What Is Microsoft, Anyway?

I know how that headline looks, but this isn't an existential question. No prior knowledge of Kierkegaard or Nietzsche is required for reading this story.

All that's necessary is an inquiring mind, because if we're going to honestly assess what Ray Ozzie's leaving means to Microsoft (Nasdaq: MSFT  ) and, therefore, to us as investors, we have to first consider what Mr. Softy is.

Microsoft by numbers
We can answer that question in a variety of ways. The best, I think, is with numbers:

Business Segment

Fiscal 2010 Revenue*

Fiscal 2009 Revenue*

Fiscal 2008 Revenue*

Windows & Windows Live Division $17,800 $14,690 $16,815
Server and Tools Division $14,878 $14,276 $13,217
Online Services $2,198 $2,110 $2,164
Microsoft Business $18,909 $18,864 $18,904
Entertainment and Devices $8,114 $8,035 $8,502
Corporate and Other $597 $462 $818
TOTAL $62,484 $58,437 $60,420

Source: Capital IQ, a division of Standard & Poor's.
* Numbers in millions.

Interestingly, the only consistent growth segment by revenue is Server and Tools, which includes Windows Server and Microsoft's cloud-computing effort, Windows Azure.

The numbers don't change much when you head further down the income statement:

Business Segment

Fiscal 2010 Operating Income*

Fiscal 2009 Operating Income*

Fiscal 2008 Operating Income*

Windows & Windows Live Division $12,089 $9,569 $11,876
Server and Tools Division $4,990 $4,638 $3,845
Online Services ($2,436) ($1,760) ($619)
Microsoft Business $11,664 $11,454 $11,681
Entertainment and Devices $589 ($3) $314
Corporate and Other ($2,798) ($3,535) ($4,826)
TOTAL $24,098 $20,363 $22,271

Source: Capital IQ, a division of Standard & Poor's.
* Numbers in millions.

What this says to me is that Server and Tools is the future of Microsoft. It's the division best positioned to deliver the growth that value investors hope for. It's also the group Ozzie has been most closely associated with.

Ouch.

What's next?
Ozzie apparently hasn't decided what's next after Microsoft. Between now and his leaving, he'll be working on entertainment projects, presumably to boost the appeal of the Xbox gaming platform in its battle for market supremacy against Sony's (NYSE: SNE  ) PlayStation and Nintendo's Wii.

My guess is that Ozzie will also assist with a mobile-gaming strategy for Windows Phone 7, since this is an area where Apple's (Nasdaq: AAPL  ) various iOS devices have proved to be strong. He also has a more fluid view of mobile services than does his soon-to-former boss, Steve Ballmer, as DailyFinance's Kevin Kelleher points out.

Two scenarios: one awful, the other good

Investors worrying about Ozzie's departure have good reason to be scared. Too many of Mr. Softy's top executives have left for competitors.

The most oft-cited example is Stephen Elop, former head of Microsoft Business, who is now CEO of Nokia (NYSE: NOK  ) . But I think Elop's leaving was largely a non-event. As you can see from the tables above, Microsoft Business is a steady ship.

More worrisome to me Don Dodge's departure for Google (Nasdaq: GOOG  ) -- and not by choice, I might add. Though a lesser-known executive, Dodge is highly respected among software developers. Upon his joining Google, he came clean about why The Big G was a better home for him:

Vic Gundotra at Google was the first one to contact me with an opportunity ... 90 minutes after the news of the layoff hit. That fast, decisive action was refreshing, and such a contrast to the slow, secretive bureaucracy at Microsoft. That speed and decisiveness also reflects different approaches to hiring great people, building great products, and serving customers well. [Emphasis added.]

You know who else is widely respected among developers? Ray Ozzie. He cut his teeth coding and is widely considered the genius behind the creation of Lotus Notes, the productivity software that proved so attractive to IBM (NYSE: IBM  ) that it spent $3.5 billion to acquire Lotus Development in 1995.

If, like Dodge, Ozzie joins Google, Apple, or another of Microsoft's rivals to help create cloud computing's next great killer app, it would clarify just how out of touch with developers the company has become.

On the other hand, if Ozzie leaves to take another stab at being an entrepreneur -- he's helped create two software companies that were later acquired -- it would be good for the software industry writ large. And in a time of flux, the industry needs as many proven, fast-moving innovators as it can find. Few have a better track record than Ozzie.

