Tuesday, October 04, 2005

Microsoft to Music Moguls: Play Fair!

Microsoft Corp. has broken off licensing negotiations with the four global music companies, raising questions about the Redmond, Wash., software maker's plans to start a subscription-based music service, according to people familiar with the talks…

According to the people briefed on the discussions, the negotiations broke down Friday over what Microsoft considered unduly high royalty rates [emphasis added] sought by the labels….

—Wall Street Journal

Yes, that’s right. Microsoft is complaining about “unduly high royalty rates.”

This from a company that has been earning “unduly high” margins on hacker-prone operating software that nobody actually likes to use from Day One—and getting away with it.

Now, I know a lot of people disagree with my view that Microsoft has a monopoly, and that Microsoft abuses that monopoly whenever a competitor introduces a better product—which is almost always—by either incorporating the offending function into its operating system or by coming out with a half-baked clone and giving it away at cut-rate prices.

(Just today I was writing a document in Microsoft Word and made the mistake of trying to switch the page numbering from the upper right header to the lower right header. I ended up with page numbers at both the upper right and lower right of each page. I could see no way to change this—the “help” function in Word is like a computerized version of the so-called “instructions” found on the back of an IRS tax form, but even more useless. I had to find an earlier version of the draft lacking the duplicate page numbers and rewrite the stupid thing. So much for Alan Greenspan's famous computers-as-magical-productivity-tools theory.)

Still, I don’t begrudge Microsoft its monopoly. It was easy, and quite profitable, to short stocks of companies Microsoft was targeting back in the 1980’s and early 1990’s.

But those days are gone. Microsoft began losing its mojo along about the time the internet began changing the way people used their computers. Search, mapping, instant message—all these features have been pioneered by non-Microsoft companies. And the amazing thing is they remain the domain of non-Microsoft companies, because Microsoft can’t underprice free.

The lousy search function built into Microsoft Network, and the even worse instant-message function Microsoft keeps trying to foist on its users, are fooling nobody.

And now that Microsoft has clearly become an also-run in the department of downloadable music, the company is left to complain about the “unduly high” royalties being demanded by the music owners.

It’s like Darth Vader complaining about Luke Skywalker’s sword.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


dthorn said...

The Gospel according to St Matthew: thou shalt not begrudge those who beget aggravation and lost innovation upon thee (if you have made money on other victims)

The ranks of potential adherents must be very small. (I for one have suffered only and have no charitable feelings.)

KPKeller said...

Jeff --

While I agree with much of what you say about MS as company, fixing page numbers in Word's headers and footers (you meant footer when you said header, I think) is really not that hard. Delete the page number in header, and insert the number in footer, or vice versa....There are many other features in Word that are maddening; this is not one of them.

stealthelephant said...

Luke Skywalker and Darth Vader used light sabers, not swords. Even a Sith Lord can tell you that.

Anonymous said...

The complaints may be relatively mute considering Google and Sun's counterstrike announced today. This seriously cramps Microsoft's style. Google just gets more interesting by the minute. Although, I think investors will start to get a taste of what all of these new employees do to operating margins. If not this quarter, then definitely next...

Jeff Matthews said...

Sorry! Light saber!

Shows how much I know about Sith Lords.

As Patrick said when he reproached Ron Insana for not knowing what a "Sith Lord" is: any 13 year old would know that.

Sam S. Park said...

Creating an empire is one thing, but maintaining its dominance poses an overwhelming challenge. Microsoft will taste some of its own medicine, and its peers will try to dethrone the almighty tech king. Techtrader's comment on Google and Sun's announcement is prime example. Et tu, Google...

Prudent Investor said...

This stock is experiencing multiple compression exactly due to Jeff's reasoning -- namely losing its dominance in a rapidly evolving and highly competitive industry. By my estimate, stock could easily go to teens before getting interesting. There are still tons of shares that Fidelity et al needs to sell.

k9thunder said...


I have agreed with most of your writings but I think you're being too harsh with Microsoft. As Microsoft "alumni" I understand and appreciate the way the company operates. It can be tough place to work and very competitive within let alone with outside partners/suppliers but experiences I gained was invaluable. I negotiated 7 figure contracts on annual basis and let me say we didn't take any prisoners. Besides, companies wanted to become associated as Microsoft partner/supplier so dearly that they gave in quite a bit.

And nice job on debate with Patty on CNBC. Sure Patty gave grand acting performance and polished as ever being a lying con that he is but your points based on facts sealed the fate of immature Patty.

Keep up the good work!

mamis said...

As a former MS Office engineer, I got a good laugh out of the Google-Sun announcement. I guess McNealy felt he could combine Sun's StarOffice with Eric Schmidt's WordPerfect...oops, I mean Corel...oops, I mean Novell Office. Hey, maybe they can ally with Apple and bring Steve Jobs's Claris experience into the mix!

I also got a good laugh from Jeff's opinion that MSFT did not innovate because they didn't think of search, maps, or instant messenger. You left out email! MSFT didn't invent email -- they stole the idea from someone else! Those bastards!!!!

