Thursday, August 08, 2013

Letter to Steve Ballmer

Mr. Ballmer:

As a long-time shareholder, I’ve sent a few letters to you in the past.  I sent one just a few months ago, which was intercepted by your haughty IR department which penned a self-congratulatory response.  This time I’ve chosen to post on Blogger (interesting that Microsoft doesn’t have anything like that, isn’t it?).

Last night I was reading Miguel Helft’s quite good article on YouTube in the August 12th issue of Fortune.  As I read it, I couldn’t help but wonder what would have happened if Microsoft, instead of Google,  had acquired YouTube.  Sadly, my conclusion is that YouTube have faded away, after becoming another goodwill impairment charge for Microsoft and perhaps then limping along like Digg. Instead it’s becoming a juggernaut under Google’s ownership.

Why is it that other entities have found a way to grow and expand over the last decade, while Microsoft has settled for a GDP growth rate?  Has Microsoft become sclerotic?  Does it have warring fiefdoms like General Motors in 2005? Is it an indecisive, directionless IBM pre-Gerstner?

I know this: if I had taken one third of my original investment in Microsoft and invested in Google, and another third and invested in Apple, I’d be far richer today.  Here are some ideas for your consideration:

1.       Return to stock options. I once worked for a supplier to Microsoft.  We marveled at your company.  If we missed a delivery date in Taiwan, or had a service failure in Scotland, people in Redmond frequently knew before any of us at our home office.  Dedicated, committed and motivated Microsoft employees were becoming multi-millionaires in their thirties from their stock options.  We were amazed at the speed and strength of your competitive response to Netscape, unleashing IE in seemingly no time.

Mr. Gates’ friend Mr. Buffet helped to convince him to stop being generous with options.  While I understand the argument that options are an expense, the situations aren’t alike. Mr. Buffet (and I’m a big Buffet fan) invests in mature, cash-generating businesses with wide competitive moats: Coca Cola, Jordan’s Furniture, General Re and other giant reinsurers, Burlington Northern Santa Fe railroad, as well as juicy preferred stocks from GE, Goldman Sachs and Bank of America.  He structures large cash incentives for the management teams but no stock compensation.  That makes sense in slow growth, cash-harvesting businesses.  But Microsoft’s competitors are still generating double-digit growth.

While the mandarins at the FASB and SEC require companies to account for options as a current period expense, one thing we know for certain is that options only get exercised if the price of the underlying stock goes up. I’ll happily accept increased stock option expense in exchange for a higher stock price.

2.       Move faster – a lot faster.  You had the surface technology for years, only to watch Apple build a giant business with the IPad. Your competitive product: The Surface - which isn’t bad-was launched with arguably the worst major ad budget TV campaign ever.  People dancing around a board meeting table slapping tablets?  I trust everyone near that project was fired long ago. When will the next Surface come out?  And the one after that?  My guess is that whatever your answer, it is too long.

Mobile computing was an obvious trend, but your response was years in coming.  When it finally arrived the Windows phone is pretty good.  But where is Skype? I distinctly remember the first time I saw a Facetime call on an IPhone.  Dazzling!  But Windows phones still ship without Skype?  And the cool new Nokia XXX won’t be available on Verizon for months? How are those things possible?  Beginning in September have all Windows phones ship with Skype as a button.  Ready to use with a click.  You have the power to make that happen don’t you?

Facebook was built on weekly releases.  Unheard of at the time-but they made it work. You should help/require Nokia and HTC to release updates at least quarterly, with larger screen, Skype-out-of-the-box versions for this Christmas.

3.       Buy back less stock, spend more internally.  How much stock has been repurchased over the last ten years?  The price still hasn’t caught up with the 1999 high, and is about the same it was in 2008.  If you have cash outside the U.S. and don’t want to trigger U.S. tax, put R&D and developers there.  There are star coders everywhere in the world now.

4.       Release cool new versions of Skype continuously.  Investors are generally surprised that you haven’t screwed Skype up (yet).  Where are the cool new features?  Where is the buzz?  I’ll bet the Skype team has hundreds of ideas on how to make it a better product.  Give them some money and some serious release deadlines.

5.       Tackle audio.  I know, Zune was a disaster.  But so is dealing with regimented, inflexible ITunes.  How easy is it to load music from a CD to a Surface and then sync with a Windows phone? If it takes more than 20 seconds and requires passing through endless security and license clicks, its too complicated and needs simplifying.

6.       Frigging show up.  Are you so above us serf shareholders that you don’t have to attend quarterly earnings calls?  I know that many analysts ask dumb-ass questions.  Trust me I know.  Niggling questions about basis point changes in tax rates don’t inform the majority of shareholders.  But you control the mike at the start and can talk about anything you want.  Tell us what is going on and what we can expect.