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We don't disparage shenanigans, as a rule, but this is clearly a positive development for consumers. To read more about how to protect yourself, click here.

In today's Motley Fool Take:

Microsoft's X-Rated Problem

Go over last night's third-quarter earnings report from Microsoft(Nasdaq: MSFT) and you'll be treated to the usual suspects. It topped profit projections by a penny per share. It was guarded in its near-term outlook. All of its operating divisions managed small yet definite gains.

Wait a minute.

Scratch the latter.

While Microsoft managed modest gains in most of its businesses, one line item stands out like a Mac user at a Bill Gates Fan Club meeting. Its Home and Entertainment division suffered a steep 42% drop during the period. How can a company manage to grow revenue in iffy segments such as software and online subscriber services but fail to make headway in something as seemingly recession-resilient as home and entertainment?

What's the problem? It's in the game. This shortcoming is weighing heavily on the shoulders of the struggling Xbox video game console. While no one expected things to go smoothly as the company pit itself against Sony(NYSE: SNE) and its global installed PlayStation2 user base of roughly 50 million consoles, this hurts.

The company dropped the selling price of its console from $299 to $199 and has tacked on bonus incentives for the noble "razor and blades" intent of losing money on the hardware but making it up on the margin-friendly software side.

But the problem is that it is now selling the razor at a loss and folks aren't coming back for the blades. Any hope that the plan is actually working and that the 42% drop can be attributed to the price drop exclusively was dashed when it noted in last night's release that "the revenue decrease was caused primarily by lower sales of Xbox video game systems and related games in all geographic regions."

So even with a lower system price and a larger installed base of users the games aren't moving like they used to. Anywhere.

The problem isn't that Microsoft can't stand being a distant second in any venture. Its MSN.com service is tens of millions of users away from AOL Time Warner's(NYSE: AOL) America Online yet it still managed to grow its subscriber revenue by 9% this past quarter. Its fastest growing business division is also its smallest: Business Solutions.

So it's not the unfamiliarity with huffing and puffing behind a leader that's at fault here. It's just that the model isn't working. Microsoft and its shareholders' historical expectations for fat margins no doubt had them playing along with the rollout of the low-margin Xbox console. Surely, the lucrative software licensing royalties and the promising broadband-enabled delivery of software updates would make it a rich-margin Microsoftesque addition.

It hasn't happened. At this point, it's not likely to happen. While Nintendo has often appeared as the most likely console maker to bow out of the home system hardware race, maybe Microsoft should beat it to the punch and fold. The game isn't fun anymore.

Discussion Board of the Day: Microsoft

Were you impressed with Microsoft's earnings yesterday, but disappointed by the state of its video game business? What are your thoughts on the company's fiscal 2004 outlook? All this and more -- in the Microsoft discussion board. Only on Fool.com.

Starbucks Buys the Best

Starbucks (Nasdaq: SBUX) can now say it's Seattle's Best Coffee. Well, sort of. The java giant announced today that it's purchasing the smaller hometown rival from AFC Enterprises(Nasdaq: AFCE), which also owns Cinnabon, Popeye's Chicken, and Church's Chicken.

Starbucks will pay $72 million in cash for the Seattle Coffee Company, which includes the Torrefazione Italia coffee line in addition to Seattle's Best. Earnings per share for fiscal 2003 are expected to be a cent lower because of the purchase, but Starbucks anticipates the buy adding to its bottom line in 2004.

There are several interesting things about this move. First, Seattle's Best Coffee was founded in (duh) Seattle in 1970, around the same time that Starbucks was. Originally called "The Wet Whisker," Seattle's Best has obviously had a very different 30 years than Starbucks.

The brand reaches more customers through its 12,000 national distribution points (including 5,000 supermarkets) than it does with its 129 North American locations. Starbucks will own all of those locations, plus 21 Torrefazione Italia cafes. AFC will retain the chain's 93 international stores.

Another interesting aspect is that, at least for now, Starbucks says it intends to operate the Seattle's Best and Torrefazione locations under their own brands. That's surprising coming from Starbucks. You'd think they'd just switch them over and be done with it. But perhaps Seattle's love-hate relationship with Starbucks, and fear of a backlash, are reasons why it will just let Seattle's Best be.

Finally, the timing of this acquisition is undoubtedly opportunistic. AFC has been under pressure recently, with the news that it will restate its 2001 and 2002 results and delay filing its 2002 annual report. Shares tumbled 22% the day the story broke, dropping them to a new 52-week low. Though the adjustments will all be non-cash and don't seem to signal fraud of some sort, the market just doesn't tolerate any hint of impropriety anymore.