Since you know so much about computers, Jeff, perhaps you can tell me who "invented" instant messenger? Or even tell me which decade it was invented in?

mamis said...

Forgot to mention one other thing:

Have you ever noticed how all of Google's products are "beta"? Gmail. Maps. News. It's all marked "beta". That way, any bugs can be dismissed with, "oh, it's only a beta".

Won't it be interesting to see what happens when Google's brilliant engineers have to ship something that's not beta?

I can tell you what'll happen, but I don't want to ruin the surprise. You probably wouldn't believe me anyway.

Jeff Matthews said...

I think, "mamis", you have it exactly backwards.

The great thing about Google is precisely that it puts out a product in "beta" and lets real people use it.

Then it tinkers with the product and works on it, and makes it better...thanks to real world users like me.

I have had that experience on this very blog, providing real world feedback to the Google blog people, and they have made adjustments along the way.

The fact that this is still a "beta" product hasn't stopped me from blogging for 10 months on it. The thing works. And it's better than it was 10 months ago.

Same thing with Gmail, which was not a very slick product when I first got it. But today--even though it is still "beta"--it is a terrific email program...far better than Microsoft Network, which I have been chained to for 10 years.

The "Microsoft" model of releasing new product, as I understand it, is this:

1. Announce a date 2 years off when MSFT will introduce a killer product that solves everyone's problems.

2. Delay the product another year to work out the bugs, without actual real people using the product--just engineers.

3. Finally ship a product that doesn't work too well, and isn't easy to use, and still has bugs.

4. Work on fixing the bugs and promise "Version 2.0" some time in the next millenium.

5. Collect monopoly profits from the operating software.

Forgive me for being sarcastic, but I think the Google model of introducing new software is superior. After all, Microsoft is me-too in maps, satellite photos, email, instant message and blogging software

You are wrong about another thing: I don't know much about computers.

I just use them, like an average guy.

mamis said...

Wow. Where to begin.

First, you're wrong about MSFT not letting users test products before they're shipped. I worked on Excel and Office. We had thousands of users banging on the products before they were shipped. Do you seriously doubt this, or are you just being argumentative?

Second, you're wrong about Google's motivations for calling everything "beta". They're doing it because they have learned from MSFT: release something to the public as soon as it's "good enough", then fix it on the fly. And it's not that MSFT is evil or GOOG is brilliant; it's that MSFT makes client products and GOOG makes server products.

Third, if MSFT is such a monopoly in apps, why has Quicken been kicking MSFT's butt for 15 years in personal finance? Why is is that when MSFT's competitors win it's because they're brilliant, but when MSFT wins it's because of an illegal monopoly? Perhaps Excel won because it's better. Perhaps Quicken won because it's better. Perhaps Google search won because it's better.

Finally, I don't have a problem with your sarcasm; I have a problem with your egomania. I'm an open minded guy. I know nothing about La-Z-Boy or Overstock, so I enjoy reading the perspectives of those who do. You, however, know nothing about software and how it is built, yet you pontificate about it and ridicule those who disagree.

It's your prerogative to be closed-minded, of course; it's your blog and your fund. I just get annoyed by the "I'm wealthy, therefore I'm smart, therefore I'm correct" mentality that is so pervasive in hedge funds (hello, Cramer).

BTW, if I type my home address into GOOG maps, it points to a building two blocks away. If that was an MSFT product you'd excoriate them. As a GOOG product, you congratulate them for saying, "hey, it's just a beta...it's not supposed to work!"

Sam S. Park said...

Jeff and Mamis,

You guys have a good debate brewing that may top that of overstock's. Both make really good and valid points. But when Jeff mentioned "monopoly," I don't think he meant just over the proprietary applications. Microsoft has an aggressive and dominating presence in the technology industry. Microsoft's omnipresent existence practically forces consumers to use products that are somehow related to Microsoft. This kinda controllable influence allows an entity to possess monopoly.

Aside the pricey products, I don’t mind Microsoft applications… I actually greatly appreciate its products. So many people have become so dependant on MSFT’s apps, and it’s a hassle to learn new variations of other similar products. However when consumers learn that computers wouldn’t cost what they would without MS related products, Microsoft will begin to lose some of those monopolistic abilities.

k9thunder said...

MSFT employees are asked to install new MS software versions and we chow down our own dogfood... Also beta releases are provided to partners and anyone who chooses to download the beta versions and provide feedback.

As for Quicken vs. MS Money, Money is finally on par with Quicken but I persoanlly prefer Quicken.

You see many initial releases by MS are buggy and lacking good UI (user interface) but subsequent releases ROCK!

Sure there are lots of disdain feeling towards MS in general and easy to make fun of BUT one cannot dispute it's dominance.

But gotta admit, Google is becoming formidable challenger to MS...

PS - Rick Belluzo used to work right above me (literally office above me down few office). He "retired" early and as ex-shareholder of SGI, almost confronted him on SGI legacy at Redwest cafeteria. :)