TechWeek: The Trouble With Being Microsoft

As you can tell from the mug shot, I've been around for a while, and I've been thinking about a story I covered back in the early 1980s: the decimation of heavy industry in California.

The causes were legion, but remember that this was long before trade agreements such as NAFTA, outsourcing and digital technology created the global economy. Simply put, American managers, particularly those in the steel industry, traded long-term growth for short-term profits, and in the end got neither.

I'm reminded of this because of a conversation about Microsoft (MSFT) I had this week with Marc Klee, a portfolio manager with American Fund Advisors. We were discussing Microsoft's announcement that it will spend approximately $2 billion more than expected in fiscal 2007, and the market's sharply negative reaction to the news.

Klee noted that the stock took an 11% hit the day after the earnings report, a swan dive that chopped some $30 billion from the software giant's market capitalization. "American companies, he mused, "get criticized for not investing in the future. And it appears that they also get criticized for investing in the future."

See the parallel? Investors have been all over Microsoft -- and with good reason -- for some time, complaining that management hasn't done enough to unfreeze the company's stock. Now it appears that Ballmer and Gates have gotten the message, and what's their reward? A $30 billion slap in the face.

Sure, there are plenty of reasons to be skeptical. Microsoft does not have a great track record of delivering innovative new products, particularly when it strays from its core Windows/Office/SQL Server business. "Given Microsoft's 's recent struggles in the Internet space, many investors question the utility and wisdom of spending even more money to pursue what appears to be a losing battle," said Sanford W. Bernstein analyst Charles Di Bona. "In the absence of greater insight into the spending, its necessity and its potential returns, the concern is that the spending is a waste," he continued in a note to clients this week. (Di Bona, by the way, has an outperform rating on Microsoft, and is not negative about the company's new direction.)

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