Microsoft Corporation (NASDAQ:MSFT) CEO Satya Nadella promised a new day at the software giant, and for the most part he has delivered. But there are limits: The new Microsoft is not cuddly. Personal relationships do not trump business opportunity.
This has caused salesforce.com, inc. (NYSE:CRM) CEO Marc Benioff to register a complaint to European regulators that its pending acquisition of LinkedIn Corp (NASDAQ:LNKD), a company he now admits he tried to buy, may run afoul of Europe’s antitrust laws.
The old Microsoft would have dared regulators to move against it. But this is the new MSFT. It is offering concessions to get the deal done, and it could be approved as early as next month.
Bill Gates would never have done that.
Extend and Embrace the Cloud
What has Benioff most upset is Microsoft’s decision to “embrace and extend” the position of its Azure cloud by offering cloud-based applications, specifically its CRM Dynamics product, which competes with Salesforce’s flagship.
Benioff told Re/Code that Nadella asked him to meet with Azure head Scott Guthrie, discussing his product, and that Guthrie was then named to head the team developing CRM Dynamics. HP Inc (NYSE:HPQ) reportedly chose MSFT over Salesforce in September.
Benioff saw this as a personal betrayal, especially after losing the LinkedIn bidding war, where he now says he offered more in a combination of stock and cash, losing out to Microsoft’s all-cash offer of $26.2 billion.
Salesforce, of course, was originally developed using Oracle Corporation (NASDAQ:ORCL) database software, and Benioff has had a tortured relationship with founder Larry Ellison. He moved to support MSFT Azure as a counterweight to Oracle, and now finds himself in bed with a competitor.
The lesson here is the age-old saying: If you need a friend in business, get a dog.
Microsoft never intended Azure to be “just” a bare-bones infrastructure cloud like that of Amazon.com, Inc.‘s (NASDAQ:AMZN) AWS platform. The plan from the beginning was to use Azure as a tool for selling MSFT software. In this way, it is using Azure in the same way that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has used Google, adding additional software and services to Windows 10 accounts, delivered through Azure, which can later turn into money.
Microsoft is using open source in the same way, bringing even open source developers into its Azure ecosystem. MSFT has teamed with Tesla Motors Inc (NASDAQ:TSLA) founder Elon Musk, and others, in the OpenAI project, aimed at opening up artificial intelligence code.
OpenAI will now be running its biggest experiments on Azure, giving Microsoft a strong position in the next phase of software development.
Bottom Line on MSFT Stock
The strategy is to have multiple “touch points” for developers, companies and users, each of which can then be used to sell the entire Microsoft ecosystem of software and services delivered by Azure.
This is possible only because former CEO Steve Ballmer settled the company’s antitrust case with the U.S. government, a case Gates had unsuccessfully fought, even offering to extend terms of the settlement past their 2007 expiration, to 2012.
Getting the government off Microsoft’s back allows the company to compete as fiercely as it likes in the cloud, without fear of lawyers looking over its shoulder before every move. The LinkedIn concessions are thus a preemptive strike for peace, less an example of MSFT being old than of Microsoft being new.
This is reflected in the MSFT stock price, up 12% in the past year, while increasing its dividend from 36 to 39 cents per share, and getting profit margins back to their accustomed level of almost 25%, after falling hard in the first year of Nadella’s stewardship on the back of heavy Azure investment.
It’s why Microsoft has gone from having a price-earnings multiple nearer to that of Apple Inc. (NASDAQ:AAPL) under Ballmer to one closer to Alphabet — a P/E that is fully justified by its prospects.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, GOOGL, AAPL and MSFT.
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