Microsoft (MSFT) Makes It Case

July 27, 2007 by Douglas A. McIntyre

At a meeting with analysts and the press, Microsoft (MSFT) made its counter-intuitive case. The world’s largest software company intends to keep diversifying into internet advertising and hardware device, whether investor like it or not. Wall St. should look at the company’s three year prospects and not the current stock price. The future of the company is not just Windows, no matter how poorly its new businesses are doing.

The company plans to use broad distribution of its OS, e-mail, and MSN users to drive its search and online advertising businesses.

The company’s management understands completely that "investors who argued Microsoft should focus on its core desktop and server software business and forget businesses like digital music players and video games" make up the bulk of its shareholder base.

A look at the company’s most recent earnings show that the battle will be uphill. The company’s device and online businesses both lost money. The Xbox is up against competition from both the Nintendo Wii and Sony (SNE) PS3. MSN has to contend with Google (GOOG), AOL, (TWX), and Yahoo! (YHOO).

The interesting aspect of Microsoft’s plan is that it will not be satisfied to simply milk its OS and server software businesses. This would almost certainly make the company more profitable. Not is it willing to make huge acquisitions to try to solve its online and game system problems.

Microsoft will go it alone, with its huge cash flow and tremendous balance sheet, it can play in the markets forever, but it probably cannot play to win.

Douglas A. McIntyre