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Is Microsoft Becoming IBM?

Quick name this company:  It has been one of the fastest growing companies in America for the last 20 years.  It is now arguably the most powerful technology company in the world.  It is feared by its competitors and grudgingly tolerated by its customers.  It invests massive sums into a research division that has some of the best computer science minds in the world.  It has been sued for anti-trust violations and anti-competitive practices.  It has entered into a government consent decree that limits its freedom of action.  It has been so successful in its core business that it now finds itself increasingly looking for other areas of growth.

If you answered Microsoft, you’re wrong… sort of.  The answer is actually both IBM, circa 1975, and Microsoft, circa 2005.  In fact the parallels between the IBM of old and the Microsoft of today are in many ways so similar that it’s really kind of spooky, especially so given that Microsoft in large part has IBM to thank for its current ascendancy.

Like IBM, Microsoft dominates its core business to the point that it is able to generate tremendous margins and cash flow.  Similarly, Microsoft’s success has created major problems including a massive government investigation and an anti-trust judgment that has placed significant restrictions on its business.  These restrictions in many ways are forcing Microsoft to become more introverted, such as making it more attractive to develop new technologies in-house rather than acquire them because the government is likely to try and block any significant acquisitions.

Combine these traits with a stock that is in transition from a pure growth story to a earnings and income story and you pretty much have carbon copies of each other simply separated by 30 years.

For Microsoft executives they must find the parallels very unnerving, for they know all too well how the IBM story goes:  IBM became so big and myopic that it unwittingly almost gave away the store to a no-name supplier (Microsoft) that ultimately became one of their toughest competitors. By the early 1990’s IBM was in such bad shape that it almost imploded from its own strategic missteps and mismanagement.  These days IBM is in much better shape thanks largely to its near death experience which profoundly affected the company and in many ways made IBM much more humble and much more willing to consider outside ideas.

Granted, becoming IBM isn’t necessarily a bad thing, especially becoming the IBM of 2005.  The key then for Microsoft is to avoid the near death experience that IBM needed to survive.  Right now there’s no suggestion that Microsoft is even close to such an experience, but the potential for such an experience arguably exists the larger, more powerful, and more introverted Microsoft becomes.   Just ask IBM.

April 1, 2005 | Permalink


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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.