Future Is Later for Microsoft

Microsoft(MSFT - Cramer's Take - Stockpickr) makes Wall Street nervous. And the takeaway from the software giant's meeting with analysts last week is simple: Get used to it.

CEO Steve Ballmer and a parade of senior executives made it clear this past Thursday that Microsoft is going to invest heavily in new businesses over the next few years, and if that means margins and operational earnings (the bottom line was saved by a massive buyback plan) will take a hit -- which it does -- so be it. "The opportunity and prospects for innovation and growth [have] never been better," Ballmer told analysts at the daylong event.

The bill for those opportunities will come due in a hurry. Microsoft will spend an additional $2.7 billion this year as it strives to catch up with online giants such as Google(GOOG - Cramer's Take - Stockpickr) and Yahoo!(YHOO - Cramer's Take - Stockpickr). Average margins next year are likely to drop 2 full points to 38% as the mix of business begins to shift away from the company's core desktop-oriented business toward online ventures and entertainment, said CFO Chris Liddell.

Consider the Zune, Microsoft's answer to Apple's(AAPL - Cramer's Take - Stockpickr) wildly popular iPod. Set to launch in time for Christmas, the music player will represent an investment of "hundreds of millions of dollars" in development, manufacturing and marketing costs, according to Robert Bach, president of Microsoft's new entertainment and devices division.

How long it will take the Zune to make money isn't clear, but one of the scores of PowerPoint slides shown to the analysts indicated that it would be later than fiscal 2008.

That's no surprise. Even though the Zune will be cheaper to build than the Xbox 360, Bach outlined an ambitious -- and expensive -- strategy to build the brand. Bach said his plans for the Zune have much in common with the Xbox strategy, a blend of online, hardware, software and services.