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Microsoft Needs New Ideas

The headline on Microsoft's (Nasdaq: MSFT  ) fourth-quarter report last night: "Microsoft's Annual Revenue Reaches $60 Billion. Fastest annual revenue growth since 1999 fuels 32% increase in earnings per share."

Mr. Market's reaction to said report: a 7% share price haircut.

Can we reconcile Microsoft's optimism with the market's skepticism? Discuss. I'm getting a little verklempt.

The good news for Microsoft ranges from the obvious (18% year-over-year sales growth to $15.8 billion; $0.46 of earnings per share, for a 48% annual boost) to the subtle (a balanced product portfolio performance). Hey, even the online services division increased revenue by an impressive 24% -- but it dug a bigger hole to store its 132% fatter operating losses.

With these numbers in hand, it's no wonder Mr. Softy is looking for a quick fix by shoring up the online segment with an already-profitable Yahoo! (Nasdaq: YHOO  ) . The entertainment and devices section is the other underperformer in Microsoft's stable of business lines, thanks to a $188 million operating loss this quarter. That's a lot better than last year's $1.2 billion sea of red ink that wiped out nearly half of the gains from the meat-and-potatoes "client" segment, but it's still a money-losing operation.

I wonder why Steve Ballmer freaks out at the thought of losing the search and advertising wars to Google (Nasdaq: GOOG  ) , but not at handing the game-console crown to Nintendo (OTC BB: NTDOY.PK) or the music market to Apple (Nasdaq: AAPL  ) . How is it worth throwing billions after a major rival, only to scare away the engineering talent that makes (made?) Yahoo! great? In the second case, well, let's just throw more bad money after that Zune abomination and hope the Xbox saves the day.

Google seems unfocused at times, starting up expensive side projects and buying into unexpected markets -- but that's all part of a deliberate strategy to chase serendipity down and put it to work. Microsoft is doing far worse, because it throws serious muscle into those non-core segments and hopes to make something out of nothing. Many a business has copied Microsoft's ruthless strategy over the years, but the company has outgrown its own skin. Hey Steve, I think Google has a few ideas you could use -- how about 20% time or a new focus on usability? Call me.

Further Foolishness:

Microsoft is a Motley Fool Inside Value recommendation, and Google is a Motley Fool Rule Breakers selection. Nintendo and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Google but holds no position in any of the other companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure always keeps a line open in case Redmond comes calling.

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  • Report this Comment On July 18, 2008, at 2:35 PM, taojoness wrote:

    Microsoft and new ideas is an oxymoron.

    as long as they believe their own propaganda that every grey box with vista jammed in is a sale they will slowly grind down like a bead of sweat on the CEO.

    people will sooner or later realize that it is not that they don"t know how to work their computer its that the computer does not work with this operating system that like mr Blamer keeps getting BIGGER AND BIGGER

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