Rattle and Tempest
However, other shareholders and Wall Street analysts were rattled by the news, particularly by the lack of explanation about where the money was going to be spent and why, prompting Microsoft CEO Steve Ballmer to release a
memo to staff members explaining the move and trying to calm their nerves.
"To ensure that we win where we see opportunities and can respond with speed when the marketplace changes, we made the decision to ramp up investments during Q3 in a number of key areas
we also provided guidance for Q4 of this fiscal year and for FY07, that indicates our willingness to be aggressive when making investments where they are strategic for future growth," he said.
To read more about exactly where Microsoft plans to spend all this money, click here. But, after the initial tempest, some Wall Street analysts are supporting Ballmers position. Charles DiBona, an analyst at Sanford C. Bernstein & Co in New York, said in a research note released this week that "the overwhelmingly negative market reaction to the recent surprise announcement of greater-than-expected FY-07 operating expenses is somewhat exaggerated and a reaction in part to the poor communication of that news rather than to the actual ramifications and implications of that spending." Microsoft remained strategically well-positioned versus its traditional competitors and was in a reasonably solid position to fight off its newer rivals, he said, adding that some incremental spending was essential given the risks to Microsofts current business and the opportunities to expand its franchise. "We believe that the spending, rather than being purely defensive (though there is an element of that) and even wasteful, may in fact bring incremental upside to the company," he said. He also made clear that he believes the Google competitive threat is about platforms, not about advertising or applications, given its estimate that search ads represented just $376 million dollars, or less than 1 percent, of Microsofts revenue over the last 12 months. In fact, the entire MSN division accounted for just $2.3 billion or 5.4 percent of Microsofts total revenues, DiBona notes, adding that the opportunity cost of losing that business and the threat of losing the existing business to Google hardly would qualify Google as Microsofts top competitor. But that is what Microsoft executives have been saying publicly. In a wide-ranging interview at Microsofts Worldwide Partner Conference in 2005, Ballmer said the biggest challenge facing Microsoft, and what keeps him up at night, is competing with search specialists such as Google and Yahoo. "When you talk about our greatest competitors, you have to look at those companies doing things to change the future," Ballmer said. "We just launched our own search product with our own search technologies some months ago, and we are in the game. I dont underestimate that [it] is going to be very hard, and we are very focused. The thing that is going to be the hardest to make progress on will be to take market share from Google and Yahoo," he said at the time. To read more about Ballmers thoughts on the competition, click here. But, to Sanford Bernsteins DiBona, the real risk is around Google becoming a platform for service-oriented applications and, as a result, potentially disrupting the core Windows client franchise, "with the impacts on other key franchises such as Office and even the server business being secondary effects of that greater struggle over the core platform," he said. The idea of that must send shivers down the spines of executives like Ballmer and Gates, who would much rather have shareholders believe the fight with Google is about advertising revenue than about its core Windows franchises. But, even with that being said, DiBona is bullish about the potential further downside for the stock, saying that "at current levels, we feel that the stock represents a solid fundamental value with limited downside from here and the opportunity for substantial appreciation. "We continue to believe that Microsofts share price undervalues the true growth potential of the company and view this as the most compelling long-term investment opportunity in our coverage." Now those words must be music to Gates and Ballmers ears. Check out eWEEK.coms for Microsoft and Windows news, views and analysis.
While acknowledging that "the bottom-line result of these investments created a shift in our near-term profitability that was a surprise and the change in our stock price reflects this," he was his usual upbeat self, concluding that "Ive never been more confident that we are making the right investments."