On the death of Microsoft

Back in 2009, I placed both Office and Windows, the sources of Microsoft's revenues, on my Technology Deathwatch list. 

The rapid shift to the cloud, the mobile web and to smartphones, that I assumed at that time would occur over the next 5 or so years, would fundamentally shift the "personal computing" landscape.

Microsoft probably wouldn't be able to keep up. And even if it could, the massive revenue and profit-generating machines of Office and Windows would not survive. At least, not as we understand these services. After all, dinosaurs may evolve into birds, but in doing so become something completely different.

Last week, Forbes ran a devastating piece on the *future* of Microsoft. It's not a pretty picture:

When a company hits a growth stall, 93% of the time it will be unable to maintain even a 2% growth rate. 75% of the time we can expect it will fall into a no growth, or declining, revenue environment.  And 70% of the time it will lose at least half its market capitalization. That’s because the market has shifted, and the business is no longer selling what customers really want. No matter how hard management tries to recapture the past, customers have decided to move on.

At Microsoft, we see a company that has been completely unable to deal with the market shift toward smartphones and tablets:

• The overall PC market declined by 2% last quarter
• Consumer PC shipments dropped 8% last quarter
• Netbook sales plunged 40%

Stalled company management will tout earnings growth, even though revenues are flat or declining.  But smart investors know the ongoing effort to “manufacture earnings” does not create long-term value.  They want “real” earnings created by selling products customers desire -  creating incremental, new demand.  Success doesn’t come from wringing a few coins out of a declining market – but rather from being in markets where people prefer the new solutions.

Not all earnings are equal.  A dollar of earnings in a growth company is worth a multiple.  Earnings in a declining company are, well, often worthless.  Those who see this early get out while they can – before the company collapses.