While the short run excitement is more around the Super Bowl, the longer term impact on the Seattle region will be from Microsoft. Since I was one of the top analysts on Wall Street following Microsoft (in a prior life), I feel well qualified to give some thoughts on the changing of the guard.

Satya Nadella Appointed as Third CEO in Microsoft History

Steve Ballmer is not given enough credit for the growth in revenue and earnings under his tenure at Microsoft. He was appointed as CEO in February, 2004. In the subsequent 9 years, revenue grew from $36.8 billion (FY 2004) to $77.3 billion (FY 2013) and earnings from $8.2 billion to $22.1 billion over the same period. That ain’t chopped liver! Under his leadership he made Microsoft into a powerhouse in the Enterprise (and succeeded with the consumer in Xbox and Skype). Microsoft is now:

1. The leader in productivity software by a country mile in the Enterprise (Google’s efforts don’t seem to be taking hold as well)

2. Dominates in email in the Enterprise

3. Dominates in server software in the Enterprise

4. The leading gaming platform with Xbox

5. The owner of Skype, the leader in video communication

Instead, the press and many analysts have focused on areas where Microsoft has had weakness. Key issues have included:

1. Losing ground with the consumer due to the emergence of tablets and smartphones (forcing Nokia acquisition)

2. Fears that as the platform transformed to the cloud, Microsoft would lose ground as other cloud providers had strong share

3. Weak support of PHP and Linux, the up and coming platforms for the web and Enterprises

4. Google’s domination of search seems to be more widespread even though Microsoft share bounced up a bit

5. Microsoft has no compelling entry or traction in social

These concerns have meant that the stock has not followed earnings and revenue growth. This contraction in its multiple is in direct correlation to the degree that analysts fear that Microsoft has become weaker in terms of future dominance as consumers switch to tablets and smartphones and Enterprises shift more towards the cloud.

The choice of Satya as the next CEO is a clear indication that Microsoft wants to protect the Enterprise franchise they worked so hard to develop under Steve Ballmer. While, he is a reasonable choice because of that, the future success of the company (and in the shorter term, the stock) may depend not only on how well he protects the Enterprise jewel in the crown but also on how he addresses these perceived weaknesses. He can do it in one or both of the following two ways. First, he can make aggressive hires of well-respected executives (outside the company) that can create credibility that Microsoft will be better positioned to address several of the perceived weaknesses. Second, he can be more aggressive with acquisitions, buying companies that are leaders in the areas that Microsoft is weak. Steve Ballmer already made one such aggressive acquisition, Skype. Once these acquisitions are made, it is incumbent on Microsoft to retain the creative, entrepreneurial executives that have built these companies.  Having John Thompson as Chairman will provide Satya with a talented mentor to help him Microsoft through the next phase of growth.

Seattle Seahawks Win the Super Bowl

In our last blog we made a grievous error, focusing too much on one side of our analysis. At the beginning of the blog we pointed out that the game was the irresistible force meeting the immovable object. Our work on how to analyze quarterback performance indicated a substantial advantage, on offense, for the Denver Broncos. Thus the irresistible force. What we ignored was the immovable object by picking Denver to win. The Seattle defense throughout the season showed itself to be the best defense in the league (as a 49er fan this is hard to admit and that may have impacted this omission!). Additionally, the Seattle special teams were superior statistically to those on Denver. And those strengths proved far more important in determining the outcome of the game. We erred in not making the analysis a 360 view of all factors for each team. We do not believe we erred in our conclusion that the key to Seattle winning throughout the season was their defense rather than their offense. So we do stick by our conclusion that if Seattle keeps that defense intact they can win with any of many different quarterbacks in the league. I ask the readers whether they believe that Seattle would have won that game anyway if their quarterback was any of the mid-tier of quarterbacks in the league instead of Russell Wilson.  To me it is similar to the fact that San Francisco got to the NFC title game three years in a row with two different quarterbacks substantially due to their defense. And while Kaepernick tends to get lots of credit for them reaching the Super Bowl last year, they would have reached it with Smith as quarterback in the prior year had their punt returner not fumbled twice. So we salute the Seattle defense. But the 49ers will be back in your face next year!