer digital devices, e.g., iPods, iPads, iPhones, etc.

Ballmer, on the other hand, derided Jobs' description and assured everyone that PCs were getting more valuable and individualistic with each passing year. And, for good measure, just in case they weren't, Microsoft was putting Windows on cell phones and tablets, too.

Or, to quote Ballmer directly,

"People are going to be using PCs in greater and greater numbers for many years to come.

Nothing people do on a PC today is going to get less relevant tomorrow. There are usage cases- whether those are done today on PCs or on alternate devices- that are going to grow in popularity."

Maybe so. But let's consider the real core issue- replacement cycles and associated software.

Which do you believe people replace more often- cell phone or laptop/PC? I'm guessing it's their phone.

Ballmer may be correct that people will still use a PC, and those applications done on only a PC, such as finance, spreadsheets, complex word processing, will remain there. But use in greater numbers? Only as youngsters become teens and acquire low-end laptops.

I don't think the number of computers/person is going to rise. And I suspect the average personal laptop age will increase, as well.

Instead, people will focus their energies for new devices and applications on cell phones, tablets and music devices.

As usual, Microsoft's CEO is fighting the last war, desperately clinging to the hope that large-scale software on PCs will continue to maintain Microsoft's value as a company.

I suspect Jobs' perspective on digital device growth rates and usages are more on target.

Ballmer & Microsoft Roasted On CNBC- Herb Greenberg Returns!

Microsoft CEO Steve Ballmer has been in the news in the past few days.

The Wall Street Journal's All Things Digital conference gave rise to an extensive interview of Apple's CEO Steve Jobs by Walt Mossberg. Jobs made some disparaging remarks about PCs and laptops, intending, many thought, to diss Microsoft.

Ballmer shot back with some rather lame comments, to judge by this morning's Journal article on the topic. Essentially, Ballmer's remarks boiled down to, 'oh yeah? Well, we're going to come out with a tablet, too! So, there!'

But I think by far the more interesting treatment of Ballmer was on CNBC yesterday morning.

Herb Greenberg, the very outspoken and independent-minded analyst who left MarketWatch last year, is back on CNBC. In New Jersey, no less, which had to have been tough to move from Newport Beach, California. Not to mention from one nearly-bankrupt state to another. But, I digress....

Spurred on by Greenberg, several guests and co-anchors spiritedly debated the Apple/Jobs vs. Microsoft/Ballmer/Gates topic.

Greenberg was pretty firm in his contention that Microsoft has just gone nowhere. Either he, or another guest, noted, as I have contended in this blog years ago, that Microsoft's biggest disadvantage is a huge operating system business which hinders its ability to excel in entertainment devices, applications and other software or hardware areas. Someone even called for the spinoff of the unit containing the XBox. Just like I did years ago.

At one point, somebody said that Ballmer simply 'has his head in the clouds,' which I think is being charitable.

As the nearby price chart of Apple, Microsoft and the S&P500Index for the past five years illustrates, Ballmer's Microsoft has done no better than the index, while Apple has shot ahead with a total return exceeding 400%.

Ballmer has completely dropped the ball for his shareholders. One guest argued that you can't even "bring back" Bill Gates because- horrors!- he's still there in a Chairman capacity.

The most stunning and disappointing element of the discussion was when the CNBC blonde female co-anchor, whose name escapes me just now, argued that it wasn't fair to cast the choice as 'Apple vs. Microsoft,' and why couldn't portfolio managers hold Microsoft as one of many tech issues?

As someone with equity and options management experience, I found that comment to be totally inane. Why would anyone take equity risk on a single issue when it performs no better than the diversified S&P, which one can buy for a fraction of the transaction cost?

Of course, this comment came from someone who works for GE, another equity that managers seem to love to hold, while it either loses money or goes nowhere.

At least it was fun to see Greenberg back and firing on all cylinders.

Apple v. Microsoft- Lessons On Value Creation

Today's Wall Street Journal happens to contain two separate articles involving Apple and Microsoft.

The headline piece in the Marketplace section is "Microsoft CEO Takes Over Gadget Unit," while Holman Jenkins, Jr.'s editorial is titled, "Apple's Second Date with History."

In the Marketplace article, Nick Wingfield discusses the troubles Microsoft has had since its initial splash with XBox. Two key senior managers are retiring, and Ballmer is now taking over the entertainment and communications devices units. He writes,

"Microsoft's problem hasn't been that it was late to the consumer-device market. Michael Garternberg, an analyst at advisory firm Altimeter Group, said Microsoft missed important consumer trends by focusing on its core business markets.

