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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

July 31, 2008 at 2:47 PM

Microsoft discloses Google, Apple threat, plus Danger sale price

The language in Microsoft’s new annual report filed today shows just how concerned the company is about the threat from Google and Apple.

Their different business models – ad-supported online software as a service, and vertically integrated software and hardware – now rank alongside Linux as major competitive risks that Microsoft investors should be aware of (if they aren’t already …).

Lots of other juicy tidbits. From the report:

The Google/SAAS threat, mentioned right after the open-source challenge, in the part where risks to the business are disclosed:

Another development is the business model under which companies provide content, and software in the form of applications, data, and related services, over the Internet in exchange for revenues primarily from advertising or subscriptions. An example of an advertising-funded business model is Internet search, where providing a robust alternative is particularly important and challenging due to the scale effects enjoyed by a single market dominant competitor. Advances in computing and communications technologies have made this model viable and enabled the rapid growth of some of our competitors. We are devoting significant resources toward developing our own competing software plus services strategies. It is uncertain whether these strategies will be successful.

Then it mentions the threat coming largely from Apple (and Microsoft’s potentially expensive response):

An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions. A competing vertically-integrated model, in which a single firm controls both the software and hardware elements of a product, has been successful with certain consumer products such as personal computers, mobile phones and digital music players. We also offer vertically-integrated hardware and software products; however, efforts to compete with the vertically integrated model may increase our cost of sales and reduce operating margins.

Apple is mentioned again later, alongside Linux in a discussion of challenges facing the Windows business:

“Apple takes an integrated approach to the PC experience and has made inroads in share, particularly in the U.S. and in the consumer segment.”

The report also finally says officially what Microsoft paid for Danger, the Palo Alto-based maker of software for mobile devices. Turns out Michael Arrington and Om Malik guessed well on this one:

“We acquired Danger for approximately $500 million in cash,” Microsoft said.

It remains to be seen whether it was a good deal for Microsoft. So far it hasn’t made a blip on earnings, the report said:

“Pro forma results of operations have not been presented because the effects of Danger and the 18 other acquisitions, individually and in aggregate, were not material.”

Also eye-opening were the figures placed on Microsoft’s real estate holdings and investments.

In 2009, Microsoft has commitments to spend $1.226 billion on new construction (check Redmond) and $440 million on property leases (check Bellevue, South Lake Union and Pioneer Square). Lease spending will be $831 million from 2010-2012, then $522 million from 2013 to 2015.

Here’s the tally of office space currently owned and leased by the company – wow:

Our corporate offices consist of approximately 13 million square feet of office space located in King County, Washington: nine million square feet of owned space situated on approximately 500 acres of land we own at our corporate campus in Redmond, Washington and approximately four million square feet of space we lease. We own approximately two million square feet of office space domestically (outside of the Puget Sound corporate campus) and lease many sites domestically totaling approximately four million square feet of office space.

We occupy many sites internationally, totaling approximately two million square feet that is owned and approximately eight million square feet that is leased…

Microsoft could practically incorporate and form its own city …



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