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Is it time for Mr. Softy to fight back?
Now may be just the time for Microsoft's comeback. The impetus for this comeback is coming from a rather unexpected person -- not Bill Gates or Steve Ballmer. Many analysts in the wake of the company's last-quarter report remarked that Bill Gates was resuming leadership of the company. Well, I have to disagree and say that he is not -- at least not in the capacity that many expect him to. Instead, a remarkable programmer named Ray Ozzie -- the famed developer of Lotus Notes -- will be Microsoft's new point man for the Web.
Microsoft, after several rebuffed attempts, acquired Groove Networks, taking on board founder Ozzie in March 2005 for an undisclosed amount. Ozzie is now spearheading a transformation of the company, this time to "Webify" everything. The change follows previous landmark strategy shifts within the company following the famous Netscape memo in 1995 by Bill Gates, which shifted the company toward the Internet, and in 2000, with the launch of the .NET development platform. This latest change is crucial for the company to make up ground it lost to pioneering Internet companies and continue to remain relevant for investors and consumers for the next decade.
It's also long overdue, but Microsoft has never been early to the game. Still, make no mistake. I don't think the company has lost a step. If anything, Microsoft, with its $35 billion cash hoard, is more dangerous than ever. Microsoft and Bill Gates have been seething for the past few years, as Google has stolen the limelight and captured both Internet surfers and investors alike with dazzling new products and a diamond-studded stock price. Microsoft may be habitually late to the next big thing, but historically, it has always managed to capture a large piece of the pie. I expect this time will be no different. Now that Ozzie has galvanized the group, expect big things to be happening -- and more quickly than investors might be expecting.
So what's at stake? Wall Street analysts have taken to calling it Web 2.0, which is essentially a hundred-billion-dollar-plus opportunity for online advertising. According to my sources, about 3.6% (at current) of all advertising (estimated at half a trillion worldwide) is spent online, despite the fact that 20% of all media viewership is already online. As that gap closes, Microsoft is positioning itself to capture as much of it as possible.
The next BIG thing
How exactly is Microsoft going to accomplish this? In a word, Ozzie.
Ozzie wrote an internal memo in October 2005, entitled the "The Internet Services Disruption," in which he outlined Mr. Softy's plan of attack. Essentially, the company is going to build a Web services platform to enable customers to have seamless experiences, supported by service-enhanced software. This opportunity is based on the thesis that hotbeds of Internet innovation are largely supported by application service providers rather than by high-scale service platforms. In other words, rather than use a myriad of different providers to handle business on the Web, build it on the Microsoft .NET platform and be done with it. As Ozzie argues, "Complexity kills."
After all, the Web 2.0 model simply has code residing on a central database that is continually updated with no effort on the part of its users. Microsoft's approach to software has been very different, distributing code as it does every few years to millions of users via new product releases, forcing a continuous cycle of complex upgrades and often frustration on the part of its users. Amid this, Google is slowly expanding its reach into what was once an inviolate domain -- the Microsoft desktop powerhouse.
What does all this mean for investors? Exactly what came out of the last quarterly earnings-spending report? Billions and billions of dollars. Investors took a shorter-term viewpoint, focusing on the dip in margins, not realizing the massive long-term opportunity that Microsoft is fighting for. The company has to build massive server farms all over the world to host its future Live Drive service, where the company plans to keep all of your information -- from emails, movies, to tax information -- and make it accessible from anywhere on any device. Again, not surprisingly, Google is doing the same thing with the rumored service GDrive but has a bit of a head start, with an estimated 250,000 servers worldwide already handling its search engine. Microsoft is also offering to host email for corporations on the Windows Live server farms, freeing them from maintaining their own servers, like they do now with Outlook. This is clearly the first inning of what promises to be a fascinating nine-inning game.
In my opinion, Microsoft shares look darn compelling in the 23 range and at 10-year lows for price to earnings and price to sales. Investors seem too wrapped up in the speculative euphoria surrounding Google and have all but given up on the mighty software giant. That short-sightedness will come back to bite Google investors, as well as Microsoft investors who were selling after last quarter. I think our Philip Durell will look a genius here, recommending shares for purchase at these levels, and value-minded investors would do well to follow his lead.
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Fool contributor Stephen Ellis welcomes your feedback. He does not own shares of any companies mentioned in this article. He also likes Windows Live Beta more than Gmail. The Motley Fool has a disclosure policy.
