Thanks for joining us! Steve’s now finished. Notes below. Watch the webcast live here.
This is a critical speech for Steve Ballmer, whose reputation has been damaged over the past six months. He did an OK job. He thinks Microsoft will succeed in search. We don’t. But Steve probably made best case he could.
11:48ET: STEVE’s ON
Boy, what a subdued entrance. No music, no applause, obviously no Monkey Boy.
Joke about auditorium bombs. Now standard blatter about innovation, competition, etc. Steve CARES about financial performance (this bullet obviously designed to address concerns he couldn’t care less about stock price).
Finally getting warmed up… Good Steve gutturals. Today about SHAREHOLDERS. Cares DEEPLY about financial success.
Our Mission: We’ve been moving beyond PC for 20 years. Server and enterprise. A lot we had to learn. Using this as an example of ability to go beyond PC, be successful, despite pooh-poohing of peanut gallery. [Here’s the problem with this analysis: Microsoft’s server business is still tiny relative to Windows/Office]. We’ve only been at Internet for 13 years. Phones/TVs same. Yes, still have a long way to go. We are coming on nicely. [Sorry, just not buying this.]
Our Stock Price: We care. Employees complain out our P/E ratio. Steve explains: we aren’t growing that fast anymore. But still 18% compounded last 6 years. This is indeed impressive, but multiple was sky-high to begin with.
WINDOWs is air we breathe. We need new releases. We’re working on it. We’re being attacked by a single competitor (Apple). Windows PCs getting smaller, cheaper (not good for MSFT financial performance until maintains unit price). PC engine healthier today than a year ago.
Mobile and Online: This is where market value has been created. We’re not where we want to be.
PROFITS: We’ve done well. We are cash generating company that can continue to return cash to sharheholders WHILE growing operating income [Translation: People, pay more for our stock already]
Talking through FY09 numbers. Nothing new. Most of FY09 Operating Expense increase is precommitted.
NOT changing stock comp policy. We are a GOOD payer, not a GREAT payer (total comp).
Enterprise vs Consumer
Lots of excitement around consumer. We see HUGE opportunities in enterprise. [Great: So Please just focus on enterprise.]
We are now arguably the world’s largest enterprise software company. [YES! And this is is where you should stay focused!]
Everything now remapping to world of Software PLUS Services. [No…it is largely remapping to world of SERVICES. Client software will continue to exist, obviously. But if Microsoft didn’t have so much vested in Client software, it’s unlikely that they would describe the world this way. In new world, software supports the service, when necessary. In old Microsoft world, service plugged into software.]
Rich client has different role. Must be easy, fun. [Got that right.]
Shift means risk? I say shift means OPPORTUNITY! [Love the energy, as always, but this opportunity also coming with big risks]
Consumer…we’re building off Windows and Office, which people already use. [Yes, this is true. But still a challenge. And it’s why it’s so critical the company focus on this business–which it still owns–instead of one it has already lost (search)]
Handles Kevin Johnson departure very well. Admits he wasn’t supposed to give Online presentation. Kevin gone, so you’re stuck with me. Finally, some laughter. [Also confirms that Kevin left of his own volition]
Why are we in search/online? Search a huge transformation in world’s economy. [YES]. It’s also a huge SOFTWARE transformation. [YES, but not the way Microsoft wants it to be, IMHO.] No paper in 10 years! [A stretch, but certainly more will be digital.]
So WHY ARE WE PURSUING? Because there’s a $1 trillion market being transformed. That is such a huge opportunity, we have to seize it. Need opportunities that big given size of our business. [Agree re size of oppty. But not the need to go after it.]
Online loss tiny relative to our business. So a good risk/return. How long will it go on? Not sure. Will be investment mode until we get scale. [Unfortunately, we’ve been waiting 13 years already. Google is 8 years old.]
ALSO, search is RIPE for innovation. Still sucks: 10 blue links. 50% of searches don’t solve problem [But 50% do. And Google WAY better positioned to add incremental innovation.]. Business model hasn’t been changed. [Neither has Windows business model…for a lot longer than search model.]
We will reinvent user model and business model. Harder for market leader to do this. [Yes, this is true, when the change is DISRUPTIVE. When it’s just incremental, market leader can sit back and watch others innovate and then steal the good ideas. Microsoft used to be great at this.]
Only two companies on planet have staying power and wherewithal to compete. [Only two BIG companies, yes. In search. But Microsoft has yet to demonstrate that this staying power will ever really lead to anything.]
Brian McAndrews takes over. Former CEO of aQuantive. A candidate to run Yahoo or Microsoft’s online business.
Uh oh, a classic Brian McAndrews Powerpoint chart. Might as well post a book on the screen. Utterly inscrutable.
Apparently is a map of world of advertising. Search, exchanges, networks, publishers, etc. Details on the thrilling remnant ad market. (Seriously low margin).
Microsoft enterprise. Atlas. Doubleclick competitor.
Big ad network: competes with Ad.com
Atlas Ad Manager, small relative to Doubleclick
Have players in each space. [Guarantee 90% of audience completely lost. Bombardment of brands, businesses, sell-side, buy-side, display, search, etc. Audience probably summarizing in minds as: “Talking about Microsoft’s ad business, which is running a distant third to Google and Yahoo and lost $488 million in last quarter.]
Need huge investment. This is scale game. [Everyone already sold on that one.]
