Goldman Sachs Masters the Obvious with Microsoft Rant

It's one of those head-slapping moments. Some guru from Goldman Sachs comes out and makes a bunch of suggestions about how Microsoft should run its business, and we at RCPU sit here and slap our heads saying, "Why didn't we think of that?" Except we did...and we weren't the only ones.

Goldman downgraded Microsoft's stock at some point over the weekend, and, in doing so, a Goldman analyst went off on a rant about what Microsoft needs to do to get itself out of the decade-long stock-price slump it's in. As Todd Bishop's always excellent blog reports, Goldman had three suggestions for Redmond. And we quote, from the Goldman report as quoted on Bishop's blog:

"(1) A materially increased dividend beyond the recent 23% increase, moving Microsoft into the top 20 dividend-paying companies in the S&P 500 in terms of dividend yield. We believe this would open the door to a larger investor base and keep the company more diligent from a spending perspective. (2) A coherent consumer strategy that could involve paring back investments and/or divesting more peripheral assets such as gaming. (3) Market leadership in Cloud. Microsoft has a strong portfolio of enterprise data center assets and could become a leader in Cloud deployments, but the competitive environment remains highly in flux, with Microsoft still not a clear 'winner,' in our view."

We'll toss out the first suggestion as being sensible enough but a little too insider-Wall Street for our purposes. It's the last two that have caused the self-inflicted red marks on our collective RCPU forehead. Basically, No. 2 is talking about Microsoft focusing on core products and either spinning off or paring down its flailing consumer businesses, including the money-losing entertainment division.

What a radical concept! We've only been banging on about that topic here in this newsletter for, oh, four years or so. If you've read RCPU at all over the years, you've noted our warnings to Microsoft that that the company should stop trying to be cool, stop trying to be everything to everybody and start honing in again on operating systems, servers and other long-time moneymakers as well as on cloud technologies (more on that in a minute).

To be fair, Microsoft has taken that tack to some extent—Windows 7 and SharePoint are good examples of enterprise technologies that are both useful and successful (or, at least, Windows 7 will be successful given time). But Redmond remains entrenched in trying to be an entertainment titan, a mobile developer and possibly still some sort of advertising agency. And all of that stuff is either a brain drag or a financial drag on the company -- or both. Microsoft should spin off, wind down or just ditch a lot of its consumer-focused efforts. But haven't we all known this for a while? And by "we," we mean most industry observers, not just RCPU? For heaven's sake, how long has Mini-Microsoft been around, anyway?

The mobile space, in particular, has been tricky for Microsoft -- as evidenced by the company's desperate Android patent lawsuit and its repeated failure to regain mobile momentum. Here again, Goldman states the obvious in observing Microsoft's place in that market. The Financial Post quotes Goldman's Sarah Friar thusly:

"'We believe that top-line momentum and hence investor sentiment on Microsoft's core Windows and Office franchises is unlikely to improve until the company gains a firmer [read: any] foothold in the growing migration to mobile devices – both smartphones and tablets,' said Ms. Friar. 'We don't see this happening this year, as Apple's iPad and iPhone plus Google's Android operating system are well established,' she said."

My goodness! What an eye-opener! We do wonder, actually, why Microsoft absolutely has to have its own mobile operating system. Is there no room for some partnership here with a more established developer? Don't Windows and, in particular, Office, still carry some weight in the marketplace?

It seems as though Microsoft would be better served to scrap plans to rely on Windows Phone 7, a mobile OS that will be obsolete the minute it comes out next week, as its candidate for entry back into the mobile market and instead maybe find a way to get other Microsoft technologies licensed onto somebody else's platform.

Sure, that's not the Microsoft way -- the company would have to (gasp!) actually cede ownership of a market. But Microsoft isn't a serious mobile competitor now, and its path toward becoming one seems quixotic at best. Maybe Microsoft has hacked away at mobile windmills for long enough.

Back to Goldman's revelations, though -- and they only get better. Dig suggestion No. 3. Here it is again: "(3) Market leadership in Cloud. Microsoft has a strong portfolio of enterprise data center assets and could become a leader in Cloud deployments, but the competitive environment remains highly in flux, with Microsoft still not a clear 'winner,' in our view."

What? Microsoft needs to be in the cloud? And nobody has claimed the cloud space yet? Geez, even Microsoft gets this one. Azure and the constant "all-in-for-the-cloud" messaging coming out of Redmond are a pretty good indication that Microsoft wants to position itself as a leader in the cloud and is making positive moves toward doing so. But, hey, Goldman, thanks for the heads up.

As expected, Goldman's rant has led to another nice wave of articles talking about how Microsoft is finished...and basically saying the same thing that Goldman said this week and that we've been saying for years. Again, it's not that we disagree with Ms. Friar or with Goldman Sachs. We actually agree, for the most part -- and maybe these words coming from Goldman will actually get somebody's attention in Redmond.

Please forgive us, though, if we say that we've heard all of this before -- because we've written it, over and over again, in this newsletter over the last few years. Then again, on second thought, Goldman might have some credibility here that we don't have.

After all, the firm is warning Microsoft about potential failures -- and nobody knows failure like Goldman Sachs, a company that likely wouldn't exist today had the U.S. government not covered it with a big TARP. So, keep preaching, Goldman. We'll be sitting behind you in the choir, which apparently either isn't singing loudly enough or is reaching the wrong members of the congregation.

What's your take on Goldman's suggestions for Microsoft? What should Microsoft do to get itself back on track? Send your thoughts to [email protected].

Posted by Lee Pender on 10/04/2010 at 1:23 PM