Here are more edited excerpts from the interview I had last week with Sarah Friar, Goldman Sachs’ new software analyst covering Microsoft. She’s the subject of today’s column.
Q: What do you think about Steve Ballmer’s ill-fated February presentation to investors, when he told them to tone down Vista expectations. Was he trying to be open and fumbled it?
A: That one still perturbs me as to what exactly he was trying to do. He was definitely trying to temper expectations somewhat and he did that. I don’t think he was trying to be as obtuse as he came across.
In reality he probably did just fumble a little bit. But this message about “some Street models are too high” — still, no one has managed to work out what he meant by that.
You have a big personality there. Steve will do what he wants to do and the investor relations department can kind of script him and say here’s how you should talk about it. But he’s always going to get out there and say what he wants to say.
Q: Some people think the move to online productivity applications is imminent, now that Google’s in the business. Others, like Sun and Oracle, have talked about it for 10 years now. When do you think it will happen?
A: I think it’s three to five years. I don’t think it’s 10 because that would suggest it doesn’t have a lot of momentum and that’s not true. There’s definite momentum to software as a service type deployment.
I think it will begin on the enterprise side rather than the consumer side and obviously Microsoft makes more money from the enterprise side so its important that they win the enterprise more. If I look at Google Apps, it’s interesting what Google is trying to do, but Google is so far from being enterprise ready that I don’t think they’re as big a threat as people like to make them.
Selling to the enterprise — part of it is product but it’s also, “Have you got the sales force in place? Do you have the channel partners in place, do you have support in place?”
Look at Microsoft. They tried to get into enterprise sales and software for 10-plus years and this is Microsoft with all the sheer weight of spend they can bring, and yet it’s only really in the last three or four years that the server and tools division has reached critical mass and become credible.
So the idea that Google would come from nowwhere and in a year suddenly be entreprise ready and out there, to me it’s just not logical.
Q: Yahoo would be complicated and could distract executives.
A: Long story short, I don’t know if I would be so delighted if they bought a Yahoo right now, even though there’s a lot of pressure from the street to do something like that. I would much prefer that they keep investing hard in online services, doing it organically, being quick and nimble. Things like aQuantive make a lot of sense me.
They just won the Digg.com advertising deal — really interesting to see them being more cool. Microsoft and cool — you don’t normally see that together — but it was good that they were aggressively going after those sorts of thing and growing it more that way rather than going after Yahoo right now.
Q: Speaking of trying to be cool, what do you think about the Xbox business?
A: That’s actually a great example of Microsoft being able to create real businesses. Xbox will be a $6 billion division for them, hopefully cracking into this year. There they’ve proven that they can learn a lesson. They were not successful in the prior console cycle; they never managed to get the profitability piece worked out. This cycle they have really managed to run against Sony quite nicely.
I think every time Sony gets close to being profitable, Microsoft will drop pricing and put the pressure back on Sony again. That makes them the aggressor, a much better place to be.
Q: Should they be chasing Apple with the Zune?
A: Zune is tougher for me. They haven’t really shown their hand yet about what they could really do with it. It’s not really a front I particularly want them to open. I’d prefer them to concentrate on things like online services.
I don’t think they’re even that super committed to it right now. Maybe they thought it was a good idea, but for now I don’t see it as a core focus at all.
Q: What about Vista? I think that’s why investors were upset with Ballmer. They expected a big pop when Vista finally came, and it didn’t happen.
A: Vista to me is just not that important right now when I think about Microsoft. I’m more excited about other product cycles — for example, the server rolling out at the end of the year; what we talked about with the Xbox division and Halo3 coming; actually Office 2007 being a much greater success story and some of the pieces they have linked onto.
The Vista OS will be what it will be; Microsoft still dominates in the operating system area. There was some concern they would lose share to the Mac; that’s not happening. It will be much more a function of PC upgrade cycles happening and them getting pulled along.
When I say its not important — its still a huge source of income, but I don’t see a risk to it and I don’t see a particular upside to it either.