Some people are talking of shorting MSFT. I have been thinking that Microsoft has been targeting new heights. I've been reading a few commentaries in Business Week, by Amy Cortes, and find that some of the statements in the article very bullish for Microsoft. Maybe the fact remains that it has run much ahead of itself and there may be a 10-15% correction before it goes ahead, but with what I've read, I would like to bring to the attention of the thread that the following issues have been raised in the commentary.
Microsoft Chairman feels that unlike the railroads and oil companies that inspired the Sherman Act 100 years ago, Microsoft is not increasing prices on captive customers, rather, the prices are coming down while the power of the software is improving.
My observation is that falling software prices does not mean that Microsoft profits are going lower, because Microsoft is only giving away products where they want to build the market share, otherwise, chances of higher profitability over longer term horizon are increasing as Microsoft emerges in a perfect monopoly position. The facts are that an ordinary customer does not know that retail prices for Windows and Microsoft Office packages have dropped, but in the computer industry and corporations, without Windows most PC makers would be out of business, so they're paying more for every new version of Windows - around $35 for Windows 3.1 vs $40-$60 for Windows 95, Windows NT for workstations, Windows 95 successors will double the cost. Even in falling prices for microsoft processors, PC makers are paying an average of $216, far more than $103 in 1990.
Other places where Microsoft is making big inroads in microsoft pricing power is corporate sales of Office Suite that combines several programs in Excel spreadsheet and Word in one deeply discounted bundle. Office has 87% of this market and cost of corporate license in most cases is headed up. Microsoft has been quietly boosting annual revenue per PC by stopping corporate customers from using their software at home at no extra charge. Also, in December it phased out concurrent licensing which allowed a company with ten thousand employees to buy a license for just 2000 if no more than 2000 would use the package. Now customers negotiating new licenses will need to pay for a copy of Office for each of its employees. Although this means that price per copy might be lower, but overall cost will just soar. Businesses, interviewed by Amy Cortes, believe that the budget on Microsoft projects will keep increasing because once a business commits to Office and builds applications with it, the software becomes the fabric. Companies have no other alternatives and most probably this combination of per processor licensing, no home usage, and recent changes made in maintenance plans will boost the cost of software significantly and of course increase the revenues of Microsoft. It is expected that Office sales may rise over five-fold in five years. Users of Windows NT and back office Suite of server programs should expect that once Microsoft establishes market position, they will eliminate concurrency positions.
The above article which has been condensed from Business Week, clearly indicates that shorting MSFT on fundamentals itself can be very tricky. Of course if the Tech sector tanks, MSFT will also suffer but I think its nice to keep at the back of the mind that MSFT by changing a few rules of the game can boost its balance sheet. |
