Microsoft is turning to search, services, and the cloud, but what the company really needs is a game changer.
3. Go Deeper Into Services
If Microsoft can't continue to make fat profits selling software, where can it turn for income? The answer should be clear given the mergers and acquisitions activity of the past year. Hardware makers Dell and Xerox, faced with similar commoditization of their product lines, stocked up on tech services companies.
Dell took out Perot Systems for $3.9 billion, and Xerox bought ACS for $6.4 billion. IBM, meanwhile, went down this road several years ago by divesting low-margin products and focusing on outsourcing. HP followed suit in 2008 with its $13.9 billion buyout of Electronic Data Systems.
Services are hot because they provide an ongoing source of revenue, rather than just one-off purchases. And while software is getting cheaper and cheaper, it's not getting any simpler to use, maintain, or integrate with other systems. Consumers and businesses are always going to need ongoing support for their tech buys, meaning continued strong demand for services.
Microsoft to date has been a bit player in the services market, choosing to participate mostly through its Avanade joint venture with Accenture. Yet 2010 must be the year the company puts its $37 billion cash reserve to work in aid of becoming a larger participant. Buyout candidates include Computer Sciences or a mid-tier offshore vendor.
4. Ditch The Zune
Microsoft needs to stop spending time and effort, not to mention money, in markets where it's already lost the battle. The best example of this is in the MP3 space, where Apple rules with its iPod, and everything else, including the Zune, is an afterthought.
Despite a bevy of promotional and marketing efforts -- such as custom designs and an HD unit that shipped in August -- Microsoft continues to play the role of also-ran in the MP3 market and that's not going to change, ever. Sales of Zune and related products were off 14% in Microsoft's most recent quarter, and market share was insignificant compared to the iPod. Microsoft needs to admit Zune was a failure, cut its losses, and get out.
5. Buy Yahoo
On the other hand, Microsoft needs to go all-in with Yahoo and just buy out the company already. Redmond is having only marginal success building out its Bing search brand, with a global market share of just 3.26% in December. That's not because Bing is not a decent search engine -- it is. Rather, it's due to the fact that Google, with 85% percent of the market, has become far too entrenched in consumers' minds as synonymous with Internet search. Even a Microsoft executive recently told attendees at the Interop tech conference to "Google" his contact info, rather than "Bing it."
Yahoo is still the leading Web portal and is the richest site for general interest content on the 'Net. Adding the Bing search tool to Yahoo's pages would bolster search traffic considerably. True, Microsoft's current alliance with Yahoo calls for just that, eventually. But the deal involves complex revenue sharing formulas, dicey traffic guarantees, and technical integration challenges sure to hamper execution. Six months after its announcement, the companies still haven't closed the deal and it's unclear when that will happen.
Yahoo shares are currently priced at about $16.00; it's time for Microsoft to tear up the old deal and go hostile, if necessary.