Microsoft Has No Choice But To Make Its Planned $6 Billion R&D Investment
While you might fault Microsoft for not doing a better job initially in explaining just how those dollars will be spent, it’s hard to argue that this isn’t a good idea for a company that generates approximately $1 billion in cash a month. After all, shouldn’t it do something to grow its business with that money?
It seems to me that the real question is whether Microsoft is spending the money merely to chase someone else’s strategy—namely Google’s—or to advance toward what it truly sees as an opportunity to excel? In this case, I think it’s a bit of both.
Google is a real and growing threat to Microsoft. Its dominance on the Web gives it the ability to launch competing products that could strike at significant arteries that feed the heart of Microsoft’s cash-generating machine. Gmail is an obvious example, and fundamentally there is nothing in Microsoft Office that could not be offered as a Web service for free or at a fraction of the current cost of Office.
Google is a competitor unlike any Microsoft has faced in the past. Its position in search and its brand awareness is far superior to the fleeting threat that Netscape posed in its heyday. The big difference, of course, is Netscape’s business model was to charge for the use of its browser, so it was easy for Microsoft to simply roll its own browser out for free to eliminate the up-and-comer.
But Google is an advertising-based model with a very low cost of sales and content, and it is attracting some of the best developer minds in the business.
Are we heading toward a day when the applications that make up Microsoft Office will be offered for free over the Web? There’s no doubt that the answer is yes. The only question is whether the suite of choice will be free from Microsoft or free from Google or free from some other company.
It’s going to happen at some point, and Microsoft can’t stop it. For example, the traditional issue of needing to be compatible with Microsoft Word won’t even matter, given that opening a document built in the forthcoming Google word-processing program will require nothing more than accessing the program for free over the Web.
There is no doubt that this is where we are headed. Microsoft knows it and needs to invest heavily to catch up to Google before this evolution takes place.
As Ballmer explained last week, Microsoft is already generating $2.5 billion a year in advertising sales, and that number is going to become increasingly larger.
Microsoft, which has traditionally attracted excellent talent based on the prospect that its options would make them rich, has been anything but a growth stock in recent years. At the same time, Google’s share price seems to have no ceiling. That’s awfully attractive to prospective employees—not to mention it rains a whole lot less in Silicon Valley than it does in Seattle.
The Google threat is real and has been growing stronger over the past two years. Microsoft has been unable to do much to slow the advance during that time.
It seems to me if you’re a short-term investor in Microsoft, you want it to turn the dollars back to the shareholders so you can buy Google stock with it. If you are a long-term investor, you want the company to do exactly what Ballmer says it is going to do, and that’s push its business model toward the future before Google or some other company pushes its business model over the edge of a cliff.
Make something happen. I can be reached at (781) 839-1202 or via e-mail at [email protected].