location based blog: DEAR STEVE BALLMER: Here's How To Fix Microsoft And Get Me To Buy Your Stock (MSFT)

The following "letter" to Microsoft CEO Steve Ballmer is written by a major long-time enterprise customer of Microsoft's who is now a technology investor. The investor does not own Microsoft's stock--and won't unless Steve makes some changes.

Dear Steve: When is it time to start worrying?

With the recent posts about Microsoft’s online business, and that group’s performance since 2005, I thought it makes sense to revisit the current course and speed of the entire enterprise, and what changes might make sense that could have a material impact on the strategic positioning of Microsoft.

Note: please recognize I do understand the details of the last quarter’s financial performance, but as a Microsoft investor and employee, you certainly can’t be taking solace in the stock’s performance over the last decade.

Here are six key messages for you and your senior managers, as you pursue better market performance for your stock.

1. Stop neglecting the enterprise opportunities

Look at the stock performance of Oracle (ORCL) over the last 10 years as a proxy here. I am always amazed at how little the tech press and technorati mention ORCL in any dialog about recent success within our industry. Love him or hate him, the one thing Larry Ellison has done has been recognizing the evolving enterprise opportunities that have emerged over the last decade, and moving aggressively to fill in gaps in his offerings through thoughtful M&A, and the market has rewarded him for it.

Microsoft v Oracle

I think Microsoft has huge opportunities in the enterprise space. That means a few things need to change, however:

Stop restricting your opportunity scan to things only 10 degrees off of your historical definition of “True North.” Your best assets go beyond your historical desktop and server software offerings – like ORCL, it also includes the value of your enterprise relationship and your sales force. Thing bigger. Look at the SUNW acquisition and its performance turnaround as an example of pundit-contrarian plays that have paid off. You have the balance sheet to buy companies that can bring $1B+ revenue to the table Day 1 – few others do. Not sure if all of the current Business Unit and M&A teams can get you where you need to be – sometimes it is hard to let go of the current playbook. Sometimes that means long-time friends and associates have to leave the island.

This sector is your highest confidence path for new product growth over the next 5-7 years. You don’t have to go way out on the risk/return curve to find success here.

Biggest note of caution: Don’t impose too much architectural baggage on your screen for acquisitions. Just focus on customer need, and delivering great customer support.

2. Don’t be a RIMM savior

As much as there is close linkage between the Blackberry and Exchange, and a solid beachhead within enterprises, the RIMM ship has sailed. Nothing you can do or add will change that.

If anything, you need to double down your efforts for providing great iOS and Android application experiences for your enterprise customers (crossing everything from Sharepoint to Exchange). If you need to evolve your Apple relationship to make that happen, it is worth it, in my opinion. As a current Exchange user living in an iPhone/iPad world, I feel I am getting a least-common-denominator experience using the Apple mail and calendar apps, and that is not a good thing for you.

3. Start operating as a loosely-connected federation

As much as you may feel you already operate in a more decentralized decision-making environment, you are multiple steps short of the finish line. Your future, your opportunities need to be influenced by more focused views of the unique markets each P&L head sees each day. You don’t need to spin things out – that is something you have always had fundamental issues with – but there are multiple successful large multi-national companies that have found new energy and growth by pivoting their organizational models (I think you see early indicators of that happening at GOOG over the last few months).

4. Double down on Kinect

There are bold new worlds out there, and Apple is not the only one leading the way forward. When you see the early-stage experimentation with the now-more-open Kinect environment, you see exciting things ranging from new gaming and media experiences, to things like robotics innovation.

If you want to strategically subsidize something, how about considering making the next gen Kinect something that rates more strategic investment. What does that mean? An integrated GPU within the device, for a more responsive experience, and a higher res cameras for much better facial and digit recognition.

Armed with a materially improved sensor environment, and a better-supported developer ecosystem, you can take a unique leadership position in a world less-coupled to the PC.

5. Double down on windows phone 7/8/9

While you have not yet cracked the code of getting the developer community activity engaged (mainly due to market share limitations), the cement is hardening of the mobile iOS user experience. There is less incremental change with each iOS release. That represents an opportunity (unfortunately, it is an opportunity Android is exploiting in parallel). It is the always-connected experience that will shape our future, and this is a bet you cannot afford to miss out on, regardless of what lumps you take along the way. For every Bing search deal you subsidize, that is one lost opportunity for funding your (and your partners’) mobile development efforts.

From a shareholder’s perspective, I would much rather see you diverting the $2.7B annual online division’s subsidy into a $2.7B mobile subsidy in the near-term. FYI, the Nokia deal won’t get you there, especially given their non-existent North American presence (and eroding emerging market share).

6. Stop having a strategy excessively influenced by env

At some level, MSFT seems to have had a strategy over the last decade way too influenced by an intellectual enemies list. It was IBM and Linux in the beginning of the last decade. Now it is APPL and GOOG. I have mixed feeling here. At one level, having a clearly defined “enemy” can energize an organization. At another level, it frequently manifests itself in “me too” product and service strategies. Apple and Google are so consumer-focused, they seem to be the wrong “enemies” for Microsoft, who, while having lots of consumer desktop/laptop OS and office productivity tool penetration, has not really proven that consumer product development is a core part of the MSFT gene code (I left xBox aside in this observation, since Robbie Bach has left the fold).

A world with limited choice is not one that has historically benefited the consumer. A strong MSFT, with more profitable cylinders in its engine, is achievable. It just will take a commitment to change. I hope the company is up for it. In the interim, I am leaving it out of my portfolio.

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