01/04 Kelly Letter Topics
Weekly market review
Seasonal rally
Abysmal manufacturing
Horrific housing starts
Crumbling consumer conf
Rising oil price
Obama's cabinet
Is the Fed a failure?
Platinum 5-star stocks
Market forecast on track
Oil price trends
When to short Treasuries
Wrapping up this week's look at why Microsoft's business has grown while its stock price has not, CJ sent along the story of how Mike Kavis worked for one year without Microsoft products in a Microsoft office environment. He has "not used a single Microsoft product at work. It has been one year now and I have survived with Thunderbird and Evolution, Open Office, Firefox, and many other open source replacements for Microsoft products."
The open source experiment was a success, "nearly flawless" in his words. He was especially enthusiastic about Open Office, which "worked remarkably well both receiving Microsoft Office files and creating files in Office format. I exchanged literally thousands of documents between Microsoft Office and Open Office. I never encountered a single issue with Word and Excel and occasionally encountered minor formatting issues with Power Point files. The formatting issues were nothing more then some minor placement issues which probably occurred less than 5% of the time."
That led CJ to say that, more than Google Docs, "the compelling threat to MS Office's revenues to me is your argument that users can easily convert between file formats these days."
CJ is not worried about Google Docs yet: "My first inclination is to think that until Google Docs has a strong off-line story, they will not put much of a dent in MS Office's revenues. Licenses with businesses is where the MS Office suite makes its recurring income, and I don't believe many businesses are going to get on board with the cloud computing concept anytime soon. Many businesses have their own in-house variations of cloud computing using a VPN connection. I have a hard time understanding how businesses will justify trusting third-party vendors with their vital data when they can do it themselves."
That last point is probably valid, but notice the hints at the idea that it might change in the future. This is not a criticism of CJ's point, just a confirmation in my mind that what investors are unsure of is Microsoft's future -- and have been for the past eight years. Its currently installed base of products is still growing revenue and profits, but the what-ifs are adding up:
What if cloud computing keeps growing in popularity and becomes as accepted as online shopping and online payments? I remember when people hesitated to buy from Amazon.com because it required using a credit card online. Then people said PayPal had no future because it wasn't a real bank. Online money? Who would ever trust that? How quaint those early concerns seem in retrospect, and we're only talking ten years ago. Now that Amazon.com has been hassle-free for so long and PayPal is bigger than American Express, nobody talks that way anymore. It could well go the same way for cloud computing. If so, the MS Office franchise looks shaky indeed.
What if people realize that they're finally free to use any operating system they want because they can use any applications they want online or freely downloadable ones offline? What if Mike's one-year experiment becomes the norm, not the interesting case study? Then, the Windows franchise looks shaky.
What if Google really does have the internet permanently locked up? It could keep growing revenues as its search share grows and leave Microsoft with no online business model because it has no serious advertisers to tap for an ad-supported online application environment and can't charge because all its competitors make their apps available to users for free.
This week has been a search for the reason investors have refused to pay up for Microsoft's growing earnings, a trend that has left the price of MSFT stock flat for the past eight years. I think the best answer is that Microsoft's business model is still working, so it hasn't changed. Pro-Microsoft investors would say, "Don't fix it if it ain't broke." Doubters would say, "It is broke but you just don't know it yet."
For the past eight years, the doubters have dominated in the market. We'll see down the road whether the pro-Microsoft gang is right that the company's business model is not broken.
