Microsoft's Billion-Dollar Bust Recalls the Old Shell Game

Looks like that "upgrade fatigue" is worse than we thought.

When I listed here on Monday the reasons to buy or avoid Microsoft (MSFT:Nasdaq - news - boards), I mentioned buyers' increasing resistance to buy new versions of the Microsoft Office suite.

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Problem, of course, is that anyone who has the Office applications circa the "Office 97" release from four years ago already has incredibly powerful, feature-rich applications well beyond what maybe 98% of PC users need -- or want.

Office 2000, and the upcoming Office 10 (they've gotta get this new-release naming-convention thing right sooner or later ...), just pile on more, and more obscure, features. Don't get me wrong: I use and like the Office 2000 apps, and I'll be near the front of the line to buy Office 10.

But it increasingly looks like that will be a pretty short line.

When Microsoft warned Thursday about its billion-dollar miss, it focused most of the attention on lower-than-expected revenue in its applications business (read: the Office suite) and its consumer business (read: its slow-growth Microsoft Network -- MSN -- business).

Here we were worrying about the corporate adoption rate of Windows 2000, the early forecasts of the uptake on 2001's Windows upgrade, "Whistler," and the general slowdown in PC sales, which means fewer of those birds-nest-on-the-ground sales of licenses for copies of Windows installed by PC makers on every new machine that goes out the door.

And then bingo!, just as with those guys working New York street corners with their walnut shells, Microsoft says "Looky, looky -- it wasn't there, it's here."

Makes me wonder.

Last night Adam Lashinsky wrote on RealMoney.com that he thinks the biggest issue in the Microsoft warning isn't this Billion-Dollar Bust, but what's yet to come: How much worse will it get?

Microsoft CFO John Connors tried to deflect questions about that, assuring us that this Billion-Dollar Bust guidance is their best effort at forecasting ... but, in effect, after all, who knows about the future?

Meanwhile, Microsoft investors are left to stew: What now? What's next? What to do?

Let's see if we can reduce the Microsoft announcement to a series of knowns and unknowns, "where do we go from here?" steps:

• Microsoft's planning process is getting soggy. Yes, it warned before the tsunami hit, but it's hard to believe this came as much of a surprise as Microsoft and Connors suggest.

• No one, no one, is safe from an across-the-board slowdown. Not just the much-heralded slowdown in PC sales, but the broader slowdown in consumer spending.

• Building an online service is an incredibly expensive proposition. Because Microsoft sees MSN as a strategic move -- in this case, something that can help drag-through sales of other products, and keep the flag in front of buyers, it's unlikely to fold or sell (to whom?) MSN. But the endless $400 rebates, heavy TV advertising, and costly point-of-sale efforts push further and further into the future the time when MSN may actually make a buck on its own.

• Microsoft got hammered down about three bucks in after-hours trading Thursday night and early, preopen trading Friday morning. Looks like more 'Soft ugliness ahead in the market on Friday.

• At the same time, as I said Monday, Microsoft has a lot going for it. I mentioned on the RealMoney.com Columnist Conversation last night, right after the Microsoft warning came out, that if the stock got down as much as five bucks, to $50, I thought we'd see pile-on buying. Adam reminds me that David Readerman of Thomas Weisel Partners has also said $50 is the threshold at which he'd start buying, too. His analysis came up with that number as 1.8 times Microsoft's earnings growth rate. But now that earnings growth rate has been adjusted downwards. Is $50 now too high?

• Microsoft may have left the building as a trader's stock. I think it's still a heck of an earnings machine, even at these new numbers, and so is, at the right price, still a good buy for investors. But I reiterate my notion from last night: the magic number looks like $50. And if it does hit that price, it probably won't be available there for long.

Friday looks messy, with lots of influences swirling around: Nasdaq futures will be down at open. It's a triple-witching day. There will be considerable activity in Microsoft, initially downwards from the three-buck haircut at which Microsoft will open. As we near the end of the year, we see tax-loss sales emerging. People with a good year so far are saying the heck with it, and are moving out of the market to preserve the year's gains. And we have another profit-taking Friday.

I'd be a Microsoft buyer at a couple of bucks below Friday morning's premarket price of $52. But only if I planned to sit on this one for a while.

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Can't ignore that nice quarter reported by Oracle (ORCL:Nasdaq - news - boards) Friday afternoon.

My God, how sweet it must have been for Larry Ellison Thursday night. I'm reminded of the old Hollywood line from the legendary producer Darryl Zanuck, who rose from a self-described alcoholic night clerk at the only hotel in Wahoo, Neb., to produce more than 170 movies: Loosely paraphrased, Zanuck said, "It's not enough for me to succeed beyond my wildest dreams, but my best friend must also lose beyond his worst fears." For him to feel good, that is.

Umm, Larry? Sound about right?

Oracle only beat analysts' expectation by a penny, but in this time of daily warnings and misses, and of course in tandem with Microsoft's Billion-Dollar Bust, that looks pretty good. Oracle closed up about a buck in after-hours trading, and will probably also do well on Friday.

The real tell of the Oracle results may be a reminder that across-the-board generalizations about the software market going kaput may miss the point: In certain niches, there's still money to be made.

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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had no positions in the stocks mentioned in this column, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour .