Increasing profitability – microsoft’s new strategy


Microsoft earns over half its revenues and most profits from its window operating system and office, a collection of applications for personal computers. Despite a near monopoly over the workings of the world’s PCs, however growth is flagging. The introduction of a new Windows vista operating system next year should provide a boost, but it is unclear precisely how Microsoft can expand further.

Bill Gates has a reputation of giving things away. Through his charity he has donated $30 billion to the worlds needy. He recently utilized much of his time to see it he spent well. To the appreciation of Microsoft’s investors of Gates’ software firm announced that they would return $40 billion to the shareholders in the form of share buy backs.

But this latest decision was not a matter of philanthropy. The firm’s latest quarterly results only caused ripples down Wall street because of the announcement that only $20 billion will be returned to shareholders through a tender offer sometime in August and another $20 billion given back by 2011. The software giant managed to rake in net profits of $2.8 billion in the three months in the quarter ending June. But despite this wild profitability its share price has been stagnating.

Microsoft acknowledged a couple of years ago that accumulating and sitting on a vast pile of cash has few benefits. In 2004, responding to pressure from analysts and institutions, it announced that it would buy back a gigantic $75 billion and pay a juicy dividend too. That seemed to be a sign that it would eschew acquisitions, costly and risky diversification, or huge boosts to R&D budgets.

Microsoft has still been prepared to open its wallet. But forays beyond its core business into the burgeoning online market have yielded few profits. Xbox, Microsoft’s games console, has grabbed a share of the market but despite heavy spending it still lags a long way behind Sony’s Play station.

MSN through its online presence has wrested a small share of the online advertising market and a huge amount of traffic. But it still runs at a loss and the investors are unimpressed. In April the software giant said that it would increase its spending on online products and other new markets by $2.5 billion, mainly to compete with Yahoo and Google. Its shares plummeted, wiping $32 billion from the firm’s value in one day.

But the need to adapt is pressing. Microsoft’s particular concern should be its main cash-cow. Its dominance of the PC market could come under pressure from online applications. Rather then buying software in a box, consumers are increasingly able to download it from the internet. Microsoft has responded with plans to develop its online software.

Handing over the company’s war chest to investors may not seem like the obvious best response to these threats. Microsoft still has big cash reserves and it is clear that the company needs to concentrate on making its management structure nimbler and more innovative. Last year the reorganization that got the Window division and the internet more closely aligned was a good start.

The news is that Steve Ballmer, Microsoft’s CEO is personally looking at the start up firms of Silicon Valley in search of the next big thing. Microsoft has bought some 20 small tech firms in the past year. This is encouraging. In the end it is ideas rather than money that will keep Microsoft ahead of the pack.