It's likely that Starbucks saw an easy way in and took it. And who can blame them? AFC needs the cash to pay down its debt, and says this allows it to focus more on its core non-coffee businesses. For Starbucks, it's just another move towards expanding its coffee empire.

Quote of Note

"It is inhumane, in my opinion, to force people who have a genuine medical need for coffee to wait in line behind people who apparently view it as some kind of recreational activity." -- Dave Barry

Kraft Cuts the Cheese

When Altria Group(NYSE: MO) spun off 16% of consumer food giant Kraft(NYSE: KFT) in June 2001, Kraft had just bought Nabisco and told Wall Street to expect double-digit earnings growth. Investors flocked to the opportunity, driving the stock price up almost 50% a year later.

Yet today, the stock price is back under $30, as it was soon after its IPO, and growth expectations are more subdued. Kraft reports Q1 EPS up a healthy 22% year over year, but an anemic 3% revenue growth. Not what investors expected. What gives? Cheese and tobacco.

Take cheese. Kraft owns 40% of the North American retail cheese market with its familiar Philadelphia, Breakstone, Cracker Barrel, Velveeta, and Cheeze Whiz brands, to name a few. But apparently, the more than 500 ways Kraft sells us cream, natural, sauced, cottaged, cubed, sliced, and grated cheese isn't as powerful as its Jell-O, Maxwell House, Oreos, or Tang brands. (Heck, the company even distributes Starbucks(Nasdaq: SBUX) coffee!)

At an extreme where consumers face the choice between plain, black-and-white labeled "Beer" or "Facial Tissue" and Budweiser or Kleenex, consumers are choosing to cut the Kraft cheese. So, Kraft chops prices, squeezing the brand part of the profit margin.

Want proof? Ask yourself this simple question: If your kids demand Oreos, will they settle for Giant or Safeway brands? Hardly. But then consider this: If you wanted to grill an eggplant according to a recipe calling for shredded mozzarella and parmesan, would you pay more for Kraft than generic? I didn't. Scientific proof, man.

Then there's fear of liability for any part of 84%-owner Altria's tobacco woes. Debt rater Standard & Poor's says that should Philip Morris USA end up in bankruptcy, Kraft's potential exposure (lawyers' term for "How bad it can get if you gotta pay a lot") is "limited, but not eliminated" by the corporate reorganization that led to the separation of Altria's food and tobacco businesses.

Many investors -- like me in an IRA -- suck up the risk and lower growth ( reported today) to invest in Altria because of the dividend yield approaching 8%. But Kraft's 2% can't compare. With shares at 25 times enterprise value to free cash flow, the company isn't growing fast enough for growth investors, and is hardly a bargain for value investors. My bet is that the latter will be the one to change first.

Sources for Stock Ideas

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Quick Takes

Tech stocks got a boost today, thanks to solid quarterly reports from bellwethers Microsoft(Nasdaq: MSFT) and Intel(Nasdaq: INTC). The former saw a slight increase in profits and hinted at better-than-expected full-year results. The latter showed higher margins than expected, and CFO Andy Bryant said, "We actually feel a little bit more confident."

J.P. Morgan Chase (NYSE: JPM) reported first-quarter profits 43% higher than a year ago. The nation's second-largest lender saw strength in its investment-banking and home finance divisions.

Fellow financial firm Merrill Lynch(NYSE: MER) also beat estimates. Like J.P. Morgan, fixed-income business in the investment-banking division helped fuel the quarter.

Coca-Cola (NYSE: KO) earned $0.34 per share in the first quarter. The company said results were affected by the war in Iraq, a lengthy national strike in Venezuela, a change in deposit laws in Germany, and a shift in the timing of the Easter holiday.

In local news, English professor Andy Hildebarg left for a week-long retreat in the mountains. Torn by inconsistencies in his field of study, he plans to use the time to ponder why we park in driveways and drive on parkways.

And Finally...

Today on Fool.com:

  • For updated stories throughout the day, bookmark our ever-changing News section.
  • Ford, the No. 2 automaker, tops estimates and reaffirms guidance.
  • Credit agencies simplify the procedure for ID theft victims.
  • General Dynamics reports strong results and may offer strong value.
  • First-quarter income at MGM Mirage fades on the horizon.
  • Learn investing lessons from the irrepressible Iraqi information minister.
  • Compared to a 401(k) or traditional IRA, a Roth can lead to more money in retirement.
  • In Fool's School, how does a stock split influence company earnings?

Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Jackie Ross, Reggie Santiago, Dayana Yochim