Microsoft ( MSFT) 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
Bach said it will take three to five years to gain significant share in the portable-player market. The company will start by launching the Zune in the U.S. and move on to other countries and new kinds of players the following year. Then there's Online Services, which will soak up $500 million of the $2.7 billion in extra spending. The company's MSN division alone lost $26 million on sales of $561 million in the fourth quarter at a time when other online players are growing strongly. When will the red ink turn black? Microsoft won't say -- but the company's commitment to a strategy of making the Web and software services a key part of every single thing it does -- came across loud and clear. "It's our aspiration to create seamless Web, desktop and mobile experiences for all activities relevant to users and customers in all our markets," said Ray Ozzie, who succeeded Bill Gates as the company's chief software architect. "This new Web-based value delivery model has turned the technology industry on its head, from design to development to marketing and sales and customer relationships." One very simple example: Users of the next version of Outlook will be able to access their calendars via the Web by using the company's Windows Live platform. Moreover, users of both the Xbox 360 and the Zune will be given multiple opportunities to play (or share) music online as a way of building virtual communities, a recipe Bach called "our secret sauce." Advertising, not something at which Microsoft has ever excelled, is becoming a major concentration. "We have an absolutely relentless focus on advertisers," said Ballmer. "I'm probably spending more time today with advertisers than I am with enterprise customers." It's worth noting that nearly all of Microsoft's profit comes from its core businesses, including Windows, Office and various server products, so Ballmer's decision to allocate so much of his time to a money-losing business seems significant.
The way Ballmer sees it, Microsoft is a company with two cores -- its desktop business and its server-oriented businesses. And he's quick to remind listeners that many analysts said the company, which started out with just a desktop business, would never succeed in the world of servers and the enterprise. It has, of course. Now, he wants to make online a third core and entertainment the fourth. Don't think Ballmer will give up on the new strategy very easily. "There is nothing that we have undertaken -- with a couple of exceptions, like Microsoft Bob, that I'll cop to in advance -- where I'd say, 'We have decided that we have not succeeded, and let's stop.' We've either succeeded, or we're still telling you we're going to succeed," he says. (Microsoft Bob was a poorly conceived attempt in the 1990s to make a cartoon-like character a major part of Windows.) Interestingly, the analyst meeting at which Microsoft focused more on noncore businesses than ever before was the first in which Chairman Bill Gates, on vacation in Africa, did not attend. "I have to become the full-time champion of innovation. Because if you look at the four things that will really allow us to both succeed in the marketplace, change the world, grow and drive shareholder return, innovation is the foundation," Ballmer said. How did Wall Street react to all this? in a word, nervously. Some investors were bothered by Ballmer's "champion of innovation," remarks, taking it as a signal that he will move away from day-to-day operations, an unlikely eventuality. But the greatest fuss of the day was caused by Kevin Johnson, co-president of the Platform and Services division, when he repeated the company's prediction that Vista, the next version of Windows, will meet its deadline of business availability in November and consumer availability in January unless a major bug or other flaw surfaces during testing.
His remarks, both in tone and in substance, were nearly identical to statements other Microsoft executives have made in the last few months, but many investors, with some encouragement from the media, took them as an indication that the long-delayed operating system is likely to be delayed yet again. The stir knocked the company's stock down by about 2% on Thursday. (It closed Friday up 1.6% to $24.25.) Some investors, though, convinced that the long-frozen stock needs a shock, seemed pleased. "They have some great opportunities to go after markets that can add meaningfully to the top and bottom lines," said analyst Pat Becker Jr., of Becker Asset Management, a holder of Microsoft shares. Becker, who noted that it is difficult to move the revenue needle when a company is as large as Microsoft, said the heavy investment in Xbox 360 is likely to pay off, because Sony ( SNE) faces manufacturing problems likely to keep its upcoming Playstation 3 console in short supply when it debuts later in the year. Although Ballmer & Co. stuck to their guns all day, that's not to say they were cavalier. The phrase "shareholder value" was repeated often, and Liddell essentially apologized for surprising investors in April with the news that Microsoft will up spending by some $2 billion to become more competitive with online powerhouses such as Google. "We had a disconnect in the third quarter from the way we think about the company and the way you think about the company," he said, promising to make it easier for analysts and investors to hear from Ballmer and top brass. Given the bumpiness of the road mapped out Thursday, investors will probably put Liddell's promise to the test long before the next analyst day.