Microsoft sees worst stock drop since 2000: Welcome to the post-PC era

Microsoft announced a $900 million write-off on Surface tablets on Thursday (see “Microsoft takes $900M write-down on Surface, but Office 365 looks strong“). On Friday, the market responded with a $32 billion wipe-out of shareholder value, with the company stock off $4.04 for the day, closing at $31.40, down 11 percent. This is the largest drop in Microsoft’s market value since 2000, and 245 million shares traded hands, almost five times the usual 50 million. While the earnings were only 9 cents below expectations, the consumer side of Microsoft is not performing at anything like the levels that Microsoft management projected, most glaringly in the Surface tablet write-down but also in the Windows smartphone side of things as well.

This is on the heels of a massive “One Microsoft” reorganization that Steve Ballmer announced in a 2,700 word memo on Thursday (see “Microsoft reorganizes and this time it’s for all the marbles“). The reorganization itself drew a great deal of commentary, since it is sweeping: Instead of a patchwork quilt of product organizations, each with its own marketing and product planning, Ballmer has centralized marketing, sales, and strategy groups and consolidated product engineering into four groups. For the first time all hardware is is under one head, as are Windows, enterprise, and cloud solutions.

But the huge misestimation of Surface demand, the faltering steps in smartphones, and the dramatic tailing off of demand for Windows raise existential questions for Microsoft and Ballmer. The earnings report has led many to see that the reorganization doesn’t address the fundamental questions about Microsoft’s decline as a consumer brand.

Rick Sherlund, a well-known analyst at Nomura Securities who has followed Microsoft since the 1980’s put the reorg and the numbers side by side:

“The recent reorganization does not fix the tablet or smartphone problem. The devices opportunity just received a $900 million hardware write-off for Surface RT and investors may not even like the idea of wading deeper into this territory.”

Microsoft has over $75 billion in hand, so it has a lot to invest or, perhaps, a lot to lose.

I am sticking to the predictions I have been making about Microsoft’s fortunes in recent months:

  • Microsoft did not believe that the post-PC era was upon us, even as it designed and brought the Surface to market. It thought about it as a “tablet PC,” and that design bias was baked into the machine, OS, and apps. It thought a large community of users would want good ol’ Windows and Windows apps and a dedicated keyboard to do “real” work. This has been proved decisively wrong.
  • Ballmer should have reorganized sooner if the reorg was to actually reflect the reality of what Microsoft must change to compete in the new world order. But it isn’t: It’s designed around a fictional Microsoft and a fictional world where 2.5 million more Surface tablets would have been bought and millions more Windows phones would have been sold.
  • The bright spot in what otherwise looks like a car wreck is the enterprise side of the company, which delivered 100 percent of the good news this quarter. As I wrote on Friday, “Office 365 . . . has risen to a $1.5 billion run rate, and the business division as a whole — including Office applications — rose 14 percent to $7.21 billion, although that included revenue from a deferred upgrade offer. Server and enterprise tools grew 9 percent as well.”

Microsoft is being whipsawed by the future: in this case, the rise of proximal devices, the so-called mobile devices — our tablets and smartphones — that are always with us. (“Mobile” is the wrong term, because we use them at home and in the office more than as mobile devices. Mobility is not their defining capability but their close-to-hand character.)

Ballmer has shown himself unable to get on the right side of this power curve for years. He scoffed at the iPhone when it was first introduced, saying it was too expensive and would only be a niche player. The Zune was another example of too little too late. And now we are seeing the same slow-and-tight response to tablets.

The company spokespeople will continue to say the same mantra: The company is in this for the long haul, it will get the formula right, people will start buying Surface because they want Windows, deep down inside.

Here are my final three predictions:

  1. Microsoft will not publicly abandon the company’s official future — Microsoft elbowing its way into the post-PC world with Windows smartphones and tablets — despite the stark proof to the contrary, and it will spend an additional $5 or $10 billion on this doomed effort. It will keep that up until . . .
  2. the board finally pushes Ballmer out. He can’t have more than a few quarters before they’ll need to get him out.
  3. After that point, a new CEO will come in from the outside, shut down, sell off, or wind down all the PC-era nonsense and reorganize once again to make Microsoft an enterprise software company, and a leading one at that. The Azure effort is still up in the air, but Office, Office 365, Exchange, Outlook, SharePoint, Yammer, Analytics, and a long list of other products add up to a serious competitor in the enterprise space, squaring off with Google,, and IBM (see “Microsoft will rise from the ashes of Windows and Surface failures“). But Surface and Windows Phone will be shut down, and relatively soon after Ballmer’s ouster. Xbox might be spun out as a separate business or sold to some other gaming company. Windows OS might be milked for a while, but it only has a few years to live if you look at the stats.

But, as I said, the delusions of Microsoft will not be dispelled by the market’s tough love. As Robert Frost wrote in a very different context, “the best way out is always through,” and the best way for Microsoft is to reconfigure itself into a business that can deliver real value here, in the post-PC world we are already in. It has to push through to that postnormal footing.

One last comment: I mentioned in my recent post on the reorganization that it builds a Microsoft nothing like Google or Apple. As I said, “The new Microsoft has no place for a Jonny Ive controlling user experience.” That should be remedied in the next reorg, after Ballmer’s departure.

Relevant Analyst
Stowe Boyd

Stowe Boyd

Lead analyst Gigaom Research

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