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October 08, 2007

Comments

Victor Cook, Jr., New Orleans, Louisiana

Joel,

Thanks for your comment. One important difference between Microsoft (now) and IBM (then): when Lou Gerstner made the decision to not break up the company and shift the emphasis to services, management was throwing money down the drain, not theoretical money (like MSFT today) but actual money. So what difference does this make? Motivation.

For IBM in 1992 it was a fundamental question of survival. Not so for Microsoft in 2007. As a result they stand to suffer much greater opportunity revenues losses, because they don't need the money. A hungry animal will take risks a healthy one would never accept. See my April 9, 2007 post on "Microsoft + DoubleClick?"

In that post I introduce a measure of competitive power I call "Gerstner's Rule" because I found it in his book "Who Says Elephants Can't Dance." By the way, this book is a must read. A fascinating inside account of how Lou Gerstner turned the company around.

Joel Yarmon

Victor,

Interesting article. It's important to have the long view. IBM has totally transformed itself from a product company to a service company. Sure they still make big iron, and their R&D is top notch, but IBM Global Consultants will continue to increase their percentage of revenue for the company as a whole over the next decade.

Microsoft is in a similar situation, and should perhaps be compared more to Apple than Google. Microsoft never invented a single product for the first 20 years of their existence. Everything from DOS to Excel was licensed or purchased from other folks. Microsoft can afford to 'lose revenue' to remain relevant with Google, but lets not forget about their other ancillary businesses that, so far, Google hasn't encroached upon. The xbox/gaming division is making up a bigger and bigger part for Microsoft. Halo3 did $300mm sales in its first week! Their push into the digital living room is obvious with the triple play of the Xbox360 (media center), Xbox live (MSFT Itunes) and the Zune (iPod). In spite of all this, I don't believe Microsoft has turned a profit yet on its gaming division. As recently as a year and a half ago, I remember reading articles saying Microsoft was losing over $200 per xbox sold, and a quick Google search points to the company still losing over 70 bucks per unit (http://www.cnbc.com/id/21195260).

Bottom line: Microsoft, like IBM, has enough cash on the balance sheet and has been around long enough to take financial hits while reorganizing into a company that's fit to compete for the 21st century consumer's dollar.

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