Changes in the Air at Microsoft - Call Down the Thunder and Bring on the Hell


If you happen to be a fan of the movie “Tombstone” that starred Kurt Russell as Wyatt Earp, there is a scene in which Earp shouts out the following: "All right, Clanton...You called down the thunder. Well, now you've got it! You tell 'em I'm coming, and Hell's coming with me, you hear?! Hell's coming with me!"

For many reasons, this scene pops directly to mind every time we consider Microsoft and its need to make changes to its businesses in order to better address the realities of today's mobile-centric marketplaces. As we write, there are fresh rumors circulating that Microsoft's obvious Wyatt Earp candidate - CEO Steve Ballmer, of course - is getting close to making some major changes to how Microsoft is structured and organized. It's all rumor and there is no way to predict what, if anything, will really take place.

We can offer the following from Ballmer's Letter to shareholders from their most recent annual report, dating to October of 2012 - and in fact it is these words from the letter that remind us of “Tombstone”:

Last year in this letter I said that over time, the full value of our software will be seen and felt in how people use devices and services at work and in their personal lives. This is a significant shift, both in what we do and how we see ourselves — as a devices and services company. It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses. The work we have accomplished in the past year and the roadmap in front of us brings this to life.

It is almost impossible to write the above - the emphasis is ours - without believing that significant structural changes need to take place. But given the reality of what Ballmer actually penned, it isn't out of the question to put possibly significant stock in the restructuring rumors. The question that immediately comes to mind is whether or not Ballmer is indeed the right candidate to play Wyatt Earp here.

Can Ballmer really bring down the kind of thunder needed to move Microsoft forward, and move its stock out of its decade-long lethargy? (Though we do note that there has of late been a bit of a run-up to the stock - since mid-March 2013 the stock is up $7, and has been hovering in the $34 - $35 range for the better part of a week now.) We've never thought so. Our deepest analysis for this was provided back when Steven Sinofsky decided to leave Microsoft. Nor do we think so today - even as the stock takes a turn for the better.

The problem, as we've enumerated from a variety of perspectives over the last year, is that Ballmer is too much of a legacy CEO. From any perspective other than that of bringing original, visionary and exciting mobile thinking to the game, Ballmer has been an outstanding CEO - one who has maintained robust revenue and profit growth during his entire tenure as Microsoft's CEO. The problem as we've often noted is that Ballmer has turned Microsoft, from a stock market perspective, into a value company. This is really the only way that Microsoft can preserve its ongoing legacy revenue streams.

This approach however is what has doomed Microsoft's stock to stagnation. We also believe Microsoft blew a chance at some redemption with what we've argued to be rather dumb marketing strategies for the Surface tablets. During its most recent earnings release in mid April 2013, the stock had not yet had its full recent bit of a run-up (though it had up-ticked a bit), but we did speculate if Microsoft's Surface tablets had had an impact on those earnings.

ValueAct Capital - Now a 1 Percenter

It recently became public that ValueAct Capital now owns roughly 1 percent of Microsoft’s stock. That may not sound like a lo,t but in fact it represents a rather massive number of shares – enough so that ValueAct might very well be able to make some demands on Microsoft. It's an unusual position, but perhaps more knowledgeable players who have better street information on who is out there acquiring large positions in Microsoft may be quietly picking up shares in anticipation of a major restructuring move. Microsoft itself could conceivably be anticipating a call to action by ValueAct and may be looking to deliver proactive action ahead of any such demands.

Any restructuring will likely come down to Ballmer's specific words: "This is a significant shift, both in what we do and how we see ourselves - as a devices and services company." It is an interesting choice of words since Ballmer does not use the word "mobile" here. It strikes us that he wants to utter "mobile," but the value-based, legacy CEO simply cannot do so.

Microsoft has, of course, undergone restructuring in the past. A review of these efforts always leaves one looking at the same exact Microsoft. If the next restructuring delivers the same then it won't have much of an impact. We suspect the vision and excitement will be lacking, no matter how much Ballmer might choose to use those words.

"Devices and services" does suggest a more concerted effort to migrate Microsoft more fully into a cloud-based ecosystem. Ultrabooks, tablets and Windows Phone-driven smartphones will certainly be an ongoing part of the mix. It also suggests that Microsoft's key outlier businesses the company continues to invest heavily in - its Xbox and Bing franchises will remain a definite piece of the mix. There is no reason for Microsoft to abandon these or otherwise look to spin them off.

Xbox and Kinect reflect one of Microsoft's few footholds in consumer tech. In fact, Xbox and Kinect offer a way for Microsoft to latch onto the wearable tech market. If Microsoft were "hip" and visionary, it would already be speaking the wearable tech language, but of course it isn't doing so. It will be very interesting to us to see how Microsoft will handle these business lines in a restructuring.

Ultimately, the key question will be whether or not Microsoft emerges from a new restructuring as an ongoing legacy business with a few leadership changes in hand, or if Microsoft emerges with that hip and visionary perspective. The latter requires much more than Ballmer can deliver. Picture it…can Ballmer really deliver the Kurt Russell Wyatt Earp scene? It would need to go as follows:

We remain unconvinced that Ballmer will be able to deliver on it. We hope he does, however, as both the enterprise and consumer tech worlds need a robust Microsoft.

Call down the thunder and bring on the Hell!

Edited by Alisen Downey

TechZone360 Senior Editor

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