How Microsoft can disrupt the tech industry again

By rethinking its acquisition strategy, the computer software and electronics company can be an innovator in growing sectors, such as cloud services, smart phones and teleconferencing

Microsoft’s stock has been stagnant as investors lose faith in the company’s plans for its future. After peaking at just under $60 a share in early 2000, Microsoft’s stock fell to about $22 later that year and has traded mostly between $25 and $40 a share in the 14 years since then. While revenue and earnings per share have more than tripled since then, the stock price has not followed suit. The question of why can be answered fairly simply: investors have lost faith in Microsoft’s future ability to control its core markets.  What Microsoft could do can be answered fairly simply: Take a page out of Facebook’s apparent strategy and buy best of breed next generation companies.

A Dual OS Strategy

I’ll focus on how Microsoft can improve future prospects by dominating three areas: Operating systems, development tools and conferencing. It’s clear that development is shifting to virtualization and the Cloud (at Azure we were early in understanding the importance of virtualization which led to being the only VC in VMware). Cloud IaaS is becoming the center of gravity for developers. According to The Cloud Market, Linux variants account for over 90% of the applications on Amazon’s Elastic Compute Cloud (EC2).  It seems clear from the EC2 data that a large number of developers prefer developing in Linux for the cloud.

Microsoft (MSFT) is losing many customers, who would prefer to stay with them, by not having a more robust integration with Linux in its cloud. While Microsoft claims to be supportive of Linux, other cloud providers like Amazon (AMZN), VMware (VMW), IBM (IBM) and Salesforce.com (CRM) are actually doing much more to support Linux. If one considers all devices, including smart phones and tablets (the Android Operating System is based on the Linux kernel), Linux’s unit share is about twice that of Microsoft Windows. I am not suggesting that Microsoft abandon Windows — it is still a great product with lots of legs, but I am suggesting that a dual OS strategy would give it an opportunity to:

  • Compete more effectively on smart phones and tablets
  • Have a cloud offering that all companies could consider for every application
  • Offer a lower cost server line that would be appealing
  • Have better retention of its corporate customer base

A way to put a stake in the ground is to buy best of breed Linux provider, Red Hat (RHT). With such an acquisition and its deep integration into Microsoft Azure, Microsoft would be well positioned as a leader in IaaS. In addition to Linux, Red Hat has a strong Open Stack player that could leverage open source application programming interfaces as a disruptive, strong alternative to Amazon Web Services (AWS). Such an acquisition would quickly become accretive as Microsoft’s reach into the Enterprise Linux workload could accelerate their short-term growth as a Cloud player and propel them into a dominant leadership position in the cloud.

Owning PHP

According to W3Techs, PHP is being used by over 80% of all websites (other estimates have it as low as 50%). PHP’s growth continues to accelerate on the backs of the shift to mobile and the rapidly expanding footprint of popular apps like Drupal, Magento and WordPress. Like Linux, it is a dominant tool for the next generation of cloud-based web and mobile applications. Microsoft should recognize the need to be the major player in PHP and acquire the market leader, Zend. I’m not necessarily saying this because Zend is in my firm’s portfolio, but rather because I believe the ownership of Zend would re-ignite Microsoft’s sway with developers. It also would better enable Microsoft to add features to its cloud offering that would optimize for those choosing to use PHP. This, along with a strong Linux position, would help Microsoft compete more favorably as a cloud provider. By having robust developer value creation strategies for both their traditional .NET base and PHP, Microsoft would be addressing the vast majority of web and mobile development and send a clear signal to the market that the next generation of applications should be built on Microsoft Azure.

The Future of Video Conferencing

The third suggested acquisition is a company called Double Robotics. Double offers a remotely controlled, robotic mobile teleconferencing system. A tablet is placed as the head of the robot and it displays the image of the person telecommuting. From anywhere in the world, it allows a user to have a physical presence in the office and speak to co-workers as if he or she were present. Skype is likely to come under attack from a variety of sources and getting out in front with a next generation product like Double would help Microsoft maintain share and increase revenue. Strong sales of this product could help increase Microsoft tablet sales. It would be important for Skype to continue to support the iPad as an option for the Double robot.

These three acquisitions, taken together, would show investors that Microsoft CEO Satya Nadella is changing the way the company operates by acquiring best of breed companies that position it to offer premier cloud services across all platforms, make its smart phones and tablets more competitive, increase its footprint in the server OS and be the innovator in teleconferencing. Putting this in perspective, Facebook has a lower market cap, less funds and weaker cash flow than Microsoft. Yet Facebook CEO Mark Zuckerberg spent $16 billion on WhatsApp fully recognizing the additional customer dominance in social that this provides. The cost of these three companies should be less than $16 billion and yet could have an even larger impact for Microsoft. Such exciting and relevant acquisitions by Microsoft would also likely payback not only in revenue growth but immediately in stock price.

SoundBytes

I’m adding this area to posts to provide quick thoughts about anything and everything.

  • Carmelo Anthony has to decide if he wants to be labeled a winner or wants to maximize salary. If he favors winning he should sign a one-year deal to go to Miami and play with Lebron no matter what salary he gets.
  • Microsoft showed a willingness to be more open with its recent announcement of Office for the iPad. But I view it as a necessary move to preserve share and a strong indication that the laptop is now close to officially dead and Microsoft’s tablet, the Surface, is in trouble. But I hope it’s also a sign that Microsoft is open to the sound advice in this blog!

 

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