I'm betting on the latter, if only because Ozzie is more creator than implementer and entrepreneurs never really stop being entrepreneurs. Think I'm wrong? Have a different view? Please vote in the poll below and then leave a comment to explain your thinking.

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Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and stock positions in Google and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple, Google, IBM, and Microsoft and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy sings the existential blues from time to time.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2010, at 6:44 PM, uc22 wrote:

    my goodness people ... all everyone did was complain that Ozzie was not a visonary. Now he is retired and you are writing another death of Microsoft article and suggesting he is indispensible. Nice how you use the 2009 figures to say Server and Tools is the only consistant grown division. How about looking at the last 30 years minus 2009?

  • Report this Comment On October 24, 2010, at 8:16 PM, techy46 wrote:

    Hopefully Ray Ozzie's off to retire. MS Business, Servers and Windows are Microsoft and none of the executives you mention are/where important to these business unit's success. MS has now shifted it's focus to make mobile devices for business and entertainment compliment and leverage from those three BUs. If they're successful, which they usually are, they'll continue to be the worlds largest software enterprise. Forget the social commentary and predict what MS earnings and stock price will be for the next 6 quarters.

  • Report this Comment On October 24, 2010, at 8:29 PM, DerekHarper wrote:

    Interesting that Don Dodge worked with Ray Ozzie at Groove Networks before being acquired by Microsoft. They are both rock stars.

    The main problem with Microsoft is slow growth and no new billion dollar businesses, while spending billions in R&D. Look at Apple, spending far less on R&D, and coming up with three new blockbuster businesses; iTunes/iPod, iPhone, and iPad. What new business has Microsoft created?

    Dodge and Ozzie are just the guys who could build new businesses at Microsoft. Now they will be doing it for competitors.

  • Report this Comment On October 25, 2010, at 2:58 AM, ajhhall wrote:

    On your figures Server and Tools looks set to contribute 21% of operating income this year. If that's the division that represents the future of the company it is hard to see exciting growth. The Windows and Business divisions are each about 50% of net profits. If they don't perform, growth at the company level will be unexciting at best.

  • Report this Comment On October 25, 2010, at 6:16 AM, LIVABJORN wrote:

    My guess is that Ray Ozzie got tired of Steve Ballmer's lack of visions. Just look at this: http://www.forbes.com/feeds/ap/2010/10/21/technology-technol...

    Among his statesments this one may be the most important for Ray Ozzie's decision to leave:

    "Ballmer also said he has no plans to retire anytime soon"

  • Report this Comment On October 25, 2010, at 2:43 PM, DerekHarper wrote:

    I like Don Dodge's vision for the future (Google) better than Ray Ozzie's (Microsoft). It is much easier to understand too! http://dondodge.typepad.com/the_next_big_thing/2010/10/ray-o...

  • Report this Comment On October 26, 2010, at 8:52 AM, TMFMileHigh wrote:

    Thanks for the comments everyone. As a follow-up, I strongly recommend Joe Wilcox's take on Ray Ozzie's departing memo:

    http://www.betanews.com/joewilcox/article/Ray-Ozzie-falls-fr...

    Good insights that properly reflect the identity crisis that exists within Microsoft.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On October 26, 2010, at 9:02 AM, TMFMileHigh wrote:

    @techy46,

    >> MS Business, Servers and Windows are Microsoft and none of the executives you mention are/where important to these business unit's success.

    I disagree. Ozzie was attempting to get Ballmer and team to think more broadly about the role of these divisions. Specifically, how they might contribute to revenue and profits in an increasingly post-PC world.

    Now that he's leaving, there's no one -- that we know of, at least -- who's beating this same drum.

    The next six years are what matter, not the next six quarters.

    @uc22,

    >>Nice how you use the 2009 figures to say Server and Tools is the only consistant grown division. How about looking at the last 30 years minus 2009?

    I used three years of data because of space constraints, but going back further doesn't change my point. Server and Tools has been on a growth track since 2005.

    Also, and with due respect, the last 30 years aren't what matter. They're irrelevant to today's Microsoft investor who has to judge how the cloud-computing opportunity (or threat, depending on your perspective) will impact financials. The picture gets murkier with Ozzie on the way out.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

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