Emerging media: We’re in every one of these, too. Games, mobile, display, etc.
InGame advertising [Small market, has developed much more slowly than expected.]
Mobile ads [Microscopic. Also developing much more slowly than expected.]
Video On Demand ads, partnerships with lots of big companies [Still small, slow to develop]
IPTV: We have software platform
Other: supermarkets based on what is in cart [Microscopic.]
Advertisers want one-stop shop. [Yes, but again, Google much better positioned to deliver it, and advertisers HAVE TO buy Google]
We will continue to invest in all media and platform. Lots of investment, but we’re excited.
STEVE TAKES OVER AGAIN
Financials of Online: 4 Business Lines.
Windows Live: Lots of users, pulls folks in. A “community play.” [Needs to explain what “Windows Live” is, because no one knows.]. A “good story” despite pricing pressure.
MSN: Expenses under control. Good contribution margin with leverage.
SEARCH: Revenue per searches should go up. Query volumes up 40% y/y. RD growing rapidly. Wildly unprofitable.
ADVERTISING: Reflects “other” business. Static story.
So search is creaming financials of whole division, but it’s mission critical. The starting point. Great business. Only business where people value advertising as part of the result.
This is a two horse race: Microsoft and Google. [Not yet]
Google still clobbering us. How do we fix?
Increase revenue per search.
Get more queries.
But to get more queries, need more advertisers. CATCH 22. This was where Yahoo came in. [Yes, but it’s not just about lots of advertisers. It’s also about consumers equating Google with Search. Most consumers don’t know and don’t care who is more relevant. They just think Search=Google.]
Revenue per search will not go up as fast as we want. Have to fix queries first. [And this, in our opinion, will take a lifetime.]
COGS not a variable expense. It’s a fixed expense. We won’t be as high as Google at $2.3 billion, but to index largest volume, we need to spend almost that much.
R&D: Google spends $2.5 billion, 70% in core search (they say). We need to think about $1.2-$1.5 just to stay competitive.
MARKETING: Google doesn’t have to. We do. [Exactly]
So when people say how do you lose $1.2 billion in this business…I say that’s how.
We are being smart and efficient with the numbers we put up. If we are going to be in this game and pursue this opportunity, we’re going to have to innovate, reinvent, and ante up. [Agree with all this. Where I disagree is odds of success. This is not just a muscle game.]
Will we succeed? YES! How?
-best and brightest
-We’ll get outside box
[This won’t do it.]
But…Steve acknowledges big, risky gamble
Nothing currently under discussion. Goes through whole schizophrenic takeover/search saga.
At right price and speed, would have been good tactic. At wrong price and too long, dumb. So we bolted.
Now people say “but you have to buy it.” No we don’t. It’s a “tactic.”
Now that we’re not going to blow $44 billion, we have more flexibility. We can now lose a lot more money on things like Live Cashback.
We can spend more on relevance [which won’t help search share.]
Will we never talk to them again? Answer: no. Never is a long time, big world. [LEAVES DOOR OPEN FOR MORE YAHOO CHATS]
Ends: It’s a two horse race. [Between Microsoft with 9% share and Google with 70% share… Never mind Yahoo’s 20% share]
Hands off to Microsoft Search Guru, Satya Nadella.
MICROSOFT SEARCH GURU: Satya Nadella
Need to pony up to increase index, improve relevance. We think we’re as good as Google in the US (on relevance). [If so, evidence that relevance won’t help gain share.]
Core innovation agenda: Simplifying tasks. Understand query intent as well as documents. Get to semantic understanding, help with TASKs. We are focused on commercial intent. High query volume, high interest.
Reinventing business model. Now it’s a $20 billion market. We can reinvent economic model. Live Search Cashback. [Like the aggressiveness and thinking here, but still no evidence it will lead to sustainable share gains. Payouts are too small to change behaviour of all but most cost-conscious shoppers. That is, if they can remember to bother.]
Going through innovations… [Here’s the problem. Google is watching this presentation. And checking Microsoft’s search 5X a day. What do you think Google will do if it sees something it likes? Copy it. Immediately. Before user changes habit. These innovations are not disruptive. They are incremental. And Google has some of the “best and brightest,” too.]
Product search: Include consumer comments. Sentiment analysis. All in search experience. [Flashback to epinions, etc. Isn’t it easier just to go to Amazon? This looks nice and sounds good. Again, though: If it’s really good, you’re going to see it on Google in a week.]
Cashback: Reinvention of business model. eBay seeing some fantastic traction: 50% better ROI. [That’s good news!]
So how the heck do we get people to know about Live Search?
1. Toolbar: Distribution deal with HP.
If search for XBox on Google, it tells you there’s a Cashback opportunity on Live Search. Seamless. [As long as consumer understands what a “gleam” is. That’s the little Cashback symbol.]
2. Facebook: Will launch web and paid search results in the fall. [This is new. Could help. Wonder how much they’re paying Facebook for the distribution. Will be interesting to see how it does.]
BACK TO STEVE
We are WITH you. We’re here to create great financial and stock performance.
- Broadest innovation footprint of anyone out there.
- Most fantastic innovation team
- Long-term tenacity [We’ll say. In this case, we think, to a fault. But extremely impressive nonetheless.]
Hands off to Robbie Bach… Peter Kafka taking over for SAI.
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