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| PC Slump Prompts New Priorities, Investment Strategies |
| Dec. 18, 2000 |
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Facing a weak PC market and the longest sustained decline in its stock price since the company went public, Microsoft has announced new corporate priorities and hired a new senior vice-president to oversee its investment strategy. Ballmer Outlines Priorities In a memo sent to employees on Dec. 14, CEO Steve Ballmer acknowledged that a slowdown in PC sales (which are off nearly 20% compared to the last quarter of 1999) has affected Microsoft's core businesses. Sent in the aftermath of Microsoft's first earnings warning in more than ten years, the memo was meant to boost morale and refocus employees on the company's core priorities for 2001, but it also signaled a possible reduction in the number of development projects and, perhaps, an earlier end of life for products currently shipping. In a historically unusual step, Ballmer announced that he has asked his top subordinates to cut costs in their departments and focus development resources on the company's most crucial strategic points. Although no specific details were given, products and projects outside of the company's core focus may be spun off into separate ventures or sold (as happened with Expedia and Sidewalk), features may be cut from upcoming products (illustrated by the company's recent decision to eliminate Office Designer and "Local Store" features for Office 10), and "older platforms" might be dropped earlier than planned. Ballmer also indicated the company will try to limit travel and entertainment expenditures, improve the purchasing process, and reduce building costs. He emphasized that no layoffs are planned, but indicated that many new positions might be left unfilled. Filling new slots might be more difficult than in the past, Ballmer acknowledged, because the recent plunge in the company's stock price has made its option-heavy compensation packages less attractive. Moreover, he noted, the main cash component (base pay) has fallen below the 65th percentile of salaries in the industry, a benchmark the company set for itself in 1999. As a result, Ballmer has ordered a special salary review for employees from the lowest salary levels up through middle managers, intended to yield additional cash to top performers. Ballmer also noted that the companywide focus on .NET should not distract employees from focusing on their first priority: "to serve customers well in our seven key businesses." Those key businesses were outlined as Windows, productivity applications, enterprise servers and tools, MSN, small business applications, devices, and the .NET platform. The memo announced no major product changes, but placed greater emphasis on Windows "Whistler" and Office 10, updates to the company's two biggest cash cows that are due in 2001. Further out, he cited the next release of SQL Server (code-named Yukon) two years hence as key not only for the company's enterprise database strategy, but also for the company's future file storage, e-mail, and user interfaces as well. He also hinted that MSN would soon incorporate fee-based services, something which has been suggested in the past but not yet implemented, and he cited bCentral as the method by which the company will provide complex business applications to small businesses. Emerson to Oversee Investments Slowing PC growth has increased the importance of Microsoft’s investment strategy, both as a way to prop up earnings in the short term, and to secure future growth in enterprise servers and non-PC devices in the long term. In a move that suggests increased emphasis on investments, Microsoft has hired Richard Emerson, a former director at investment bank Lazard Frères & Co. LLC, to fill a newly created position: Senior Vice President of Corporate Development and Strategy. Emerson will report directly to CEO Steve Ballmer and will work closely with Chief Financial Officer John Connors to oversee acquisitions, mergers, and partnerships. He will also oversee the Corporate Development Group headed by Vice President Amar Nehru. As the managing director and co-head of technology and telecommunications advisory services at Lazard Frères, Emerson advised on major telecom deals, including SBC’s acquisition of Pacific Telesis and MCI’s announced merger with British Telecom and, later, its sale to WorldCom. He also was active in other technology deals, including Gemstar’s merger with TV Guide. Under the reign of former CFO Greg Maffei, from 1997 to 1999, Microsoft invested billions in a host of companies, particularly focusing on technologies that could play a part in delivering next-generation Internet services. Very large investments (US$100 million or more) included cable companies (AT&T, Comcast, Rogers Communications, United Pan-Europe Communications of the Netherlands, Britain’s NTL and Telewest Communications, Brazil’s Globo Cabo), long distance carriers and broadband service providers (Qwest, Teligent), wireless providers (Nextel), and firms with products that lie on the fault line between computing and TV (WebTV). Maffei’s replacement, John Connors, had been active in internal cost-cutting as Chief Information Officer and head of the finance division, but had little investment experience, and the company made few sizable investments in telecom, TV-related, or Internet infrastructure companies in 2000. Emerson’s background in telecom acquisitions suggests that Microsoft may be planning to increase activity again in these areas. Apart from their long-term strategic value, increasing gains from investments may help Microsoft balance out the weak PC market, preventing a drop in its price-to-earnings ratio and a further stock slide. Microsoft already relies fairly heavily on investments: in the last two years, investment income has grown from 7% to more than a quarter of Microsoft's pre-tax earnings and has contributed significantly to earnings growth (see the accompanying chart, "Investment Drives Earnings Growth"). Although the devaluation of Microsoft’s stock may make attractive stock-swap deals harder to negotiate, the company generally uses its enormous cash reserves (estimated at more than US$20 billion at press time) for acquisitions. Meanwhile, the NASDAQ sell-off also contains a glimmer of good news: hundreds of technology companies are now available at bargain-basement prices. Latest Investments In keeping with its strategy of investing in companies that may deliver the next generation of Internet services, Microsoft is reportedly in talks to invest in Sky Global Networks, a planned spin-off from Rupert Murdoch’s News Corp. Sky would include satellite TV services in Europe and Asia and listings company TV Guide. John Malone, who as chief of Liberty Media enjoys relationships with both companies, independently confirmed that talks were underway. Media reports suggested that Microsoft might be considering an investment of US$1 billion for a 3.5% stake of Sky Global. Neither Microsoft nor Murdoch had commented on the reported discussion at press time. The investment could be a way for Microsoft to ensure that its technologies for interactive TV (including Microsoft TV and Windows CE) find their way to market. In Sept. 2000, Microsoft’s interactive TV strategy suffered two high-profile setbacks when AT&T and United Pan-Europe Communications publicized delays in their trials of Microsoft’s technology and announced deals with interactive TV competitor Liberate Technologies, despite major Microsoft investments in both companies. (There is some good news for Microsoft on the interactive TV front: Portugal’s TV Cabo is going forward with trials of Microsoft’s technology in December.) In other recent investment news:
Resources A complete list of Microsoft investments is available at www.microsoft.com/msft/invest.htm. For more information on Microsoft’s financials, see "Growth Revives in First Quarter" on page 29 of the Nov. 2000 Update. |