The shifting fortunes could be underscored in the coming weeks by a changing-of-the-guard in market capitalization. While Microsoft has long been the tech industry's most highly valued company, a little more than $6 billion now separates its $229 billion stock market value from Apple's."

Wingfield quotes an academic attributing the difference to higher consumer spending growth versus that for business IT products and services.

Personally, I think that academic got the cart before the horse, in the sense that the real difference between the firms has to do with pursuing commodity markets instead of product/markets which reward better design and functionality.

Holman Jenkins begins his editorial noting how Apple had a near-death experience many years ago, only to be rescued by the internet. Jenkins, too, discusses how Microsoft competed in operating systems, which became commoditized, while Apple went off in a different direction, specializing in digital devices for specific applications.

Jenkins believes Apple, through its closed systems for the iPod and iPhone, risks another brush with death, as Google's Android cell phone operating system challenges it for supremacy. He ends his piece contending,

"Apple this time understands (we hope) that it isn't playing for all the marbles, but can build a very nice business on just those customers who crave a premium service tightly controlled by the wonderful Mr. Jobs, even if it means paying a bit more and forgoing access to a lot of Web goodies that might not work so well in favor of a smaller number that work really well.

Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."

Jenkins' parting comment led me to construct the nearby Yahoo-sourced price chart for Apple, Google, Microsoft and the S&P500 Index for the past five years.

Sorry, Holman, but I'd bet on Apple. And actually have, as it's been a frequent member of my recent equity strategy portfolio selections, whereas Microsoft has not for a decade, and Google has not, if at all, for quite some time.

The price chart confirms what I suspected. That is, Apple's highly-focused, niche strategies have given its shareholders better returns over time, with Google already falling back to earth, and the now-hapless, gargantuan Microsoft lumbering along near the S&P's return.

I think quite highly of Mr. Jenkins, but on this topic, I have to respectfully part company with him.

In my humble opinion, as a trained marketing professional, both Messrs. Wingfield and Jenkins miss the key point about Apple's strategy versus Microsoft and Google.

Jenkins actually mentions that Apple chose to forsake the open operating systems world, and focus on niche digital devices. But he fails to understand the key benefit of that choice.

I believe it is this. Both Microsoft and Google became dominant in large markets, which, though providing for rapid early growth, have made it difficult to sustain such growth. Whether it's operating systems and basic office productivity software or online ad revenue from free search, both companies have saturated those markets and must look to higher-cost, more challenging new businesses for growth.

Apple, by contrast, chose to pursue specific consumer need satisfaction with a family of specialized digital devices. Steve Jobs has a flair for design, packaging and promotion of these devices.

Truth be told, over time, the product/market segment Jobs chose provides for better product margins and higher barriers to entry. Note how Microsoft has become loathed for its poorly-designed, patch-heavy operating systems. It's an open secret that many users still run XP and older Office packages. Including me.

Google has even forced Microsoft to include net-based Office applications in their recent product version. Meanwhile, Bing competes with Google's search, and everybody is looking at proprietary online or cell-based ad systems.

The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.

The nearby price chart for the same entities, from 1985, clearly shows Microsoft flattening by the dawn of this decade. Apple declined after the dot-com bust, then rocketed forward on the i-series products and services. Google, from its inception, only matched Apple's returns.

After Jobs, le deluge. No argument there. But Microsoft crested while Gates was still there, and Google's very wide-open business model, while initially capturing huge profits as the first-mover, is now having some difficulty continuing that early growth.

I see Schumpeter's theory at work in this picture. Apple re-invents itself in a technological space far faster and more successfully, profitably, than either of its putative rivals.

With large markets tends to come commoditization and earlier end to superior growth and returns. The case of Apple, Microsoft and Google bears that out once again.

Carol Bartz Finally Ties Yahoo Up With Microsoft

The big news in the technology sector this week was Yahoo's deal with Microsoft. Ever since the latter launched its semi-hostile takeover bid for the former, some sort of alliance has been talked about.

With Carol Bartz' recent assumption of the CEO position at Yahoo, investors' hopes brightened. Yet, after reading the reports on the actual deal, and various pundits' reactions to it, it seems many of those investors headed out of Yahoo positions, causing a one-day 12% drop in its stock price after the Microsoft deal was announced.

