Back in 1990, I bought shares in a small company from Redmond, Washington for $1.
At the time, Microsoft was already successful, although it was still a bit of an upstart having gone public just four years earlier. I bought its shares for the funds I managed, and watched it grow into a giant.
Microsoft ended that decade as the world’s largest company by market value. To get there, it rode the tidal wave of personal computing, and it capitalised on key mistakes by rivals.
The story of Microsoft is the story of the technology industry. It disrupted the old order, made money for early investors, and then got disrupted itself.
Bill Gates made a lot of people rich
The PC was the disruptive technology of that era. Suddenly, computing power and apps were on our office desks, and tens of thousands of incumbents were out of a job. Typists, book keepers and mail sorters were replaced by word processors, spreadsheets and email. The market grew from $2bn in 1980 to $529bn in 2000.
When IBM launched its PC in 1981, it needed an operating system to make the machine work, so it licensed Microsoft’s DOS product. That was a big mistake. They should have bought it. But IBM was more interested in its hardware designs, not realising that this hardware would rapidly become a commodity. The lasting value lay in the software of the operating system. And Microsoft remained free to license that software to other PC manufacturers. In effect it had been granted an incredibly valuable monopoly!
Apple made exactly the same error. It didn’t license the Mac operating system to other hardware makers. To get the Mac experience you had to buy a premium priced Apple machine, which meant it remained a minority taste. As a result, Microsoft was left with a market share of around 90% in personal computing.
By the time I bought Microsoft stock it was also starting to get serious with apps. It already had Word and Excel but these played second fiddle to specialist programs like Wordperfect and Lotus 123. So Microsoft bundled their apps together into the Office suite, and used its market power to dominate that market too.
By 2010 Microsoft effectively owned the PC and office software market, and it was sitting pretty. It was one of the world’s most profitable companies. And it was complacent.
Who’s going to drink Microsoft’s milkshake?
An awful lot has happened to personal computing in the last few years. Desktop PCs or laptops running Windows have stopped being the only way most of us use computers. Mobile devices running Google’s free Android operating system or Apple’s iOS mean we have become used to other ways of working.
In this post-PC era, the cloud has also broken the link between my documents and my personal computer. This Penny Sleuth has been written using the Windows PC that sits in my office, and using my notebook which runs Google Chrome. The resulting Google Docs file sits in the cloud and can be easily accessed from both devices, as well as from my tablet or phone. So there’s no excuse for not working on it!
It’s all happened more quickly than anyone expected – not least Microsoft! Internet-connected smartphones and tablets hadn’t been invented ten years ago, but now they outsell PCs by more than four to one.
The market is being disrupted, and it’s happening much faster than in the 1990s. The Economist called it a “Cambrian Explosion” of new companies. Click here to read my special report on investing in these disruptive new businesses.
At the corporate level this means we no longer have to operate our own data centres and maintain lots of computing power on site. Companies such as Iomart and Telecity will host our IT for us. The programs we run on our network can now be rented from the cloud rather than bought and installed on our system. This is software as a service rather than software as a major capital investment.
The cloud is disruptive because it lowers the upfront capital costs of doing business. And it’s open to any internet user – unlike Microsoft Windows, any type of computer can interact with it. It’s a lot easier to start up a company if you can rent everything and pay for just what you need. It undermines big in-house IT departments and companies that thrive on supplying them.
So the appointment last week of Satya Nadella as Microsoft’s new CEO is very interesting. He replaces Steve Ballmer, who had been in charge for 14 years. In general I’m a fan of longevity; but only if the man at the top makes the right calls. Under Ballmer, Microsoft has protected its key Windows and Office franchise, but it also missed the huge shift to mobile. The new man, Mr Nadella, is closely associated with the cloud and brings the prospect of fresh thinking and a desire to innovate.
In a way Microsoft looks to have followed a normal company lifecycle. A period of rapid growth, followed by a maturity which has seen the shares stagnate. The cash flow from its PC software heritage means that it has happily avoided a subsequent period of decline. Microsoft remains a big, powerful company; but it needs some reinvention under its new leader. If Nadella pulls it off the shares could be very good value, though not as compelling as they were back in 1990!
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