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On Microsoft (MSFT)

Copyright 2006 Geoff Gannon Microsoft is a difficult situation for me to evaluate. I think the company still has a lot of growth ahead in some areas. But, that depends on where management wants to take it. There are three core businesses that are already well developed: Windows, Office, and Servers. The moat in the first two are wide. The Windows moat is huge.

The business model in operating systems is great. You keep upgrading every few years; the hardware needn't progress for you to find things to tweak and get people to buy the next step up. It's insanely profitable. I think the new launch (Vista) will be bigger than people expect (eventually) in how it allows for cross selling other Microsoft products (but we'll see about that). I expect the press to be very negative at least until well after the launch, because there will always be some bugs and delays.

Games Eventually, video games will be a big business for Microsoft. I hate the economics of the console business, but love the economics of the publishing (and development) side of things. I'm sorry to see that Microsoft didn't use its cash pile to buy up an established business here (publishers were cheap in the market a few years ago; an all cash deal would have worked well. Now, everyone thinks video games will be the next big thing). The console wars are going well for Microsoft. The two keys to establishing a dominant console are launching first and getting good games on your platform. We'll see how Sony (SNE) does this round, but I expect them to be the big loser. Nintendo may surprise here. I think the Xbox 360 and Nintendo's new console (Wii) will do very well. It'll be interesting to see the breakdown of the consoles in both the domestic and foreign markets.

I think Sony may still be strong overseas, but could be in a much poorer position at the end of this round than they were with the PS2. Search Long-term I am optimistic about search. I think Google's position is much weaker than most people think. I don't think Microsoft will be the only one to benefit here. Search is a very natural cross sell with Windows. That's the direction everything seems to be headed in (combining online and desktop search). For future growth in terms of market share I think Microsoft is in a better position than either Yahoo (YHOO) or Google (GOOG). I also think we might see a couple other (largely unknown) search engines gain some share. I think Google's strength is its brand. Its dominance helps with advertisers more than users.

I don't think it has a lock on users. Also, I think Google has been poorly positioned for doing much of anything outside of keyword search. I expect to see a lot more in the way of intelligent, social search inspired stuff. Years from now, much of search will have to be helping you find what you didn't know you wanted to find. Google is dominant in a different business: helping you find what you know you want to find (but don't know the name / location). The two types of search are very different. Both will be important, but the growth in other forms of search will be coming off a smaller base and will likely integrate with keyword search. Google has the most to lose here. Other Devices Microsoft wants to perform well on mobile devices and on your TV. Compared to competitors it is very strong in these respects.

The strategy seems to be the one I would favor - to control the point of initial contact wherever software is used and then to only venture into the actual application or content side of the business where it is highly profitable to do so. In video games it will be highly profitable. In other areas it is less likely to be very profitable. I expect to see more generic, web-based applications. These will be less profitable for everyone. Office should hold up well, but not as well as Windows. Basically, Microsoft needs to take what it has in PCs and import that to TVs, Handheld Devices, Consoles, and the Web. That should be the strategy. I think that is the strategy.


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