What's Branding Got To Do With Stock Price?

Steve Ballmer circle hand

Photo: AP

Recently, Business Insider posted a provocative article titled “10 Crazy Ideas to Send Microsoft’s Stock Price Soaring – And Why They Won’t Happen.” It’s a good summary of the various ideas put forward over the years by employees, investors, and analysts for pushing up the stock price. As a stockholder myself, the article hit home and punctuated the still unanswered question: why is Microsoft’s stock price underperforming?Just last year Apple surpassed Microsoft as the most valuable technology company. This claim was based on the value of the combined outstanding shares of the company. It was an event that could have rightly caused the uncorking of more than a few champagne bottles in Cupertino. I can tell you it was an event that produced some grinding teeth in Redmond.

The stagnating MSFT share price has long been a gripe of Microsoft shareholders. So while the issue was not new to the spotlight, Apple’s ascent to the top tech spot did increase the wattage. The fact is that in the past five years (reporting dates from June 12, 2006 to June 1, 2001) the MSFT share price only moved from $22.10 per share to $24.42. That’s an increase of just 10%… over five years! Compare this to the stock movement of Microsoft’s chief competitors over the same five-year period:

Apple       $58.83 → $345.51; up 487%

Google     $386.57 → $520.90; up 35%

VMware   $55.55 → 97.30; up 75%

Oracle      $13.47 → $34.22; up 154%

IBM          $77.95 → $167.50; up 114%

So why is the Microsoft share price stuck? Let’s start with a few facts that make the question so confounding. The first, most obvious, thing to point out is that Microsoft has achieved impressive financial performance. Take a look at the most recent quarterly earnings report for FY11, Q3:

“Redmond, Wash. – Apr. 28, 2011 – Microsoft Corp. today announced third-quarter revenue of $16.43 billion for the quarter ended Mar. 31, 2011, a 13% increase from the same period of the prior year. Operating income, net income, and diluted earnings per share for the quarter were $5.71 billion, $5.23 billion, and $0.61 per share, which represented increases of 10%, 31%, and 36%, respectively, when compared with the prior year period.”

The reward to the stock price: Nada.

Another possible reason to review and reject is that Microsoft isn’t delivering on its mission “to enable people and businesses throughout the world to realise their full potential.” Actually the company is doing precisely that! Windows 7 not only course corrected the performance failures of Vista, it went far beyond by delivering an elegant and powerful OS – beating its own revenue projections by leaps and bounds. Its Server and Tools business is doubling down on cloud computing and achieving impressive successes.  Its Office division continues to innovate the nearly ubiquitous suite of productivity apps with a steady stream of advances to Office (Office 365 delivers a solid web-enabled experience), Exchange, and SharePoint. And its Entertainment group can add the holiday 2010 debut of Kinect to its consumer line up that features the tremendous success of Xbox and Xbox Live—and make no mistake, this brand’s leading foothold in streaming media into the livingroom is hugely valuable. In sum, aside from a still struggling mobile offering, Microsoft’s problem is not an inability to produce high quality, innovative tech solutions and products. Which by the way, drive mountains of income back to the Redmond giant.

So what on earth is the problem? I have a thought. And it’s this: Microsoft continues to be dogged by a lingering perception that it’s simply not at the forefront of what’s really happening in the marketplace – at least not to the extent that the market perceives competitors like Google and Apple to be leading and heading in the right direction. To support this notion I have two data points.

First, I recently was speaking to a business class at the University of Washington. Imagine about 40 students in their early (very early) twenties. I asked for a show of hands … “If over night I was to make all the Google in your life go away so you awoke to a Google-free world in the morning, would you feel the loss in a way that would make it hard to get on with your day?” All but one hand was raised. This deserves a moment of pause. Think about that. Next up, Apple. Same question. This time roughly ¾ of the hands were raised. Again, a pause is deserved. Finally, Microsoft. Wait for it … one lone hand was raised. One. I then pointed out to everyone in the room that each one of them relied on PPT for presentations, depended on Excel for data analysis, used Word for crafting papers and did all that work on a PC powered by Windows. On top of that many in the class spent way too much time on Xbox Live. Yet despite this functional dependence, the love just wasn’t there. This group of Millennials just wasn’t feelin’ Microsoft.

