Microsoft Tries for a Reboot

by Tom Taulli | July 11, 2013 11:45 am

As expected, Microsoft’s (MSFT[1]) CEO Steve Ballmer has launched a wide-scale restructuring of the company[2].  In fact, this is nothing new for the company.  It seems that there is a reorg every couple years or so.

But will it work this time?  Well, it won’t be easy.

But there are some hopeful signs. Perhaps the most important is that the tech world is undergoing some massive transformations — and this seismic shift could provide nice growth opportunities for companies like Microsoft. The key drivers are really mobile and the cloud.

According to Ballmer: “We have entered an always-on, always-connected era that holds new promise for what technology can bring to people’s lives and to businesses everywhere on the planet.”

Now Microsoft has some huge advantages to capitalize on things. It has thousands of talented engineers; a global information technology (IT) infrastructure; a huge community of developers; incredible distribution, with over 1 billion users; and a well-respected brand.

In fact, Microsoft’s Windows operating system (OS) and services — like Skype, Explorer, SkyDrive, Office, Yammer, Bing and even Xbox — could become a high-powered opportunity for the next-generation of technologies. According to Ballmer, the focus will be on providing one experience across all screens, whether it is “wearable, a phone, a tablet, an 85-inch display or [a device] not yet even imagined.” All of this would be connected into a super-intelligent cloud.

Yes, this is a spot-on strategy. And to make this vision become a reality, Ballmer is going to try to break down the bureaucracy and fiefdoms at Microsoft.

Keep in mind that the company has always had many product departments, which have been fiercely competitive.  They also had their own finance and marketing organizations. But this approach often resulted in duplication and lack of integration.  As a result, Ballmer is going to consolidate Microsoft into four broad product categories — operating systems, Apps, Cloud and devices — and also centralize the finance and marketing departments. There will also be reshuffling of many of the senior executives across these new categories.

On its face, this seems like a good strategy. But ironically enough, it may actually increase the slowness the lumbering giant is trying to fend off.

First of all, when all groups are required to develop unified products, it generally takes longer because of the need for collaboration, group decisions and testing for integration. Besides, since each department will be larger, there will probably be even more bureaucracy and political infighting. There is then the problem of getting warring departments to suddenly find ways to work together!

But Ballmer’s letter has another ominous move. That is, he wants to push hard on creating a “family of devices,” which will include “phones, tablets, PCs, 2-in-1s, TV-attached devices and other devices to be imagined and developed.” Again, this will add another layer of complexity to the development process. Let’s face it, there are big differences in software and hardware creation.

Oh, and the device business is extremely brutal. Just look at the wreckage of companies like BlackBerry (BBRY[3]), HTC, Nokia (NOK[4]), Sony (SNE[5]), Motorola and Palm. Even Apple (AAPL[6]) and Samsung (SSNLF[7]) have been running into issues.

All in all, Ballmer has ambitious expectations. But they may be too hard to achieve. If anything, they may make Microsoft even worse as it struggles to deal with the deterioration of the core PC market. In the latest quarter, the industry saw a grueling 11% drop in shipments (according to reports from Gartner and IDC).

Of course, the big driver is the relentless growth of mobile. But even there, the dominant OS is Google’s (GOOG[8]) Android and its disruptive business model — it’s free. Google can do this because it can monetize the platform with its massive ad business. Microsoft, on the other hand, does not have this advantage.

It’s certainly not good.  And this is why Ballmer seems to be in the panic mode.

In other words, for investors it is probably best to stay away from Microsoft, in light of the risks. In fact, the valuation — P/E of 18 — is far from cheap. Hey, Apple’s only trading at 10x, and that company is still growing at a much faster pace.  More important, it has already cracked the code for operating a successful hardware/software business … and it’s taken decades to pull off.

Tom Taulli runs the InvestorPlace blog IPO Playbook[9]. He is also the author of High-Profit IPO Strategies[10]All About Commodities[11] and All About Short Selling[12]. Follow him on Twitter at @ttaulli[13]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  2. a wide-scale restructuring of the company: http://blogs.wsj.com/digits/2013/07/11/ballmer-announces-reorg-one-microsoft/
  3. BBRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBRY
  4. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  5. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
  8. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  9. IPO Playbook: http://investorplace.com/ipo-playbook/
  10. High-Profit IPO Strategies: http://goo.gl/TXQsz
  11. All About Commodities: http://goo.gl/FfP8R
  12. All About Short Selling: http://goo.gl/t5Jzb
  13. @ttaulli: https://twitter.com/ttaulli

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