Meanwhile, an article in the Wall Street Journal this week extolled Microsoft's Ballmer for finally getting a few things right, e.g., Windows 7, improved XBox revenues, and the Yahoo deal.

As the nearby two-year stock price chart for Microsoft, Yahoo and the S&P500 Index shows, there wasn't a huge difference between the three. Certainly, after applying some risk premium for the two companies, they would both have underperformed the index.

The second chart, a five-year view, reinforces that conclusion.

I don't think Ballmer is by any means out of the woods yet.Microsoft has not convincingly outperformed the S&P for years, and I don't really think it's about to start now.

As for Bartz and Yahoo, I'm inclined to be a little less critical than most published pundits.

Unless you think she simply lost her mind last week and got snookered by Ballmer, the odds are that, despite her upbeat remarks to the media since she took over the helm at Yahoo, Bartz found things much, much worse than she feared.

To have gone from forecasting a 'boatload of cash' to come Yahoo's way from Microsoft for any tie-up, to getting very little, clearly disappointed a lot of shareholders. Even Ballmer chimed in with helpful comments like, 'people don't understand how good this deal is for Yahoo,' or some similar quote.

I think Bartz got the best deal she could for a firm, the very existence of which, prior to her arrival, was in doubt. She managed to outsource development for search, keep a lot of ad revenue, and get breathing room to pursue her objective of pumping up Yahoo's content.

If you revisit Bartz' remarks about the future she envisions for Yahoo, it's all about content, not search. She has managed to narrow the management focus of the firm and get continued search technology for free.

Not too bad. My guess is Bartz saw things as much worse than outsiders, and just couldn't drive a bargain that would effectively pay Yahoo up front for the Microsoft deal. But she still got what she wanted, and probably the best result among several not so stellar ones available.

While I would be unlikely to own Yahoo anymore, and don't forsee it entering our equity portfolio anytime soon, Bartz seems to have done a lot in a short time to begin reversing the damage done over many years by Terry Semel and Jerry Yang. Investors who want to own Yahoo should at least be thankful for that.

An Interesting View Into Microsoft's Recent Activities

As I continue to catch up on last month's Wall Street Journals, I came across a rather innocuous piece announcing the departure of Microsoft's head of operating systems and online efforts, Kevin Johnson, to become the new CEO at Juniper Networks.

Among the things mentioned in the Journal piece were a subsequent internal memo from Microsoft CEO Steve Ballmer stating he wants to

"out-innovate Google" and "changing the way we work with hardware vendor" to fight Apple.

These would be humorous, if they were not so sadly out of the realm of possibility for the aging, inept software giant.

When is the last time anyone saw Microsoft innovate?

And compete with Apple in hardware? Is Ballmer serious? How? With a follow-on to the abysmal Zune?

Now, in the wake of Johnson's departure, Ballmer is reversing course on his decision of only three years ago to split the desktop operating systems group from the online group.

Given Microsoft's dismal performance record for its shareholders over the past few years, as depicted in the nearby, Yahoo-sourced chart, you have to seriously wonder if anything Ballmer touches will work.

More Details On Jerry Yang's Bungled Negotiations with Microsoft

Wednesday's Wall Street Journal article on Microsoft's second act in pursuing Yahoo was most enlightening.

If you've ever wondered whether some large company CEOs are operating way over their heads, this article answers your question.

"Yes."

The details regarding the extent of Jerry Yang's blunders in the initial discussions of Microsoft's bid, about which I first wrote here, are staggering. That Yang, after driving Yahoo further downhill after Terry Semel's departure last year, would hold out for a higher price than Microsoft's already-insanely generous offer, was unbelievable. As I wrote in that prior post,

"...it's been at least March of last year before the stock's price was, even for short periods, routinely above Microsoft's offer price. Jerry Yang's resumption of the CEO role last summer has cratered his firm's stock decisively since then."

But Yang isn't alone. I also wrote in that post,

"As for Microsoft, I pity their shareholders. If they didn't have half of this offer in cash on their balance sheet already, would any bank lend them all of the money for this takeover bid? Could even Goldman float a bond issue to fund this for them at reasonable rates?

If anything, I think it reminds us, per my many posts on Microsoft, Gates and Ballmer (see appropriate labels), that the company has been very sloppily managed in a financial sense."

Yang's arrogance managed to save Ballmer's shareholders- so far.

Now Ballmer thinks he can go back, with new partners, and dismember Yahoo, keeping the search engine for himself and letting his acquisition partners take their respective pieces of the ailing Yahoo.