The second data point is more purely academic.  In 2008, Professors Mizik from Columbia University and Jacobson from the University of Washington (as it happens, a former T.A. and professor of mine, respectively) authored a paper in the Journal of Marketing Research, titled “The Financial Value Impact of Perceptual Brand Attributes.” Like most journal papers it was thick with heady equations and statistical wizardry. But even I got the upshot of the papers big aha:

“We find that relevance and energy provide incremental information to accounting measures in explaining stock return.”

While this is pretty straightforward language for a research paper, I’ll go one farther in simplification … If the market perceives a company to be delivering products that are relevant to consumers’ lives and does so in a way that exhibits innovation and dynamism (the two parts of energy, per the study), then the market rewards those companies by driving up their stock price.

Short of a better reason, this could well explain Microsoft’s stagnant stock price.  The market simply doesn’t perceive Microsoft as being as relevant or as energetic as the companies with which it competes.

And why is that? I have a thought about this as well. It’s a two-parter, but each packs quite a punch on its own. First, unlike Google, Oracle, VMware and IBM, which are all monobrands, i.e. they go to market under the one corporate master brand, and unlike Apple which goes to market under obvious Apple-endorsed product brands such as the iPhone, iMac, iPad, iTunes, and now (did you see it coming?) iCloud, Microsoft is a mixed bag when it comes to branding strategies.  To be fair, Microsoft has a far more complex portfolio of offerings from its massive commercial server business to joysticks for hardcore gamers—and everything in between. The core problem is that the branding strategy of going to market with so many – often un-endorsed by Microsoft (at least until very recently) – brands chokes the brand equity flow that should be accruing from bing, Xbox, Windows, and Kinect to Microsoft.

The second part to what I think is driving Microsoft’s lack of perceived innovation and dynamism is that they don’t do much to fix the perceptual deficit. And by “not much” I really mean way too little to make a dent. Consider that Microsoft spends over a billion dollars per year in combined marketing spend. So ask yourself, what did you think of the last corporate brand ad you last saw from Microsoft? You know, the one that touted all their inspiring innovations and cool, market-leading products and services? Can’t quite recall it? That’s because it was four years ago with the Your Potential, Our Passion campaign. During 2007 while the campaign ran, the MSFT stock price continued a fairly steady upward march to a high of just over $37 in October. We’ll never know for certain to what degree there was cause and effect, but I think it’s more than mere coincidence. Contrast this to Apple’s always-on efforts which today are realised in a TV spot that depicts the iPad and voices over how it enhances the lives of CEO to children and ends with the promise that they’re “just getting started.”

The conclusion is simply this. It’s not enough for Microsoft to perform well, it must be perceived to perform well today AND make people believe that it’s got the moxie to keep it going on well into the future. That is a brand issue. Until Microsoft makes the appropriate investment in a corporate brand campaign that will tell its impressive story to the same billion people who daily rely on its product, sorts out its brand architecture in a way that allows equity to accrue to the corporate brand from its successful commercial and consumer brands, and sustains the activity with relentless consistency, I believe the company will continue to see its stock price stagnate.

A final, personal note to Steve Ballmer – should you be reading (hey, stranger things have happened): I’ll bet you $1000 that if you spend a paltry $100m on a corporate brand campaign, and the proper maths is done, you’d find the bump in stock price would deliver one of the greatest ROMI triumphs on record. If you want to take the bet, email me: [email protected].

Rob Osler is Senior Director of Brand Strategy in the San Francisco office of Anthem Worldwide, the strategic design division of Schawk, Inc. His previous positions include director-level roles in brand strategy for Microsoft, Wongdoody, Intermec, Western Wireless, Landor and Fitch. http://www.anthemww.com

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