Bring me the head of Alfredo Ballmer?
Not yet, not this time, but...
The analysts aren't exactly calling for Steve "Uncle Fester" Ballmer's head yet, but an interesting piece by Dina Bass that went up on Bloomberg yesterday evening may give the Microsoft Prez some idea of the fate that awaits him should the stumble turn into a nosedive.
Microsoft yesterday did not "beat the street," coming in about two cents under analysts' estimates. This is maybe fair enough, considering the economic background, but the company's numbers also show that it's conspicuously failing to make significant inroads outside its existing franchises. Bass, meanwhile, has been talking to analysts who're beginning to speak of Steve Ballmer's management style as a brake on growth.
Whether or not this really is the case isn't particularly material; the problem for Steve will be that if Microsoft does start to run into the sand, he's going to carry the can for it anyway. For the record though, we don't think Steve is the problem, just part of the problem.
Bass points to Ballmer's decision to run the wireless group himself after Paul Gross' departure, and then more recently to eliminate Rick Belluzzo from the command chain, as indicators of a small company culture that has him taking more and more control for himself, leaving Microsoft without the strong deputies it needs to run individual business units.
Steve certainly seems to be remarkably careless with deputies. When he first took charge of the company it might have looked like a much-needed clearout (indeed, he indicated as much himself), but once you've done the clearout you generally try to put competent managers in place, and keep them there for a while. This seems not to be happening.
The Q1 numbers themselves paint a pretty clear picture of the problem Ballmer has to solve if he's to avoid having to walk the plank. Desktop applications, i.e. Microsoft Office, was flat at $2.44 billion, compared to $2.41 billion the previous year. Platforms, i.e. Windows, rose 11 per cent from $2.05 billion to $2.29 billion, while enterprise software and services chalked up a 2 per cent rise to $1.28 billion.
It's nice work if you can get it, as we're fond of remarking, but note first that the Windows sales are almost entirely dependent on PC sales, that even Microsoft ended up admitting that WinXP hadn't triggered a PC business revival after all, and that the revenue rise must therefore be an indication that Microsoft has managed to squeeze a little bit more money per box out of us all. Obviously, although the Windows Tax itself is pretty durable, there are limits to how high it can be, and Microsoft has to look elsewhere for stellar growth.
This 'elsewhere' was Office a couple of years back, but although Office itself is now pretty much a franchise too, it's not a PC tax in the same way as Windows is, there's not a lot of room left for growth in unit sales, and people do not feel the need to upgrade with every new version. Hence the static sales levels, and hence Microsoft's intense desire to introduce a rental model that'll give it annual income from Office users. But again, even if the rental model is introduced and sticks (which we doubt) there's a limit to how much money per user Microsoft can squeeze.
So look at enterprise software and services, bearing in mind that Steve began talking about transitioning Microsoft to a services company around two years ago, and that this is also what .NET is about. This is the area Ballmer needs to be growing, but it's not doing so, .NET Server is now promised for the second half of this year, so the strategy is unlikely to be rolling properly before next year. So Steve, how do you contrive that services transition in the interim, and failing that, how do you keep the analysts sweet?
Last but not least, we have the consumer division, Xbox, and the wireless operation. Microsoft's professed satisfaction with Xbox sales isn't borne out by yesterday's numbers. Microsoft now expects to sell 3.5-4 million of them by the middle of this year, which is enough to put it in a challenging position, but considerably less than the 4.5-6 million it hoped for. And the difficulty here is that if Microsoft is to succeed in establishing a new franchise for itself in the games console/home entertainment market, it will need to be number one - two or three will not do.
Wireless, meanwhile, is all to play for. Microsoft doesn't have any of the top tier phone manufacturers on board, and although it has a strategy to circumvent them, it's too early to be looking for signs that it's actually working. And of course the mobility group lost its boss, Ben Waldman, last month. But we're told by people who profess to know that Ben's personal leave really was personal leave, rather than being anything to do with the Fester Factor.
Nevertheless, Fester has a wider problem. As The Register has been arguing for years, Microsoft has been very successful in tending and defending the desktop franchise, which more or less boils down to money for free, but it has not been particularly successful in breaking out of it. Even where it has been able to leverage the desktop into other areas it has not been anything like as successful as it suggests in its Powerpoints. It has, ever so slowly, cut its way into the server market, but it does not rule it, not yet, anyway. Nor has it eliminated AOL, and it has wasted considerable quantities of money in the cable market to little visible effect. The latest numbers still show no clear signs that Microsoft is successfully breaking out of its existing franchises, and possibly even indicate that it is failing to do so - that is the problem. ®
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