Interestingly, though, the Yahoo senior people who dealt with Ballmer and heard his ideas referred to his plan as,

"filling his Internet hole," simply to compete with Google.

Yang's stubbornness on price robbed his shareholders of their just dessert of an overpriced offer by Ballmer to let them exit their misery at the hands of Jerry Yang and his inept management team. This is a great example of how someone who may have been instrumental, long ago, in dreaming up and implementing a value-creating idea, such as Yang, a Yahoo co-founder, can become not only useless, but counter-productive to value creation and realization in the firm's later life.

Ballmer is in a similar situation. He obviously added some value to Gates as they initially created the PC software industry in the 1980s.

But since 2000, Ballmer has been a liability for Microsoft, doing nothing to improve his shareholders' situation, either.

Ballmer escaped making a big mistake once, already, thank to Yang's stupidity and arrogance, thinking he and his team could seriously create more value than the Microsoft offer.

However, now it looks like he won't necessarily escape a second time. The complexity of the deal he now envisions could well make buying all of Yahoo look good by comparison when the dust settles.

Should be an interesting summer to watch these two firms.

Steve Ballmer's Idiocy- "Pondering Change" at Microsoft

Friday's Wall Street Journal ran a rather curious article concerning Microsoft, entitled "Ballmer Ponders Changes at Microsoft."

The piece begins,

"As Bill Gates ends three decades in Microsoft Corp.'s top management, Chief Executive Steve Ballmer faces a major question: How do you make a 100,000-employee software giant much more agile?

There are no easy answers. But in a memo last summer to his top lieutenants, Mr. Ballmer drew lessons from two other U.S. business icons -- Wal-Mart Stores Inc., known for the central management of its retail outlets, and General Electric Co., known for businesses that operate autonomously. His conclusion: Microsoft needs more elements of both."

This is a joke. Ballmer is a pompous fool.

The nearby Yahoo-sourced price chart for Microsoft and the S&P500 Index tell a very clear story.

After an astounding performance for shareholders from its IPO in 1986 to 2000, the company has simply declined, then stalled for the last eight years.

Eight years.

Isn't it a little late for Ballmer to wonder what's gone wrong? Where were he and Bill in, oh, say 2002? After the stock price was falling through the floor much faster than the index.

The Journal article continues by noting,

"At the center of Mr. Ballmer's dilemma is ongoing tension over whether Microsoft's huge business divisions should have wide freedom to set their own course -- or be more centrally planned, a strategy that could meld expertise across the company in ways that provide an advantage over rivals with narrower technology portfolios. In the memo, according to Microsoft executives, Mr. Ballmer cites lessons from both the Wal-Mart and GE experiences.

"We're not a conglomerate, but we're not a monolithic operating company," Mr. Ballmer said in a recent interview. "The question is, 'are we always hitting the right balance?'" "

Let's humor Mr. Ballmer. After all, did he not also leave Harvard prior to completing his degree? No matter. Neither he, nor Gates have any sort of disciplined management education, and it shows in the way their company simply stopped performing after 15 years.

Here's another Yahoo-sourced price chart. This time, it depicts the past five year performances of Microsoft, the S&P500 Index, and Ballmer's choice of role models, Wal-Mart and GE.

It's just pathetic, isn't it? Not one of the three firms has managed to outperform the index at all for five years, nevermind doing it consistently.

Give Ballmer credit for knowing how to choose two other turkeys with which to compare his company.

I'm not going to go searching for contrary examples, but I think we all know that Google looks a hell of a lot better than any of these three firms.

My point is, Ballmer is missing the point!

As recently as in this post from earlier this month, I again called for Microsoft's breakup, as I first did in May of 2006. You can read through the many posts I've written about Microsoft to see how I have argued for its divestiture of the company's operations into four independent businesses: operating systems, desktop applications, online, and gaming.

GE has the same problems, and has been under fire for over a year now to be broken up, too. My posts on GE are now somewhat well-known for this view, only way before it became popular last year.

Wal-Mart is simply a retailer which has pretty much saturated its primary markets, and failed in its attempt to move upmarket. It is only doing better lately as the recent slowing of economic growth has brought some of its former customers back from stores like Target and Kohls.

However, the key point is that Ballmer chose, for companies to emulate, two other losers.

If that doesn't tell you all you need to know about Ballmer's and Microsoft's probable future performance, I don't know what else will.