A modern-day Gerstner is needed to cure all of Microsoft’s ills

Analysis Later today (Thursday) Microsoft will release its figures for the past quarter, and there’s more than a good chance that financially speaking, things will be pretty much okay. But no better than that.

Increasingly there is an opinion forming that Microsoft is nearing an inflexion point in its success and that both success and share price have peaked, after which the company, its products, and all its attempts to invade all of its neighboring business areas, may be doomed to mediocrity, and a downward spiral, reminiscent of IBM when it reached the 1980s. IBM needed a change of management, which was affected by ousting John Akers and putting Louis Gerstner, ex-Nabisco in charge, to rethink its direction pull it out of the mire.

It’s hard to picture a glowing outlook for Microsoft in the near to medium term future while being run by Steve Ballmer, and when it has so many failures on its hands and when its strategy is fundamentally “knee jerk” and based on Windows.

It puts us in mind of that age old joke about travelers asking a local yokel how to get back to a town they recognize on the map. He replies “If I was going there I wouldn’t start from here.” Where Microsoft is right now is a lousy place to start and it seems to us it is looking less promising by the day.

Although Microsoft knocking copy has fuelled writers for many years, this is not knocking copy, just an observation that times have changed and the Microsoft needs to move on. Anti-Microsoft arguments have always been based on resentment at the company’s seemingly unending and perhaps in some cases, unjustified, successes. No longer. Today it is the evidence that points to a Microsoft that is moribund on the innovation front and which is a ragbag of separate and loosely tied together business units, each with the same operational formula, and only slightly varying missions. Loosely expressed that reads “Get Google, and Push Windows.”

Google leapfrog

We would argue that that Microsoft really has reached its inflexion point whereas for some commentators in the past it was just wishful thinking. One indicator this week is that Google just leaped over Microsoft, in the eyes of consumers, as the world’s most successful brand, as measured by US researcher Millward Brown, measuring brand value (rather than pure consumer recognition).

This has happened despite Microsoft spending hundreds of millions a year in advertising, while the Google brand spreads by word of mouth and internet usage. Microsoft’s brand value fell to third place and co-incidentally Nokia, Apple and Samsung now sit in 12th, 16th and 44th places, but significantly these brands are all moving up in value as Microsoft moves down. The conclusions were reached by interviewing people in all the major countries around the world, not just the US.

But on the face of it there is little wrong at Microsoft. That’s if you accept the Microsoft version of events. It remains dominant in the office and the enterprise, it has just shipped its most sophisticated operating system upgrade ever, and will soon ship the office suite to go with it. It has given billions to its shareholders and yet still has $29 billion in the bank.

And in the Faultline territories of digital media, Microsoft could argue that it’s doing a great job. It has the dominant media player, the dominant PC based Digital Rights Management software, it has finally brought its VC-1 codec to a point where it can be licensed and it remains the lead software supplier to the largest Telco in the US, AT&T in its IPTV roll-out, a rollout that is vital to the long term financial health of that company.

Microsoft has converted a third placed gaming console position to a market leading position, is growing market share among handsets and has made a recent shrewd acquisition in in-game advertising networks and is building out it AdCenter product line to position itself better against Google, and it has launched the Zune and its PlayReady handset DRM to better position itself against the iPod and the iPhone and others.

The Xbox Live network and the other Microsoft Live network offerings in instant messaging, VoIP and conferencing are all generating more and more revenues in some cases in partnership with some of the biggest operators in the world, in others, like Xbox and MSN, directly from consumers.

Costing a fortune

And if you are a Microsoft employee and you regularly drink your own Kool Aid, then read no further. Because it is starting to become apparent that the invasions of turfs in entertainment, networks and gaming are costing Microsoft a fortune and not getting it very far. Last quarter Microsoft revealed losses in all of these activities, just as it has for many of the last few years and just as it will when it launches its first calendar quarter (its third financial quarter) numbers again today.

Its losers are Online Services Business (OSB) which includes MSN and Windows Live and Hotmail, and the Entertainment and Devices Division (EDD) which includes the Xbox 360, mobile and IPTV and peculiarly Mac Office, which somewhat lifts the division. Last quarter the losses for OSB were around $155 million on revenues of $624 million while EDD was responsible for flat losses of around $290 million on revenues on $2.9 billion.

The only positive thing about these numbers was that EDD had risen its volumes considerably through the Xbox.

But if there was a division for law suits at Microsoft, then that would have lost the most money by far. The various anti-trust and patent actions that Microsoft is involved in is expected to use up between $1.5 and $1.8 billion of the poor shareholder’s money, and although much of that has been set aside, this is as a direct result to the knee jerk way Microsoft reaches for bundling and the way that it uses other companies’ intellectual property without asking, and that’s a management issue. And it’s worth reminding ourselves that if the intellectual property trial that went in Alcatel-Lucent’s favor over MP3 patents is upheld on appeal, Microsoft can double the amount it expects to lose in legal actions.