Revenues approached $70 billion last year, profit margins well north of 25% and rising. The stock is up 19% year-to-date. The company could nearly pay out its whole debt from cash (short-term investments are four times bigger than the debt load) and revenue prospects from the launch of Windows 8 later this year look extraordinary.
Yet, the stock's price-earnings ratio remains mired in the low teens. OK, Bing is still losing money. Yes, Windows Phone is still a failure. Tablets remain untapped. Game growth is slowing. But despite a stock price rising twice as fast as that of Google (GOOG) over the last year, investors are willing to pay twice as much for Google's earnings.
Why? Here's my theory: The cloud.Cloud is growing like gangbusters. Clouds save money by reducing the need for servers and other hardware, they make arguments over operating systems a thing of the past, they let companies such as Facebook scale in Internet time, and they're a market Microsoft has to be big part of in order to make it to 2020. Microsoft has a public cloud called Azure, but Amazon.com (AMZN) still has an estimated 90% of that market. Microsoft also has a Cloud Services Architecture, but you never hear about it. Its customers are called slow to the cloud, wedded to Windows. Inside the cloud problem is another, bigger problem, one Microsoft has struggled with for a decade: Open source. This week Microsoft moved to isolate the problem by putting its open source eggs into one basket, Microsoft Open Technologies. The recent move of rival VMWare (VMW) explains why. VMWare, which has acted as a sort of Oracle (ORCL) in the cloud space, with its proprietary virtualization system and kernel, is now pushing its Cloud Foundry Platform as a Service (PaaS) offering as very, very open source, even severely open source. It is. The software is offered under a standard Apache license. Just like Citrix's (CTXS) CloudStack infrastructure. And Rackspace's (RAX) OpenStack infrastructure. Microsoft may have alliances with these companies - it has a tight one with Citrix - but it remains outside the cloud mainstream. That's because cloud is the first new enterprise architecture developed in the age of open source, and despite Microsoft's many contributions to open source - it has given away a ton of code and hosts the Codeplex repository - open source remains a foreign country to Microsoft. Jean Paoli, who heads the new open source unit, accidentally gave away the game in a blog post: "This new structure will help facilitate the interaction between Microsoft's proprietary development processes and the company's open innovation efforts and relationships with open source and open standards communities." There's Microsoft, there's open source, and the two are separate. Companies like Microsoft talk about open source as "giving your code away" but that's not how it works. The code benefits enormously from the exchange. It gets developers who both improve it and build on the platform. Microsoft will only be able to facilitate interaction and only have relationships with open source. There will be none of that exchange of intellectual assets, the open give-and-take of a truly collaborative process among developers, that is the telltale heart of open source, the key to winning the "developers, developers, developers" who are in turn the key to success in software. In a coding sense Microsoft will always be the priest at the wedding, trying to exert authority, but unable to truly engage in the mysteries of what follows. This makes Microsoft's future look very cloudy indeed.
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